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Council for Medical Schemes joins the fray

10 April 2008 Gareth Stokes

Earlier this year FAnews Online reported on government’s intention to regulate prices set by private hospital groups. Since then the Council for Medical Schemes (CMS) has released a detailed report on cost increases in the medical schemes industry. Titled Evaluation of Medical Schemes Cost Increases: Findings and Recommendations the report suggests a number of interventions to remedy soaring costs.

Registrar of Medical Schemes Patrick Masobe’s executive summary concludes that “the most important contributors to medical scheme costs are hospitals (excluding specialists and general practitioners) at 29.4%, medicines at 18.3% and specialists at 18.0%.” The balance of medical scheme expenditure is split between administration costs of 9.6%, managed care (non health) of 5.1% and broker fees at 2.2%. He concludes that cost increases since 2000 have largely been confined to the first three items on this list. “Non-healthcare cost increases were significant during the 1990s, but flattened from 2001,” says Masobe.

The shocking statistic is that between 2000 and 2006 “hospital costs per average beneficiary per month have increased in real terms at an average annual rate of 8.3%.” Private hospitals are costing medical schemes (after allowing for inflation) 65% more in 2006 than they were in 2000.

Does collective bargaining make sense?

The problem facing the medical schemes industry is where to cut costs. And right now it seems the CMS is hell-bent on squeezing savings from the private hospital sector. Their main proposal is to implement a collective bargaining vehicle to facilitate price negotiations between medical schemes and healthcare service providers. The result will be to replace fee-for-service prices with those agreed through central bargaining. Such intervention is understandable given the above inflation increases charged by private hospitals.

But there are some concerns. The report seems to have been produced with a particular goal in mind. And that goal was to prove that private hospitals are the only culprit for rising healthcare costs. It’s interesting that the CMS and government don’t view the 9% lost to administration as excessive. Surely this charge should diminish over time with improvements in technology and economies of scale. They also ignore the 18.3% chunk of fund expenditure taken up by medicines. That’s where previous government intervention was supposed to lead to massive savings? And there’s 20% or so of expenditure that apparently doesn’t warrant a mention.

Netcare rejects the proposal

Last week Friday Netcare rejected the proposal out of hand. “We do not support price regulation in a sector with significant supply constraints and most certainly not when based on misinformation. This is not to the benefit of the greater healthcare industry or the healthcare consumer,” said Netcare chief executive Richard Friedland.

A bargaining council will do little to solve the country’s healthcare crisis. Friedland says the proposal “is not only in direct contravention of the competition law but will also not solve the problem of increased demand for healthcare, which is driven by lifestyle chronic diseases, obesity, aging and medical innovation.” He says the CMS decision ignores the “unintended consequences of Prescribed Minimum Benefits, which have led to medical schemes reducing primary medical cover!” PMBs are a major cause of additional expenditure by medical aid schemes, proving that such increases cannot only be attributed to private hospital price increases. Friedland also notes that private hospital inflation has been below CPIX inflation for the last four or five years.

We believe the wildly differing inflation assumptions stem from the costs being measured by each party. The CMS is comparing expenditure by medical schemes on an annual basis whereas the private hospitals are measuring actual price increase in hospital supplies and services. Thus the CMS is reporting on medical schemes expenditure inflation rather than private hospital cost inflation. And increases in medical scheme expenditure go about more than just hospital cost inflation.

The crux of the matter

Once again it appears the public versus private debate is at the heart of the matter. Unfortunately South African medical aid consumers are the last people who will be considered as the CMS, government and private hospitals thrash out a solution. The state appears intent on forcing the private sector (and therefore individual taxpayers) to shoulder an ever increasing portion of previously public healthcare costs.

Consider these comments from Prof William Pick, CMS chairperson: “Thus, whereas in the past medical scheme participation accounted for 20% of the population, it now only reaches 14%. This decline is a consequence of changes in the affordability of medical schemes. From a public policy perspective this outcome is of particular concern when consideration is given to the fact that the bulk of financial and human resources in the South African health system are concentrated in the private sector.” While a reduction in the number of lives covered by the healthcare sector is obviously a step backwards it does not require government intervention to fix.

The natural market forces of supply and demand should eventually restore the balance. If the country’s existing medical aid schemes cannot keep private hospital costs in check with around seven million members then they’ll obviously continue to shrink.

Editor’s thoughts:
Government recently railroaded its pharmacy regulations on the industry and now appears set to tackle the next culprit – private hospitals. Do you believe private hospitals are the root cause of problems in the medical aid industry? Add your comments below or send them to gareth@fanews.co.za

Comments

Added by Independent Broker, 10 Apr 2008
The mauch talked about report by the Council for Medical Schemes on costs refers. What I find particularly desturbing is that broker is again being singled out in this report as a major contributor towards non-healthcare costs. Prof Pick, Chair of the CMS, contributes the decline in private medical scheme membership to the affordability issue alone. However, how does the Council propose to solve this problem; by re-regulating the broker! Medical scheme brokers, an already overregulated endangered species on the Red List facing extinction, now face having further regulation heaped upon them and the much hailed newly formed joint representing body is causing a deafening silence in not taking up the issue. Since the first set of regulations, specialist medical scheme brokers have become few and far between. It is simply impossible to make a living from selling medical scheme products only. Related medical insurance was ruled illegal (Leadergaurd et al) Council is even frowining on the commission brokers earn from selling medical scheme loyalty/rewards programmes. Fact remains, medical scheme products are difficult to understand, even more so for the person who in the past have not had medical aid exposure. Terms and methodology, such as PMBs and managed care, are foreign to the average low-income worker. These are the very people all agree are the people that should be netted to alleviate the burden on state healthcare. Council now wants the broker to earn commission income directly from the member or the employer. Considering the fact that members are leaving the private medical schemes arena due to unaffordability, just where does Council think the average member will be willing/able to find (or afford) the extra bank charges for the additional debit order to pay the broker the advice fee they envisage? (Not to mention the additional cost to the broker - the broker already overburdened by the cost of double compliance and accreditation). Even when Utopia dawns and we have a PMB option that is similar across all open medical schemes and costs exactly the same from all schemes, there will still remain need for the broker to interpret intricate concepts such as PMBs, the PMB formulary, designated service suppliers, chronic disease lists, co-payments, network providers, processes, the list is endless. Only, now even more brokers will be forced out of the medical schemes arena - just who will remain to scout for new members, to educate those new members and to act as go-between? Or does the Council envisage that, due to the anticipated National/Social Health Insurance, no low-income earner will remain in private healthcare and therefore will have need for broker services? Perhaps what we need is for the broker industry to collectively demand an independent audit on the actual non-healthcare costs related to the intermediary...
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