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Thursday, November 1, 2007
Private plunder

According to the 2007 Annual Report of the Council for Medical Schemes (CMS), escalating costs in healthcare have been identified as a key threat to the sustainability of the medical schemes industry and to the success of future reforms.

In a rather chilling comment it adds, “Some of the issues might require legislative intervention.”
Essentially this is a story about structuring the private healthcare industry to suit government objectives — a sort of hijacking facilitated by legislation.
The reforms are embodied in the draft Medical Schemes Amendment Bill, which was approved by Cabinet and published for public comment in November 2006. It is intended to create the legal framework for three key initiatives:
• To establish the Risk Equalisation Fund, which will
o provide for the submission of beneficiary information necessary to calculate the equalisation transfers; and,
o specify the methodology for the estimation and payout of the risk equalisation payments;
• Governance – to draft legislative amendments designed to improve governance; and,
• To increase transparency and encourage greater efficiency of medical schemes benefits, and further, to reduce incentives for unfair discrimination.

Comments Registrar Patrick Masobe, “We believe that an important contribution to uncontrolled escalation of pricing is the absence of meaningful negotiations between health care providers and medical schemes.” This has resulted in providers setting prices independently of the schemes’ benefit decision-making processes. The National Health Reference Price List (NHRPL) does not inhibit cost escalations as it is only a reference price list.
Since early 2006 the responsibility for this price list was handed over to the Department of Health. The list is despised by the SA Medical Association which constantly challenges its application. The government was forced to re-issue the 2006 price list without updates, other than a note of the rate of inflation.
But the authorities are very determined to control costs in South Africa’s health care system because it needs the private administrative infrastructure as the foundation for a national social security and health system — the social aspects were discussed in our issue last month (see Insurance Times & Investments Volume 20.9 October 2007 page 6).
Mr Masobe advises, “We have developed recommendations with regard to the process of developing tariffs that will improve the sustainability of schemes. We have been in consultation with the Board of Healthcare Funders on the merits of our proposals in this regards, and expect to place them before the Minister in due course.”
One serious problem is that government, seemingly incapable of providing adequate healthcare for its citizens, is hoping to rely heavily on the private sector to do the job. Its profit motivation, reward of shareholders and competition to provide world-beating (if excessively sophisticated) services is an essential part of its nature, which makes it a very unhappy bed partner for government.
Trying to make private enterprise an extension of a currently inefficient and poorly run government health service is not going to work.
Paradoxically a centralised government healthcare system, if properly managed, is actually a better economic model. The reason is that competition and private enterprise is all very well in an open economy where consumers have a choice; but a disaster in sectors that are characterised by inelasticity of demand. By this is meant that, while for example you may have a choice which car to buy — indeed, whether to buy one or not — in health care you have no choice whether to be injured in an accident or not, or whether to get a brain tumour. If you contract an illness you have no choice — you have to pay if you want to survive.
Another behaviour modifier is fear. If you are frightened of air travel you simply don’t buy an air ticket. But in medical matters fear actually forces you to buy something: buy vitamins to ‘stay healthy’; pay for tests in case you have a liver, heart or kidney problem; have expensive x-rays, even scans, because of constant headaches. A classic fear purchase is for a Caesarian. It is very expensive and often quite unnecessary.

Of course, the idea of preventative check ups is highly desirable: PSA density tests for prostate cancer; mammograms to look for breast tumours, or chest x-rays for TB are amongst many useful diagnostic procedures that can and do save lives. But can they be managed better? And indeed, can they be provided to a wider population for a lower cost?
In other words, how much should the forces of the free market be allowed to operate in the healthcare arena? Can government involvement be a hindrance or an asset?
There is no real answer to either of these questions; because they simply highlight a philosophical, social and administrative conflict of interest. The conflict must be removed, and a true workable partnership between the public and private sector resolved.
As Professor Heather McLeod pointed out in her conference presentation to the Board of Healthcare Funders of Southern Africa held in July, “Consumer choice is more useful:
• the better consumer information is;
• the more cheaply and effectively it can be improved;
• the easier it is for consumers to understand available information;
• the lower the costs are of choosing badly;
• the more diverse are consumer tastes.

