Discovery Health - Healthcare Inquiry [PDF]

Discovery Health Submission to the Competition Commission Market Inquiry into the Private Health Sector 17 November 2014

Discovery Health Submission

17 November 2014

Contents Executive Summary ....................................................................................................................................................ix Overview.......................................................................................................................................................................... ix Drivers of medical scheme claims inflation ...................................................................................................................... x Provider Markets ........................................................................................................................................................... xiii Competition and governance in the medical schemes and administrator markets......................................................xvii Managed care and the role of Vitality ........................................................................................................................... xxii Consumer choice and information ............................................................................................................................... xxiii Non-medical scheme health insurance products ......................................................................................................... xxiv Recommendations......................................................................................................................................................... xxv 1 Introduction ........................................................................................................................................................ 1 2 Medical Inflation ................................................................................................................................................. 1 2.1 Premium setting .................................................................................................................................................... 13 2.2 Headline premium increases vs actual increases in scheme premium income received ...................................... 17 2.3 Components of premium inflation ........................................................................................................................ 19 2.4 Drivers of medical scheme claims inflation ........................................................................................................... 20 2.5 Tariff inflation ........................................................................................................................................................ 23 2.6 Demand side factors .............................................................................................................................................. 28 2.6.1 Impact of age on demand for healthcare ................................................................................................. 29

2.7

2.6.2

Impact of chronic disease prevalence on demand ................................................................................... 35

2.6.3

Other factors impacting on the demand for healthcare ........................................................................... 38

2.6.4

The role of adverse selection in driving demand for healthcare .............................................................. 40

Supply side factors................................................................................................................................................. 48 2.7.1 Hospital admission rates in excess of those predicted by demographic factors ...................................... 51 2.7.2

Increased utilisation of radiology and pathology investigations .............................................................. 58

2.7.3

Changes in health professional billing and coding .................................................................................... 59

2.8 Claims increases by category of health professional and medical service provider ............................................. 63 2.9 Non-health expense inflation ................................................................................................................................ 70 2.10 The impact of reserve building on medical scheme costs ..................................................................................... 73 2.10.1 Shortcomings of the current approach to medical scheme solvency regulation ..................................... 76 2.10.2

Solvency requirements treat schemes with different risk profiles in the same way ................................ 78

2.10.3

Solvency requirements treat schemes with the same risk profile in different ways ................................ 81

2.10.4 Solvency requirements are expensive for medical scheme members, and have a negative impact on the broader economy ..................................................................................................................................................... 82 2.10.5

Summary of the shortcomings of the solvency requirement ................................................................... 85

2.11 Out-of-pocket payments ....................................................................................................................................... 85 Appendix 1: Components of plan-mix adjusted premium increases .............................................................................. 88 Appendix 2: Methodology for Figure 2-5 ....................................................................................................................... 91

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Appendix 3: Deloitte Opinion ......................................................................................................................................... 92 3 Characteristics of health professional and service provider markets and the role of administrators in negotiating with providers ....................................................................................................................................... 95 3.1 Hospitals ................................................................................................................................................................ 99 3.1.1 Characteristics of the private hospital market in South Africa ................................................................. 99 3.1.2 3.2

Health Professionals ............................................................................................................................................ 117 3.2.1 Characteristics of the health professional market in South Africa ......................................................... 117 3.2.2

3.3 3.4

DH’s role in managing health professional costs .................................................................................... 122

Pathology ............................................................................................................................................................. 125 Medicines ............................................................................................................................................................ 130 3.4.1 Characteristics of the medicine market in South Africa ......................................................................... 130 3.4.2

3.5 3.6

DH’s role in managing hospital costs on behalf of client schemes ......................................................... 108

DH’S role in negotiating medicine prices and managing medicine utilisation ........................................ 140

Factors constraining the strategic purchasing function of schemes and MCOs .................................................. 142 Access to information on quality of care ............................................................................................................. 145 3.6.1 DH’s role in collecting and disseminating quality of care data ............................................................... 147

Appendix: Comparisons of clone/generic and originator product pricing and usage .................................................. 151 4 Competition and governance in the medical schemes and administrator markets ......................................... 154 4.1 Overview of medical schemes and administrators’/ managed care organisations’ activities ............................ 160 4.1.1 Medical schemes..................................................................................................................................... 160

4.2 4.3

4.4

4.1.2

Medical scheme administration ............................................................................................................. 161

4.1.3

Managed care services ........................................................................................................................... 162

Regulatory environment...................................................................................................................................... 163 The competitive landscape .................................................................................................................................. 165 4.3.1 Competition between schemes for beneficiaries ................................................................................... 167 4.3.2

Competition for medical scheme administration ................................................................................... 179

4.3.3

Trends in market shares and concentration ........................................................................................... 194

The relationships between medical schemes and administrators/ managed care organisations ...................... 197 4.4.1 Key provisions of the Act regarding the relationship between medical schemes and their administrators and managed care organisations ............................................................................................................................ 197 4.4.2

The contractual relationship and governance arrangements between DH and its client schemes ....... 198

4.4.3

The relationship between DH and DHMS ............................................................................................... 199

Appendix 1: Technical marketing comparisons ............................................................................................................ 215 Appendix 2: Medical schemes – share of beneficiaries ................................................................................................ 220 Appendix 3: Administrators – share of beneficiaries ................................................................................................... 225 Appendix 4: Illustration of cost savings achieved by DH for its restricted schemes .................................................... 228 Appendix 5: DHMS/DH Service Level Agreements ....................................................................................................... 233 5 Managed care and the role of Vitality ............................................................................................................. 254 5.1 Units and services supporting managed care services ........................................................................................ 256 Discovery Health Submission

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5.2 DH managed care services .................................................................................................................................. 257 5.3 Financial return on investment ........................................................................................................................... 260 5.4 Improvement in quality of care and health outcomes ........................................................................................ 261 5.5 Conclusions on managed care interventions ...................................................................................................... 262 5.6 The role of Vitality ............................................................................................................................................... 262 Appendix....................................................................................................................................................................... 266 6 Consumer choice and information .................................................................................................................. 268 6.1 Introduction ......................................................................................................................................................... 268 6.2 Factors affecting consumers’ choice of scheme .................................................................................................. 269 6.3 Factors affecting consumers’ choice of scheme benefit options ........................................................................ 271 6.4 The role of brokers and information dissemination ............................................................................................ 273 6.5 Ongoing innovation as a factor in medical scheme choice ................................................................................. 274 Appendix....................................................................................................................................................................... 275 7 Non-medical scheme health insurance products ............................................................................................. 281 7.1 Impact of the regulatory environment on insurance products and medical schemes........................................ 283 7.1.1 How health insurance products compete as “alternatives” to medical schemes .................................. 284 7.1.2 7.2

How health insurance products compete for share of premium ........................................................... 284

Impact of these products on medical schemes ................................................................................................... 285 7.2.1 The negative impact of buy-downs on medical schemes ....................................................................... 285 7.2.2

The negative impact on scheme design and compliance with PMBs ..................................................... 286

7.2.3

The negative impact on medical scheme’s ability to attract low income consumers ............................ 287

7.3

Conclusions .......................................................................................................................................................... 287 8 Optimising the interactions between the public and private healthcare systems ........................................... 289 8.1 Health professional, health informatics and management education and training ........................................... 289 8.2 Use of private facilities and services to fill gaps in public sector service delivery ............................................... 289 8.3 Use of private sector organisations to manage public facilities .......................................................................... 291 8.4 Public sector competition with private healthcare facilities and services .......................................................... 291 8.5 Leasing unused public facilities to private operators .......................................................................................... 292 8.6 Expanding medical scheme coverage to relieve pressure on the public healthcare system .............................. 293 9 Recommendations .......................................................................................................................................... 294 9.1 Recommendations to reduce medical inflation and to reduce the level of medical scheme premiums ............ 300 9.1.1 Address the problem of adverse selection through mandatory cover or stronger underwriting protection for medical schemes ............................................................................................................................. 300 9.1.2

Address factors artificially increasing scheme premiums ....................................................................... 310

9.1.3

Address the inflationary aspects of current PMB legislation .................................................................. 314

9.1.4

Summary: impact of implementing recommendations to reduce medical scheme premium inflation . 315

9.2

Measures aimed at increasing access to medical schemes for low income families .......................................... 316 9.2.1 Low Income Medical Scheme (LIMS) ...................................................................................................... 316

9.3

Measures to improve competition, efficiency and quality of care in the delivery of healthcare services .......... 317 9.3.1 Health professionals ............................................................................................................................... 317

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9.3.2

Hospitals and facilities ............................................................................................................................ 322

9.3.3

Medicines ................................................................................................................................................ 325

9.4 Establishment of a health services regulatory agency ........................................................................................ 326 9.5 Optimising the interface between the public and private healthcare systems .................................................. 327 Appendix 1: Extending cover to uncovered households .............................................................................................. 329 Appendix 2: Underwriting provisions ........................................................................................................................... 330 Appendix 3: Operating results of delaying plan upgrades............................................................................................ 331 Appendix 4: Analysis of differential increases across scheme options ........................................................................ 332 Appendix 5: Summary of the LIMS study and key findings .......................................................................................... 334 Glossary .................................................................................................................................................................. 336

List of Figures Figure 1-1: Corporate structure of Discovery Ltd and Discovery Health ..................................................................... 3 Figure 2-1: Healthcare inflation above CPI, % ........................................................................................................ 12 Figure 2-2: Headline vs. Actual premium increase for the 9 largest open schemes: 2009-2013 ................................ 18 Figure 2-3: Components of plan mix adjusted premium increases between 2008 and 2013, in Rands plpm ............... 20 Figure 2-4: Components of plan mix adjusted premium increases between 2008 and 2013, in Rands plpm ............... 21 Figure 2-5: Claims increases by component for DHMS 2008 – 2013 ........................................................................ 23 Figure 2-6: Tariff inflation compared to CPI .......................................................................................................... 24 lpFigure 2-7: Relative contributions of service provider categories to average tariff inflation ................................... 25 Figure 2-8: [confidential] ..................................................................................................................................... 26 Figure 2-9: Tariff increases for individual providers compared to inflation 2008-2013 .............................................. 27 Figure 2-10: SEP increases for 2008-2013 compared to inflation ............................................................................ 28 Figure 2-11: Industry PMB cost plpm (2005 terms) for females .............................................................................. 30 Figure 2-13: Industry PMB cost plpm (2005 terms) for males and females .............................................................. 31 Figure 2-14: Premiums compared to claims per age band ...................................................................................... 32 Figure 2-15: Average age per life: 2008 - 2013 ...................................................................................................... 33 Figure 2-16: DHMS age distribution over time ...................................................................................................... 34 Figure 2-17: The change in chronic prevalence for DHMS by age band: 2008 to 2013 .............................................. 36 Figure 2-18: Duration of members on DHMS who claim for biologics ...................................................................... 38 Figure 2-20: Age distribution of membership using different definitions of Medical Scheme membership ................. 43 Figure 2-21: Medical scheme members expressed as a % of mandatory formal wage earners .................................. 44 Figure 2-22: Average family size of members on medical schemes ......................................................................... 45 Figure 2-23: Proportion of female lives using different definitions of Medical Scheme membership ......................... 46 Figure 2-24: Proportion of female lives per age band ............................................................................................ 47 Figure 2-25: Increases in claims cost attributable to tariffs, demand and supply side effects .................................... 49 Figure 2-26: Admission Rate by Year: 2009-2013................................................................................................... 52 Figure 2-27: Caesarean deliveries as a proportion of births: 2008-2013 .................................................................. 54 Figure 2-28: DH's experience with high cost drugs: 2008-2013 ............................................................................... 55 Figure 2-29: Casualty admission rate per year: 2008-2013 ..................................................................................... 56 Figure 2-30: Average number of health professionals per admission: 2008-2013 ..................................................... 57 Figure 2-31: Average number of visits per health professional per admission .......................................................... 57 Figure 2-32: Pathology visit rate per 1,000 lives: 2008-2013................................................................................... 58 Discovery Health Submission

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Figure 2-33: Prevalence of Bipolar and Major Depression by option and year (per 1,000 relevant lives): 2008-2014... 60 Figure 2-34: Out of hospital back pain diagnosis: 2008-2013 .................................................................................. 61 Figure 2-35: In hospital back pain diagnosis: 2008-2013 ........................................................................................ 61 Figure 2-36: Impact of unbundling of musculoskeletal codes: changes in the proportion of admissions and cost incurred: 2009-2013 ........................................................................................................................................... 62 Figure 2-37: [confidential] ................................................................................................................................... 69 Figure 2-38: [confidential] ................................................................................................................................... 70 Figure 2-39: Cumulative change in NHE based on per member per month costs ...................................................... 72 Figure 2-40: Cumulative change in DHMS broker fees - 2008 baseline based on per member per month costs .......... 73 Figure 2-41: % Reserves required to avoid insolvency due to scheme volatility with a probability of 99.5% for different scheme sizes ...................................................................................................................................................... 79 Figure 2-42: In-hospital coverage ratio: 2008-2013 ............................................................................................... 86 Figure 2-43: Overall in and out of hospital coverage ratios: 2008-2013 ................................................................... 87 Figure 2-44: Factors contributing to DHMS annual premium increases ................................................................... 88 Figure 2-45: Components of overall premium increase between 2008 and 2013, in Rand plpm ................................ 89 Figure 2-46: Components of plan mix adjusted premium increase between 2008 and 2013, in Rands plpm ............... 90 Figure 3-1: Supply of private hospital acute beds in 2012, per 1,000 insured lives, by DH referral region and network contribution ..................................................................................................................................................... 100 Figure 3-2: Concentration index per region by network contribution .................................................................... 101 Figure 3-3: Bed Supply and Concentration Index by Region .................................................................................. 101 Figure 3-4: DH experience in KZN following the opening of Hillcrest ..................................................................... 104 Figure 3-5: Growth in KeyCare and Delta Plans ................................................................................................... 111 Figure 3-6: [confidential] ................................................................................................................................... 112 Figure 3-7: [confidential] ................................................................................................................................... 113 Figure 3-8: [confidential] ................................................................................................................................... 114 Figure 3-9: Doctors per 1,000 insured lives by referral region. 2012 ..................................................................... 120 Figure 3-10: National market share for the three main groups 2010-2013 ............................................................ 126 Figure 3-11: Estimated regional market shares for the top 3 Pathology groups and Vermaak – 2013 ...................... 126 Figure 3-12: Pathology cost generated by Lab Group and Hospital Network .......................................................... 128 Figure 3-13: Pathology cost generated by major lab group and small hospital groups - 2013 .................................. 128 Figure 3-14: Adoption of generic medicines for in hospital and out of hospital ...................................................... 138 Figure 3-15: Utilisation of Efexor versus generics ................................................................................................ 140 Figure 3-16: Impact of Drug Utilisation Review (DUR) on usage of preferred medicines 2012-2013. ........................ 141 Figure 3-17: Utilisation of Coversyl versus clones and generics ............................................................................. 153 Figure 4-1: Schematic of competition by administrators and managed care organisations for schemes and beneficiaries ....................................................................................................................................................................... 167 Figure 4-2: New DHMS business written by distribution channel, based on annualised premium income (monthly, January 2012 – June 2014) ................................................................................................................................ 173 Figure 4-3: Advertising spend for large open schemes September 2013-August 2014, by media type. ..................... 177 Figure 4-4: Average 2014 contribution for a family of four ................................................................................... 206 Figure 4-5: Beneficiary growth for DHMS over the period 2008-2013 relative to the industry ................................ 209 Figure 4-6: Average beneficiary age of DHMS relative to industry ........................................................................ 210 Figure 4-7: Surplus generation trends against industry, R’m ................................................................................. 211 Figure 4-8: Real administration and managed care fees Rands per member per month: 2008-2014 ........................ 213 Figure 4-9: DHMS has maintained the highest possible credit rating for 14 consecutive years ................................ 215 Figure 4-10: The continued ability to attract relatively young members impacts positively on age profile................ 216 Discovery Health Submission

