Health minister Aaron Motsoaledi has vowed to reform the private health care system to bring down costs. Andile Makholwa examines the challenges he is up against, as there's no agreement on what needs to change 

With an almost evangelical zeal, health minister Aaron Motsoaledi has been lobbying support for a national health insurance (NHI) in SA and has encouraged everyone who can, to help fix the ills in the health system.

He was on such a mission last month in Johannesburg when, addressing leaders of the SA Council of Churches, he dropped a bombshell. He claimed that private health-care groups were preparing a high court case to stop the NHI, which is still in pilot phase.

Motsoaledi - who made the same claim again in an interview with the FM - says he is prepared to fight such a legal challenge. Though no-one in the industry has been prepared to discuss the possibility of legal action against the NHI, such a move will undoubtedly cause a huge rift with government. It also indicates how high the stakes are when it comes to health-care costs, since a cap on fees is likely under the NHI.

Motsoaledi, health minister since May 2009, has ruffled feathers with his assertion that hospital groups are responsible for uncontrollable private health-care costs and that they need to be regulated. He believes private health-care costs need to come down as one of the two major conditions necessary for the successful implementation of the NHI. The other is an overhaul of the public health-care system.

Though there's no debate that the public health system needs to improve, there's no agreement on what needs to be done to curtail health-care inflation, which has risen higher than the consumer price index (CPI) over the past decade. About 20% of SA's 52m population use private health care, with 16% covered by medical aid. The rest pay "out of pocket" or through hospital cash plans. The trouble is that often those with cover battle to cope with the sharp rise in prices.

Motsoaledi says his office is inundated with complaints of high prices in hospitals. Cases include a patient who was charged R18000 for dilatation and curettage; another was billed R30000 for removal of an abscess.The minister has been criticised by the industry for "quoting figures out of context" and for trying to deflect attention from the sorry state of public hospitals, one of the factors driving greater use of private facilities.

But complaints of shockingly high medical bills are growing. Private hospital groups admit that the service they offer is unaffordable to some, but argue that private care, by its nature, isn't for everyone. However, Motsoaledi believes the problem is that the prices are artificially high and he's vowed to bring them down. The first step is an investigation into possible collusion among the providers through the competition commission.

The commission says an inquiry into the sector is due to begin later this year. Its scope is wide and it will have the powers to summon anyone with information that may assist it to establish what's driving up costs and recommend what needs to be done. Motsoaledi says it took him three years to convince the commission to set up the inquiry because it didn't understand the dynamics of SA's private health-care industry and didn't believe government had to be involved in issues of pricing.

He argued that nowhere in the world is the health minister neutral on prices. "The inquiry will uncover the truth because everybody is washing their hands [of the problem] saying ' it's not me'," says Motsoaledi. "We need that market inquiry to settle [on] the truth, just like a court of law where each witness has their own version of events, but eventually the jury forms a common version out of the evidence they get." Motsoaledi says the commission's abolishment in 2004 of collective bargaining between private health-care providers (hospitals and doctors) and funders (medical schemes) was a "terrible blunder".

He says he has a duty to live up to section 27 of the constitution, which defines health care as a right and that lack of affordability in the private sector is contrary to the ideals of the constitution. He's also inspired by the strides made by US president Barack Obama in persevering with health-care reform, in spite of much opposition, and which is likely to be one of the achievements defining his presidency.

In some respects, SA's private health care is likened to that of the US. The money spent is huge but access is limited. Motsoaledi is not alone in raising the alarm about costs. "It's a jungle out there," says Humphrey Zokufa, MD of the Board of Healthcare Funders, an industry body representing 85% of medical schemes. "The commission must go with a fine-tooth comb and utilise the powers it has to unearth what is going on and come up with meaningful suggestions. The challenge for the commission is to find out exactly what the cost drivers are."

He warns that those who benefit from the current system might hide information. Motsoaledi believes the problem lies with the three dominant hospital groups, Mediclinic, Life Healthcare and Netcare, which together control 75% of the market.

He says the problem began around 1999 when private hospitals started consolidating themselves into the three groups through mergers and acquisitions, which were approved by the competition commission. Before that they were fragmented. He says this tilted the balance of power in their favour, creating a situation where they now dictate, not negotiate, prices to medical schemes.

And because they're not regulated, they can charge whatever price they want."The providers are completely unregulated and I call it the law of the jungle. It's every man for himself and the devil take the hindmost. Nobody protects any other person," he says.