“Medical care conforms badly with the key conditions; the state is much more than a safety net. It does things which private markets for technical reasons either would not do at all, or would do inefficiently,” added McLeod. She is Visiting Associate Professor at the University of Cape Town (Public Health and Family Medicine), and Extraordinary Professor at the University of Stellenbosch (Statistics and Actuarial Science).

Demographic challenges

Like most ‘developing countries’ South Africa has distinct demographic challenges: a high level of poverty; a huge mismatch between the geographic spread of resources; a high cost burden of curable and preventable diseases; lack of hygiene, and lack of sufficient sanitation and domestic water supply. Nor can one overlook the chronic shortage of medical skills.
The relatively high level of poverty is a serious challenge because, even if the healthcare structure were much improved, there are not enough people to fund it. South Africa has a population of 47 million, yet only eight million of them are registered for tax, and fewer still carry the main burden of income tax (about four million).
According to a recommendation from the World Health Organisation (WHO) global healthcare consumption (as a percentage of GDP) should amount to 5% (at least in developed countries). The USA sits at 15,4%, with Australia, New Zealand, France and Spain at around 10%. South Africa is spending about 8,4% of GDP on healthcare – or R148,6 billion, according to the WHO. It sounds good, but what does it really mean?
To begin with it assumes we are happy with our current GDP (about R1 727 billion using the common expenditure based measurement). A GDP of R3,5 billion would perhaps be nearer what we really need economically, but would indicate healthcare spending of ‘only’ 4%. The point being it is not a very good measure for a developing country wilting under the weight of such widespread poverty. We simply don’t have enough people in employment, our GDP per head of population is too low, and there aren’t enough tax payers to cover the cost of the healthcare we need.
In any case WHO rates SA 175th out of 191 countries with regards to efficiency in health care; citing negative issues such as rationing (which is a reality), regulatory intervention, different perspectives, and no common language (our italics). In other words, the Department of Health is squandering its R60 264,2m budget in general inefficiency, inept use of resources, poor administration, fraud, and overall low moral integrity.
Lack of education, too many children being born into poverty, dreadful HIV/Aids statistics, and other preventable diseases create further burdens on a nation struggling to uplift its healthcare services. There are now 5,3 million people with HIV (about 11% of the population), with some 370 000 dying a year from Aids.
While the public sector spends R1 368 per person (for about 38 million people) on health care the private sector is spending R9 428 per person (for 7,2 million). It looks like an imbalance of resources, To some extent it is, but the authorities must also realise that much of private sector funding arises from a choice made by individuals, or at least as part of employment packages. Instead of looking for ways to plunder this initiative, government should rather seek ways to emulate it.
But all one hears is criticism:
• Brokers are getting too much commission from medical schemes;
• Administration companies are not independent;
• There are too many benefit options;
• Too many schemes with insufficient numbers of members;
• Pricing negotiations are incorrectly based; and,
• There’s unfair marketing practices of managed care organisations.

Some of the allegations are, in part, true. But instead of thrusting legislation down its throat and interfering in the free market mechanism, government would better serve the community if it obeyed similar market principles, underscored with a grander vision of serving the people.
After all its own legislation, The Constitution of the Republic of South Africa, 1996 clearly states:
everyone has the right to have access to health care services, including reproductive health care….
…. the state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realisation of each of these rights.

More than ten years down the road it is still fiddling with other laws, like the Medical Schemes Amendment Bill with a view “to improving medical scheme governance, rationalising benefit design, to improve the transparency of benefits, and implement the risk equalisation fund.’
Whether this will really help is not so much the issue, as whether government itself might like to subject itself to the same laws. By Nigel Benetton
Note: These and other issues are to be debated at greater length in our upcoming publication, The South Africa Annual Financial Review, due out 3rd December 2007. If you want to buy contact us (details on page2).

Copyright © Insurance Times and Investments® Vol:20.10 1st November, 2007
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