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Figure 4-11: DHMS reserves are higher than the next nine largest open schemes .................................................. 216 Figure 4-12: DHMS has the lowest cost inflation in the industry ........................................................................... 217 Figure 4-13: DHMS annual contribution increases consistently lower than other open schemes since 2008 ............ 217 Figure 4-14: DHMS remains the most affordable medical scheme choice across the plan spectrum ........................ 218 Figure 4-15: [confidential] ................................................................................................................................. 218 Figure 4-16: [confidential] ................................................................................................................................. 219 Figure 4-17: [confidential] ................................................................................................................................. 219 Figure 4-18: Example of cost savings achieved by DH: “Medical Scheme X” ........................................................... 228 Figure 4-19: Example of cost savings achieved by DH: “Medical Scheme Y” ........................................................... 229 Figure 4-20: Illustration of key performance indicators for DH’s “Medical Scheme Z” ............................................ 230 Figure 4-21: Summary of cost savings achieved by DH for “Medical Scheme A” (2012) .......................................... 231 Figure 4-22: Example of cost saving initiative "Rapid Recovery Project" ................................................................ 231 Figure 5-1: Number of ongoing and new managed care initiatives over the past 5 years. ....................................... 256 Figure 5-2: [confidential] ................................................................................................................................... 259 Figure 5-3: [confidential] ................................................................................................................................... 261 Figure 5-4: Impact of Vitality engagement on hospital-related costs in DHMS for different diseases ....................... 263 Figure 5-5: Impact of fitness engagement on hospital admissions and costs .......................................................... 264 Figure 5-6: Savings due to Vitality and risk management ..................................................................................... 265 Figure 6-1: Most important factors influencing employers’ choice of medical scheme 2014 ................................... 270 Figure 6-2: Choice of 15 benefit options to suit varying medical needs ................................................................. 271 Figure 9-1: Lifetime present value without LJPs applied ....................................................................................... 305 Figure 9-2: Impact of current LJP structure ......................................................................................................... 306 Figure 9-3: Impact of proposed LJP structure ...................................................................................................... 307 Figure 9-4: DHMS pensioner ratio from 2008 to 2013 .......................................................................................... 307

List of Tables Table 2-1: DHMS plan mix adjusted claims increase versus actual claims increase: 2008-2014.................................. 16 Table 2-2: DHMS published premium increases per life versus actual premium increases: 2008-2014 ....................... 18 Table 2-3: DHMS plan mix adjusted claims inflation versus CPI: 2008-2013 ............................................................. 22 Table 2-4: Claims and premium comparison of sample options and age bands for 2013........................................... 31 Table 2-5: Claims and premium comparison of sample options and age bands for 2013, split by chronic status ......... 35 Table 2-6: Differences in the REF industry community rate for different population groups ..................................... 47 Table 2-7: Selection effect of members changing to the Executive and Classic Comprehensive Plans ........................ 48 Table 2-8: Total supply side impact and plpm: 2009-2013 ...................................................................................... 51 Table 2-9: Supply side impact by category plpm: 2009-2013 .................................................................................. 51 Table 2-10: Cost impact of additional admissions above the level expected: 2009-2013 ........................................... 52 Table 2-11: Residual cost plpm and impact on scheme expenditure: 2009-2013 ...................................................... 58 Table 2-12: Cost of unbundled codes: 2009-2013 .................................................................................................. 62 Table 2-13: [confidential] .................................................................................................................................... 63 Table 2-14: [confidential] .................................................................................................................................... 64 Table 2-15: [confidential] .................................................................................................................................... 64 Table 2-16: [confidential] .................................................................................................................................... 65 Table 2-17: [confidential] .................................................................................................................................... 65 Table 2-18: [confidential] .................................................................................................................................... 66

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Table 2-19: [confidential] .................................................................................................................................... 67 Table 2-20: [confidential] .................................................................................................................................... 67 Table 2-21: [confidential] .................................................................................................................................... 68 Table 2-22: [confidential] .................................................................................................................................... 68 Table 2-23: [confidential] .................................................................................................................................... 68 Table 2-24: NHE components: 2013 .................................................................................................................... 71 Table 2-25: Hypothetical income statement ......................................................................................................... 74 Table 2-26: Impact of growth on solvency ............................................................................................................ 76 Table 2-27: The impact on DHMS if the scheme had priced for an operating break-even between 2008 and 2013 ..... 84 Table 3-1: Number of active practitioners in 2013 ............................................................................................... 118 Table 3-2: Number of billing practices in June 2014 by Specialist discipline (excluding KeyCare) ............................. 118 Table 3-3: GP Network Coverage: visits for members of DH client schemes by region (June 2014) .......................... 123 Table 3-4: KeyCare GP Network Coverage: % Network visits for members of DH client schemes by region (June 2014) ....................................................................................................................................................................... 123 Table 3-5: DPA Specialist coverage: % DPA Specialist visits for members of DH client schemes by region (June 2014) ....................................................................................................................................................................... 124 Table 3-6: Patent applications and patent grants in BRICS countries - 2011 ........................................................... 132 Table 3-7: Comparison of prices between SA and the UK for a basket of generic drugs - July 2013 .......................... 133 Table 3-8: Top 20 specialty products with the biggest percentage difference to SA prices - July 2013 ..................... 134 Table 3-9: International benchmarking of medicine product prices – 2012 ............................................................ 134 Table 3-10: Comparison of public and private sector prices for PMB conditions .................................................... 137 Table 3-11: Comparisons between generic and clone prices of medicines to the brand originator prices ................. 139 Table 3-12: Comparison of generic and clone prices to originator brand Crestor (Rosuvastatin) ............................. 151 Table 3-13: Comparison of generic and clone prices to originator brand Coversyl (Perindopril) .............................. 152 Table 3-14: Comparison of generic prices to originator brand Efexor XR (Venlafaxine) ........................................... 153 Table 4-1: Medical schemes administered by DH (as of September 2014) ............................................................. 166 Table 4-2: Composition of scheme membership: employers and individuals ......................................................... 168 Table 4-3: Shares of beneficiaries for open schemes and certain restricted schemes (2013) ................................... 171 Table 4-4: Shares of beneficiaries of restricted schemes (2013)............................................................................ 172 Table 4-5: DHMS employers that offer split risk, by alternative options ................................................................ 178 Table 4-6: Changes in beneficiaries and shares of beneficiaries for medical schemes, by scheme type .................... 179 Table 4-7: Scheme switching, by administrator (2009-2015) ................................................................................ 186 Table 4-8: Administration of scheme types, by administrator (2013) .................................................................... 188 Table 4-9: Market shares for medical scheme administrators (2013) .................................................................... 190 Table 4-10: Market shares for managed care organisations (2013) ....................................................................... 190 Table 4-11: DH tender history over past 5 years .................................................................................................. 192 Table 4-12: DH's restricted scheme administration business ................................................................................ 193 Table 4-13: Restricted schemes currently under DH management and tenure ....................................................... 194 Table 4-14: DHMS committees .......................................................................................................................... 204 Table 4-15: Top 12 open schemes and the number of benefit options .................................................................. 205 Table 4-16: Relative sizes of open schemes and certain restricted schemes (2000-2013) ....................................... 221 Table 4-17: Relative sizes of open schemes and certain restricted schemes (2000-2013) ....................................... 222 Table 4-18: Relative sizes of restricted schemes (2000-2013) .............................................................................. 223 Table 4-19: Restricted scheme beneficiaries (2000-2013) .................................................................................... 224 Table 4-20: Administrator shares by beneficiaries (2000-2013) ............................................................................ 226 Table 4-21: Administrator number of beneficiaries (2000-2013)........................................................................... 227

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Table 5-1: [confidential] .................................................................................................................................... 260 Table 5-2: [confidential] .................................................................................................................................... 266 Table 6-1: [confidential] .................................................................................................................................... 275 Table 7-1: High level summary of the major health insurance product categories .................................................. 282 Table 7-2: Total annual contribution to cross-subsidy from sick and healthy members .......................................... 285 Table 7-3: Total annual contribution to cross-subsidy from sick and healthy members following benefit buy-down . 286 Table 9-1: Impact of extending the GWP ............................................................................................................ 304 Table 9-2: Impact of excluding PMBs for category C ............................................................................................ 304 Table 9-3: Additional savings for increasing the CWPs ......................................................................................... 305 Table 9-4: Savings of earlier plan upgrades ......................................................................................................... 308 Table 9-5: Impact of underwriting changes on DHMS .......................................................................................... 309 Table 9-6: Impact of Recommendations on DHMS .............................................................................................. 315 Table 9-7: Comparing the currently covered medical scheme population to the uncovered population (2011 data) . 329 Table 9-8: Underwriting categories .................................................................................................................... 330 Table 9-9: IH claims increase or decrease factors ................................................................................................ 331 Table 9-10: Proportion of members who downgraded their plan in the next year .................................................. 332 Table 9-11: Percentage change in the proportion of members who downgraded their plan in the next year ........... 332

List of Boxes Box 1: Key Observations: Medical inflation ............................................................................................................. 7 Box 2: Key Observations: Health professional and healthcare service provider markets ........................................... 95 Box 3: Key Observations: Medical scheme and administrator competition ............................................................ 154 Box 4: Key Observations: The relationships between medical schemes and administrators .................................... 157 Box 5: Key Observations: Managed care and the role of Vitality ........................................................................... 254 Box 6: Key Observations: Consumer choice and information ................................................................................ 268 Box 7: Key Observations: Non-medical scheme health insurance products............................................................ 281 Box 8: Summary of Recommendations ............................................................................................................... 294

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Executive Summary Text, graphs, boxes and tables in yellow are confidential and have been omitted in the public version

Overview s1. The private healthcare system in South Africa provides rapid access to very good quality of care for millions of South Africans. We believe that this system is a valuable and sustainable national asset, and a vital component of the broader national healthcare system. It is also a vital component of the broader economy, contributing over R121bn to GDP1, and with private hospitals alone contributing an estimated R17bn to annual tax revenues, and sustaining approximately 218,000 jobs2. The high quality of private healthcare in South Africa is also a key element in our country’s ability to attract and retain vital scarce skills that are required if we are to achieve the economic growth goals of the National Development Plan. s2. Discovery Health (Pty) Ltd (“DH”) is a significant stakeholder in the private healthcare system. We manage the funding of healthcare for over 2.9m individuals, including employees of over 20,000 companies, with total premium and claims flows of approximately R50bn in 2014. DH is deeply committed to building an affordable and sustainable private healthcare system that maximises value (defined as the maximum quality of care attainable at the lowest cost) for all users of that system, within the broader context of an equitable and effective national healthcare system for all South Africans. s3. This document has been prepared in an attempt to make a substantive and positive contribution to the important objective of the Market Inquiry into the Private Health Sector (“the Inquiry”), by sharing detailed analysis of the extensive data available to us, as well as our insights and perspectives on all of the key issues and questions raised by the independent Panel of experts appointed to conduct the Inquiry on behalf of the Competition Commission (“the Panel”). s4. This submission attempts to address as many as possible of the issues and theories of harm raised by the Panel in the Terms of Reference and the Statement of Issues documents. s5. The submission begins with a detailed analysis of medical inflation as experienced by the beneficiaries of medical schemes, and the drivers of inflation in the medical schemes environment. Whilst we recognise that medical scheme premium inflation is only one aspect of medical inflation, and does not reflect the experiences of millions of South Africans who do not belong to medical schemes, our data is most comprehensive and accurate on this aspect of medical inflation, and hence focuses mainly on that. The analysis focuses mainly on inflation, rather than on the absolute levels of prices and costs, as we lack rigorous data on which to base analysis and commentary on absolute price levels in other countries. s6. Following the analysis of inflation trends and drivers, we analyse key features of the markets in each aspect of the healthcare delivery system, including health professionals, hospitals, pharmaceuticals etc., and outline how DH works to manage both cost and quality of care as well as the results of those efforts. s7. The submission then provides a detailed analysis of market structure, market shares and competition in the medical schemes and medical scheme administration markets, and outlines key aspects of the governance arrangements

1

National Treasury Fiscal Review for 2011. These are the estimated 2010 findings of the economy-wide impact for hospitals who are members of the Hospital Associations of South Africa (“HASA”). It is therefore a conservative estimate for the industry as a whole. These findings are reported in a study conducted by Econex and Quantec Research for HASA. December 2011. Available online at: www.econex.co.za. 2

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between schemes and administrators, with a specific focus on the relationship between DH and the Discovery Health Medical Scheme (“DHMS”), as well as with DH’s 12 restricted scheme clients. s8. The submission also addresses other issues raised by the Panel, including analyses of the roles and impacts of managed care, consumer information and choice, non-scheme health insurance products, and the interface between the public and private healthcare systems. s9. The submission concludes with our recommendations to address several of the key issues and problems identified in the analysis, which we respectfully submit for consideration by the Panel.

Drivers of medical scheme claims inflation Overview s10. This submission analyses inflation trends in open medical schemes, using DHMS data. Medical inflation is defined as the increase in premiums experienced by a member of a medical scheme who remains on the same benefit option from one year to the next. This captures how members of medical schemes actually experience medical inflation. s11. We acknowledge that medical scheme premium inflation is only one aspect of medical inflation as experienced by consumers, but this is the aspect for which we have the most comprehensive data. We also analyse out-of-pocket payments, although data on these are limited. s12. This analysis focuses on price and cost inflation, rather than on the absolute level of prices and costs in the private healthcare sector. While comparisons of absolute price and cost levels with international benchmarks are critical, there are no adequate and comparable benchmark data on private healthcare costs in other countries. How medical schemes set premiums s13. Premiums for the next scheme year are based on estimates of the financial position of the scheme at the start and end of the year for which the premiums are being set. Key assumptions are made regarding: 

Tariff increases, increases in utilisation of healthcare services, and changes in benefits and claims risk management approaches, all of which will impact on projected claims increases;



Membership movements, which impact on the proportion of members in different benefit options (“plan mix”), which in turn impacts significantly on premium income and claims increases;



Expected non-health expense (“NHE”) inflation, including increases in administration and managed care fees, broker fees and scheme office and trustee costs



Expected investment returns; and

 The financial targets in terms of operating surplus, total surplus and solvency levels of the scheme. s14. Open medical schemes receive lower actual increases in premium income than the published premium increases, due to changes in plan mix, largely because a higher proportion of new members buy into lower cost plans each year than the prior year. Over the period 2009 to 2013, the average published premium increase for the largest 9 open schemes was 10.5% per annum, but the actual increases realised by these schemes averaged 8.8% per annum. Drivers of medical scheme premium increases s15. Premium increases are driven by 3 main factors: claims inflation, NHE inflation and reserve building. s16. Claims inflation accounts for almost the full extent to which medical premium inflation exceeds the Consumer Price Index (“CPI”). Solvency requirements also contribute to inflationary pressure, while NHE are deflationary. s17. On a plan mix adjusted basis, DHMS premiums were R454.21 higher per life per month (“plpm”) in 2013 than they were in 2008. Of this, R273.84 (or 60% of the total increase) is attributable to increases in CPI over this period. Most

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of the excess of premium inflation over and above the impact of CPI (i.e. the difference between R454.21 and R273.84), can be explained by inflation in claims costs, which accounts for R192.70 plpm (or 42.4% of the total plpm increase). Solvency requirements accounted for R2.35 plpm (or 0.5% of the total), while NHE reduced premium increases by R14.68 plpm (or -3.2% of the total increase). Claims inflation is therefore by far the most important determinant of premium inflation. Drivers of claims inflation s18. Claims increased by 11.3% per year over the period 2008 to 2013, exceeding average CPI (6.7%) by 4.6% per year. The 4.6% by which claims inflation exceeded CPI per year can be broken down into three parts: 

63.2% of the excess inflation is due to increases in volume as a result of demand side factors (2.9% out of 4.6%)



27.9% of the excess inflation is due to increases in volume as a result of supply side factors (1.3% out of 4.6%)

 8.9% of the excess inflation is due to tariff increases exceeding CPI (0.4% out of 4.6%) s19. Annual tariff increases are therefore a minor factor in explaining the difference between CPI and annual premium increases. Over 90% of this difference is attributable to increases in volume of services consumed by scheme members each year, due to both demand and supply side factors, with demand side factors being by far the most important. Analysis of tariff inflation s20. Tariff inflation has been only slightly higher than CPI over the period 2008 to 2013, and is not the main reason for claims inflation in excess of CPI. Average annual tariff increases between 2008 and 2013 exceeded CPI by only 0.4% per year (tariff increases of 7.1%, relative to CPI of 6.7%). s21. [confidential] [confidential] [confidential] [confidential] [confidential] s22. GP and specialist tariff increases exceeded CPI due to deliberate decisions by DHMS to offer higher tariff increases to GPs and specialists to (i) ensure high levels of participation in contracted networks, (ii) compliance with PMB legislation, and (iii) to minimise member co-payments. s23. Medicine price increases have been lower than other categories, due to Single Exit Price (“SEP”) regulations, but the level of medicine prices remain high relative to international benchmarks. Steep utilisation increases have resulted in overall medicine cost inflation significantly exceeding CPI. Demand side factors s24. Demand side factors reflect the extent to which members of medical schemes demand more healthcare services from year to year. They are the main reason for volume increases, and hence for excess claims inflation. s25. Demand side factors account for 63.2% of excess claims inflation over the period 2008 to 2013. s26. Demand side factors are largely due to adverse selection, and to a lesser extent, a worsening disease profile within the existing medical scheme population. Adverse selection is the process whereby proportionally more high risk, sicker individuals tend to remain in medical schemes. s27. Adverse selection manifests in an increasing average age, an increasing prevalence of chronic disease, increasing disease burden, deliberate anti-selective behaviour (e.g. members joining a medical scheme, claiming, and then leaving shortly thereafter) and in the changing patterns in which members select benefit options within a medical scheme. A member aged 60 – 64 claims more than 3 times what a member aged 20 – 24 claims. A chronic member, Discovery Health Submission

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regardless of age, claims roughly 2.3 times what a member without chronic conditions claims. To the extent that the average age and the ratio of chronic members increase, average scheme claims costs will increase. s28. DHMS data show clear evidence of significant adverse selection trends: 

Over the period 2008 to 2013, chronic prevalence in DHMS increased by 4.9% per year.



