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Medical schemes on life support

02 February 2015 Michael Settas, Xelus Specialised Risk Solutions

Since the scrapping of centralised negotiation on medical tariffs by the Competition Commission in 2004, the setting aside of tariffs by a high court in 2009 and the interpretation in 2010 by the Council for Medical Schemes (“CMS”) that Prescribed Minimum Benefits (“PMB”) must be paid at cost, it is no surprise that medical schemes have been struggling to control costs.

Middle to upper class citizens exercise their constitutional right to purchase private cover, as opposed to relying on state health services, but the reality is that private sector cover levels are dwindling because of the substantial inflationary pressures it faces.

Ignoring CPI

The Consumer Price Index (CPI) is an important inflationary guideline in South Africa as salaries increase according to these levels. This also forms the corner stone of budgeting, as any increases above CPI levels will see the public tightening their belts and making sacrifices in certain areas in order to cope with the increase. Since 2000, the misguided policy choices on the finance side of the private healthcare industry, combined with the lack of supply-side regulations, has seen South African consumers face medical scheme tariff increases, far beyond CPI levels.

While the policy pursuit of a classic social financing structure - based upon open-enrolment, community rating and cross-subsidisation of the old and sick by the young and healthy - appears laudable, the truth of the matter is that it fails to fulfil the promise of affordable lifetime protection when these risks are not balanced out by means of:

• Mandatory membership - which means the young and healthy, old and sick all partake in the risk pool;
• Enabling medical schemes to negotiate and enter into more efficient contracts with providers; and
• Restraining the overt commercialisation of the supply chain.

Feeding a hungry monster

The lack of regulatory adherence to Section 33 (2) of the Medical Schemes Act, which requires that each benefit option within a scheme is financially self-sustaining, is another concern. The younger and healthier members who are mainly accommodated in the mid-range options are presented with a poor value proposition because they are substantially overcharged to subsidise the top and bottom-end options.

This industry-wide practice has prevailed to sustain the high cost benefit-rich options and the lowest cost network options, where the cost barriers to entry are simply too high for lower income consumers to participate in the private sector.

The overt focus of Prescribed Minimum Benefits (PMBs) on hospital-centric curative treatment is another matter that has exacerbated the cost crisis. High costs have caused the erosion of non-PMB benefits, most notably preventative primary care, which in turn have given rise to the costly curative mindset in the industry at the moment.

The issue of cost

In addition to the above, the CMS’ interpretation of Regulation 8 that PMB benefits must be paid at cost, has restricted schemes in their dealings with providers because providers are commercially better-off when they do not enter into the less costly contractual agreements of schemes.

Other areas of concern include the fact that members and funders are basing their decisions on price, and not value. This is mostly because the private healthcare supply chain cannot measure the value offering, but the matter can be addressed by standardising benefits and implementing systems that measure the quality and cost of care, using outcomes data in an industry-wide centralised database.

In doing so, it could help pave the way for schemes to contract specific suppliers because they offer the best quality, not the lowest fee, and hence drive providers to become more aware of quality, cost and clinical outcomes. This will increase their value offering.

Technology as a role player

In the current environment, it is assumed that the new technology that is being imported is commercially selective, or that providers are able to sustain historic revenues regardless of the possible cost and outcome advantages that these new technologies present.

Whether or not these assumptions are accurate, it is quite clear that:

• There is a lack of competition amongst medical service providers at the clinical level of disease prevention, diagnosis and treatment which, if corrected, will put a strong emphasis on health outcomes, offering the most appropriate treatment at an optimal price;
• The purchasing of enhanced medical technologies is not currently controlled, and thus no rationing of these expanding medical services is possible, i.e. a measurement of the cost of these services and that they are indeed improving health outcomes.

Scrap antagonistic pricing

To conclude, the way forward in solving the myriad of existing problems is not going to be achieved through increasingly unrealistic and antagonistic pricing regulation within the funding industry (eg Regulation 8).

Whilst it is easy to point fingers and hang on to ideologies, the funding industry needs to start realising that without revision of the onerous regulatory elements and the introduction of supply-side interventions, its survival is in jeopardy.

Medical scheme increases have averaged 3.5% above the CPI level for more than the past decade, whilst simultaneously offering less and less member benefits. This means that in order to maintain consistent benefit levels year-on-year, consumers would need to absorb cost increases even higher than 3.5% above the CPI level. As such it is quite clear that, in the current framework, the value proposition of private healthcare is dwindling rapidly.

Sharing the risk

Suppliers are also not without risk in this scenario. If the funding industry ultimately shrinks, the private supply industry will shrink along with it.

Currently, the only element that keeps cost-conscious consumers within the private sector, is the precarious condition of most state healthcare facilities. It is fair to assume that if our state sector was of a reasonable quality, the medical scheme environment would be a fraction of what it is today.

Ideally, what is required is an overarching regulatory framework that holistically encompasses all aspects of supply and funding. Therefore, the funding industry would do well to start lobbying with government on this. Pending the outcome of the Competition Commission’s focus on competitive forces within the industry, their investigation may be a perfect opportunity to commence lobbying.

With that being said, the government’s almost exclusive focus on the NHI programme will hopefully abate now that the 2014 elections are over and some intelligent regulatory changes can be made independent of what the NHI is aiming to achieve. A smarter, holistic regulatory framework can lead to a sustainable quality-oriented private healthcare model.

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