The minister argues that since the goal of the three groups, which are all profitable counters on the JSE, is to maximise profits, they have little concern for affordable care. He's backed by a report produced in 2009 by Judge Jody Kollapen, then chairman of the human rights commission, which researched access to health care in the spirit of section 27 of the constitution.

"Costs within the private sector rose steadily between 1990 and 1998, however they rose more steeply after 1998 and this was largely consistent with the period in which the private hospital market became heavily consolidated into three hospital groups, which continue to dominate in terms of buying and building new hospitals," Kollapen's report says. "The cost escalation and overprovision is a consequence in part of the fact that regulation of the private sector has focused more on medical schemes and less on providers. As a result, the potential for profit, rather than need appears to have been the deciding factor in the expansion of private sector facilities."

It says that overprovision means that some of SA's private hospitals have better equipment than many in rich countries. The report also suggests thathigh costs may have been fuelled by unethical practices in which private hospitals overcharge on surgical supplies and materials such as drip sets, gloves, syringes and suture materials.

Zokufa has repeatedly argued that the imbalance in the legislation puts medical schemes in a weaker position when negotiating with hospitals. For instance, the Council for Medical Schemes - a statutory body - says medical schemes must pay in full all conditions listed under the Minimum Prescribed Benefits but there's no statutory body prescribing how much providers should charge.

Prof Alex van den Heever, a health economist at Wits University, says this is a symptom of a badly structured health system. He says health care is a necessary service and that since consumers take insurance or medical aid to pay when they're sick, they are price insensitive when being treated.

Another problem, he says, is market concentration of the providers. Mediclinic is dominant in Cape Town and surrounding areas; Netcare is more prevalent in Johannesburg; and Life Healthcare is big in Durban and Port Elizabeth. This makes it possible for them to collude as a group by offering services at a particular price or threaten to exclude members. "So the dominant groups are not only three, but in certain areas they are the only show in town. That makes schemes weak when negotiating prices. They have such power that they can be overpriced and provide inefficient care," says Van den Heever.

Discovery Health CEO Jonathan Broomberg says there are many factors to the problem. Health-care costs rise faster than CPI in most countries and surveys show that health-care inflation in SA runs at 3% above CPI, but it is the 8th lowest out of 52 countries. Total health-care inflation each year is made up of three components: the price/tariffs charged by providers; demand-driven utilisation; and supply-driven utilisation. Hospital inflation has been between 5,8% and 6% over the past couple of years and CPI at around 5,5%.

Broomberg says prices are a part of the problem, but not the only one and they are not the real reasons that health-care costs deviate significantly from CPI. "The real problem is that more services are being consumed by medical scheme members each year, and this is driven by both demand and supply-side factors," he says. "On the demand side, factors that are pushing costs are ageing, chronic diseases (diabetes, high blood pressure, high cholesterol, HIV/Aids) and cancer. Our data shows that people with chronic diseases on average claim as much as four times as those without chronic diseases."

Van den Heever disagrees: "I'd argue that there's no concrete evidence about an increase in the utilisation. Utilisation is a function of age distribution. The more old people, the sicker they become. The average population of the medical schemes in 2000 was the same as it is in 2013.

"Somebody has to explain why utilisation increases by 3% every year. I'd argue that it's being driven by specialists and private hospitals, that they have profit sharing arrangements. This includes the admission of patients, stays in hospitals and referrals to more expensive services as well as the billing of theatre. It's highly inconceivable that medical scheme members have become systematically sicker. Utilisation by babies and older people continues to rise every year."

Van den Heever says there's a high probability that there is collusion between the hospital groups because of the way in which they share profits and incentives. "There's a big incentive for hospitals to make specialists happy and specialists get privileges within a hospital group. Even if they weren't doing anything explicit, they'd both naturally behave [in the manner] that drives up health-care demand. It would range from passive collusion to active collusion. Hospitals overinvest in equipment to attract the specialists," he says.

Motsoaledi shares a similar view. He says a growing disease burden should be an opportunity to lower the costs because the demand is high. He has been able to reduce the price of antiretroviral (ARV) drugs by 53%. Government is now paying R89 for ARVs per person per month compared with R313 a few years back.

Though that may be true with medicine, it's not necessarily true with hospitals, says Roly Buys, executive for funder relations & contracting at Mediclinic. He says having more patients means more nurses on duty and that increases have been due to factors beyond the control of hospitals. Following the economic crisis in 2008, CPI has shown a downward trend. Hospital inflation has followed suit, sometimes ahead of CPI. Buys says this is because key hospital input costs such as nurses' salaries (50% of input costs), admin salaries (10% of input costs), electricity, food, and so on have increased at rates higher than CPI.