There is a significantly higher proportion of females of child-bearing ages in DHMS (and in the industry), where at other ages, the proportion of females follow national averages.



Individuals diagnosed with chronic conditions requiring expensive treatment join medical schemes in order to access funding for their treatment. This is seen in the fact that large proportions of members who claim for conditions such as Multiple Sclerosis (for which biologic medicines cost R120,000 per year), or Breast Cancer (biologic medicines cost R180,000 per year) and Rheumatoid Arthritis (R97,000 per year for biologics), claim within the first year of joining DHMS. s29. There is also adverse selection within schemes, as individuals diagnosed with serious conditions tend to buy up to benefit options with richer cover. This is seen in the fact that people who upgrade to options with richer benefits claim 35% more than other members on those options. Supply side factors s30. Supply side effects refer to the way in which the treatment of patients by health professionals and medical service providers changes from year to year, for a given burden of disease. s31. The supply side impact is significantly smaller than the demand side impact, and explains 27.9% of the excess claims inflation above CPI. s32. Factors influencing the supply side impact include increases in the hospital admission rate, changes in clinical decisions made by health professionals, new medical technologies, increased usage of pathology and radiology services, and changes in coding and billing patterns over time. Claims increases by category of health professional and medical service provider s33. Annual tariff increases explain only 8.9% of excess claims inflation over the period 2008-2013. s34. DH has achieved tariff increases at or below CPI for hospitals and pathology services. s35. Where tariff increases have been above CPI, these have been the result of deliberate decisions by DHMS to increase remuneration to reduce member co-payments and to comply with Prescribed Minimum Benefit (“PMB”) legislation. s36. The main factor contributing to increases in health professional claims costs has been increases in volume of services. The highest annual claims increases in excess of tariff increases were in respect of pathology (8.1% above tariff increases), radiology (6.6%) and individual specialists (5.8%). NHE inflation s37. NHE includes the cost of administration, managed care, broker fees, and scheme office and trustee costs. Total NHE accounted for 13.4% of DHMS gross contribution income (“GCI”) in 2013, while administration and managed care fees accounted for 11.1%. s38. DHMS has negotiated volume related discounts in the administration and managed care fees paid to DH since 2008, ensuring that it benefits from economies of scale arising from its growth. Between 2008 and 2013, these discounts have reduced DHMS’s administration fees by a cumulative value of R1.5bn, which amounts to a reduction of 11.0% in real terms over the period, equivalent to a reduction of 2.3% per year. s39. As a result, NHE (in total, including administration and managed care fees, broker fees and scheme costs) have reduced by 12.3% in real terms over the period. Discovery Health Submission

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The impact of reserve building on medical scheme costs s40. The Medical Schemes Act No. 131 of 1998 (“the Act”) requires that medical schemes hold 25% of annual gross premiums in reserve every year. s41. This requirement is out of line with international and local standards of prudential capital management for insurance entities, and has been a significant driver of inflation, particularly for rapidly growing schemes. s42. The current 25% solvency requirement does not adequately protect some schemes against insurance and other risks. s43. The result of this ‘one size fit all’ solvency regulation is that some schemes are significantly over-capitalised, whereas others are significantly under-capitalised, given the risks they face. s44. Because medical schemes have no source of capital other than member premiums, over-capitalisation means that member premiums have been higher than they ought to have been, and the solvency requirement has been inflationary. Members have paid for these solvency requirements without gaining any real benefit from them. s45. Large amounts of unnecessary capital are tied up in medical schemes, which could have been used to fund member claims, and to reduce premium increases, without increasing risk. s46. The current solvency requirement penalises the following types of schemes: 

Large medical schemes



Schemes with high membership growth



Schemes who price adequately and prudently for risks



Schemes who hold properly quantified and adequate reserves for incurred but not reported claims

 Schemes who invest member funds responsibly s47. Conversely, current solvency requirements have rewarded those schemes who under-price, do not hold adequate reserves, take risks with the investment of member funds, and who are shrinking and losing members. It has also not adequately protected the members of small schemes. s48. A move to a Risk Based Capital (“RBC”) approach, in line with international regulatory standards, would result in lower premiums for the majority of medical scheme members in the country, and better risk protection for the members of many schemes. Out-of-pocket payments s49. Medical schemes do not have comprehensive data on out-of-pocket payments. s50. Out-of-pocket payments are small for in-hospital treatment, due to extensive cover of hospital treatments and the impact of PMB legislation. For DHMS, the in-hospital coverage ratio (ratio of claims paid to claims submitted) is above 95%. s51. Out-of-pocket payments are higher for out-of-hospital treatment. s52. The extent of out-of-pocket payments is dependent on the benefit options that members buy. s53. DHMS coverage ratios for combined in- and out-of-hospital claims are between 85% and 95%.

Provider Markets Characteristics of the private hospital market s54. There are significant regional variations in hospital bed supply and concentration, with a national average of 3.4 acute hospital beds per 1,000 insured lives and a range of 1.5 to 6. Hospital tariff negotiations occur on a national basis with each hospital group, resulting in a single annual tariff increase per medical scheme for all hospitals within the group. Prices therefore do not reflect regional variations in supply and demand, and there is limited price competition at a regional level. Discovery Health Submission

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s55. Price competition between hospitals occurs mainly in the context of medical scheme network plans, which are growing in importance, but still cover a minority of scheme members. s56. Network plans give medical schemes countervailing power to negotiate discounted tariffs for inclusion in hospital networks, but this is constrained by limited supply in some regions, and by competition between open schemes, which limits the ability of schemes to switch hospitals in and out of networks. s57. Hospitals compete only to some extent on the basis of price or quality of care. They compete mainly on the ability to attract specialists to work in the hospital, and patients choose hospitals largely on the basis of where their specialist works. Consumers have no incentive to be aware of hospital costs, as schemes generally cover hospital costs, and there is a lack of public information on hospital cost and quality. Together, these factors tend to increase the cost of hospital admissions. s58. Current Health Professionals Council of South Africa (“HPCSA”) regulations prevent hospitals from employing, or contracting with doctors and other health professionals, and prevent the emergence of integrated, multi-specialty group practices and other innovative delivery models. These regulations also limit the ability of hospitals to manage all cost components of a hospital admission, and contribute to increasing hospital costs. s59. The private hospital system has shown limited innovation in the settings in which care is provided. South Africa has an overreliance on higher cost, ‘one size fits all’ acute care hospitals to treat all types of admissions, whereas globally, a high proportion of admissions has moved to day surgery and specialised high volume centres. In the USA, approximately 90% of elective procedures are on a same day basis, compared to 15% in South Africa. Discovery Health’s role in managing hospital costs s60. DH relies on its data analytic capacity, and a range of clinical risk adjustment tools and assets to negotiate lower hospital tariffs and to manage hospital costs within the context of alternative reimbursement mechanisms (“ARMs”), hospital network plans, and through support for alternative settings to general acute care hospitals, such as day surgery centres. In 2014, ARMs cover 70% of total DHMS admissions and 65% of total hospital expenditure. s61. Hospital network plans play an important role in managing hospital cost and reducing scheme premium inflation. Network hospitals are selected on the basis of efficiency, and range of services. The DHMS KeyCare plan, aimed at low income families, now covers over 411,000 beneficiaries, and the Delta Plans cover over 200,000 beneficiaries. DH has also developed day surgery networks to increase the usage of these facilities. s62. These strategies have been successful in managing hospital costs for DH’s client schemes to a certain extent. [confidential] [confidential] The Council for Medical Schemes (“CMS”) data also confirm that DHMS cost inflation has been lower than for all other open schemes for several years. These gains have allowed DHMS to offer rich benefits at competitive premiums, and therefore to compete successfully with other open schemes for beneficiaries. They have also contributed to DH’s competitive position in the market for administration and managed care of restricted schemes. s63. However, certain features of the hospital and medical schemes markets constrain what DH has been able to achieve in terms of reducing total hospital costs for client schemes. These include a limited ability to shape hospital competition, a lack of efficient alternatives to acute care hospitals, and limited control over the total volume of hospital admissions, which is a key driver of total hospital expenditure by schemes. s64. In addition, the levers of selective contracting and network plans are constrained by competition between open schemes for beneficiaries, and by the fact that only a minority of scheme members are willing to use restricted hospital network plans.

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Characteristics of health professional markets s65. Health professional markets are fragmented, with most health professionals practicing alone, or in small groups, with the exception of radiology and pathology, which have consolidated into larger practices. The HPSCA regulations preventing multi-disciplinary group practices have contributed to this fragmentation. As a result, health professional services are characterised by weak coordination, and poor flow of information. These factors contribute to increasing costs, and may also impact negatively on quality of care. The high degree of fragmentation also means that professional practices lack capital and other resources required to stimulate innovation in service delivery models. s66. There are significant regional variations in the supply and concentration of health professionals. In some areas, the ratio of specialists to GPs is relatively high, leading to a degree of competition for patients. Many patients often bypass GPs and see specialists directly, which undermines the important triage role of GPs, and contributes to increasing costs. s67. The capital intensive nature of radiology practices has led to consolidation, with approximately 114 practices in the market. There is typically one radiology practice in each private hospital, creating an effective local monopoly of radiology services for hospital patients, and to a lesser extent for outpatients. s68. The capital intensive nature of pathology has also led to significant national and regional consolidation and concentration. There are 3 large pathology groups, accounting for 90% of the market, with some smaller regional and specialist competitors accounting for 10%. s69. There is limited competition for pathology services, with historical relationships prevailing between different pathology and hospital groups, and with hospital in-patients having no influence as to which pathology group does their pathology tests. Pathology groups do not generally compete on price, but for the support of referring doctors, with some exceptions in the case of pathology network arrangements. The design of pathology forms tends to increase the volume of pathology investigations requested, inflating total costs. s70. The limited competition in the radiology and pathology markets is aggravated by the fact that referring doctors are not aware of the prices of investigations, and by the fact that scheme members have limited incentives to be aware of prices, as most costs are covered by schemes. s71. While there is rapid adoption of new technologies in radiology and pathology, these markets tend to lack innovation in service delivery models, relative to most global healthcare systems. s72. The combination of fee for service (“FFS”) reimbursement and the “third party payer” system contribute significantly to the high annual increases in the volumes of health professional services and costs experienced by medical schemes. These trends could be mitigated through the introduction of ARMs for health professionals, and through closer integration and more extensive risk sharing in contracts between health professionals, hospitals and medical schemes. Discovery Health’s role in managing health professional costs s73. Schemes generally determine annual increases in underlying FFS tariffs for individual health professionals by inflating the prior year’s tariffs at or around CPI. Individual health professionals are free to accept these tariffs, or to charge any other tariff they choose. s74. In order to ensure compliance with PMB legislation and to limit co-payments for scheme members, DH has designed various payment arrangements for GPs and specialists, which reimburse at higher rates than the prevailing scheme rate, in return for no balance billing. DHMS and some of DH’s restricted scheme clients make extensive use of these payment arrangements. Currently, over 86% of all DHMS GP and specialist consultations take place within these payment arrangements.

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s75. Supply constraints, the FFS reimbursement system and PMB requirements of the Act limit the ability of schemes and MCOs to shape competition and influence volumes and total costs of health professional services. DH is investing significantly in innovative reimbursement arrangements with health professionals in an attempt to manage cost inflation and to improve quality of care. s76. In the case of pathology, DH negotiates bilaterally on behalf of client schemes with each of the major groups to determine annual increases in tariffs for DH client schemes, which elect annually whether or not to participate in the agreed arrangements. [confidential] CMS data indicate that DHMS pathology cost increases have been consistently lower than those of other open schemes for several years. This is due to a combination of competitive tariffs and active claims risk management, and contributes to the competitive position of DHMS and DH in their respective markets. Characteristics of the medicines market s77. Several aspects of the current regulatory environment impact on inflation in medicines costs. s78. The current registration process has a number of flaws which impact adversely on medicine pricing: the registration process takes 5 years or longer, inhibits market entry of new products and damages competition. In addition, pharmaceutical companies that wish to register new medicines do not need to prove clinical novelty or added clinical value. s79. South Africa’s approach to medicine patents does not require substantive patent examination. As a result, South Africa grants a high number of patents relative to other countries, and has the highest medicine patents approval rate of all BRICs countries. The inappropriately easy access to patent protection and the practice of patent evergreening harms competition and precludes access to affordable medicines. s80. The introduction of SEP in 2004 has had a dampening effect on medicine price inflation. However, the other key elements envisaged in the price regulatory framework, namely international benchmarking and pharmacoeconomic evaluation are yet to be introduced. As a result, the absolute level of medicine prices in South Africa is in many instances higher than in comparable countries. s81. Generic medicines are an integral part of cost containment strategies for healthcare funders. However, the gap between generic medicine prices and the equivalent brand innovator products is far narrower in South Africa than in most international markets. Even where low cost generics are available, these are often not prescribed or dispensed. DH estimates that if all doctors and pharmacists prescribed and dispensed optimally, so that lowest priced generics were used where possible and appropriate, DHMS could save approximately R520m per year in medicine expenditure, and that savings of up to R1.5bn would be possible across all schemes. s82. An unintended consequence of the SEP legislation is that it has prevented pharmaceutical manufacturers and schemes from entering into innovative reimbursement models, including risk sharing models. s83. The purchase of medicines by the state through a state tender achieves very low prices, arguably at the cost of higher SEPs in the private sector. s84. The mandatory funding of medicines for PMB conditions reduces the countervailing power of funders in negotiations with pharmaceutical manufacturers to reduce SEPs. This inflates costs for certain PMB conditions where high cost medicines are prescribed. Consideration should therefore be given to allowing medical schemes to procure medicines for treatment of PMB conditions at state tender prices.

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Discovery Health’s role in managing medicine costs s85. DH has developed a number of tools and assets in the management of medicine prices and utilisation. [confidential] These tools include benefit design to increase the usage of preferentially priced medicines; active SEP price negotiation; clinical protocols to manage medicine utilisation; drug utilisation reviews; and the use of designated service provider (“DSP”) arrangements and pharmacy networks to managed medicine expenditure. Factors constraining the strategic purchasing function of schemes and MCOs s86. While DH has been relatively successful at managing total costs and inflation for its medical scheme clients and their beneficiaries, all schemes and Managed Care Organisations (“MCOs”) face a number of systemic constraints that prevent them from functioning optimally as strategic purchasers of healthcare goods and services. These include: 

The Act and its interpretation, including PMBs, open enrolment provisions and national coverage requirements, which favour the rights of individual consumers to ‘free-ride’ on schemes, over the collective rights of scheme members and the ability of schemes to act as collective purchasers for the common good of all members.



Supply side factors which constrain the ability of schemes and MCOs to establish more selectively contracted networks. These factors include real and apparent supply shortages, lack of competition, too few insured lives, and a lack of consumer information on quality of care and value.

Access to and publication of data on quality of care s87. Schemes and MCOs require access to accurately coded claims, and clinical data including results of investigations, and data on the outcomes of care in order to effectively manage costs and quality of healthcare for schemes and their beneficiaries. Currently, only some data are routinely provided to schemes and MCOs by health professionals, hospitals and other service providers. s88. DH actively collects and analyses quality of care data from both members and providers, and uses these in engaging with hospitals and health professionals in efforts to improve quality of care and outcomes. s89. The publication of robust quality of care and outcomes data would contribute to making the healthcare sector more transparent, and to improving cost and quality of care over time. DH strongly supports the publication of verified quality of care and outcomes data across all healthcare providers and facilities. Such publication should be implemented on a gradual and cooperative basis, and should avoid some of the risks of perverse incentives and gaming observed in other health systems in response to dissemination of these data. In order to support this, health professionals and hospitals should be required to provide schemes with a minimum clinical dataset, including pathology and radiology results and hospital summaries.

