Debate on high private hospital costs hots up

Johannesburg - The debate regarding private hospital costs is heating up with a medical scheme hitting out at the largest private hospital groups, while two of these explain their side of the coin.

The three largest hospital groups in the country, Netcare, Life Healthcare and Mediclinic declared year-on year profit increases of between 17.8% to 25% at the end of their most recent financial year ends, according to Dr Bobby Ramasia, principal executive officer of Bonitas Medical Fund, the second largest open medical scheme in South Africa.  

“This should be seen in the context of an environment where the average man in the street is struggling to keep up with medical scheme contributions,” said Ramasia.

He pointed out that Bonitas’ hospital costs are the medical scheme’s single biggest ticket item and account for over 44% of the scheme’s total annual expenditure on claims.

The scheme’s hospital claims have also been increasing by more than 10% (per life per month) since 2011 and the scheme’s projections indicate that this figure will increase by 10.8% in 2014.  

“Hospital tariffs are set through annual negotiations between medical schemes and hospitals. These negotiated tariffs remain fixed throughout the year and the balance of power is clearly biased in favour of the listed private hospital groups,” he said.

Medical schemes are relatively fragmented with just over 90 registered medical schemes serving private medical scheme members.

By contrast, he said, the private hospital sector is highly concentrated with the three largest private hospital groups accounting for approximately 80% of all hospital spend.

“This is detrimental to medical scheme members, who have been saddled with contribution increases in excess of the Consumer Price Index (CPI) and reductions in benefits to keep the medical schemes sustainable," said Ramasia.

"Fee increase negotiations with hospitals should focus on volume as well as the value it adds.”   

Ramasia said all stakeholders within the healthcare industry have a responsibility to seek ways to make healthcare more affordable in South Africa.

“However, hospitals in particular, which represent the single largest source of expenditure, should come to the party by reinvesting a portion of their profits towards making medical schemes more sustainable by being more forthcoming during fee negotiations," said Ramasia.

“We look forward to partnering with hospitals going into 2015 in anticipation of minimising member contribution increases.”         

Ramasia responds to more questions from Fin24:

Why should the big private hospital groups help medical funds to be sustainable? Is it not the nature of the private sector to work on supply and demand?

In normal circumstances the market or demand dictates pricing. However, in the medical scheme industry the law of supply and demand is distorted in that medical schemes pay most, if not all of the hospital costs.

Patients or members are generally not involved in the settlement of the hospital invoices as most are dealt with electronically and are thus unaware of the costs involved or how hospital costs affect their medical scheme contributions.

In addition, it is the norm for doctors or specialists to specify which hospital patients should use and it is fair to say that very few patients “shop around” for the most cost effective hospital rates.

Are you insinuating that the big private hospital groups are breaking the law or are acting in a non-ethical way? If so, please provide more details.

Absolutely not. At least a portion of the profits made by hospitals are due to improvements in efficiency and there is nothing unethical about making a profit.

However, as mentioned before, hospitals account for about 40% of total medical schemes and we are asking hospitals to become more forthcoming during fee negotiations with medical schemes.

Hospitals could make a significant impact on the medical scheme affordability by reinvesting at least a portion of their profits in the form of lower negotiated fees.

That would be good corporate citizenship in action as suggested by King III.  

Is it a fact that members of medical schemes are partly funding the expansion of the big hospital groups or is this just an opinion? If a fact, please provide further details or proof.

About 80% of patients who make use of private hospitals are private medical scheme members and as such they are the primary source of revenue and profits.

It is fair to assume that at least some is being used to fund overseas expansion.
What is the role of the Medical Council or other industry bodies in finding a balanced approach?

They all have a role to play in regulating the industry and as you are probably aware a Competition Commission inquiry into the costs of private healthcare is currently underway.

Fin24 also approached the big three private hospital groups in SA. Only two responded.

Mark Bishop, head of business services at Netcare [JSE:NTC]:

Netcare notes that expenditure on hospitals will be the largest element of a medical scheme costs, the Council for Medical Schemes (CMS) has confirmed on Tuesday that 35.3% of medical scheme costs was related to hospitals in 2013.  This compares to the 44% reported by Bonitas.

Hospitals are the largest investor in infrastructure and the largest employer of medical staff in the healthcare industry.

It being noted that over two thirds of the costs of running hospitals will be related to staff and that it is well known that there is a shortage of nurses in SA.

The cost of labour, therefore, has a direct impact on the price of healthcare and thus on the annual increase in the prices and tariffs charged.

The cost paid by a medical scheme is a function both of the price and volumes of services it purchases from hospitals.

It is noteworthy that hospital prices have tracked medical inflation for many years and that South Africa has one of the smallest differences between Consumet Price Inflation (CPI) and medical inflation.

Volumes, however, have increased due to the increasing disease burden.  

Netcare actively engages with all schemes to assist them in their drives to reduce their costs.

These include tariff structures which transfer risk to the provider, case management processes followed by Netcare employed case managers to manage the costs and utilisation of each hospital event, and other programmes.

In addition Netcare carefully considers its annual increases to ensure that these are not inflationary, but are aligned with the increase in the cost of service delivery.

Dr Kamy Chetty, executive: strategic relations and health policy at Life Healthcare [JSE:LHC]:

Thank you for giving us the opportunity to respond.

The points raised [by Bonitas] are the very issues that the Competition Commission will be addressing through its inquiry into the private healthcare market.

The inquiry will be comprehensive and has called for submissions to be made by all parties.

Bonitas can submit their input and the Commission will, at the end of the inquiry, make its findings based on the factual evidence presented to it.

- Fin24

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