Private Health Insurance – Is it the Consumer’s Choice?
The recent release of the draft regulations outlining the proposed demarcation between health insurance products and medical schemes disregards medical scheme members already hard pressed in meeting soaring private healthcare costs. In order to underst
South Africa’s private healthcare sector possesses world class service capabilities but a dearth of supply side regulatory intervention for the past 3 decades has resulted in an oversupply of medical facilities, especially at tertiary levels.
The subsequent wastage and over-servicing have elevated private healthcare costs to unsustainable proportions. As a percentage of salaries, medical scheme contributions in the 1980’s were a mere fraction of what they are now – and within that lower cost medical schemes were able to provide far more comprehensive medical benefits than is available today.
The massive growth in the number of private hospital beds, measured on an insured life ‘per capita’ basis , that started in the late 1980’s and continued through to the 1990’s is well documented.
What is somewhat less known though is that subsequent to this rate of increase in beds, the transfer of control of these beds was consolidated into the three main hospital groups in SA, namely Netcare, Mediclinic and Life. In 1996, the number of independent hospital groups accounted for 49% of all acute hospital beds in South Africa’s private sector.
In 1998 these 3 groups went on a major spending spree acquiring independent hospitals - a mere 2 years later they owned 70% of the available beds and by 2006 that figure was 84% . In so doing, the private hospitals garnered an industry monopoly and they did it virtually overnight.
The current Medical Schemes Act (MSA) was promulgated in 1998 incorporating the original set of Prescribed Minimum Benefits (PMB). The PMB services defined a mandatory set of tertiary hospital based curative care services that every medical scheme had to cover.
It doesn’t take much thinking to work out why the 3 private groups suddenly started a major shopping excursion in 1998.
Alongside these largely unregulated commercial events there were two regulatory interventions that exacerbated cost problems – unintended consequences of law change.
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Firstly, entrenched within the new MSA, was open-enrolment and community rating but without the concomitant balancing of mandatory membership to offset the risk of anti-selection. Open enrolment is the guaranteed acceptance by a medical scheme of an applicant regardless of age, health status or historical cover and community rating is the practice of charging everyone the same contribution regardless of claims or health status.
In an open-enrolment environment without mandatory membership, the young and healthy won’t join until they are older and sick, since they are guaranteed acceptance at any stage in the future – this well-known human behaviour is called ‘anti-selection’.
The graph (FigureA.1) is an excerpt from a 2008 CMS report and clearly shows the dip in medical scheme members from ages 19 to 34 years. This dip is typical in any voluntary health insurance market.
The introduction of mandatory cover has literally not even been contemplated since the promulgation of the MSA in 1998 and as such medical schemes have had to cover these 'anti-selection' risks, whilst attempting simultaneously to manage a monopolised hospital sector quite willing to take advantage of such a situation.
It is with no small sense of irony that the draft demarcation regulations infer blame upon insurance products in 'keeping the young and healthy out of the medical scheme system’ yet by combining open enrolment with non-mandatory membership, the medical scheme regulators provided an unbalanced framework that has singlehandedly achieved exactly this undesirable practice for more than the past decade.
US President Barack Obama’s latest health reforms were vetoed in their entirety by a Florida court for the very same reason. The court ruled that enforcing mandatory cover breached the constitutional rights of individuals to freedom of choice but then subsequently ruled that since the system would not have sufficient protection from anti-selective behaviour, the entire reform proposal was set aside.
South Africa, however, continues within such a skewed regulatory structure.
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The graph (Figure 4.1) shows the significant increase in hospital costs from 1999 to 2006, well above the trend line based on costs in the 1990’s.
During the course of 1998, private hospitals also negotiated a large increase in tariffs from schemes in exchange for removal of traditional mark-ups on medicines and other consumable items.
The exchange was meant to be a more transparent and controllable pricing structure for schemes to budget around. Unfortunately the mark-ups were simply converted to hidden rebates and subsequently hospital costs soared as from 1999 onwards.
Beyond 2006 the trend has continued with hospital inflation outstripping CPI by an average of 3.5% pa from 2007 to 2010.
The second key regulatory change came in 2005 from the Competition Commission – the body ruled that medical schemes could not collectively negotiate reimbursement tariffs with providers. This drove a wedge between the medical schemes, leaving much of the negotiating power and price determination in the hands of the monopolised hospital sector.
In response to outcries from the medical schemes, the collective establishment of an industry tariff was undertaken by the Department of Health resulting in the National Health Reference Price List (NHRPL). This ultimately mutated somewhat but its primary shortcoming was that it remained a voluntary reference against which medical schemes could not collectively negotiate. And to add insult to injury, a further Government process undertaken to establish a more industry representative tariff was declared irregular by the courts in 2010 and the entire structure was set aside.
And is it any surprise that it was the Hospital Association of SA, amongst other providers, that brought the case to the High Court?