Competition and governance in the medical schemes and administrator markets Medical scheme and administrator competition The roles of medical schemes, administrators and MCOs s90. Medical schemes are not for profit trusts regulated by the Act, and governed by independent Boards of Trustees, elected by members of the scheme. The Act defines open schemes as those to which membership is available to any member of the public, and restricted schemes as those which restrict membership based on factors such as Discovery Health Submission

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employment. In 2013, there were 86 schemes, covering over 8.7m beneficiaries. Schemes also compete with nonscheme health insurance products including hospital cash plans and ‘gap cover’ products. There are an estimated 1.9m such policies in the market at present. s91. Medical scheme administration may be carried out by a scheme itself or outsourced to an external administrator. In 2013, 85% of schemes were administered by an external administrator. Administrators operate on a for-profit basis, and earn a fixed administration fee per policy. In 2013, there were 14 third party administrators and 13 selfadministered schemes. s92. Managed care services are a critical component of the mitigation of clinical and financial risk for medical schemes. Managed care services can only be provided by registered MCOs. Most administrators are accredited as MCOs, while some specialised MCOs provide only managed care services. s93. The activities of medical schemes, administrators and MCOs, as well as brokers, are regulated by the CMS in terms of the Act. The Act requires formal agreements between schemes and administrators and MCOs, which can be terminated with no more than 3 months’ notice. The CMS closely monitors the fees paid by schemes to administrators and MCOs. Competition between schemes for beneficiaries s94. Open schemes compete with each other for beneficiaries, who join open schemes through their employer or as individuals. Approximately 58% of open scheme beneficiaries join through employers, and the balance as individuals. 70% of DHMS members join through employers. s95. Open schemes compete to be listed as a prescribed open scheme by the employer. Some employers will prescribe only one open scheme, while others may prescribe more than one. The prescribed open schemes then compete within the employer for beneficiaries. Brokers play a significant role in advising employers and/or trade unions, as well as individual employees on their choice of scheme and scheme options. s96. Some employers nominate a restricted scheme as the only choice for their employees. s97. Restricted schemes do not compete with each other for beneficiaries, because they are restricted to specific employers or industry groupings. Restricted schemes do not generally compete with open schemes. The Chartered Accounting Medical Fund (“CAMAF”) and Profmed which are classified as restricted schemes, compete with open schemes for beneficiaries. Competition between open schemes s98. Competition for beneficiaries in the open scheme market is intense. In 2013, there were 26 competing schemes (including CAMAF and Profmed). Switching between open schemes is easy, both for employers and for individuals. Over 400 of DHMS’s employer groups now offer a choice of more than one scheme, and this trend is increasing. Churn rates in the open scheme market are high. 307,564 members joined and 249,792 left DHMS in 2013. Between 2008 and 2013, a total of 649,724 members left DHMS’s competitors, and 566,280 joined DHMS. s99. DH actively assists DHMS in competing for beneficiaries. Since inception, DHMS has grown considerably, reflecting its competitive offering. Since 2000, 2.2% (57,338) of DHMS’s 2.62m beneficiaries have joined as a result of 7 scheme mergers, with the balance due to organic growth. The role of brokers in competition between open schemes s100. 97% of DHMS members join through a broker. Brokers may be independent, or may be tied to one scheme. Large and medium sized employers are typically advised by large, independent “corporate brokers”. Brokers play a critical role in enhancing competition amongst open schemes by facilitating comparative shopping. They have expertise in benefits, premiums and scheme rules, as well as on the quality of administration and managed care services.

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Brokers also enhance competition by facilitating switching between medical schemes, usually following annual reviews of open schemes’ offerings in terms of benefits and premiums. DH provides extensive support to brokers to ensure that DHMS maintains its competitive market position. Medical scheme market trends s101. Consolidation has led to a reduction in schemes from 144 in 2000 to 86 in 2013, due to amalgamations and liquidations. s102. Growth in total beneficiaries has been moderate, increasing at a compound annual growth rate (“CAGR”) of 2.2% (from 6.6m in 2000 to 8.8m in 2013). s103. Overall beneficiary growth within open schemes has been flat, increasing by roughly 200,000 between 2000 and 2013 (a CAGR of 0.3%). Within this, some schemes have grown rapidly, while others have stagnated or shrunk. s104. Within the open scheme market, DHMS has grown rapidly, adding approximately 1.9m beneficiaries between 2000 and 2013 (CAGR of 10.2%). Bestmed has added 140,000 beneficiaries (CAGR of 11.7%) and Resolution Health has had a CAGR of 28% although off a small base. Bonitas has contracted slightly over the period, losing 50,000 beneficiaries. s105. Approximately 2m beneficiaries have joined restricted schemes between 2000 and 2013 (CAGR of 5.9%), driven by the Government Employee Medical Scheme (“GEMS”), which added 1.8m beneficiaries between 2006 and 2013 (CAGR of 76.8%). s106. GEMS has impacted significantly on the distribution of beneficiaries between open and restricted schemes. Prior to 2005, government employees could belong to any open scheme. Given that GEMS had 1.8m beneficiaries in 2013, in its absence the open scheme market would likely have grown by approximately 2.7% per year, instead of its actual rate of 0.3% per year. s107. Despite the consolidation trend, there are examples of recent successful market entrants. In the past decade, 5 of the largest 20 restricted schemes have been new entrants. s108. The CMS does not seek to restrict the number of schemes, but does control entry to ensure the viability and sustainability of schemes. Competition for the administration of medical schemes s109. Administrators compete actively to provide administration and managed care services to both open and restricted medical schemes. Administrators also assist their open scheme clients to compete for beneficiaries. The growth of an open scheme and restricted scheme clients benefits the administrator through an increase in its fees, which are charged on a per policy basis. s110. Administrators have different business models. Some choose to perform basic administration services at relatively low fee levels, while others offer a more extensive range of services at higher fee levels. Having both models in the market is healthy for competition, allowing administrators to differentiate themselves, and schemes to adopt a model which suits their needs. s111. Competition for the administration of schemes is based on price and on the quality of services offered, including the ability to reduce claims costs. s112. There are a total of 14 third party administrators, including Discovery Health, MMI Holdings and Medscheme, all three of which are supported by large financial institutions. s113. New entrants are able to enter and to become effective competitors relatively quickly, as many systems and services required by administrators and MCOs can be purchased ‘off the shelf’ or acquired from third parties. s114. In 2013, 6 of the 14 third party administrators administered only one open scheme, 2 administered no open schemes, while the balance administered 2 competing open schemes.

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s115. The threat of a scheme switching administrators to self-administration, or to another third party administrator, acts as a competitive constraint on administrators, and enhances the countervailing power of schemes when dealing with them. Between 2009 and 2013, 21 schemes switched administrators. s116. The contracting of administration services for restricted schemes occurs in a competitive bidding market. Notwithstanding consolidation, up to 14 administrators tend to compete regularly for the administration contracts of schemes. The intensity of the bidding process and subsequent negotiations result in competitive prices. Once contracts are awarded, fees are negotiated annually and are constrained as schemes are able to switch administrators or move to self-administration, and are also monitored by CMS. s117. DH offers current and prospective scheme clients a fully integrated administration and managed care service. DH’s business model is to build competitive advantage by investing in human capital, technology, software systems and other assets that facilitate continuous innovation to improve scheme benefit design, control healthcare costs, and improve the quality of administration and healthcare services delivered to members of its client schemes. s118. DH provides administration and managed care services to DHMS, the largest open medical scheme in South Africa, and to 12 restricted schemes. In September 2014, DH provided administration and managed care services to 2,920,714 beneficiaries (approximately 2.62m in DHMS and approximately 300,000 in DH’s restricted scheme clients). s119. DH has won 10 administration contracts for restricted schemes over the past 5 years, including 2 for 2015. Administrator and MCO market shares s120. As administrators and MCOs compete for the business of open and restricted schemes, as well as with self administered schemes, the market for administration services can be defined as including all schemes, which is consistent with the findings of the Tribunal in prior cases. s121. The administrator market has consolidated from 36 in 2000 to 14 in 2013. s122. Based on the fact that GEMS outsources the bulk of its administration services to MMI, and the bulk of its managed care services to Medscheme, market share analysis for administration indicates that MMI is the largest player in the administrator market, with 35.5%, followed by DH at 32% and Medscheme at 12%. In the managed care market, Medscheme is the largest player, with 33.2%, followed by DH with 32%, and MMI at 14.2%. s123. As a result of the often large contracts which may change hands from one year to the next, market shares for administrators and managed care services can change relatively significantly from year to year. The relationships between medical schemes and administrators The contractual relationship and governance arrangements between DH and its client schemes s124. DH and its client schemes adhere strictly to all governance requirements of the Act, and operate in terms of detailed administration and managed care contracts. s125. DH’s client schemes’ governance arrangements ensure comprehensive and effective oversight of DH’s administration and managed care operations by scheme officials and trustees. This results in an effective governance model in which DH executes all operational aspects of the administration and managed care, under a formal mandate of the Trustees. s126. The contracts between DH and client schemes are based on a fully integrated outsourcing model. DH believes that schemes and their members are best served, in terms of quality of service and efficiency, by a single entity that has a comprehensive, real time view of all member data and interactions with the healthcare system and the administrator/MCO, and is able to service members at every point of service required.

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s127. The effectiveness of this integrated model was confirmed by the Deloitte Review, commissioned by the Trustees of DHMS in 2012 (“Deloitte Review”). This review compared the impact of the integrated outsourcing model with alternative models, and estimated that an integrated model incurs on average 15% lower NHE than a model relying on multiple service providers. s128. This model creates significant benefit for each of DH’s client schemes and their members, reflected in the strong performance of these schemes, and in the competitive administration and managed care fees which they pay to DH. The relationship between DHMS and DH s129. DH was founded in 1992 as a for-profit health insurer. After implementation of the revised Act, DHMS was established as a medical scheme, and DH was appointed to provide administration and managed care services to DHMS. The contractual relationship has endured since that time, and contracts are renegotiated and updated on a 3 year cycle. s130. DHMS has well organised and effective governance arrangements, which ensure a functional, arms-length relationship between DHMS and DH. The Deloitte Review confirmed the effectiveness of these governance arrangements. s131. The contractual relationship between DHMS and DH is best described as a relational governance model, in which the parties participate in a long term, trust based commercial relationship, subject to effective governance. This can be contrasted with a transactional governance model, in which a contract for services is let more frequently. A properly implemented relational governance model has several advantages over a transactional model in the context of not-for-profit open medical schemes. These include: 

It provides sufficient security of contract tenure to incentivise the administrator/MCO to make substantial, long term investments in the development of human capital and other assets required to manage a medical scheme effectively. This ensures that not-for-profit medical schemes are able to countervail the strong market position of for-profit healthcare service providers. Absent these investments by administrators/MCOs, not-forprofit schemes would not be able to attract the human capital nor to develop the assets, to countervail the market power of hospitals and other for profit service providers.



It gives the scheme significant countervailing power to negotiate competitive administration and managed care fees.



It encourages and allows for both the scheme and its administrator and/or MCO to engage in long term strategic planning, and to align their interests over long periods. s132. The outsourcing model adopted by DHMS, and its long term contractual relationship with DH is pro-competitive. It results in a strong alignment of incentives between the two parties, and incentivises DH to invest in the skills, assets and systems required to ensure that DHMS maintains a highly competitive position in the market. The role of DHMS, supported by DH, as an innovator and strong competitor adds to the level of competition in the market for beneficiaries of open schemes. s133. With the possible exception of the quantum of fees, the interests of the DH and DHMS are aligned, due to the fact that what is good for DHMS is good for DH, and vice versa. To the extent that DHMS’s objectives are satisfied, it will maintain a highly competitive position in the open schemes market, and will continue to grow. Growth of DHMS directly benefits DH which earns revenue through the fixed monthly fees payable by DHMS per policy. s134. In order to ensure ongoing and complete alignment of interests between DH and DHMS, DH provides administration and managed care services only to DHMS within the open schemes market. DH provides marketing and distribution services to DHMS, and having more than one open scheme client would introduce unacceptable

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conflicts of interest. DHMS members also have access to the Vitality wellness programme offered by Discovery Vitality (Pty) Ltd, a subsidiary of Discovery Limited. s135. There is an effective balance of power in the relationship between DH and DHMS. DHMS’s governance structures, together with effective oversight by CMS, have ensured that the Scheme has been able to negotiate attractive and competitive administration and managed care fee arrangements, resulting in the Scheme obtaining significant value for money across all performance metrics. s136. In terms of the Act, all medical schemes retain full rights to their data, and may terminate their contracts with three months’ notice. These legally enshrined rights ensure that the power in the contractual relationship ultimately resides with the scheme, rather than the administrator. s137. The current contractual model and governance arrangements between DHMS and DH have been highly effective in achieving consistent, positive results for DHMS and its members. This can be seen in the current competitive position of DHMS in terms of its benefits, premiums and client services, and in its excellent performance against all key objectives. s138. DH also invests in ongoing innovation to ensure that DHMS is able to compete effectively with other open schemes for beneficiaries. Since 2004, DH and Vitality have introduced 214 unique innovations enhancing the value proposition to both client schemes and their members. s139. DHMS has negotiated scale related discounts in the administration fees paid to DH since 2008. Between 2008 and 2013, these discounts have reduced DHMS’s administration fees by a cumulative value of over R1.5bn, and have resulted in administration and managed care fees falling by 11.0% in inflation adjusted terms, equivalent to an annual reduction of 2.3% over the period. If measured over the period 2008 to 2014, administration and managed care fees have decreased by R2.1bn, or by 12.1% in real terms, equivalent to a 2.1% reduction per year, over the period. Administration fees will continue to increase by 1.0% below CPI in each year of the next contract period, 2015-2017. s140. These trends were confirmed in the Deloitte Review, which concluded that the Scheme benefited from a 27% total reduction in administration fees per member per month for the period 2005-2012. In addition, Deloitte concluded that DH was passing on to DHMS a significant proportion of the benefits of the scheme’s increasing scale. s141. The overall impact of the administration and managed care services provided to a medical scheme are best captured in the concept of value, which provides a combined view of the fees paid by the scheme for administration and managed care, and the benefits enjoyed by the scheme and its members, in terms of improved member value, improved scheme performance, lower claims costs and improved service. s142. The Deloitte Review concluded that DH provides DHMS with significant value-for-money. It found that for each Rand spent on third-party administration fees, DH generates additional value for DHMS members of between R1.77 and R2.03.

Managed care and the role of Vitality Aims of managed care s143. Managed care aims to control medical schemes claims costs, by reducing prices and volumes of services where possible, without compromising quality of care. DH also focuses managed care efforts specifically on improving quality of care and health outcomes for members of its client schemes. s144. DH’s approach to managed care is based on the notion of “value-based care”, which ensures that the patient remains at the centre of the healthcare system, and aims to achieve the best possible healthcare outcomes at the lowest possible cost.

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Scope and financial returns of managed care s145. DH provides a comprehensive set of managed care services to client medical schemes. These include hospital, health professional, medicine, dental and fraud risk management, as well as disease management and care coordination programmes, and claims audit services. Currently, DH implements 84 different managed care interventions and programmes for client schemes. s146. A large and skilled team of analysts, health economists, health professionals and actuaries support this work. s147. The savings for DHMS from new and ongoing managed care activities in 2013 are estimated at R3.6bn, equivalent to 11.6% of DHMS’s total potential risk claims, and representing a return on DHMS’s investment in managed care fees of 327%. s148. DH invests significantly in several programmes aimed at improving the quality of care and health outcomes for members of client schemes. These programmes are yielding demonstrable and measurable improvements in quality of care and health outcomes. The role of Vitality s149. Vitality is a science and evidence based wellness programme, developed by Discovery Limited. It uses behavioural economics approaches to incentivise and reward health and wellness promoting behaviour, in an attempt to limit the growing burden of non-communicable disease. s150. Membership in Vitality is available to members of all DH client schemes. It is entirely voluntary, and separate premiums are charged for participation in the programme. At present, 54% of DHMS members participate in Vitality. s151. Peer reviewed research, published in leading journals, confirms that engagement in the Vitality programme is associated with lower incidence and cost of lifestyle disease. s152. Engaged Vitality members have lower hospital admission rates, shorter lengths of stay, and lower total hospital costs than non-Vitality members’, as well as lower total claims costs. Vitality has succeeded in increasing engagement levels consistently over time, thus strengthening these positive effects on DH’s client medical schemes. s153. DHMS has benefited from savings arising out of its members’ voluntary participation in Vitality. These savings are estimated at approximately R4.9bn between 2008 and 2013, and at R1.2bn in 2013. DHMS’s claims costs are estimated to be 3.9% lower than they would have been in the absence of the Vitality programme.

