Vicious cycle makes medical schemes expensive

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Cape Town - As the blame game of who is responsible for the high cost of private health care in South Africa continues, a Fin24 user, who works in the industry, adds his insights to the debate.

READ: Debate on private hospital costs heats up

Fin24 user Fred writes:

I have been reading the articles on private healthcare - and especially the comments they generate - with a lot of interest.

I would like to provide my personal view on some of the issues.

I work in the private healthcare industry for both medical schemes and providers.

In short, my job is to try and make the industry sustainable for everyone - members included.

As my salary is paid for by stakeholders in private healthcare, you could rightfully argue that I have a conflict of interest. Nevertheless I would like to give you my view from the inside.

Why medical schemes are expensive

In short, medical schemes have to provide a basic set of Prescribed Minimum Benefits (PMBs) and they are not allowed to vary contribution rates by age (as they were doing prior to 2000).

Both of these regulations provide excellent social protection for members in that they are assured that they will have cover for most life-altering healthcare issues.

They also won't be forced to pay extremely high contributions after they retire and no longer earn a salary.

It has created a problem in SA

Age is the single biggest factor in determining how much you expect someone to claim in a year.

What this means is that young members pay more than they claim, while older members tend to pay less than they actually claim, because they are subsidised by younger members.

This means younger, healthier members feel they are paying more than they should as they know they don't claim much.

This has lead to younger members opting to stay out of the system until they feel they require medical scheme cover.

Best example

The best example of this behaviour is a woman who joins a scheme three months before trying to start a family and then leaves after the child is born and healthy.

Assuming all goes well, the scheme will break even or lose a small amount of money.

As a practical example, a basic hospital plan will cost R1 500 per month. If the mother is on for 14 months - lets ignore contribution increases after 12 months for simplicity - then she will contribute R21 000.

The average total cost of a birth event (without complications) is around R30 000.

Research has shown that this behaviour is very prevalent and the proportion of women at child-bearing ages on schemes is higher than for the population as a whole.

There are other examples of similar behaviour, but this is one of the best documented.

Stuck in a vicious cycle

A side effect of this is that schemes have had to become very strict when evaluating whether or not to pay a claim or apply waiting periods.

What this means is that we are currently stuck in a vicious cycle where more younger members are staying out of the system until they actually need cover.

This means the costs of subsidising benefits for older members is spread over an ever smaller pool of young, healthy members.

This in turn leads to higher contribution increases - and/or reductions in non-PMB benefits - which in turn lead to more young members staying out of the system due to high contributions for poor benefits.

And so the cycle continues...

Tariffs agreed

The tariffs agreed between medical schemes and providers have been increasing by only slightly more than the Consumer Price Index (CPI) or sometimes even at the same rate.

The difference between these increases and the level of contribution increases can be attributed to the slow and steady ageing of the medical scheme population as younger members stay out of the system.

This is a simplification of a very complex environment and there are definitely other issues which drive costs such as poor governance and inefficient administration.

However, young healthy members opting to go without cover is undoubtedly one of the largest reasons we have high contribution rates.

A simple solution

One of the simplest fixes would be mandatory medical scheme membership for everyone who earns a taxable level of income.

This would lead to an immediate reduction in contribution rates as the cost of subsidising benefits for older members is spread over a larger pool of younger, healthy members who claim less than they contribute.

The young, healthy taxpayers of today would then be subsidised in their old age by the next generation of taxpayers who contribute to medical schemes.

This would also be a required initial step on the route to implementing National Health Insurance (NHI).

READ: Why private healthcare is expensive

Why healthcare providers are so expensive

It is true that providers are running a business and therefore they should reasonably be allowed to make a profit.

It is also true that they require a lot of costly training and have high running costs.

However, this doesn't justify some of the exorbitant fees that are being charged, nor does it mean that providers are necessarily overcharging on purpose.

Supply and demand

But think about this in terms of supply and demand: Highly specialised providers are extremely rare due to the training and costs and therefore they should be able to charge more than less specialised providers.

However, there is no mechanism regulating how much more they can charge and therefore it is up to them to set their own prices with no regulatory guidance.

We know that in most cases where there is no system to challenge prices - either competition or regulation - then prices tend to be higher than necessary.

Almost all developed countries have a fixed price schedule for healthcare services. The South African equivalent - National Health Reference Price List (NHRPL) - was ruled void in 2010 after it was opposed by providers.

Interestingly, the reason was not because the providers disagreed with fixed prices.

Rather, it was because the process for setting annual increases was unrealistic and rigid, leading to unrealistically low increases in prices. Providers also had limited say in setting the increases.

This in turn meant that, after a few years, prices were not realistic reflections of the cost of providing the services.

READ: Two sides to private hospital care

Possible solutions

In order to address this we will require some government or industry body (preferably the latter) with a mandate to provide guidance on setting prices in the private healthcare industry.

A longer term fix would be to enhance the capabilities of the state healthcare.

This would mean that the private providers have more competition and thus will be forced to reduce prices where possible.

It would also improve the health outcomes for poorer citizens, who cannot afford medical cover in the first place - which is a more significant advantage for society as a whole.

Simplistic view

This is a very simplistic view of the key issues in my mind and there are other issues that will also need to be addressed in order to make private healthcare cheaper.

Personally, I am looking forward to the outcome of the inquiry into the private healthcare market and hope that it results in a change for the better.

ALSO READ: Payment of private hospital staff questioned

- Fin24

Disclaimer: All articles and letters published on MyFin24 have been independently written by members of the Fin24 community. The views of users published on Fin24 are therefore their own and do not necessarily represent those of Fin24.

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