Issues regarding the Structure of the South African Health Market

Prof Alex van den HeeverChair in the Field of Social Security

Alex.vandenheever@wits.ac.za

Source for Content

The contents of this presentation reflect a high level summary of the analysis in a report provided to the Competition Commission in 2012

http://www.compcom.co.za/assets/Healthcare-Inquiry/Review-of-Competition-in-the-South-African-Health-System.pdf

What makes markets work?

• Basis for exchange – Individuals produce products and are able to exchange

them for other products• Consumers– Understand the product (price/quality)– Have a choice of alternatives– Able to exercise choice

When do markets fail?

• Basis for exchange – Individuals produce products and are unable to exchange

them for other products (absence of efficient systems of exchange – money)

• Consumers– Do not understand the product (price/quality)– Have limited or no choice of alternatives– Unable to exercise choice

How do consumers lose control of demand?

• Product complexity– Price, cost and quality comparisons not possible in real

time– Market problems possible despite competition

• Market concentration– Structural reduction in products choice– National or geographic markets

• Market manipulation– Collusion to exclude competition from the market• Agreements between market participants, including the sharing

of information (e.g. prices/costs)• Punishment for non-compliance

– Payment of kickbacks to intermediaries able to determine demand (agents)

– Market segmentation• Forcing consumers into market segments on the basis of their

ability to pay

Correcting dysfunctional/failing markets

• Ensure an efficient basis for exchange• Put consumers rather than product suppliers in

control of demand– Effective market signalling• Price• Quality

– Product simplicity – remove need for advice• Correcting markets is more than just about price

What about efficiency?

• Allocative efficiency - static• Technical efficiency - static• Dynamic efficiency - innovation

ANALYSIS OF THE SOUTH AFRICAN MARKET

Two key “products”

• Insurance• Healthcare

• What about consumers?– Don’t understand what they’re buying– Don’t understand the pricing or the cost– Have no idea about product quality– Key strategic product purchases are channelled through

conflicted intermediaries

3rd Party Managed Care

Diagnostic Specialists

SurgicalSpecialists

3rd Party Administration

Hos

pita

l-bas

ed

and

subs

titut

e se

rvic

es

Medicines and other medical products and services

Financing and Risk Pooling

Health goods and services

Health insurance - unregulated

General PractitionerConsumer

Information asymmetry

Information asymmetry

Health insurance - regulated

Holding companies

Brokers

3rd Party Managed Care

Diagnostic Specialists

SurgicalSpecialists

Hos

pita

l-bas

ed

and

subs

titut

e se

rvic

es

Medicines and other medical products and services

Financing and Risk Pooling

Information asymmetry

Information asymmetry

Health goods and services

Gate keeperConsumer agentsPossible conflicts of interestMoral hazardAnti-selectionRisk-selectionCommercial relationships

Health insurance - unregulated

Financial sector holding companies

General Practitioner

Brokers Health insurance - regulated

Consumer

3rd Party Administration

WHAT’S IN THE CONTRACT TODAY

Systemic Market-related Issues

What is internalised/externalised within contracts between consumers and health insurers?• Price• Cost• Quality

What is internalised/externalised within contracts between insurers and health care providers?• Price• Cost• Quality

Regulated Insurance

Unregulated Insurance

Regulated Insurance

Unregulated Insurance

Markets only compete on factors/signals that are transparent to relevant decision-makers

Internalised into Insurance contract – medical schemes

• Risk Medium• Price Medium• Quality of coverage Medium• Quality of health care services Medium/Weak• Quality of healthcare products Medium/Weak

• Regulations prevent some risks from being transferred arbitrarily back to consumers

Insurance contract – other

• Risk Weak• Price Weak• Quality of coverage Very weak• Quality of health care services Very weak• Quality of healthcare products Very weak

Internalised into insurance contract with HC service providers

• Derived from the contract between consumers and insurers

• Risk Weak• Price Very weak• Quality of coverage n/a• Quality of health care services Weak• Quality of healthcare products Weak

MARKET OUTCOMES

Real per capita changes in medical scheme expenditure and GCI (2012 prices)

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0 50

100 150 200 250 300 350 400 450 500

Hospital claims Specialist claims Rest claims GCI

Year

Inde

x 19

90 =

100

Source: Council for Medical Schemes data from scheme audited financial statements 1990 – 2012 (adjusted for CPI)

Changes in the structure of medical schemes expenditure on benefits (1981-2012)

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0%10%20%30%40%50%60%70%80%90%

100%

General Practitioners Specialists DentistsHospitals Medicines Other

Year

Perc

enta

ge o

f tot

al c

laim

s ex

pend

iture

Source: Council for Medical Schemes data from scheme audited financial statements 1981 - 2012

Hospital claims (real pbpa) compared to beds per 1,000 and market concentration (HHI) (for private

beds)19

97

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.0

50.0

100.0

150.0

200.0

250.0

300.0

Hosp claims Beds/Pop HHI (lag 1 yr)

Inde

x w

ith 1

997

= 10

0

Point at which beds per 1,000 is roughly equal to the US and UK (noting that they have vastly older populations)

Changes in total beds in South Africa 1976 to 2010: public and private sector

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Beds (pub) Beds (prv)

Return on Capital Employed (Mediclinic and Netcare)

Source: Anthony Felet, Duncan Lishman and Fatima Fiandeiro, “Do hospital mergers lead to healthy profits?”, 2012, p.11

Return on Capital Employed (Mediclinic and Netcare) – 1997 - 2011

Source: Anthony Felet, Duncan Lishman and Fatima Fiandeiro, “Do hospital mergers lead to healthy profits?”, 2012, p.11

Average age of Medical Schemes 2000 -2013

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

5

10

15

20

25

30

35

31.2 31.6 31.6 31.9 32.0 31.7 31.6 31.4 31.5 31.6 31.5 31.6 32.0

Average age of beneficiaries

Average age of beneficiaries

Sources: CMS Annual Reports 2003-4, 2004-5, 2005-6, 2007-8, 2009-10, 2010-11, 2012-13

Real hospital cost (pbpa) changes from 2001 to 2006 (percentage) (includes medicines)2

00

1 t

o 2

00

6

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

5.4%

5.5%

53.9%

Other Nurse salaries Age

Other causes

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Total Non-health Administration

Perc

enta

ge o

f GCI

Non-health expenditure trends from 1974-2010: percentage of Gross Contribution Income (GCI)

Source: Council for Medical Schemes data from scheme audited financial statements 1974 - 2010

Major deregulation

CONCLUDING REMARKS

• Ensure that health insurers have the incentive to purchase efficiently– Remove conflicts of interest in markets for advice– Simplify and standardise products– Market transparency on key indicators central to consumer

choice– Internalising price and quality into the contract– Deal with regulatory arbitrage– Ensure governance arrangements correctly locate the

commercial imperative in the scheme

• Ensure that insurer incentives cannot be undermined by anti-competitive structures and conduct on the supply side– Market transparency (price/cost/quality)– Conflicts of interest• Separate doctors from other products

– Accumulation and abuse of market power• Market diversification• Penalise abuse

– Collusion

END