Consumer choice and information s154. Consumers’ choices of medical schemes and the options within medical schemes are very important, as medical schemes fulfil a critical role in pooling health risks, and providing consumers with protection against the adverse financial consequences of health events. s155. In addition to pooling risks, medical schemes and their administrators/MCOs fulfil a crucial role as healthcare purchasing agents for consumers. They do this by negotiating tariffs with providers, contracting provider networks, analysing information on price and quality, implementing clinical protocols etc. s156. Consumers’ choice of medical scheme depends on the channels through which they join. For DHMS, 70% join through their employers. Employees are typically given a choice of one or two medical schemes, chosen by the employer and/or trade union, usually on the advice of a broker. When consumers join a scheme as individuals, they typically do so via a broker, who provides advice on scheme and option choice. s157. Following the scheme choice, consumers choose the benefit option which best suits their financial and medical needs. This choice is influenced by consumers’ healthcare needs, their financial situation, and their preferences for

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network flexibility, benefit richness, control of day to day expenses, and extent of out of pocket payments. The design of benefit options influences consumers’ utilisation of healthcare services and products. s158. Brokers play a very significant role in advising consumers on their choice of scheme and scheme products. Currently, 97% of DHMS members join via a broker. Brokers have expertise in all aspects of schemes and their benefit options. The factors that influence brokers’ choice of scheme and plan options include premiums, benefits, financial stability of the scheme and quality of service. s159. DH invests significant resources in providing members and brokers with easy access to extensive information to assist with scheme and benefit choice, and with usage of their DHMS benefits. These resources include brochures and printed materials, SMS communication, and digital channels including website and broker and member smartphone and tablet applications.

Non-medical scheme health insurance products The health insurance market s160. A large number of non-medical scheme health insurance products are in the market, written on short and long term insurance licenses and regulated by the Financial Services Board. There are no accurate data on the size of the market, but some estimates suggest that there may be approximately 1.9m polices in issue at present. s161. Some of these products supplement medical scheme cover, and others are seen as replacement cover by consumers, and thus compete with medical schemes. Regulatory issues s162. Health insurance products are not subject to the requirements of the Act, and thus compete unfairly with medical schemes which are subject to the Act. s163. Health insurance products are able to risk rate premiums, and to exclude conditions and/or clients on the basis of risk. They also do not comply with PMBs, and are allowed to allocate higher percentages of premiums to broker commission. s164. These products are therefore priced at lower levels for young and healthy members, by restricting benefits and by excluding high risk and sick members, using mechanisms not available to medical schemes. Impact on medical schemes s165. Some consumers, not realising that health insurance cover is typically inadequate, view these products as replacements for medical schemes. Younger and healthier consumers, who are quoted lower premiums for these products due to risk discrimination, may opt to buy health insurance rather than join a medical scheme. This aggravates adverse selection against medical schemes, and drives premium inflation, as fewer young and healthy members cross-subsidise older and sicker members in medical schemes. s166. Some younger and healthier consumers buy lower levels of cover in medical schemes than they otherwise would have, and then supplement this cover with gap insurance. This weakens the cross-subsidy from younger and healthier members to older and sicker members within schemes. s167. Some scheme options include intentionally designed co-payments or deductibles to influence member behaviour (e.g. to encourage them to use network providers), allowing schemes to negotiate network discounts, and to offer lower premiums and better value for money. However, where consumers buy health insurance products to fill these gaps, this undermines the positive impact of the co-payments or deductibles, and causes further cost inflation for medical schemes.

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Recommendations s168. We respectfully submit the following recommendations and proposals for consideration and discussion by the Panel: Measures to reduce medical inflation and to reduce the level of medical scheme premiums Address the problem of adverse selection: s169. Explore options for a gradual expansion of mandatory membership of medical schemes for those in formal employment. This could include criteria based on size of employer group and/or individual or household income. The use of employer subsidies, as well as allowing low income medical schemes (“LIMS”) should also be investigated in this context. s170. In the absence of mandatory cover, more effective underwriting rules to protect medical schemes and their beneficiaries against the worst impacts of adverse selection should be investigated and implemented. More effective underwriting rules would discourage anti-selective behaviour, and would reduce the overall impact of adverse selection. Specific changes to strengthen current underwriting rules might include: 

Increasing general waiting periods (“GWPs”) from 3 months to 12 months



Increasing condition specific waiting periods from 12 months to 36 months



PMBs should not be payable during GWPs



Cost neutral Late Joiner Penalties (“LJP”) should be implemented, with the LJP for new joiners above age 60 increasing to 105%.



Option upgrades should be underwritten using the same rules as proposed for the underwriting of new members.



Removing the current provisions of the Act that allow employer groups to join schemes without underwriting on 1 January of each year. s171. We further recommend that the changes in underwriting protection of schemes proposed here be implemented after a once off “amnesty period” of 6 months. This would allow all those outside of medical schemes the opportunity to join medical schemes before implementation of the new rules. s172. We estimate that if all of the above measures to strengthen underwriting protection were implemented, this would save DHMS approximately R434m per annum. Extrapolation to other medical schemes would yield similar results. s173. An effective demarcation framework that protects medical schemes from the negative impacts of non-medical scheme health insurance products should be implemented. With minor modifications, the current draft regulations promulgated by the National Treasury will meet this objective. Address factors which are artificially increasing scheme premiums: s174. An RBC approach to scheme solvency regulation should be investigated and implemented as soon as possible. This would address the problems of the current ‘one size fits all’ approach that forces all schemes to hold 25% of gross premiums in reserves. It would allow large and stable schemes to hold less reserves, and would ensure that members of smaller schemes which require more than 25% in reserves are adequately protected. 

We estimate that had an RBC approach been in place, DHMS members would have paid R1.7bn less in contributions from 2008 to 2013, and the average premium would have been 2.6% lower in 2013 than it actually was.

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

Conversely, assuming the current rate of scheme growth, the continuation of the current 25% solvency requirement will result in DHMS members paying approximately R60bn in additional, unnecessary premiums over the next 20 years.

 Many other schemes, including GEMS, would benefit greatly from an RBC approach as well. s175. While an RBC approach is being investigated, consideration should be given to changing the current requirement that the 25% solvency requirement be applied to gross contributions including personal savings account contributions, to a requirement that only risk contributions are included in the solvency calculation. There is no rationale for a scheme to hold an additional 25% of savings account premiums, as a member can never claim more than their total annual savings premium, and no risk is carried by the Scheme in respect of member savings. This simple change will provide some years of significant respite from inflationary solvency pressure for growing schemes, while an RBC approach is investigated. s176. Consideration should be given to removing s33(2)(b) of the Act, which requires that each option within a medical scheme must be self-sustaining, and must therefore be priced to break-even each year. This requirement artificially inflates premium increases for the higher benefit options within schemes. In the case of DHMS, we estimate that premiums could have been lower by approximately R600m between 2008 and 2013 in the absence of this requirement. Analysis of other schemes would reveal similar results. s177. If an RBC framework is implemented to regulate scheme solvency, consideration should be given to revising Annexure B of the regulations to the Act, which constrain how schemes may invest their assets, resulting in suboptimal investment returns. An RBC approach would be sufficient to protect schemes against investment risk. s178. Consideration should also be given to allowing schemes to count unrealised gains in the assets used to calculate scheme solvency. This change would allow schemes to manage their investments with a longer time horizon, which is likely to improve investment returns in the long run. s179. The above recommendations regarding mandatory cover or strengthening of scheme underwriting protections, together with a RBC approach to solvency regulations, could have a significant impact on medical scheme premium inflation, and the long term sustainability of medical schemes, with no negative effects on schemes or their members. s180. We have estimated this aggregate impact using DHMS data and assuming two scenarios: 

Scenario 1: Assuming that mandatory cover for those earning more than R100,000 per year, RBC solvency regulation, and elimination of the need for self-supporting options had been in place since 2008, the total saving to DHMS members between 2008 and 2013 would have been R15.2bn, and premiums would have been 12.3% lower than they are today.



Scenario 2: Assuming no mandatory cover, but more effective underwriting provisions, RBC solvency regulation, and elimination of the need for self-supporting options had been in place since 2008, the total saving to DHMS members between 2008 and 2013 would have been R6.1bn, and premiums would be 7.3% lower than they are today. s181. Savings of this order would apply to all open medical schemes, and the positive impact of these recommendations would be felt by millions of beneficiaries of medical schemes. s182. Furthermore, we estimate that if these measures including mandatory cover had been in place for the past 20 years, DHMS premiums in 2014 would have been 35% lower than they are today. In the absence of mandatory cover, but with the other changes in place, DHMS premiums in 2014 would have been 22% lower than they are today. This means that had some form of mandatory membership been in place, DHMS members would have been paying an average premium of R2,021 per policy per month, compared to the actual average of R3,090 per policy per month. Similarly, in the absence of mandatory membership, but with more effective underwriting, DHMS

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members would today be paying an average premium of R2,410 per month, compared to the actual average of R3,090 per family per month. s183. Thus, taking into account the long term impact of these various regulatory requirements, the cost to DHMS members of not having mandatory membership is currently R12,825 per family per year, and the cost of less effective underwriting provisions in the Act is R8,160 per family per year. Analysis of the impacts on other open schemes would yield similar results. Measures to address the inflationary aspects of current PMB legislation: s184. We propose that the following changes to PMB requirements of the Act be investigated and considered for implementation: 

Reduce the scope of the current specialist and hospital focused PMB list to those conditions that are truly required to provide scheme members with protection against serious medical conditions; and



Introduce a defined package of primary care PMB conditions and treatments. These new primary care components of a PMB package should not add to the total cost of PMBs, but should be accommodated by a reduction in the scope of the current PMB package. s185. These two proposed changes would reduce the current inflationary pressures on medical schemes and their members, and would also increase the role of GPs and primary care within the private healthcare system. Measures to increase access to medical schemes for low income families s186. The concept of LIMS for low income individuals in formal employment and their families should be investigated for possible implementation, ideally in conjunction with employer and/or tax subsidies. s187. LIMS schemes would allow access to well structured, affordable medical scheme cover for millions of people in low income households who cannot afford current medical scheme premiums, particularly if offered with an employer and/or explicit tax subsidy. Most of these individuals already spend a small, but significant proportion of household expenditure on out of pocket payments for privately provided primary healthcare. LIMS schemes will provide these households with richer benefits and better protection against the negative financial effects of out of pocket payments. Providing affordable access to high quality private care will also substantially reduce the burden on the public healthcare system, creating more space for this system to be improved in preparation for the proposed National Health Insurance (“NHI”) system. Measures to increase competition, efficiency and quality in the delivery of healthcare services Health professionals: s188. The HPCSA regulations preventing the employment of professionals and the emergence of effective multidisciplinary teams of health professionals should be removed. These rules serve no useful purpose, and inhibit the emergence of innovative healthcare delivery models which are flourishing in healthcare systems around the world. Removing these constraints would stimulate supply side innovation, with positive impacts on medical inflation as well as on the quality of healthcare. s189. We recommend that the proposed Certificate of Need process for health professionals be amended from the National Health Act No. 61 of 2003. In our view, it will be practically impossible to effectively regulate the location of practice of over 30,000 individual health professionals. Attempts to do so will not achieve the intended distribution of health professionals, and will most likely result in a waste of resources and unintended consequences. s190. We recommend that a collective negotiation process between schemes, administrators/MCOs and representatives of health professionals for the maintenance and upgrading of coding be investigated and Discovery Health Submission

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implemented. This process should involve collective negotiations in relation to actual codes, the description of codes, and the relative value unit of codes, but not the tariffs associated with the codes. s191. We recommend that a system of collective negotiation of tariffs for health professionals, limited to tariffs for treatments of PMB conditions only, be considered and investigated. We would envisage this system working as follows: 

Collective negotiations between representatives of health professionals and schemes would determine the maximum tariff that health professionals could charge for treatments of PMB conditions only.



Schemes and professionals would be free to reach mutual agreement on either lower or higher tariffs than the agreed maximum tariffs. However, in the absence of any voluntary agreement, the maximum tariffs would apply.



This approach is justified in the case of PMBs, as the Act requires schemes to fund these treatments in full, regardless of the amount charged by a health professional.



This selective approach to collective tariff negotiation would create more symmetry in countervailing power between schemes and health professionals in relation to the treatment of PMB conditions, and would protect schemes without payment arrangements from excessive charges for treatments of PMB conditions. At the same time, both health professionals and schemes would retain the freedom to agree on either lower or higher tariffs for PMB conditions on a mutually acceptable basis. s192. We recommend against extending collective tariff negotiations to include all health professional services beyond treatments for PMBs, as this may facilitate collusive practices among health professionals, damage competition and contribute to tariff inflation. s193. We recommend that a national standardised pathology request form, which eliminates bundling of tests wherever possible, and includes indicative reference pricing of tests, should be investigated and implemented as soon as feasible. The current design of pathology request forms has resulted in the increasing cost of pathology over time. Many health systems globally have shifted to more efficient and transparent pathology request forms, which eliminate bundled requests and show pricing of tests. s194. We recommend that the feasibility of requiring health professionals to provide schemes with a minimum clinical dataset, including radiology and pathology results and hospital summaries, be investigated and implemented as soon as feasible. This will assist schemes and MCOs in playing a more active role in the measurement and improvement of the quality of healthcare services delivered to medical scheme members. Hospitals and facilities: s195. The National Department of Health (“NDoH”) or the Office of Health Standards and Compliance should implement an effective, scientific system of licensing of hospital and other healthcare facilities. This process should focus on optimal supply of beds in relation to the insured population in each region, as well as on the development of new alternative settings of care and innovative models of care delivery. s196. We recommend against the implementation of any form of collective negotiation of hospital and facility tariffs. This approach would harm competition in several ways including: 

It would damage competition between hospital groups, by increasing the risk of collusive practices between hospital groups, reducing price competition for participation in network arrangements, weakening incentives for improvements in efficiency and innovation in delivery models, and reducing competition between hospitals and alternative care facilities



It will damage competition between open schemes, which compete to reduce hospital, facility and pathology prices and total costs in order to enhance their ability to offer members competitive premiums.



It will damage competition between administrators/MCOs for administration of open and restricted schemes.

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s197. Health professionals treating medical scheme members in hospital should be required to provide the hospital, the medical scheme, and referring doctors with a hospital summary, and hospitals should be required to ensure compliance with this requirement. Medical schemes and MCOs need access to clinical information in order to measure and improve efficiency and quality of care. One particular gap in the South African private healthcare system is the absence of hospital summaries, which contain essential information on the diagnosis and treatment provided during the admission. In most health systems, doctors treating hospital patients provide such a summary. Medicines: s198. The patent registration process for medicines should be strengthened, by a shift away from a depository system of registering pharmaceutical patents, towards a substantive patent examination process. s199. The process for registration of new medicines should be improved to shorten registration times, and should take into account both product novelty and pharmaco-economic factors. In addition, a process for expedited registration of “biosimilars” to encourage competition with high cost biologic medicines should be implemented. s200. International price benchmarking should be implemented as soon as possible, and should include both clone products and generic medicines. South Africa should be excluded from the benchmark countries when determining the average of the lowest 3 prices in benchmark countries. s201. Consideration should be given to setting a minimum price differential between generic prices and prices of originator products. s202. Consideration should be given to allowing medical scheme members access to state tender prices for all medicines of public health importance (including vaccines, and medicines for TB and HIV/AIDS) as well as for all medicines used to treat PMB conditions. s203. The NDoH should encourage the development of risk sharing models between pharmaceutical manufacturers and medical schemes, and should provide guidelines for these models. s204. The NDoH, the MCC and the Pharmacy Council should jointly publish and endorse a national generic medicine database, including a full list of all recognised generic medicines and their prices. s205. The regulations calling for removal of all rebates and incentives in the pharmaceutical supply chain, and for transparency in logistics fees should be implemented. Any increase in dispensing fees to compensate pharmacies for lost income, should be accompanied by proportionate reductions in SEPs. Establishment of a health services regulatory agency s206. We recommend that the mandate of the Office of Health Standards and Compliance within the NDoH be expanded so as to allow it to regulate critical aspects of the healthcare delivery system. This expanded mandate should cover the following: 

It should establish policies and legislation to ensure the cost efficient provision of high quality of care by private, practices and commercial entities;



It should mandate and collect minimum clinical and financial data from all providers in order to: – research and publish information to assist consumers and other stakeholders to evaluate value (costs, quality of care etc.) of the private health care system – It should itself regulate the issuing of facility licenses or advise the issuing authority



It should promote innovation in service delivery models, and encourage better distribution of supply side resources, including in poorly served and geographically distant areas;



It should develop and maintain progressive tariffs systems for professionals and hospitals consistent with policy goals, including alternative hospital reimbursement schedules and the tools associated with these such as DRGs.

