van den Heever BMC Public Health 2012, 12(Suppl 1):S5 http://www.biomedcentral.com/1471-2458/12/S1/S5 multiple risk groups, even if there are disproportionately more poor risks. Significant market pressure consequently exists to keep the better risk groups in the comprehensive options as they stabilise the pricing for their lucrative corporate clients who demand comprehensive coverage. Virtually all open schemes therefore deliberately over- price their low-cover options to cross-subsidise their comprehensive options. Without risk-equalisation, however, government cannot easily expand the package of mandatory minimum benefits as this would compel schemes to consolidate options and destabilise the pricing of schemes with older and sicker demographic profiles. Scheme consolidation would also accelerate through the death spiral mentioned earlier, with a market equilibrium reached only when all the remaining schemes are broadly similar in demographic profile, which is most likely after significant consolidation. Although technically the expanded package with and without risk- equalisation at the new equilibrium point could be regarded as equivalent from an equity perspective, the market dynamics should be different. The extent of scheme consolidation likely in the without risk-equalisa- tion scenario, while increasing the capability to manage provider costs, may reduce competition to such an extent that medical scheme contribution increases would have to be regulated. Cost containment Although risk-equalisation would have incentivised schemes to manage healthcare provider costs more effec- tively (by forcing them to compete on price rather than risk), a degree of government involvement in the man- agement of cost is inevitable due to the market power of private providers. Although cost increases have stabilised during the 2000s, the market power of hospitals and spe- cialists in particular are able to apply systemic upward pressure for some time to come. Other health providers and medicines are unlikely to impact on cost as the for- mer have limited market power and the latter are subject to increasing price regulation. As three hospital groups dominate the private health system, schemes presently acquiesce to their price demands or face the threat of having their members bal- ance-billed (required to pay the difference between what the scheme pays and hospital charges). As hospital cover- age is the essential driver of demand for medical scheme coverage, short payments on catastrophic cover will result in members quickly switching their scheme (facili- tated by open enrolment and brokers) to one willing to capitulate to the hospital groups. As schemes are prohib- ited from colluding amongst themselves by competition legislation, a collective stand against a threat to balance bill is not possible. Threats to cherry pick hospitals into Page 11 of 13 networks are also easily repelled as the market for such contracts are small, and kept that way by the hospital groups. The hospital groups express their market power by preventing the emergence of price competition in the market for hospital services, thereby giving them near complete control over their revenue flows, constrained only by the number of specialists [16]. Although specialists are essential to the development of a selective contracting market for both their own and hos- pital services, were they to begin to enter in to such arrangements the hospital groups are likely to retaliate through the denial of hospital privileges. Thus although specialists have market power in relation to schemes, their power over the concentrated hospital system is weak. Hos- pital groups consequently compete, but not on price. They compete for specialists. This non-price competition drives costs up and not down, and constitutes a form of market failure quite unique to health markets. A strategy that would have gone a long way toward bal- ancing the market, recommended by the Taylor Commit- tee of Inquiry in 2002 but never implemented, was to boost the autonomy and capability of public hospitals and to permit them to compete with private hospitals and specialists for the patronage of medical schemes. Unfortunately, over the past fifteen years public hospitals have deteriorated. The general low regard for public hos- pitals consequently makes them unattractive for medical scheme members and removes the leverage schemes could otherwise exercise over private hospitals. Managing non-price competition Resolving price determination within the non-price com- petition market for hospitals and specialists would go a long way toward cost management within medical schemes. Proposals in this regard [25] involve the estab- lishment of an independent (both of government and the private sector) price regulator to coordinate centralised negotiations between medical schemes, final consumers of healthcare, and all providers. The resulting prices and tar- iffs would apply exclusively to the non-price competition market. Any market participants willing to negotiate agreements on a selective contract basis (between schemes and non-colluding healthcare providers and suppliers) would be permitted to do so provided they complied with existing competition laws. The proposed centralised negotiations would therefore balance out market power differences between funders, consumers and healthcare service providers resulting in more balanced pricing. Irresolvable disputes in the nego- tiations would be managed by automatic referral to an independent arbitrator who would decide which com- peting bid to accept. The arbitrator would not be free to make a separate proposal. The final decision by the arbi- trator would be required to take account of factual