Fouché Venter, Alexandros Constantinou and Zulaikha Brey
The mandated target inflation range set for the South African Reserve Bank (SARB) is between 3% – 6%. Furthermore, the SARB has a relatively strong track record in keeping inflation within this range. Yet the annual increase in premiums for private healthcare insurance consistently rises at a much higher rate than the general price level. This is not exclusively a South African phenomenon: while South African medical costs increased at an average rate of 8.6% per annum between 2010 and 2012, the world average during this same period was 9.7%.¹ This has led to all sorts of accusations in the media and from the Government – but who exactly is to blame? Our first response is to point a finger at the insurer. The insurer in turn points to the private health care sector who then points to the costs of their inputs and suppliers. This leaves us guessing as to where these cost/price increases truly originate.

To answer this question, the entire healthcare value chain would need to be unpacked and methodically scrutinised. As a means of doing this, the Competition Commission (the Commission) has released a draft terms of reference for a market inquiry into the private health sector. The Commission is given the power to perform such an inquiry as a result of chapter 4A of the Competition Amendment Act (the Act) which came into effect on the 1st of April 2013. This inquiry aims to “… investigate the state, nature and form of competition in the market.” 2 The inquiry will serve as a foundation for future investigations into anti-competitive conduct or structure in the market as well as investigate areas for potential regulation.

This inquiry is expected to take years to complete. In the absence of these findings, we consider some of the contributing factors that the Commission will need to investigate.

The state of competition, barriers to entry and institutional factors

Prior to 2004, the private healthcare sector practised collective bargaining and published jointly determined tariffs. This continued unhindered between the medical schemes and various healthcare providers with oversight from three industry associations, namely the Board of Healthcare Funders (BHF), the South African Medical Association (SAMA) and the Hospital Association of South Africa (HASA).3 The problem seen at the time by the Commission is that the act of collective bargaining, joint determination of tariffs, and the publication thereof, amounted to price fixing; a contravention of section 4(1)(b)(i) of the Act. In light of this collusion, it was deemed necessary to outlaw such practices, which took place in 2004.

Extracts from the Competition Tribunal orders state that:

“[BHF] hereby undertakes to cease publishing a tariff, recommended scale of benefits or other form of price guidelines for services rendered in the private healthcare industry.” 4

“… [HASA] confirms that it no longer:

determines, recommends or publishes tariffs to or for its members; [or]

engages in any conduct which facilitates an agreement between its members on prices.” 5

 

A number of recent articles loosely claim or insinuate that ever since the decision to outlaw central bargaining; the costs of private healthcare have increased substantially. A disciplined economic study can help verify whether this is the case; until then, the decision to abolish central bargaining may have contributed to rising costs and can form the subject of further research in the form of the Commission’s inquiry, scholarly work, and the like.

High barriers to entry in the health care sector may also have the effect of limiting rivalry by hampering new entrants. In the healthcare sector, barriers to entry can include the high costs associated with purchasing medical equipment, general construction of medical facilities, the requisite licences from the Department of Health, and even shortages of medical staff (elaborated below).6 If the capital costs involved are too high, or the licencing process too onerous, lengthy and costly; or staff cannot be found, then taken as a whole, these factors can create significant friction for new entrants and increase the pricing power for incumbent players.

Other factors may also increase market power in this sector. For example, the inelastic demand of consumers for critical procedures (patients have little bargaining power over prices in emergency cases) and information asymmetries7 (consumers are generally less informed than their doctors) may give incumbents additional advantages, and can give rise to artificially inflated private healthcare costs.


Shortages of medical staff

A large problem in South Africa is the shortage of medical staff. According to World Health Organisation data, the number of physicians (includes general practitioners and specialist medical Practioners) in 2011 was 7.6 per 10000 population. This is slightly down from the 7.7 in 2004; and is much lower that the situation in most of the other BRICS8 countries, for example. Whereas we look marginally better than India (at 6 per 10000 population); China (14.2), Brazil (17.2) and especially Russia (43.1) far outperform South Africa in this regard. The global average is 14 physicians per 10000. According to the CEO of Discovery Health, in order to maintain South Africa’s already low ratio, our Universities have to produce at least 2 400 doctors per year, more than twice the current output. If correct, this is an alarming statistic. Even with the two medical schools in Limpopo and the Northern Cape that have recently been commissioned by government, it is doubtful that this shortage can be reduced in the near future. As a result the demand for doctors and the skills they possess, far outstrip the supply; and with the demand for most medical procedures being very inelastic, this is likely to contribute to higher prices.

