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Is there an end in sight?

07 February 2019Jonathan Faurie
Deon Kotze

Deon Kotze

Over the past five years, the cost of medical treatment has sky rocketed in the country as there is still an ongoing legal battle regarding medical tariffs.

Medical schemes have had to bear the brunt of the pain associated with these costs; and there is no end in sight. According to the 2017/18 Council for Medical Schemes Annual Report, medical schemes spent R160.6 billion on healthcare benefits in 2017; this increased by 6.04% from the R151.2 billion spent in 2016.

FAnews spoke to Deon Kotze, Head of Research & Development at Discovery Health, to find out more about how rising costs are damaging the industry. 

Is sustainability in sight?

In order for members to get high quality healthcare at affordable prices, medical schemes must be able to sustainably bear the effects of rising medical costs. The good news is that sustainability is in sight. 

“The sustainability of any medical scheme’s ability to cover access to private healthcare for members relies on a number of factors. These include positive financial performance, meeting solvency requirements and growing the membership base with young, healthy lives.  According to the 2016/17 CMS Annual report, medical schemes reported a surplus of R3.4 billion before investment income in 2017, compared to a deficit of R2.4 billion in 2016.  At the same time, medical scheme reserves increased to R63.6 billion, which represents a solvency ratio of 33.2% (2016: 31.6%), well above the regulated minimum solvency requirement of 25%,” said Kotze. 

However, he added that growth in medical schemes was negligible in 2017; but the change in the average age of beneficiaries from 32.5 years to 33.2 years suggests that, on average, beneficiaries joining medical schemes are younger than those leaving. 

The cost burden

While the sustainability of medical schemes is better than many of us realise, it does not mean that they can go about doing a happy dance. Costs are still a major problem in the industry. 

“Almost 90% of the contributions paid by members are used to cover healthcare claims. As healthcare costs increase over time, so do the claims paid by a medical scheme. This requires medical schemes to increase member contributions to ensure that the scheme can continue to pay claims as well as to maintain solvency reserves equivalent to 25% of total annual contributions,” said Kotze. 

He adds that the increase in claims costs is typically 3% to 4% above Consumer Price Inflation (CPI) in South Africa. The increase in claims costs, and contribution increases, are unique to each medical scheme. 

It is scary to think that 90 cents out of every R1 that a member pays in contributions every month goes towards covering medical costs. While it is understandable that there needs to be price increases to cover these costs, is the industry making any movement away from the fact that 90% of contributions cover claims? If not, then the industry is fighting a losing battle. 

Key interventions

For the most part, members will willingly pay increased tariffs if they feel that their medical scheme is doing its best to absorb increased medical costs before passing them onto their members. Does this take place? 

Kotze points out that medical inflation for the 2017/18 period was 11.6%; this is the highest medical inflation rate increase since 2014/15. Changes in the prices (tariffs) of each healthcare service charged by doctors and hospitals were closely linked to CPI with annual tariff inflation increasing by 1% above CPI over this period. 

He adds that the biggest driver of the medical inflation rate is therefore not tariff increases but rather utilisation increases. This increase in utilisation can be explained by factors linked to the medical scheme population which leads to an increase in the demand by members for services (demand side factors) and factors linked to service providers, which lead to an increase in the supply of services from service providers to members (termed ‘supply side’ factors). 

“Medical schemes manage supply-side factors through risk management, which includes tariff negotiations, healthcare provider networks, medicine formularies, clinical assessment of new healthcare technology and fraud recoveries. Demand-side factors are managed through managed care programmes, and by attracting younger, healthier lives to the scheme. Medical schemes do a lot of work behind the scenes before they cannot bear cost increases any more and then are forced to increase member tariffs,” said Kotze. 

He added that Discovery Health Medical Scheme estimates that risk management initiatives, have saved its members R33 billion in risk claims since 2008, which would otherwise have been funded through higher contributions.  

Back to the drawing board

The major talk in the medical industry over the past two years has been the development and impending implementation of the National Health Insurance (NHI). 

At the end of November 2018, Cabinet dealt a devastating blow to the NHI when it sent the Bill back to the Department of Health (DoH). Cabinet ordered the DoH to work on the bill apparently flagging the future role of medical schemes under the NHI as a key concern. 

“We believe that medical schemes, and the broader private sector have a critical role to play in the South African healthcare system, and also have the potential to contribute in terms of expertise and experience to the development of a successful NHI system. In our view, the potential future area of collaboration between the public and private sectors could be of significant benefit to the healthcare system,” says Kotze. 

Editor’s Thoughts:
Coping with the expensive nature of medical care has been a subject that has been spoken about extensively in the past. If we cannot find a solution around it, exclusion may increase in the future. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za

Comments

Added by cynical simon, 07 Feb 2019
The NHI needs to be annihilated, not dealt a light blow.
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