Making sense of rising private healthcare costs

September 7 2012 at 01:56pm

The latest CMS annual report (2011/12) shows that medical scheme expenditure on private hospitals increased by 9.7%; from R30.8 billion in 2011 to R33.8 billion in 2012. Given the assertions made in this report about pricing in the private hospital sector, Mediclinic believes it is imperative to provide greater clarity on this issue. There are three main components that drive expenditure in the medical scheme environment:

An increase in the number of beneficiaries between 2010 and 2011
An increase in private hospital tariffs (price)
An increase in the utilisation of private hospitals services (i.e. an increase in the admission rate and an increase in the average length of stay per admission)

Research has shown that increase in utilisation is by far the greater driver of health care expenditure within the medical schemes environment than actual hospital prices.

	2010	2011	Annual increase
Expenditure on private hospitals (R)	30 800 000 000	33 800 000 000	9.7 percent
Average beneficiaries	8 243 527	8 398 513	1.9 percent
Expenditure on pvt hospitals pabpm	311	335	7.6 percent
Less CPI			5.0 percent
Less real hospital price inflation STATSSA			0.5 percent
= Utilisation			2.2 percent

The table shows that after removing the effect of the growth in the number of beneficiaries covered by medical schemes, the increase in expenditure on private hospitals per beneficiary was 7.7% from 2010 to 2011.

After removing the effect of the growth in the number of beneficiaries covered by medical schemes, the increase in expenditure on private hospitals per beneficiary was 7.7% from 2010 to 2011.

Data from STATSSA indicates that the CPI for 2011 was 5%, while private hospital tariff inflation for 2010 to 2011 was 5.5%. This means that private hospital inflation over and above the CPI was only 0.5 percentage points. This then leaves a residual 2.2% attributable to increase utilisation of hospital services.

It is therefore clear that utilisation (2.2%) had a much greater impact than real hospital price inflation (0.5%) on the increase in private hospital expenditure. In fact the effect of utilisation was 4.4 times that of the real hospital price increase.

This recent evidence of increased utilisation of private hospital services from the CMS report is consistent with the data published by Econex in the note entitled Medical Scheme Expenditure on Private Hospitals. In this note Econex illustrates that utilisation of private hospitals has increased significantly over the last five years with beneficiaries being admitted to private hospitals more frequently and for longer durations. Econex further demonstrates that this increase in utilisation is the driving factor behind the increase in medical scheme expenditure on private hospitals each year, and therefore the increases in contribution rates faced by members each year.

The CMS has made no attempt to quantify the increased expenditure on private hospitals into the components identified above. It seems that the CMS is unaware of the impact that the increased utilisation of private hospital services is having on the increase scheme expenditure on private hospitals. To assume that the increase in scheme expenditure on private hospitals is mainly driven by hospital price inflation is simply incorrect, especially when the data indicates otherwise. It is therefore of great concern that the CMS recommends the regulation of private hospital prices as a solution to "ever-escalating costs in the industry".

In addition, Mediclinic has engaged with the CMS with evidence of the increased utilisation trends and its impact on the industry. It is disappointing that these efforts made by Mediclinic have gone unnoticed, with the CMS insisting that price regulation will curb the contribution rate inflation in the future.

Mediclinic is further disappointed with the following statements made in the CMS report:

Price regulation of private hospitals will address the "unfair billing practices" in the market. It is unclear which "unfair billing practices" the CMS is referring to, as all private hospitals enter into negotiated contracts with every single medical scheme at the beginning of each year. These contracts are then in force for the duration of the year and private hospitals are contracted to charge only these tariffs for every service sold to the medical scheme.

The myth surrounding PMBs

The claim that PMBs are making the industry unsustainable by driving up the cost of care is unfounded. As discussed above, it is the increase in the utilisation of medical services that is the primary driver of the high levels of contribution inflation experienced within the industry.

Data from the Econex note suggests that the increase in utilisation of medical services is due to a deterioration in the demographic profile of the medical scheme population. This is because the current regulatory environment of open- enrolment and community rating without mandatory membership or a risk equalisation fund encourages anti-selective behaviour of members, resulting in a worsening risk profile of the medical scheme pool each year.

The fact that restricted schemes (which operate more like a mandatory enrolment environment) have a 12% lower contribution rate than open schemes is indicative of the impact of anti-selection on the contribution rate increases in the open schemes.

Medical scheme consolidation

The CMS acknowledges that there has been significant consolidation in the medical scheme market. However, the CMS states that there is no evidence that this consolidation has strengthened the medical schemes bargaining power in the tariff negotiating process. This statement from the CMS is untrue and proof of the contrary is evident in the benefit design of medical schemes.

Medical schemes have implemented doctor and hospital networks, imposing a 25% co-payment for use of providers outside the network. This lack of concern for the hospital groups, the doctors and even their own beneficiaries indicates the extent of bargaining power of the medical schemes.

Medical scheme financial performance

Despite schemes making a relatively small surplus in 2011 of R1 billion (R460 million deficit in 2010), schemes were able to accumulate an additional R4.3 billion in reserves. It is also important to note that the industry average solvency ratio increased to 32.6% compared to 31.8% in 2010, higher than the prescribed level of 25%. This gives an indication that medical schemes are in a good financial health and able to accrue significant amounts of cash despite the challenges they face.

* Article sponsored by Mediclinic.

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