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Optimisation of interactions between the public and private healthcare systems s207. Consideration should be given to allowing the development of private sector training platforms for the training of health professionals, including doctors, as well as for training of managers and other specialised skills required for the management of the public healthcare system. s208. Mechanisms should be developed to allow the public sector to draw on the skills of the private sector in terms of health informatics, information systems, general management, logistics and supply chain management, for example through formal training programmes and/or exchange programmes for existing public sector employees. s209. Consideration should be given to implementing a more systematic approach to the outsourcing of specific public sector services to private providers. s210. Consideration should be given to using private hospital and primary care organisations to manage wards, sections or entire public hospitals and clinics on behalf of the public sector. In addition, providing private operators with long term leases on unused public sector facilities would allow these to be operated as either private or public or combined public/private facilities. s211. Consideration should be given to allowing public sector facilities and services to provide services to medical scheme members.

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1

Introduction

1.

On the 29 November 2013 the Competition Commission published a notice that it would conduct a market inquiry into the private health sector, as well as the Terms of Reference for the Inquiry. On 1 August 2014, the Competition Commission published a Statement of Issues and invited interested stakeholders to make submissions on matters raised therein.

2.

DH appreciates the opportunity to respond to the issues raised by the Inquiry Panel, and respectfully submits the following Submission. This document has been prepared in an attempt to make a substantive and positive contribution to the important objective of the Inquiry, by sharing detailed analysis of the data available to us, as well as our insights and perspectives on the key issues and questions raised by the Panel.

3.

We hope that this submission assists the Panel to address its Terms of Reference, and provides a factual basis upon which it can make evidence-based recommendations that will contribute to ongoing access to affordable and good quality private healthcare for consumers, and to the vital role of the private healthcare system within the broader national healthcare system.

The role of the private healthcare system in the broader national healthcare system 4. The private healthcare system in South Africa provides access to a high standard of care for millions of South Africans. We believe that this system is a valuable and sustainable national asset, and a vital component of the broader national healthcare system. It is also a vital component of the broader economy, contributing over R121bn to GDP 3 , with hospitals alone contributing R52.2bn to GDP, R17bn to annual tax revenues, and sustaining approximately 218,000 jobs 4 . The high quality of private healthcare in South Africa is also a key element in our country’s ability to attract and retain vital scarce skills that are required if we are to achieve the economic growth goals of the National Development Plan. 5.

At the same time, we recognise that the costs of private healthcare are high and that inflation in these costs has been higher than inflation, as measured by CPI, placing increasing pressure on members of medical schemes and all consumers of private healthcare. This submission provides a detailed analysis of these factors, and

3

National Treasury Fiscal Review for 2011. These are the estimated 2010 findings of the economy-wide impact for hospitals who are members of the Hospital Associations of South Africa (“HASA”). It is therefore a conservative estimate for the industry as a whole. These findings are reported in a study conducted by Econex and Quantec Research for the Hospital Association of South Africa. December 2011. Available online at: www.econex.co.za. 4

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proposes some regulatory interventions which could make a material impact on inflation in medical scheme premiums. 6.

We also recognise that the private healthcare system exists alongside a much larger and critically important public healthcare system, on which over 80% of the South African population depends for healthcare services. We believe that there could and should be greater collaboration between the public and private healthcare systems, and that such collaboration could assist both systems to meet their objectives, to the benefit of all South Africans. In particular, we believe that a more efficient and affordable private sector could provide care to a much larger proportion of the population, thus removing some of the burden currently borne by the public healthcare system’s already overstrained capacity. We also believe that the private sector could and should contribute to the development of human capital for the broader healthcare system, expanding beyond the training of nurses (which it currently does to a significant extent) to the training of doctors and other much needed health professionals. Conversely, improved public sector hospitals could and should compete for patients with medical scheme cover. This would bring much needed revenue into the public healthcare system, and would inject necessary competition into the supply side of the private healthcare system. This submission does not address these or other public sector issues in depth, and focuses instead on a detailed analysis of those aspects of the private sector for which we have most data and insight.

Overview of Discovery Health 7. DH was founded in 1992 and is a wholly owned subsidiary of the JSE listed Discovery Limited (“Discovery Ltd”). Discovery has 8,484 permanent employees, of which 3,644 are employed by DH. DH operates across South Africa, with employees working in Sandton, Centurion, Cape Town, Durban, and Port Elizabeth. 8.

The ownership and corporate structure of Discovery and DH is shown below.

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Figure 1-1: Corporate structure of Discovery Ltd and Discovery Health

9.

DH is accredited in terms of the Act to provide both administration and managed care services to medical schemes.

10. DH has grown organically since inception to provide administration and managed care services to a total of 13 medical schemes covering over 2.9m beneficiaries. DH currently administers and provides managed care services to the country’s largest open medical scheme – DHMS and to 12 restricted membership schemes. Through DHMS and its restricted scheme clients, DH provides services to more than 20,000 companies throughout South Africa, including 395 companies with more than 1,000 employees. 11. DH’s membership base covers a broad spectrum of the economy, including low, middle and high income members and their families. DH and DHMS have focused significant efforts over the past decade in developing medical scheme products aimed at increasing access amongst low income employees and their families. The DHMS KeyCare plans, established in 2003 to provide access to low income households typically earning between R5,000 to R10,000 per month, now have more than 411,000 members, 50% of whom were previously uninsured prior to joining DHMS. 12. DH’s vision is to be an organisation that makes its clients healthier, that supports its client medical schemes to offer their members the broadest and best benefit choices at the lowest cost per unit of benefit, and that

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contributes towards a healthcare system that is seamless, accessible and excellently serviced within a broader sustainable healthcare system for all South Africans. 13. Globally, healthcare leaders are realising that addressing the complexity of the healthcare systems and the challenges of rising costs and variable quality of care require a collaborative, comprehensive and systematic approach. DH currently focuses extensive resources and effort on increasing the quality of care, and value for money for the members of its client schemes, and for South Africa’s private healthcare system as a whole. DH envisages a ‘value based’ private healthcare system, designed and operating around the needs of patients, and aimed at maximising value for patients, where value is defined as the best quality of care at the lowest possible cost. This vision underpins all of DH’s efforts in managing healthcare costs and in improving quality of care received by patients. 14. DH and Discovery Ltd contribute substantially to a number of initiatives aimed at improving the functioning of the public healthcare system, and at strengthening civil society organisations working to improve access to healthcare for South Africans. DH contributes approximately R15m annually to the Public Health Enhancement Fund, a component of the Social Compact agreed between 23 private healthcare organisations and the Minister of Health to support public health projects of strategic importance. The Discovery Foundation has thus far invested R123m in the training of 245 medical specialists and super-specialists working in the public sector, and intends to continue funding at this level with the aim of producing 600 new specialists over the next 20 years. The Discovery Fund provides ongoing financial support to 43 community healthcare organisations and projects, focusing mainly on primary healthcare and the provision of HIV/AIDS services and support. Structure of the Submission 15. We have not attempted to respond to every one of the wide range of important issues raised by the Panel in the Statement of Issues. Instead, we have responded on those issues for which DH has the experience and data to substantiate our views in depth. This submission is structured as follows: 

Chapter 2 responds to para 16 and 17 of the Statement of Issues which speak to the rationale for the Inquiry. It provides a detailed analysis of medical inflation as experienced by the beneficiaries of medical schemes, and the drivers of inflation in the medical schemes environment. We recognise that medical scheme premium inflation is only one aspect of medical inflation, and does not reflect the experiences of millions of South Africans who do not belong to schemes. However, our data is most comprehensive and accurate on this aspect of medical inflation.



Chapter 3 responds to paras 32, 39, 42-45 and 47 of the Statement of Issues. It analyses key structural and competition related features of the major health service provider markets, including health professionals, hospitals, pharmaceuticals etc., and outlines how DH works to manage both cost and quality of care in these markets, as well as the results of those efforts.

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

Chapter 4 responds to paras 26 and 31 of the Statement of Issues. It provides a detailed analysis of the market structure, market shares and competition in the medical schemes and medical scheme administration markets. It also describes key aspects of the governance arrangements between schemes and administrators, with a specific focus on the relationship between DH and the DHMS, as well as between DH and its 12 restricted scheme clients.



Chapter 5 responds to para 34 of the Statement of Issues. It provides a high level overview of the managed care services offered by DH, and their impacts on the cost of healthcare and on quality of care. It also briefly sets out the impact of Discovery’s Vitality programme on DH’s client schemes and their beneficiaries.



Chapter 6 responds to paras 25 and 35 in the Statement of Issues. It explores the various factors influencing consumers’ choice of medical scheme, and of specific options within medical schemes, with a specific focus on the role of consumer information and brokers in consumer choice.



Chapter 7 responds to para 37 in the Statement of Issues, and discusses the role and impact of non-medical scheme health insurance products on medical schemes and their beneficiaries.



Chapter 8 addresses para 50 of the Statement of Issues and explores specific mechanisms that would allow the private sector to make a material contribution to the objectives of the public healthcare system and to optimise the interaction between the two systems.



Chapter 9 concludes the submission with our recommendations to address several of the key issues and problems identified in the analysis, which we respectfully submit for consideration by the Panel.

Limitations of the submission 16. This submission concentrates on addressing those aspects of the Statement of Issues for which DH has the most comprehensive data, experience and insights. In relation to inflation, we focus mainly on inflation in medical scheme premiums. We acknowledge that this is but one aspect of medical inflation as experienced by consumers, and that out of pocket payments are also a key part of this experience. Schemes and administrators tend to have relatively limited data on out of pocket payments, and we do provide some analysis of these data available to us. 17. We also focus mainly on the drivers of inflation in medical scheme prices and costs, rather than on the absolute levels of prices relative to those in other countries. Once again this is due to a lack of comprehensive and accurate data on which to base an analysis of absolute price and cost levels. We do provide some comparisons of medicine prices in South Africa compared to other countries, as data on these prices are more accessible.

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18. This submission focuses almost exclusively on the private healthcare system, and does not address the public healthcare system in any depth, other than to note those areas of interaction between the two sectors where we believe some changes could optimise the interactions between these two systems, to the benefit of both.

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2

Medical Inflation

Box 1: Key Observations: Medical inflation Overview 

This submission analyses inflation trends in open medical schemes, using DHMS data. Medical inflation is defined as the increase in premiums experienced by a member of a medical scheme who remains on the same benefit option from one year to the next. This captures how members of medical schemes actually experience medical inflation.



We acknowledge that medical scheme premium inflation is only one aspect of medical inflation as experienced by consumers, but this is the aspect for which we have the most comprehensive data. We also analyse out-of-pocket payments, although data on these are limited.



This analysis focuses on price and cost inflation, rather than on the absolute level of prices and costs in the private healthcare sector. While comparisons of absolute price and cost levels with international benchmarks are critical, there are no adequate and comparable benchmark data on private healthcare costs in other countries.

How medical schemes set premiums 

Premiums for the next scheme year are based on estimates of the financial position of the scheme at the start and end of the year for which the premiums are being set. Key assumptions are made regarding: – Tariff increases, increases in utilisation of healthcare services, and changes in benefits and claims risk management approaches, all of which will impact on projected claims increases; – Membership movements, which impact on the proportion of members in different benefit options (“plan mix”), which in turn impacts significantly on premium income and claims increases; – Expected NHE inflation, including increases in administration and managed care fees, broker fees and scheme office and trustee costs – Expected investment returns; and – The financial targets in terms of operating surplus, total surplus and solvency levels of the scheme.



Open medical schemes receive lower actual increases in premium income than the published premium increases, due to changes in plan mix, largely because a higher proportion of new members buy into lower cost plans each year than the prior year. Over the period 2009 to 2013, the average published premium increase for the largest 9 open schemes was 10.5% per annum, but the actual increases realised by these schemes averaged 8.8% per annum.

Drivers of medical scheme premium increases 

Premium increases are driven by 3 main factors: claims inflation, NHE inflation and reserve building.



Claims inflation accounts for almost the full extent to which medical premium inflation exceeds CPI. Solvency requirements also contribute to inflationary pressure, while NHE are deflationary.

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

On a plan mix adjusted basis, DHMS premiums were R454.21 higher plpm in 2013 than they were in 2008. Of this, R273.84 (or 60% of the total increase) is attributable to increases in CPI over this period. Most of the excess of premium inflation over and above the impact of CPI (i.e. the difference between R454.21 and R273.84), can be explained by inflation in claims costs, which accounts for R192.70 plpm (or 42.4% of the total plpm increase). Solvency requirements accounted for R2.35 plpm (or 0.5% of the total), while NHE reduced premium increases by R14.68 plpm (or -3.2% of the total increase). Claims inflation is therefore by far the most important determinant of premium inflation.

Drivers of claims inflation 

Claims increased by 11.3% per year over the period 2008 to 2013, exceeding average CPI (6.7%) by 4.6% per year. The 4.6% by which claims inflation exceeded CPI per year can be broken down into three parts: – 63.2% of the excess inflation is due to increases in volume as a result of demand side factors (2.9% out of 4.6%) – 27.9% of the excess inflation is due to increases in volume as a result of supply side factors (1.3% out of 4.6%) – 8.9% of the excess inflation is due to tariff increases exceeding CPI (0.4% out of 4.6%)



Annual tariff increases are therefore a minor factor in explaining the difference between CPI and annual premium increases. Over 90% of this difference is attributable to increases in volume of services consumed by scheme members each year, due to both demand and supply side factors, with demand side factors being by far the most important.

Analysis of tariff inflation 

Tariff inflation has been only slightly higher than CPI over the period 2008 to 2013, and is not the main reason for claims inflation in excess of CPI. Average annual tariff increases between 2008 and 2013 exceeded CPI by only 0.4% per year (tariff increases of 7.1%, relative to CPI of 6.7%).



[confidential] [confidential] [confidential] [confidential] [confidential]



GP and specialist tariff increases exceeded CPI due to deliberate decisions by DHMS to offer higher tariff increases to GPs and specialists to (i) ensure high levels of participation in contracted networks, (ii) compliance with PMB legislation, and (iii) to minimise member co-payments.



Medicine price increases have been lower than other categories, due to SEP regulations, but the level of medicine prices remain high relative to international benchmarks. Steep utilisation increases have resulted in overall medicine cost inflation significantly exceeding CPI.

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Demand side factors 

Demand side factors reflect the extent to which members of medical schemes demand more healthcare services from year to year. They are the main reason for volume increases, and hence for excess claims inflation.



Demand side factors account for 63.2% of excess claims inflation over the period 2008 to 2013.



Demand side factors are largely due to adverse selection, and to a lesser extent, a worsening disease profile within the existing medical scheme population. Adverse selection is the process whereby proportionally more high risk, sicker individuals tend to remain in medical schemes.



Adverse selection manifests in an increasing average age, an increasing prevalence of chronic disease, increasing disease burden, deliberate anti-selective behaviour (e.g. members joining a medical scheme, claiming, and then leaving shortly thereafter) and in the changing patterns in which members select benefit options within a medical scheme. A member aged 60 – 64 claims more than 3 times what a member aged 20 – 24 claims. A chronic member, regardless of age, claims roughly 2.3 times what a member without chronic conditions claims. To the extent that the average age and the ratio of chronic members increase, average scheme claims costs will increase.



DHMS data show clear evidence of significant adverse selection trends: – Over the period 2008 to 2013, chronic prevalence in DHMS increased by 4.9% per year. – There is a significantly higher proportion of females of child-bearing ages in DHMS (and in the industry), where at other ages, the proportion of females follow national averages. – Individuals diagnosed with chronic conditions requiring expensive treatment join medical schemes in order to access funding for their treatment. This is seen in the fact that large proportions of members who claim for conditions such as Multiple Sclerosis (for which biologic medicines cost R120,000 per year), or Breast Cancer (biologic medicines costing R180,000 per year) and Rheumatoid Arthritis (R97,000 per year for biologic medicine), claim within the first year of joining DHMS.



