The recent challenge by members of Discovery Health Medical Scheme (DHMS) around the administrative charges on their medical scheme highlights the pressure that individuals are feeling due to rising healthcare costs which are increasing well above inflation. While administration costs are one area that members can apply pressure, administration is a relatively small percentage of a medical scheme’s total cost.

According to the Council of Medical Schemes annual report about R84bn was spent on direct healthcare costs for about 8.5 million beneficiaries which works out at an average of around R10 000 per beneficiary. Administration costs amounted to R7.8bn and broker costs around R1.2bn.

The industry average for medical administration as a percentage of total premiums is around 10% and the total non-healthcare expenditure is 15% of total premiums which includes administration and other costs such as marketing and broker fees.

Non-healthcare expenditure is a significant portion of total costs and is easier to manage than medical costs so members should question them especially as the Council of Medical Schemes makes the point that larger administrators do not appear to offer any cost advantages over their smaller rivals which suggests they have room to improve efficiency.

However a two or three percent reduction in administration costs is not going to stop the rapid increase in our annual medical scheme premiums. According to Damian McHugh, Head of Sales and Marketing at Momentum Health, hospital costs make up the bulk of healthcare costs at around 37% of total premiums. Expenditure on specialists accounts for 22%, medicines 17% and general practitioners and other healthcare providers account for 7% of healthcare costs.

McHugh says there is a focus on administrators to drive down fees in order to make more of the contributions received available for the paying of claims, however on the claims costs side, there is limited regulation and healthcare providers are free to charge as they wish. “This creates a potential cost problem, especially with the low number of certain providers available such as specialists.  In economic terms, low supply combined with a rather inelastic demand for a certain service we will experience a higher than normal increase in price in the absence of price regulation,” says McHugh.

For many medical schemes the biggest cost driver are the Prescribed Minimum Benefits (PMBs). PMB legislation compels medical schemes to pay service providers for treatment of PMB conditions at full cost. Nick Rudston, executive head of closed schemes at Metropolitan Health says the concern is that healthcare providers use this legislation to charge fees well in excess of commonly used industry tariffs.

Heidi Kruger, corporate communications at the Board of Healthcare Funders (BHF) says the requirement to pay PMBs at full cost is creating a major cost spiral, “if the current scenario is not checked, we could see more schemes demising or merging.  This scenario creates an open-ended liability for schemes as they can’t know what they are going to have to pay out.  It also makes budgeting very difficult,” says Kruger.

Jonathan Bloomberg of Discovery Health says PMB’s are not a major cost pressure for Discovery Health as the administrator has signed direct payment agreements with many doctors and specialists and that generally hospital costs and doctor fees are contained, however the rising incidence of chronic diseases, cancer in particular, and the associated high cost of treatment is a major concern for the scheme.

Andrew Edwards Liberty Medical Scheme (LMS) Executive Principal Officer shares Discovery Health’s concern around the mounting cost of specialised medications which is only beneficial to a minority of beneficiaries yet is steadily pushing up the medicine bill.

For example, Herceptin treatment for a person with HER2 positive breast cancer costs as much as R90 000 for nine weeks and R390 000 for 12 months, while the cost of Gleevec (for Philadelphia chromosome positive chronic myeloid leukaemia) is R360 000 per year and continues as long as the patient responds, which could be several years. In instances of resistant disease, the cost could be as much as R720 000 per year.

Edwards says the pipeline in the arena of expensive specialised medicines is reported to be extensive. “It appears that much of the R&D focus of many multinational drug companies is directed at the development of niche products intended for managing catastrophic diseases that afflict a relatively small number of people (as compared with other chronic diseases such as hyperlipidaemia or hypertension),” says Edwards.

Bloomberg says new treatments and technologies are coming in at multiples of the cost of older technologies which, combined with the higher incidence in chronic illness, is creating an explosion in healthcare costs.

Bloomberg says twelve years ago only around 1.5% of claims were over R500 000, today nearly 5% of claims are in excess of R500 000. This tripling in high cost claims is due to the combination of increased illness and the cost of new technologies to treat them.

For example the increase in multiple births through the use of IVF has resulted not only in an increase in the number of premature babies but also in technologies to save their lives which come at a high cost. It is not unusual for a medical scheme to pay R1 million to cover the costs of a premature birth.

Bloomberg says a major problem remains the over servicing or wasteful expenditure in South Africa’s private health care. For example South Africa has one of the highest rates of cesarean section in the world. There is also a tendency for excessive testing and medical investigations when to compared to global practices and that the industry needs a more integrated approach to lessen the duplication of tests and have a formal protocol on treatment and investigation.

Kruger agrees and says that “the current system allows over-servicing, entrenches fraud and does nothing to align the incentives between the funders and the providers”.  Kruger says BHF is engaged in many interventions including legal cases and engaging with government to try to contain costs.  “Some of the interventions are going to include legislative changes – things like bringing in a regulated tariff for providers and bringing in mandatory cover for people earning above a certain threshold,” says Kruger.

Negotiate

While consumers wait for the healthcare industry and government to come to agreements on how to contain rising costs, we have to find ways to make our money stretch further. We also have to learn to start negotiating with our healthcare providers. The reality is that many doctors charge fees according to what they believe their patients can afford, which means doctors are prepared to negotiate rates. Ask your doctor what they will charge for a procedure and find out whether or not your medical scheme will cover the costs in full. If you find that you will need to pay in, ask your specialist about a discount. If he or she will not reduce their rate you can make a decision to either go to another specialist or pay in the difference. You have at least made an informed decision.

The difference between a medical scheme and an administrator

The actual medical scheme that you belong to is a nonprofit entity that pool members’ money to cover future medical expenses and does not make profits. The cost drivers within the fund are mostly related to the claims by members and the rising cost of healthcare.

The medical scheme employs an administrator who collects premiums, manages claims and negotiates tariffs with hospitals, doctors and pharmaceutical companies.

The administrator is a business run for profit. In the case of Discovery Health Medical Scheme, it is administered by Discovery Health which is part of the Discovery group, however not all medical schemes are administered by a related company. For example Fedhealth Medical Scheme is administered by Medscheme and Metropolitan Health Corporate administers the Government Employees Medical Scheme (GEMS). Technically the trustees of Discovery Health Medical Scheme could move administrators if they felt that Discovery Health was overcharging or nor not delivering.

 This article first appeared in City Press