To date the industry remains without a tariff benchmark and, even if it had one, schemes are prohibited from collectively negotiating provider reimbursement by virtue of competition law. Correcting these two fundamental flaws must be an urgent and imperative Government objective. Fortunately the Minister of Health has been making the right noises in this regard and appears to reflect the sense of urgency but whether he has the political will required to get this done is not clear.
Since the 2005 ruling from the competition authority, the disparity between the rate of reimbursement offered by medical schemes and the actual charges from medical specialists started to accelerate. This trend was confirmed in a Council for Medical Schemes (CMS) research study published in March 2008.
The industry norm was that members were being exposed to growing out-of-pocket healthcare costs. These were no longer confined to smaller manageable amounts involving day-to-day healthcare consumption but also large exposures from tertiary healthcare events such as surgery.
Medical schemes in response started seeking solutions and attempts were made to contract service providers into networks at pre-negotiated rates. Typically the pay-off for the provider is a greater volume of business albeit at a lower fee - in a perfect market this system is rational and achievable.
But the private healthcare sector, especially at a tertiary care level, is anything but a perfect market. Specialist services remain in high-demand and the extent of the services they deliver (i.e. the utilisation component of costs ) are largely self-determined.
This phenomenon of suppliers being capable of determining the demand levels, largely unique to healthcare markets, is known as ‘supplier induced demand’.
The issue of utilisation will not be touched on in this article save to mention 2 facets thereof - it contributes more substantially to cost escalations and is more difficult to control and regulate than the unit price (i.e. tariff) component of final healthcare costs. Secondly it brings into play the quality and efficiency of healthcare delivery – this aspect of healthcare management has by far the most potential for cost savings and improvement of outcomes but needs to be implemented once the ground work of establishing a pricing mechanism is in place.
The hospital infrastructure, that conveniently wrapped itself around the needs of the specialists, allowed them to continue their practice of supplier induced demand, resulting in growing utilisation of services. Hospital competition does not involve competing for patients as much as it does for medical specialists, who in turn, are going to put patients in their facilities.
It is well known in this country that specialists are provided with free or low cost services in exchange for keeping bed occupancy rates up. Specialists are also entitled to own hospitals or related facilities or their shares, a right that has been outlawed in many countries.
The above circumstances should elicit all forms of questions on medical ethics and the resulting moral hazards yet our Government sees no need to implement supply side regulations to avert these deleterious practices from continuing.
In doing so a meaningful impact could be made against the dramatic increases in tertiary costs and provide much needed relief to the private sector.
To get back to the networks, some functional networks of providers did emerge over the past few years but mainly in the categories of medical suppliers where demand and supply were better matched (such as dentistry, optometry, primary healthcare services, etc).
There is no legal requirement for any provider to enter a network under a contracted price so the success of these networks relies heavily on prevailing market forces. Not surprisingly, these were largely unsuccessful at tertiary care levels which are also where the mandatory PMB services focused.
What followed this can only be described as disregard for the most basic principles of risk management.
Subsequent to a review of the definition of reimbursement for PMB services in Section 8 of the Medical Schemes Act, the CMS insisted that medical schemes pay for the PMB mandatory treatment at actual cost and not scheme tariff.
The MSA was promulgated in 1998 with Section 8 intact as it is now, yet a decision that the definition “payment in full” means at cost and not at scheme tariff was only enforced some 12 years later.
This action means that the CMS is actually determining health policy as opposed to enforcing an existing regulatory framework. The CMS should have referred this matter to the Department of Health for consultation and engagement with stakeholders rather than taking the expedient route of claiming a victory for the consumer.
Their desire for public favour appears to have been driven by the complex and growing cost problems in the private sector but this short lived victory will result in more systemic cost escalations that will harm the very same constituency of consumers that the CMS are mandated to protect.
Unsurprisingly this ruling invoked medical schemes to take legal recourse via their representative body, the Board of Healthcare Funders (BHF). The CMS stood in opposition in court alongside the financial recipients of such a ruling, namely medical service providers, who clearly have a major interest in this outcome.
This battle has already gone one round in the legal ring with the CMS leading slightly on the points tally but it remains subject to the High Court’s final interpretation at some stage in the future.
Whilst sympathy can certainly be extended in favour of the consumer on this issue it is veritable suicide to compel a funder to meet open ended liabilities without any form of supply side price regulation. As explained earlier, providers already have substantial control of the utilisation aspect of health costs, and under this ruling will now also have unlimited price determination. In other words, complete control of the healthcare expenditure of the insured population.
Currently the only private sector price regulation that exists in SA is the Single Exit Price (SEP) on medicines.
In the face of all the evidence shown above the CMS have compelled all medical schemes to comply with ‘at cost’ payment for PMB services threatening schemes with deregulation should they not comply.