There is also adverse selection within schemes, as individuals diagnosed with serious conditions tend to buy up to benefit options with richer cover. This is seen in the fact that people who upgrade to options with richer benefits claim 35% more than other members on those options.

Supply side factors 

Supply side effects refer to the way in which the treatment of patients by health professionals and medical service providers changes from year to year, for a given burden of disease.



The supply side impact is significantly smaller than the demand side impact, and explains 27.9% of the excess claims inflation above CPI.



Factors influencing the supply side impact include increases in the hospital admission rate, changes in clinical decisions made by health professionals, new medical technologies, increased usage of pathology and radiology services, and changes in coding and billing patterns over time.

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Claims increases by category of health professional and medical service provider 

Annual tariff increases explain only 8.9% of excess claims inflation over the period 2008-2013.



[confidential]



Where tariff increases have been above CPI, these have been the result of deliberate decisions by DHMS to increase remuneration to reduce member co-payments and to comply with PMB legislation.



The main factor contributing to increases in health professional claims costs has been increases in volume of services. The highest annual claims increases in excess of tariff increases were in respect of pathology (8.1% above tariff increases), radiology (6.6%) and individual specialists (5.8%).

NHE inflation 

NHE includes the cost of administration, managed care, broker fees, and scheme office and trustee costs. Total NHE accounted for 13.4% of DHMS GCI in 2013, while administration and managed care fees accounted for 11.1%.



DHMS has negotiated volume related discounts in the administration and managed care fees paid to DH since 2008, ensuring that it benefits from economies of scale arising from its growth. Between 2008 and 2013, these discounts have reduced DHMS’s administration fees by a cumulative value of R1.5bn, which amounts to a reduction of 11.0% in real terms over the period, equivalent to a reduction of 2.3% per year.



As a result, NHE (in total, including administration and managed care fees, broker fees and scheme costs) have reduced by 12.3% in real terms over the period.

The impact of reserve building on medical scheme costs 

The Act requires that medical schemes hold 25% of annual gross premiums in reserve every year.



This requirement is out of line with international and local standards of prudential capital management for insurance entities, and has been a significant driver of inflation, particularly for rapidly growing schemes.



The current 25% solvency requirement does not adequately protect some schemes against insurance and other risks.



The result of this ‘one size fit all’ solvency regulation is that some schemes are significantly over-capitalised, whereas others are significantly under-capitalised, given the risks they face.



Because medical schemes have no source of capital other than member premiums, over-capitalisation means that member premiums have been higher than they ought to have been, and the solvency requirement has been inflationary. Members have paid for these solvency requirements without gaining any real benefit from them.



Large amounts of unnecessary capital are tied up in medical schemes, which could have been used to fund member claims, and to reduce premium increases, without increasing risk.



The current solvency requirement penalises the following types of schemes: – Large medical schemes – Schemes with high membership growth

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– – –

Schemes who price adequately and prudently for risks Schemes who hold properly quantified and adequate reserves for incurred but not reported claims Schemes who invest member funds responsibly



Conversely, current solvency requirements have rewarded those schemes who under-price, do not hold adequate reserves, take risks with the investment of member funds, and who are shrinking and losing members. It has also not adequately protected the members of small schemes.



A move to an RBC approach, in line with international regulatory standards, would result in lower premiums for the majority of medical scheme members in the country, and better risk protection for the members of many schemes.

Out-of-pocket payments 

Medical schemes do not have comprehensive data on out-of-pocket payments.



Out-of-pocket payments are small for in-hospital treatment, due to extensive cover of hospital treatments and the impact of PMB legislation. For DHMS, the in-hospital coverage ratio (ratio of claims paid to claims submitted) is above 95%.



Out-of-pocket payments are higher for out-of-hospital treatment.



The extent of out-of-pocket payments is dependent on the benefit options that members buy.



DHMS coverage ratios for combined in- and out-of-hospital claims are between 85% and 95%.

19. In this Chapter, inflation trends in open medical schemes and their key drivers are analysed. Medical inflation is defined throughout as the increase in scheme premiums experienced by a member of a medical scheme who remains on the same benefit option from one year to the next (referred to as “plan mix adjusted premium inflation”). This is the best way to define how members of medical schemes actually experience medical inflation, and is distinguished from the average premium increase for the whole medical scheme, which is impacted by the movement of members between medical scheme options from one year to the next, and may therefore understate true medical inflation as experienced by individual scheme members. We have reconciled this analysis with the accounts of DHMS, and details of this reconciliation are shown in Appendix 1. Appendix 3 includes the report by Deloitte of an independent review of the methodology used in this analysis and in all analyses used in this Chapter. 20. While it is clear that inflation in medical scheme premiums is only one aspect of medical inflation as experienced by consumers, this submission does focus largely on inflation as it impacts on medical schemes and their members, as this is the area for which we have accurate data. We also analyse out-of-pocket payments of medical scheme members, to the extent that the data is available to us. 21. It is also important to note that this Chapter focuses on price and cost inflation, or the year on year increases in costs, and the drivers of those increases, rather than on the absolute level of prices and costs in the private healthcare sector. While comparisons of absolute price and cost levels with international benchmarks are clearly

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important, we do not, at this stage, have adequate and comparable benchmark data on private healthcare costs in other countries. Such data should ideally be adjusted for purchasing power parity, and should focus on countries that are comparable to South Africa from an economic and developmental perspective. We have not conducted a representative comparative pricing study, and hence we are not in a position to provide meaningful analysis of the level of private healthcare prices in South Africa relative to other countries. 22. Unless indicated otherwise, only data for DHMS is analysed. We are mindful of the fact that while these data represent a valid view of the experience of a significant component of the medical scheme environment, they are not representative of the entire private healthcare market, nor do they reflect the experience of price and cost inflation experienced by consumers who are not members of a medical scheme. 23. As depicted in the Figure below, medical inflation is a global issue, and in fact, out of the 52 countries surveyed by Towers Watson in 2012, South Africa had the 8th lowest real healthcare cost inflation. Notwithstanding this, consumers are increasingly concerned about healthcare costs and their rate of inflation, which continue to exceed CPI and average wage inflation, thus consuming an increasing share of disposable income over time. Figure 2-1: Healthcare inflation above CPI, %

Source: Towers Watson 2012 Global Medical Trends

24. This Chapter outlines the factors which influence annual medical scheme premium increases. These include: 

Factors expected to impact on scheme income (member movements, investment returns)



Factors expected to impact on claims expenditure (provider tariffs, benefits, managed care rules and practice, new technology, member movements)



Expected NHE (administration and managed care fees, broker fees and scheme office and trustee expenses)

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

Solvency requirements



Other factors, such as scheme amalgamations and anticipated premium increases by competitor open schemes

25. The most important factor driving medical inflation is the annual increase in the claims paid by the scheme (claims inflation). To be consistent with the use of plan mix adjusted premium increases as the measure of medical inflation, claims inflation also needs to be adjusted for changes in plan mix, rather than simply examining the increases in the average claims of the Scheme as a whole. As with premium increases, average claims inflation is distorted by member movements between options, as options have different underlying demographic profiles and different benefits, both of which impact on claims. 26. The plan mix adjusted claims inflation is analysed in terms of three drivers: 

Tariff increases, or how the price per service or product has increased



The plan mix adjusted demographic effect (ageing, increasing disease burden, etc.), which is termed the “demand side effect”, as it reflects the extent to which increasing demand for medical services among the insured population drives claims inflation



The residual, which is termed the “supply side effect”, which reflects the way in which health professionals and other healthcare service providers influence the utilisation of healthcare services for a given disease burden in the population, e.g. through the introduction of new medical technologies, increasing admission rates, etc.

27. Prior to analysing trends in premium inflation and their drivers, we provide a brief description of how medical schemes set premiums each year, and the important difference between headline (or published) increases and the actual increases received by medical schemes each year.

2.1 Premium setting 28. The following section briefly describes how medical schemes set premiums, and the impact of various factors in determining premium increases from year to year. This section does not cover the governance aspects of scheme’s annual premium setting decisions, which are covered in Chapter 4. 29. Medical schemes determine premiums for any given year in August / September of the prior year, as all changes to medical scheme rules for the next calendar year, including premiums, must be submitted to CMS by the end of September in the prior year. This requires complex estimations and projections of the financial position of the scheme by the end of the following year, based on assumptions relating to underlying medical inflation, membership movements, investment returns, the proposed premium increase and benefit changes.

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30. The initial step in premium setting is to estimate the financial position of the scheme by the end of the current calendar year. This estimate is then used as a basis for estimating the likely financial outcomes in the next financial year, based on assumptions regarding changes between the current calendar year and the next financial year in a number of key parameters. These key assumptions include: 

Factors expected to impact on scheme income – Premium income: This will increase, but not in a completely predictable fashion, as discussed further below – Membership movements: New members will join the scheme, existing members will leave the scheme, and some members will change options. Based on these movements, the demographic profile of the scheme (average age, male / female proportions, proportion of chronic members, etc.), and of each option, will change. – Investment returns: Returns on the scheme’s invested reserves will change



Factors expected to impact on claims expenditure – Tariff increases: Tariffs for all health professionals, hospitals and other services providers are implemented on 1 January every year. The SEP for medicines is typically announced in January or February each year. – Benefit changes: Benefits may be enhanced or restricted, leading to either increased or reduced claims costs – Managed care and claims risk management: Protocols and rules may change, which could either reduce or increase claims costs – Changes in medical technology and practice: New medicines and technologies may be introduced, leading to changes in practice and higher claims costs. Medical approaches to conditions might also change, leading for example to increases in the ordering of radiology and pathology investigations and/or to higher hospital admission rates, all of which may increase claims costs.



Expected NHE inflation – Increases in administration and managed care fees – Increases in broker fees – Increases in scheme office and trustee costs



Legislated scheme solvency requirements



Other factors: – Anticipated competitor scheme premium increases: for open schemes, competitor premium increases may impact on competitive dynamics in the market, leading to member movements – Other factors: in addition to the above factors, premiums will also be influenced by possible scheme amalgamations (one or more schemes electing to merge with an open scheme) or large membership movements into or out of the Scheme (e.g. if a large employer group joins or leaves the scheme).

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31. The ultimate premium increase has to be sufficient to cover the estimated cost of all of the above changes, and is then tested for its likely impact on the following key scheme financial indicators: 

The expected operating result (i.e. risk premiums minus risk claims minus expenses)



The overall surplus or deficit in the scheme (operating result plus investment returns)



The expected statutory solvency position of the Scheme (overall accumulated funds, based only on realised investment gains, divided by gross annual premiums, as at the end of the next financial year)

32. There are complex interrelationships between the different determinants of premiums. For instance, if claims inflation is expected to be high, higher premiums will be required. This means that the solvency requirement increases (see below), which means that even higher premiums are required. This may in turn lead to more membership movements than anticipated (e.g. loss of membership), requiring further premium adjustments etc. All of these factors, and their interrelationships thus have to be carefully evaluated to ensure that the stability of the overall “ecosystem” of the scheme is maintained. 33. In order to ensure that this stability is consistently maintained, it is critical for a scheme to be priced to generate an overall operating surplus. If a scheme incurs an operating deficit in any year, it not only has to recover from that deficit in the following year, but also has to increase premiums for underlying medical inflation and solvency requirements in the following year, which means that the scheme’s premiums will most likely be significantly higher than competitors, which can precipitate significant member movements with further knock on effects. These dynamics are of particular relevance to open schemes as they compete for members in the open market, but they are also of importance to restricted membership schemes. 34. Estimates of likely membership movements are another critical factor in determining the premium increase. In recent years, DHMS has experienced a consistent pattern of more new joiners purchasing lower cost options than higher cost options, presumably due to affordability constraints. The net result of various membership movements is termed the scheme’s ‘plan mix’. To the extent that the plan mix changes during the year and therefore differs from the plan mix at the end of the prior year, it will lead to differences between the published premium increases and the actual increase in premiums received by the scheme for that year. In other words, if more people join lower rather than higher cost plans, the average increase per person will be lower than the published premium increase. This is discussed in more detail in Section 2.2. 35. In addition to this important impact on the actual premium income achieved by the scheme, plan mix also has a material impact on the scheme’s claims experience. Table 2-1 sets out the differences between plpm increases in claims and plan mix adjusted claims increases for DHMS, from 2008 to 2014. For instance, between 2012 and 2013, average claims across the entire Scheme increased by 8.8%. However, this average increase disguises the flattering impact on claims of the higher proportion of members on lower cost plans in 2013 compared to 2012. This shift in plan mix impacts on claims in two ways. Firstly, people who join lower cost plans tend to be healthier, and hence claim less. Secondly, lower cost plans have lower benefits, and hence members of these plans claim

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relatively less than members of higher plans with the same disease profile would. As the Table shows, the plan mix adjusted increase in claims in 2013 was 11.1% in that year, 2.3% higher than the actual increase of 8.8%. Table 2-1: DHMS plan mix adjusted claims increase versus actual claims increase: 2008-2014 Year Plan mix adjusted claims increase Increase in plpm claims

Difference

2008 to 2009

15.0%

13.3%

1.7%

2009 to 2010

11.3%

8.2%

3.1%

2010 to 2011

9.7%

7.7%

2.0%

2011 to 2012

9.5%

7.4%

2.2%

2012 to 2013

11.1%

8.8%

2.3%

2013 to 2014 Source: DHMS

11.3%

9.7%

2.2%

36. Therefore, when setting premiums for the next year, the scheme has to anticipate how plan mix changes will affect the income (by estimating plan mix adjusted premium income), as well as the claims of the scheme (by estimating the plan mix adjusted claims increase). Another way to consider this is that every option has to be priced to be self-sustaining5 and hence that pricing has to be done per option, not for the scheme as a whole. 37. In summary, when setting premiums for the following year, assumptions have to be made for: 

Tariff increases, increases in utilisation of healthcare services, and changes in benefits and claims risk management approaches, all of which will impact on projected claims increases;



Membership movements, which will impact on plan mix and hence allow for estimates of plan mix adjusted premium income and claims increases;



Expected NHE inflation – Increases in administration and managed care fees – Increases in broker fees – Increases in scheme office and trustee costs



Expected investment returns; and



The financial targets in terms of operating surplus, total surplus and solvency levels of the scheme.

38. Once these are taken into account, the required plan mix adjusted premium increase can be determined. 39. Once all elements expected to impact on scheme premium income, claims costs and NHE are estimated, the impact of all of these changes on the scheme’s solvency must be taken in to account. In the case of DHMS, the ongoing growth of the Scheme has required consistent increases in the annual premium simply to ensure that

5

Medical Schemes Act, No. 131 of 1998. Section 33(2)(b)

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the Scheme is able to meet the statutory solvency requirement. The impact of the statutory solvency requirements on annual premium increases and therefore on inflation are discussed in detail in Section 2.10.

2.2 Headline premium increases vs actual increases in scheme premium income received 40. As explained above, medical inflation is defined here as the increase in premiums experienced by a member of a medical scheme who remains on the same benefit option. This plan mix adjusted premium increase is generally the same as the headline (or published) premium increase announced by a scheme in September of any year, for implementation on 1 January of the following year 6. Based on DH analysis, if the 9 largest open medical schemes over the period 2009-2013 are examined, published premium increases announced by these schemes averaged 10.5% per annum7. However, these schemes realised actual increases in premium income of 8.8% per annum, significantly less than the published increases. In the case of the DHMS, published increases averaged 10% over this period, while the actual increase in premium income received by the scheme averaged 8.3%. These discrepancies between headline premium increases and the increases in average scheme premiums received, are attributable to member movements (i.e. changes in medical schemes’ plan mix).

6

This is not always the case. Some schemes announce what they anticipate to be the average increase in premiums taking into account expected membership movements from the current year to the next year. No consumer actually experiences this average increase, as it is distorted by the fact that only some members move between options. For this reason, brokers far prefer the headline increase to be calculated as the plan mix adjusted premium increase, or the increase in premium that a member would pay if they remain on the same benefit option, and this is the practice that DHMS follows. 7 These 9 open schemes included DHMS, Medihelp, Bonitas, Momentum, Liberty, Sizwe, Fedhealth, Bestmed and Resolution.

