Annual integrated report 2011

Health policy and regulation: SA

Growing healthcare costs demand innovative solutions that get to the cause of medical inflation.

Private hospital contribution to the economy

Private healthcare makes a substantial direct and indirect contribution to the economy. A study on Hospital Association of South Africa (HASA) members shows that with a workforce of greater than 64 000 full-time equivalent employees, sales revenue of greater than R36.5 billion and tax contributions of over R5.9 billion1 in 2010, private hospitals make a substantial direct contribution to the South African economy.

When the economic multiplier2 effect of the provision of healthcare services by HASA members is taken into consideration, private hospitals and their value chain sustained production to the value of R110 billion, supported 218 000 jobs throughout South Africa (SA) and generated more than R17 billion in government tax revenue during 2010. In addition, the economy-wide impact of private hospitals’ operations sustained capital stock to the value of R92.7 billion, or 1.8% of SA’s total capital stock.

HASA members economy-wide contribution to SA’s gross domestic product amounted to an estimated R52.2 billion in 2010, or 2.2% of the country’s GDP.

This value-add does not include the economic benefits of keeping the formally employed healthy and productive.

Focusing on sustainable healthcare

From a financial point of view, a sustainable healthcare sector is arguably one in which the expenditure on healthcare grows at a rate that matches general inflation within the economy. This presents major regulatory challenges globally. For almost 50 years, spending on healthcare has grown by two percentage points in excess of GDP across all OECD countries.3

Reasons include:

  • The burden of disease;
  • Wage inflation, especially in emerging markets with active unions such as in SA; and
  • The cost of regulation for medical and related sectors, such as medical scheme reserving requirements which have cost the consumer R32.6 billion in the past decade.

Ironically, many healthcare problems stem from past successes. These costs have been increased through medical successes such as increased life expectancy and lowered infant mortality. Increased costs also arise from changing lifestyles and the new medical challenges that result. The World Health Organisation (WHO) has projected that by 2015, approximately 2.3 billion adults will be overweight, and more than 700 million will be obese.4

The increased burden on the healthcare sector is notable due to increased prevalence of chronic conditions. This can be seen in the graph below.

Chronic conditions by scheme per 1 000 beneficiaries
Chronic conditions by scheme per 1 000 beneficiaries

Source: Council for Medical Schemes
1 Includes corporate, personal income and indirect taxes
2 Econex Study on Hospital Association of South Africa members, 2011.
3 Source: The McKinsey Quarterly. Healthcare costs: A market-based view. September 2008.
4 World Health Organisation, Obesity and Overweight, Fact Sheet No. 311, Sept 2006. http://who.int/ mediacentre?factsheets/fs311/en/ index.html

Cost implications and holistic solutions

Increasing demand and costs are driving healthcare inflation above general inflation levels. One option to counteract this pressure is to extend healthcare to include not only diagnosis and treatment, but also prevention and general wellness.

Regulation is important in the healthcare industry, but price regulation alone cannot solve healthcare cost inflation. A renewed focus on broader wellness helps to address the strain on existing healthcare systems resulting from increased demand due to an ageing population, an increasing population that is overweight and living with chronic conditions, lower insurance payments, expectations for high quality and safety and new regulatory requirements.

The evidence clearly indicates that healthcare needs significant disruptive innovation to address its major problems.

The proposed National Health Insurance (NHI)

SA is at an important juncture with regard to universal coverage. The proposed system represents a break with the past and the potential evolution of a substantially different system. The changes that will be made now set up the foundation for a new health system for the next few decades. The intentions of this system will not be realised immediately. Infrastructure needs and nurse and doctor training contribute to this delay in rewards gained. Historical evidence also suggests that free access to health could also place a significant additional burden on the system.

As stated in the National Planning Commission Vision 2030: “In South Africa, the term NHI may be open to misinterpretation, as it will not be a typical insurance system. It will be predominanlty based on public provision at first, and mainly funded through general tax revenues.” As a result, many within the SA workforce will remain dependant on private medical cover for the foreseeable future. Private healthcare and private medical schemes have a significant role to play in providing healthcare in SA. We believe it is important for government to continue its close oversight of the private medical scheme industry in the interest of consumers.

Medical schemes and the challenge of adverse selection

Schemes operate on a social solidarity model, with the young and healthy cross-subsidising the older and less healthy, which factors into the delicate balancing act involved in costing premium. There is evidence to suggest that take-up of a medical scheme cover is often motivated by the existence of a serious medical condition.

For example, there is evidence that older people with chronic renal failure needing dialysis join medical schemes to get dialysis in the private sector, as limited resources in the public sector have meant severe rationing by age with dialysis not typically provided over age 60.

The impact on a medical scheme is substantial; the industry community rate for all medical scheme members was estimated using an age-gender profile from mid-2008 to be R310.505 . A healthy 60-year old male is expected to cost R583.28 per month but one with chronic renal failure needing dialysis is expected to cost R19 291 per month. The net effect is that the community rate for all members of medical schemes must increase to cover the costs of this anti-selection.

Problems besetting private healthcare include the reality that the young and healthy have no incentive to join medical schemes until they are ill. Preventative and primary care is not given much focus in the Prescribed Minimum Benefits (PMBs) that schemes are obliged to pay out of risk pools. Care remains fragmented and arguably inefficient as a result. Regulation disallows the employment of doctors by private hospitals and risk is not equalised across the various schemes. All of these problems may be addressed by relatively simple regulatory interventions with significant contributions to the sustainability of the health sector.

Pricing in private hospital provision

As reflected in the graph below, increased utilisation contributed 44.0% of the total increase in private hospital expenditure by medical schemes in the study period6. Real price inflation contributed 4.9% of total increase in private hospital expenditure. It should be noted that this was aided by a stable currency and its impact on medical consumables inflation.

In 2010, medical schemes spent 37% of total benefits on hospitalisation. Adjusting for real price inflation of 5% would yield R1.5 billion of savings for the schemes, relative to the saving that can be attained from improving the risk profile of the scheme through the mandatory cover of healthy employed South Africans of R19.3 billion as suggested by McLeod (2009). The average premium would fall by more than 20%.

5 McLeod H, Expanding Health Insurance Coverage. Innovative Medicines South Africa. NHI Policy Brief 2.
6 Netcare submission: Discussion document: “The determination of health prices in the private sector”.

Increase in medical scheme spend on hospitilisation - 2003 to 2009
(per beneficiary per month) R000
Chronic conditions by scheme per 1 000 beneficiaries

Outlook on regulation

There is full support for the end goal of universal coverage. It is however well understood that the implementation of mandatory insurance for the NHI is likely to be spread over a number of years. As a result, many South Africans will remain dependant on private medical cover. Due to the time needed to make adjustments in public sector performance, and given the expectation of increased demand for health under NHI, it is critical to ensure that private medical schemes remain healthy and that insurance risks are well contained, specifically the risk of adverse selection.

The implementation of the Risk Equalisation Fund (REF), which seeks to equalise the risk faced by medical schemes in respect of providing PMBs, has not proceeded. This is because the Medical Scheme Amendment Bill, which contains crucial provisions for the implementation of REF, has not been considered by Parliament. Irrespective of the role of private medical schemes under NHI, whether it offers substitutive benefits or merely top-up cover, risk equalisation is critical. It is also critical that younger and healthier people are encouraged to join sooner rather than later.