Providing an ‘at cost’ benefit alongside high demand for these services nullifies a critical aspect of potential risk management otherwise available to medical schemes. It leaves no space for price negotiation since no provider would be willing to enter into a network agreement involving price reduction if legally the provider is entitled to an unlimited income.
Under current medical scheme regulations a medical scheme is only compelled to pay at cost for a PMB service if the member involuntarily acquired the services from a ‘non-contracted’ service provider under certain circumstances such as a medical emergency. If a member receives PMB services from a ‘contracted’ network provider then the provider is paid in full in terms of the contract between the scheme and the provider and no shortfall will transpire.
However, and this is the rub, in the event that the scheme is unable to contract certain service providers then the relevant PMB services must be paid at cost regardless of who delivers them. And since there now exists even less incentive for providers to enter contracted network arrangements under the payment ‘at cost’ ruling, one can only believe that human nature will inflict its toll upon such an ill thought out policy.
In the first legal engagement between the BHF and the CMS, the CMS were presented with a copy of a circular from the South African Medical Association (SAMA) urging their members not to enter contracted network arrangements for PMB services since they could be paid at cost under the PMB ruling instead of accepting a lower contracted fee.
Further to this irony, the CMS published a circular late in 2011 castigating medical schemes for implementing such high contribution increases whilst acknowledging the following regarding increases for medical specialists and hospitals - “[the increases] cannot be rationally explained but might be attributed to market failures inherent within the private healthcare market”.
And so the vicious circle continues – as medical schemes are placed under more cost pressure even more non-PMB services will be carved out of current medical scheme benefits creating even more shortfalls in cover.
According to the latest annual report of the CMS for 2010, only slightly more than 50% of private hospital admissions were for a PMB condition so the scope to carve more and more out of existing benefit offerings is enormous.
In the 1980’s most medical scheme members enjoyed comprehensive benefit plans covering almost everything from unlimited medicines to specialised dentistry to comprehensive hospital care.
As cost pressures grew, more benefit options came about with limited benefits – schemes also made use of savings accounts to fund day-to-day benefits, thereby shifting these costs onto the members.
That trend continued strongly over the past 2 decades with only the bare minority of members now able to afford comprehensive plans. These benefit downgrades are so obviously a factor of affordability and have very little if anything to do with the availability of supplementary health insurance products as speculatively mooted in the draft demarcation regulations.
The CMS undertook their own survey regarding downgrades and concluded in their 2010 annual report that the majority of reasons revolved around affordability.
Paying out of pocket has become the norm rather than the exception. Services that are not a PMB are short paid, co-payments are applied or limits are imposed.
Given all of the above it is clear as to why medical schemes are grappling to control high tertiary costs. But the medical scheme market remains competitive so instead of giving consumers an increase of CPI plus 5 to 6%, each year they create options with less cover and you can have them at CPI plus 2 to 3%. Medical scheme increases for 2012 averaged around 9 to 12% - the anticipated CPI for 2012 is about 6%.
The disparity between the numbers is glaringly obvious. To illustrate the long-term impact, if a family is currently spending 13% of their net income on medical aid, quite a feasible percentage, and the differential between CPI and scheme increases is 4% pa, within 10 years that family’s medical aid spend will have grown to almost 20% of net salary in order to maintain the same benefits.
Given such onerous private sector issues, price negotiation between schemes and specialists could be virtually non-existent for many medical schemes. Possibly only the very large schemes will have any chance of using their volumes to influence specialist providers into networks but this will still be limited to those specialists where demand and supply have some element of equilibrium.
Over the past few years the health insurance industry found a growing demand from consumers for supplementary insurance to cover these high cost tertiary events not covered by their medical schemes. This accelerated the rise of the appropriately named ‘gap cover’ industry, none of which was by consumer choice but rather by direct experience of the inherent dysfunctions already elucidated above.
The point ‘supplementary’ above is underscored because without question it is not desirable that the insurance industry goes head-to-head with the medical schemes industry. Medical schemes are fundamentally more efficient funding vehicles since they do not pay tax or have shareholders and there is clearly a greater public need for an efficient mechanism of healthcare funding.
However, given all of the above, it is abundantly clear that an inclusive and co-operative approach to the demarcation regulatory framework is going to be vital in protecting the consumer.
The insurance industry has throughout all the proceedings leading up to the release of these draft Demarcation Regulations indicated a willingness to partake in a framework that will offer the necessary protection to medical schemes and simultaneously allow insurers to offer value added products to consumers.
The draft unfortunately ignores all input provided by the insurance industry and deploys a blunt and simplistic approach to the demarcating of health insurance products from medical schemes that in no way assists the consumer or medical schemes for that matter.
Should Government proceed with the regulations in their current form one can only imagine they will face a huge public backlash or even a legal challenge to the constitutional right of consumers to insure themselves against such intrinsically entrenched financial risks.