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Figure 2-2: Headline vs. Actual premium increase for the 9 largest open schemes: 2009-2013

Source: DH and industry data

41. This same trend can be seen in the case of DHMS in recent years, as illustrated in Table 2-2 which shows how published premium increases translated into actual average premium increases plpm for the years between 2008 and 2014. Examining the increase for 2014, for example, indicates that DHMS published an increase of 8.9% across all options. However, the average premium per person received by the Scheme increased by only 7.6% in 2014, because the plan mix changed between 2013 and 2014, with a higher proportion of members buying into lower cost options than in the prior year8. Table 2-2: DHMS published premium increases per life versus actual premium increases: 2008-2014 Year Published increase Actual increase in plpm premiums 2008 to 2009 12.8% 10.7% 2009 to 2010 9.8% 6.7% 2010 to 2011 7.9% 6.3% 2011 to 2012 8.9% 7.6% 2012 to 2013 10.9% 10.2% 2013 to 2014 8.9% 7.6% Source: DHMS

Difference 2.1% 3.1% 1.6% 1.3% 0.7% 1.3%

42. The published premium increases reflect the increases in premiums for a member of the same income and family composition remaining on the same benefit option. In reality, however, these variables change from year

8

In the rest of the document, all of our analysis is presented over the period 2008 to 2013. At the time of writing, 2014 experience is still under development. However, we know what the premium increases in 2014 are, and hence we include it here for completeness (and we also present our estimated claims increases for the full 2014 year for completeness).

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to year, as the distribution of members on options changes within the scheme. For several years, open medical schemes have been experiencing a significant ‘buy down’ trend, in which existing members buy down to lower plan options, and in which new joiners tend to join at lower options than would have been the case in the past. In addition, the average family compositions and income distributions also change over time. The net result of these trends is that open medical schemes have been consistently receiving lower actual increases in premium income than those reflected in the headline premium increases published each year.

2.3 Components of premium inflation 43. As noted above, in setting premiums each year, medical schemes take account of three major factors: expected claims inflation, expected inflation in non-healthcare expenditures and the need to build solvency reserves. This is captured in the following equation.

Premium increase = f(claims inflation; non health expense inflation; reserve building)

44. In Appendix 1, we show this equation for the Scheme over the period 2008 to 2013, without making any plan mix adjustments. The figures in the Appendix therefore reconcile with the DHMS audited financial statements. 45. As explained above, the plan mix adjusted premium increase is the most appropriate measure of medical inflation as experienced by members of medical schemes. Figure 2-3 shows that plan mix adjusted premium inflation over the period 2008 to 2013 was R454.21 plpm. This can be broken down into CPI (R273.84, or 60.3% of the total plpm increase), and excess inflation, amounting to R180.37 plpm or 39.7% of the total. This excess inflation can in turn be broken down into claims inflation, at R192.70 plpm, solvency requirements (R2.35 plpm), and reductions in NHE (which reduced premium increases by R14.68 plpm).

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Figure 2-3: Components of plan mix adjusted premium increases between 2008 and 2013, in Rands plpm

Source: DH calculations

46. Figure 2-3 above illustrates how claims inflation effectively explains the full extent to which premium increases exceeded CPI for DHMS between 2008 and 2013. In order to fully understand medical scheme premium inflation, it is thus critical to understand the drivers of claims inflation. In the following Section, the drivers of claims inflation are analysed in detail. The other factors increasing or decreasing annual premium increases, i.e. solvency reserve building and NHE inflation are discussed in more detail later in this document.

2.4 Drivers of medical scheme claims inflation 47. Annual claims inflation is a function of annual increases in the tariffs or prices per item of healthcare goods or services consumed by medical scheme members (price increases), and of annual increases in the volume of goods and services consumed by scheme members (volume of services). The volume of services is in turn a function of various factors on both the demand and supply sides of the healthcare system. 48. Demand side factors refer to those factors leading scheme members to need more healthcare goods and services, and typically reflect an increase in the underlying disease burden of the scheme population. Supply side factors refers to those factors which drive increased demand for healthcare goods and services for a given level of disease burden in the population, and are typically due to decisions of healthcare services providers such as hospitals, doctors etc. 49. These relationships are illustrated in the following functions:

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Claims inflation = f(tariff (or price) increases; volume of services) where Volume of services = f(demand side factors; supply side factors)

50. Figure 2-4 shows the breakdown of claims inflation for the period 2008 to 2013, and indicates that excess claims inflation of R192.70 plpm was driven mostly by demand side factors (R121.82 plpm, or 63% of the total excess claims inflation), followed by supply side factors (R53.79 plpm, or 28% of the total), and that the smallest contributor to excess claims inflation was the extent to which tariffs or prices exceeded CPI (R17,09 plpm, or 9% of the total). We explain the contribution of each of these components to excess claims inflation in more detail in the following sections. Figure 2-4: Components of plan mix adjusted premium increases between 2008 and 2013, in Rands plpm

Source: DH calculations

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51. Table 2-3 shows the relationship between claims inflation and CPI for DHMS, and indicates that over the period 2008-2013, claims inflation exceeded CPI9 by an average of 4.6% per year. Table 2-3: DHMS plan mix adjusted claims inflation versus CPI: 2008-2013 Year Plan mix adjusted CPI- Sept prior year claims increase

Difference

2008 to 2009

15.0%

13.1%

1.9%

2009 to 2010

11.3%

6.1%

5.2%

2010 to 2011

9.7%

3.2%

6.5%

2011 to 2012

9.5%

5.7%

3.8%

2012 to 2013

11.1%

5.5%

5.6%

Average for period

11.3%

6.7%

4.6%

Source: DH calculations using DHMS data

52. Figure 2-5 shows the relative contributions to total annual claims increases for DHMS for the period 2008 to 2013 of each of these factors: i.e. annual tariff increases, and annual increases in the volume of services consumed by scheme members (with volume increases further divided into demand and supply side factors). 53. Figure 2-5 indicates that claims increased by 11.3% per year over the period 2008 to 2013, and therefore exceeded the average CPI of 6.7% by 4.6% per year, on average. Of this, 0.4% is attributable to tariffs exceeding CPI and 2.9% is attributable to demand side factors. The remaining 1.3% is attributable to supply side factors.

9

In this document, CPI is measured at September of every year. This is the most relevant CPI measure as medical scheme premium increases are typically announced at that time, and fee negotiations and setting are also typically based on September CPI. Where different CPI indicators in this document are used, it is indicated specifically why they are different.

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Figure 2-5: Claims increases by component for DHMS 2008 – 2013

Source: DH calculations using DHMS data

54. The methodology of dividing plan mix adjusted claims inflation into demand and supply side factors is discussed in Appendix 2 to this Chapter. We also include an independent opinion on the methodology used in Appendix 3. 55. In the following sections, tariff increases are examined in more detail, followed by demand and supply side driven volume increases.

2.5 Tariff inflation 56. Except where otherwise indicated, the data in this section in respect of tariff (or price) inflation are based on the claims received by DHMS. This does not show the extent to which health professionals or other medical service providers charge higher than DHMS tariffs. To the extent they do, this generates out-of-pocket payments for members, as explained in Section 2.11 below. Claims inflation = f(tariff (or price) increases; volume of services)

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57. DH, on behalf of client schemes, negotiates tariff increases with providers between September and December each year, for the following year. As tariff negotiations are closely linked to CPI, the year to date CPI prevailing in September is typically utilised in negotiations. 58. Figure 2-6 compares the annual average tariff increases to CPI prevailing in September of the prior year over the period 2008 - 2013. This shows that the average annual tariff increase over this period was 7.1%, only 0.4 percentage points above prior year September CPI over the period, which averaged 6.7%, indicating a very close relationship between CPI and annual tariff inflation for DHMS. One clear conclusion is that, whilst tariffs are slightly above CPI overall, they are not the main factor explaining the significant differential between CPI and scheme premium increases identified earlier. Figure 2-6: Tariff inflation compared to CPI

14% 12% 10%

13.1% 11.7% 7.1%

8% 6%

6.7%

4% 2% 0%

20082009

20092010

20102011

20112012

20122013

Average '08-'13

Tariff increase

11.7%

7.9%

5.2%

5.2%

5.7%

7.1%

CPI at Sep of prior year

13.1%

6.1%

3.2%

5.7%

5.5%

6.7%

Tariff - CPI Sep prior year

-1.4%

1.8%

2.0%

-0.5%

0.2%

0.4%

Source: DH calculations using DHMS data, and CPI from StatsSA

59. The average annual tariff increases shown here are composed of annual increases for various hospital groups, pathology laboratories, radiology practices, all other individual health professionals, as well as annual increases in the SEP for medicines. lpFigure 2-7 shows the relative contributions of each of these categories to the tariff inflation experienced by DHMS in 2013. Hospitals and specialists are the two categories contributing the most to tariff inflation, between them accounting for 70% of average tariff inflation.

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lpFigure 2-7: Relative contributions of service provider categories to average tariff inflation

Source: DH calculations using DHMS data

60. [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] 61. [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] 62. [confidential] [confidential] [confidential]

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[confidential] 63. [confidential] [confidential] [confidential] Figure 2-8: [confidential]

[confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] [confidential] 64. Figure 2-9 shows the annual tariff increases for GPs, specialists and other individual allied health professionals over the period 2008-2013, indexed to 2008. This shows that over this period, tariffs for GPs have increased by 48.9% in nominal terms, with CPI increasing by 38.1%, indicating real inflation in DHMS GP tariffs of 10.8% over the 5 year period, equivalent to an average of 1.6% real tariff inflation per annum. This is in part as a result of GPs receiving higher tariffs in return for contracting into a GP network which would offer DHMS members the guarantee of no balance billing by GPs. This therefore minimises out of pocket payments to members visiting GPs. Further details on this are provided in Section 2.11.

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65. Figure 2-9 also shows that over this period, tariffs for specialists have increased by 54.9% in nominal terms, and by 16.8% in real terms, equivalent to an average of 2.5% real tariff inflation per annum. These increases for specialists have again been partly the result of DHMS offering specialists higher rates in return for agreement not to balance bill DHMS members. 66. The “other” category in Figure 2-9 includes all allied healthcare professionals. 80% of this category is comprised of dentists, opticians, physiotherapists, clinical and medical technologists, blood transfusion services, psychologists and emergency services. Tariffs for these allied healthcare professionals have increased by 6.5% in real terms – equivalent to an average of 1.0% real tariff inflation per annum. Figure 2-9: Tariff increases for individual providers compared to inflation 2008-2013

160 Specialist, 155

Index Value

150

GP, 149 Other, 145

140

Inflation at September Prior Year, 138

130 120 110 100 2008

2009 GP

Specialist

2010

2011 Other

2012

2013

Inflation at September Prior Year

Source: DH calculations using DHMS data

67. Figure 2-10 compares the annual increases in the SEP for medicines, which is determined by the NDoH, with CPI over the period 2008-2013. This shows that the SEP inflation over this period was 3.7% lower than CPI, equivalent to real deflation of 0.5% per year. As with pathology, the volume of medicines used by DHMS members over this period has increased substantially, leading to total medicine cost increases well in excess of CPI. These volume effects are discussed in more detail below.

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Figure 2-10: SEP increases for 2008-2013 compared to inflation

145 Inflation at Sep prior year, 138 Medicine 134

140

Index Value

135 130 125 120 115 110 105 100 2008

2009

2010

2011

2012

2013

Source: DH calculations using DHMS data

68. The inflation trends and drivers within each category of health professional or medical service provider are analysed in more detail in Section 2.8 below.

2.6 Demand side factors The various components of adverse selection, or demand side factors, are discussed below. Claims inflation = f(tariff (or price) increases; volume of services) where Volume of services = f(demand side factors; supply side factors)

69. This section begins the analysis of those factors impacting on the annual increases in the volume of healthcare goods and services consumed by medical scheme members, and focuses specifically on the impact of demand side factors on these volume trends. 70. The volume of healthcare goods and services consumed by a given medical scheme population will be impacted by several key variables which are closely correlated to the underlying need for healthcare. The most important of these are age, the presence of chronic conditions, and the availability of benefits within the various medical scheme options. The impact of each of these factors on the utilisation of healthcare goods and services is examined in the following sections. 71. A medical scheme or a benefit option with an ageing population, or with higher chronic prevalence, will experience higher claims inflation than one with younger and healthier new entrants. Benefit design also

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impacts on the demand for services by members. For example, benefit options that provide richer oncology benefits will attract a disproportionate number of members requiring oncology treatment, and these members will utilise more oncology benefits due to their availability. All of these aspects can be regarded as different forms of adverse selection.

2.6.1 Impact of age on demand for healthcare 72. Age is a critical determinant of the demand for healthcare goods and services. Older people typically have more frequent claims, and claim for more expensive services than younger people, due to higher prevalence of various acute and chronic health conditions. 73. Figure 2-11, Figure 2-12 and Figure 2-13 show data from the entire medical schemes industry, analysed in 2005 by the CMS’s Risk Equalisation Technical Advisory Panel (“RETAP”), for purposes of costing the PMBs. These data clearly show that claims costs experienced by medical schemes vary significantly by age. Each Figure shows the expected average PMB costs plpm (in 2005 terms) within a given age band. The upper bound of each curve shows total costs, by age band, with the coloured sections showing the contributions to these costs of members with a chronic condition10, members with HIV/Aids11, members without a PMB chronic condition and maternity costs. These data also demonstrate that the largest contributor to higher claims costs with increasing age is the presence (or absence) of chronic disease. This is especially true in the older age groups. The occurrence of a maternity event in the ages between 15 and 44 also increases the expected cost for females in this age range.

10

The Chronic Disease List (“CDL”) is a list of 25 chronic conditions that must be covered by all medical schemes. The verification rules are as published by CMS at the time. 11 If a member had HIV/Aids and another more expensive chronic condition, the member will not be classified under HIV/Aids.

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Figure 2-11: Industry PMB cost plpm (2005 terms) for females 1,000

All CDL Conditions Chronic not Verified HIV/AIDS Maternity No CDL Conditions Total TREATED REFCT2005

900

RAW REF Price for PMBs pbpm

800

Raw TREATED REF Study 2005 Female

700 600 500

400 300 200

100

85+

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

Under 1

1-4

0

Age Bands

Source: RETAP Figure 2-12: Industry PMB cost plpm (2005 terms) for males 1,000

All CDL Conditions Chronic not Verified HIV/AIDS Maternity No CDL Conditions Total TREATED REFCT2005

900

RAW REF Price for PMBs pbpm

800

Raw TREATED REF Study 2005 Male

700

600 500 400

300 200

100

85+

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

1-4

Under 1

0

Age Bands

Source: RETAP

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Figure 2-13: Industry PMB cost plpm (2005 terms) for males and females 1,200

All CDL Conditions Chronic not Verified HIV/AIDS Maternity No CDL Conditions Total TREATED REFCT2005 REFCT2006

1,100 1,000

RAW REF Price for PMBs pbpm

900 800

Raw TREATED REF Study 2005

700 600 500 400 300 200 100

85+

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

1-4

Under 1

0

Age Bands

Source: RETAP

74. Table 2-4 shows the impact of age on claims costs, as well as premiums for a single member 12 in two of the options within DHMS, the Classic Comprehensive and Classic Saver options in 2013. A member aged 60-64 has claims costs more than 3 times those of a member aged 20-24, while the premiums are exactly the same, as required by the Act. As a result, older members on average typically claim in excess of their premiums, and are cross-subsidised by younger and healthier members. Table 2-4: Claims and premium comparison of sample options and age bands for 2013 Benefit Option

Classic Comprehensive

Classic Saver

Age Band 20-24

60-64

Expected Risk Claims13

878

2,760

Main Member Risk Premium14

2,315

2,315

Expected Risk Claims

474

1,673

Main Member Risk Premium

1,361

1,361

Source: DH calculations using DHMS data

12

A main member is also referred to as the principal member. The main member pays a different contribution to the adult and child dependents belonging to the same member family. 13 Risk claims exclude all claims paid from the Medical Savings Account 14 Risk contributions exclude the portion used to fund the Medical Savings Account but includes all scheme expenses

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75. The Figures below show a similar pattern for these two DHMS benefit options, comparing the risk premiums and risk claims (plus NHE) per age band 15 . Where the risk claims exceed risk premiums, the option incurs losses16.

Classic Comprehensive

6,000 5,000 4,000 3,000 2,000 1,000

70 to 74

75 to 79

80 to 84

85+

75 to 79

80 to 84

85+

65 to 69

70 to 74

60 to 64

55 to 59

50 to 54

45 to 49

40 to 44

Age Band Risk Claims + NHE

Risk Contributions

65 to 69

60 to 64

55 to 59

50 to 54

45 to 49

40 to 44

35 to 39

30 to 34

25 to 29

15 to 19

10 to 14

05 to 09

01 to 04

20 to 24

Classic Saver

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 -