Government policies

The Free Market Foundation (FMF) recently released an article asserting that government was the “… culprit behind high private healthcare prices.” 9 Although government policies and decisions might not be the only reason for cost increases, they likely play a role. Specifically, the adoption of the Medical Schemes Act in 1998 would have influenced the health insurance premiums paid by the private healthcare consumer. This Act introduced Prescribed Minimum Benefits (PMBs), to be provided by all health schemes regardless of a member’s risk profile. Despite the good intention and obvious benefits of this Act to many consumers, the increased benefits have placed upwards pressure on the premiums paid by less risky consumers. Indirectly, this may also have given rise to higher hospital price inflation, as many new schemes effectively incentivise consumers to seek hospitalisation by only providing full compensation in the case of admission.

Hospital costs

The increasing costs of electricity, along with other operating costs, such as food, maintenance, and rates and taxes have also increased substantially over time, all of which constitute a large proportion of a private hospitals’ total cost.10 In addition to these cost increases, salaries paid by the hospitals have increased at 9.5%⁸ per annum between 2000 and 2010, much higher than inflation over the same period. There are two reasons for these exceptional salary increases. Firstly, the private sector must compete and keep up with the public sector for scarce resources; and public sector salaries have increased strongly in response to powerful union demands. Secondly, because doctors and nursing staff (especially skilled nursing staff) are low in supply, this affords the employee additional leverage during salary negotiations.

Development of new technology

The factor that is argued to have the largest influence on medical cost increases worldwide, in both the public and private sector, is the cost of the development and implementation of new technology. While it is true that some technological advancements save costs by, for instance, introducing efficiency and better outcomes of a procedure, they can place upward pressure on healthcare costs too. Another way costs are saved is through the invention of vaccines or the creation of preventative treatments. However, the initial costs of development of new equipment, medical procedures and drugs (especially cancer drugs) are particularly high.

Population size and age

In addition to the above market and institutional challenges, the demographic landscape of the population can also play a role, placing additional pressure onto the system. Table 1 below displays the general changes to the South African population between 2004 and 2012. Population size has increased from 47.5 million in 2004 to 52.4 million in 2012. This results in increased pressure on the public and private healthcare systems.

Table 1: General population statistics – South Africa (2004 – 2012)



Source: World Health Organisation12, World Bank Data13

Furthermore, life expectancy at birth has increased from 52 years in 2004 to 55 years in 2011, while the proportion of the population over 60 years of age has also increased from 6.2% in 2004 to 8.4% in 2012. Typically, old age is also associated with a wide range of chronic diseases. As a person ages, they demand more from health care services and nursing, thus increasing the demand for healthcare.

Figure 1: The age distribution of South Africa’s population – Census 2011

Source: Statistics South Africa, Census (2011)¹⁴

The age distribution of the population also plays a key role in the financing of the private healthcare sector. As shown in Figure 1 above, the higher proportion of the population fall within the ‘healthy’ 20 – 40 year range, and this group are likely to rely less on medical insurance, or choose cheaper, lower coverage options. This may render medical schemes unable to cross-subsidise older and more sickly clients, bumping up premium ever higher.

State of Health

The general state of the population’s health also has an effect on healthcare costs. When the health of the general population declines, they are forced to increase their demand for private healthcare services, even with increasing prices. This is especially true of non-communicable diseases (NCDs) such as obesity, diabetes, hypertension and cancer.

Figure 2 below indicates changes in obesity between 1998 and 2008. The percentage of South African women over the age of 35 years that are classified as obese exceeds and in the last 10 years, the obesity of men between the ages of 35 and 64 years has also increased significantly. Obesity is often accompanied by numerous other illnesses, such as diabetes and hypertension.

Figure 2: Obesity in South Africa by age group

Source: MRC, 200815

Figure 3 displays changes in hypertension in the last 10 years. Hypertension levels in men have increased approximately 20% for men over the age of 35 years, while women over 55 experienced the greatest increase. Such increases are likely to contribute to a rise in strokes and heart attacks; and hence an increased need for medical care.

Figure 3: Hypertension in South Africa by age group

Source: MRC, 200816

Finally, the exceedingly high level in the communicable diseases (those diseases that are transferrable), place substantial demands on both public and private health care providers. In South Africa, HIV prevalence (% of population between ages 15-49) has increased from 11.4% in 1998 to 17.3% in 201117, and the incidence of tuberculosis has increased from 406 per 100 000 in 1998 to 993 in 201118.

In conclusion, there are a diverse set of factors that contribute to the cost of healthcare services in South Africa, many of which can explain the recent and rapid rise in prices. Determining the definitive source(s) of this upward pressure and the extent to which all or some of these causes should be addressed by Competition Commission, is pivotal in understanding what Government can do to tackle this problem. In doing so, the entire health value chain will need to be assessed against the backdrop of changing population profiles, institutional structures, market dynamics, government policies and technological advances. The planned market inquiry by the Commission will therefore be a difficult and complex exercise. But the quest to identify (and where possible, quantify) the main cost drivers in this sector extends well beyond the ambit of Commission, and the Government should be encouraged to adopt a holistic and cooperative approach in seeking answers South Africa’s substantial and diverse health challenges.