What is making medical cover costly?

2012-07-21 09:52

Maya Fisher-French unpacks the healthcare industry to understand why it is becoming increasingly unaffordable to get sick

The recent challenge by members of Discovery Health Medical Scheme regarding its administrative charges highlights the pressure that individuals are feeling due to rising healthcare costs, which are increasing well above inflation.

While administration costs are one area that members can apply pressure, this area is a relatively  small percentage of a medical scheme’s total cost.

According to the Council of Medical Schemes’ yearly report, about R84 billion was spent on direct healthcare costs for about 8.5 million beneficiaries, which works out to an average of R10 000 per beneficiary.

Administration costs amounted to R7.8 billion and broker costs were about R1.2 billion.

The industry average for medical administration as a percentage of total premiums is about 10%, and the total non-healthcare expenditure is 15% of total premiums, including administration and other  costs such as marketing and broker fees.

Non-healthcare expenditure is a significant portion of total costs and is easier to manage than medical costs.

So members should question them, especially as the Council for Medical Schemes makes the point that larger administrators do not appear to offer any cost advantages over their smaller rivals, which
suggests they have room to improve efficiency.

However, a 2% or 3% reduction in administration costs is not going to stop the rapid yearly increases in our medical scheme premiums.

According to Damian McHugh, the head of sales and marketing at Momentum Health, hospital costs make up the bulk of healthcare costs – about 37% of total premiums.

Expenditure on specialists accounts for 22%, medicines 17%, and general practitioners and other healthcare providers account for 7%.

McHugh says there is a focus on administrators to drive down fees in order to make more of the contributions received available for the paying of claims.

However, on the claims costs side, there is limited regulation and healthcare providers are free to charge as they wish.

McHugh says: “This creates a potential cost problem, especially with the low number of certain providers available such as specialists.

“In economic terms, low supply combined with a rather unrealistic demand for a certain service, we will experience a higher than normal increase in price in the absence of price regulation.”

For many medical schemes, the biggest cost driver are the Prescribed Minimum Benefits (PMBs).

Legislation relating to PMB compels medical schemes to pay service providers for treatment of PMB conditions at full cost.

Nick Rudston, the executive head of closed schemes at Metropolitan, says the concern is that healthcare providers use this legislation to charge fees well in excess of commonly used tariffs.

According to Heidi Kruger, the corporate communications head at the Board of Healthcare Funders, the requirement to pay PMBs at full cost is creating a major cost spiral.

She says: “If the current scenario is not checked, we could see the end of more schemes, or them merging. This scenario creates an open-ended liability for schemes as they can’t know what they are going to have to pay out.

It also makes budgeting very difficult.”

Discovery’s Jonathan Bloomberg says PMBs are not a major cost pressure for the scheme as the administrator has signed direct payment agreements with many doctors and specialists, and generally hospital costs and doctor fees are contained.

However, the rising incidence of chronic diseases – cancer in particular – and the associated high cost of treatment is a major concern for the scheme.

Liberty Medical Scheme’s executive principal officer, Andrew Edwards, shares Discovery’s concern about the mounting cost of specialised medications, which is only beneficial to a minority of beneficiaries yet is steadily pushing up the medicine bill.

For example, Herceptin treatment for a person with HER2 positive breast cancer costs as much as R90 000 for nine weeks and R390 000 for 12 months, while the cost of Gleevec (for Philadelphia chromosome positive chronic myeloid leukaemia) is R360 000 per year and continues as long as the patient responds, which could be several years.

In instances of resistant disease, the cost could be as much as R720 000 per year.

Edwards says the pipeline in the arena of expensive specialised medicines is reported to be extensive.

“It appears that much of the research and development focus of many multinational drug companies is directed at the development of niche products intended for managing catastrophic diseases that afflict a relatively small number of people (as compared with other chronic diseases such as hyperlipidaemia or hypertension),” he says.

Bloomberg says new treatments and technologies are coming in at multiples of the cost of older technologies which, combined with the higher incidence in chronic illness, is creating an explosion in healthcare costs.

Bloomberg says that 12 years ago, only about 1.5% of claims were more than R500 000.

Now, according to him, nearly 5% of claims are in excess of R500 000.

This tripling in high cost claims is due to the combination of increased illness and the cost of new technologies to treat them.

For example, the increase in multiple births through the use of in vitro fertilisation has resulted not only in an increase in the number of premature babies, but also in technologies to save their lives, which come at a high cost.

It is not unusual for a medical scheme to pay R1 million to cover the costs of a premature birth.

Bloomberg says a major problem remains the over-servicing or wasteful expenditure in South Africa’s private healthcare system.

For example, South Africa has one of the highest rates of Caesarean-section procedures in the world.

There is also a tendency for excessive testing and medical investigations when compared with global practices, and the industry needs a more integrated approach to lessen the duplication of tests and have a formal protocol on treatment and investigation.

Kruger agrees, saying: “The current system allows overservicing, entrenches fraud and does nothing to align the incentives between the funders and the providers.”

According to him, the Board of Healthcare Funders is engaged in many interventions, including legal cases, and engaging with government to try to curb costs.

“Some of the interventions are going to include legislative changes – things like bringing in a regulated tariff for providers and bringing in mandatory cover for people earning above a certain threshold,” says Kruger.

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