"People are living longer, and innovation in medical technology is increasing the range of conditions that can be treated. As a result, the utilisation rates of medical services have increased. This trend is not unique to medical schemes in SA, but is experienced in health systems throughout the world and is key to understanding why medical inflation is often higher than CPI," says Buys.

Netcare wasn't available for comment, nor was the Hospital Association of SA. Life Healthcare previously told the FM it welcomes the inquiry, which it hopes will uncover the cost drivers in the industry. On the supply side, says Broomberg, one of the problems is the shortage of doctors, particularly specialists. In SA there are five specialists per 10000 people, Brazil has 17, Russia 43. This means specialists can charge more than the actual costs of their service because patients have limited choice.

Specialists, however, put it differently. "I think it's everything associated with speciality medicine. Conditions that need specialists have high costs," says Adam Nosworthy, a medical oncologist at Donald Gordon Medical Centre.

"When it comes to oncology, drugs cost money. The pharmaceutical industry is hiking its prices significantly and that's becoming a barrier to care in both the private and public sectors. The costs of newer drugs are just exorbitant."

For instance Yondelis - a drug used in the treatment of soft tissue sarcoma or relapsed ovarian cancer - retails for R25000 per vial of 1mg. But it's unlikely that a patient would need anything less than 2,1mg, meaning that three vials would be needed for a treatment - a total of R75000 per treatment administered every three to four weeks for up to as many as six cycles, resulting in a R450000 bill.

Even those that are coming off patent are expensive, says Nosworthy. Gleevec, for example, which is used in chronic myeloid leukaemia, costs around R35000 per month. The problem is that it is a medication that, if effective, is used lifelong. A person diagnosed at age 20 would pay about R16,8m if they lived to 60. A generic version has been launched in SA, which has brought the price down to about R18000. But that's still too high to be sustained - R8,6m for a person on it for 40 years.

"The newer treatments and therapies are extremely expensive. The costs of drugs and interventions in specialist medicine are the biggest cost drivers. Companies that produce drugs and equipment launch their products at higher prices," says Nosworthy.

He admits that because there is no reference list for consultation fees, some specialists "thumb-suck" to determine their rates. At his centre, they charge R500 but in others they charge as much as R1800. Chris Archer, an obstetrician and CEO of the SA Private Practitioners Forum, agrees that the absence of tariff regulation is a problem because doctors don't know what's appropriate. However, he says it's not unusual that health-care costs rise faster that CPI. He refers to American economist William Baumol's book, The Cost Disease, which observes that industries that are dependent on human skill haven't been able to reduce production costs as technology improves. Education and health care, for example, continue to depend on specialised human skill, which doesn't come cheap. Car manufacturers, on the contrary, have been able to reduce costs through mechanisation.

Van den Heever says technology is often introduced inefficiently in health care because producers know that there's a market that will buy it. Insured people will insist on using the latest technologies and drugs to get well quickly. To react to this, insurers either become stringent on how they buy the services or cut the benefits, which is easy for them. What this does is create a bigger out-of -pocket market.

The fee-for-service payment structure is also a problem. In SA only the state or hospitals offering services on behalf of government can employ doctors.This means private doctors don't necessarily earn a full-time salary and earn each time they see a patient.

Broomberg says this encourages the provision of services because doctors and hospitals are paid according to quantity, not results or value, and they don't have an incentive to contain costs. "In health care, the asymmetry of information between the health-care system and patients makes it relatively easy to persuade patients that they require care or services, and for this reason, suppliers in health care can create demand for their services. If you marry that fact with fee-for-service, you create a driver of ongoing increases in utilisation."

The system is also wasteful. Doctors commission numerous tests on patients but do not necessarily share the results with their colleagues when referring patients.Several suggestions on how private health care could be reformed have been made. But much like there's no consensus on what drives costs, there's no consensus on what needs to be done. Suggestions range from the moderate to the radical. One of Motsoaledi's proposals is a health commission - a statutory body - to regulate prices. But this would only be possible once it's clear how prices are determined in the private sector.

Zokufa says the issuing of hospital licences needs to be revisited. "I'd argue that the conditions of getting a hospital licence should be that you will operate, as a hospital, in pursuit of making health care accessible and affordable. We're not saying you mustn't be profitable or make a return. All we're saying is that the primary goal should be to promote access. If the demands of shareholders are not counterbalanced by the objectives of section 27 [of the constitution], we have a problem."

Broomberg says if we're going to contain costs, we need to shift away from the fee-for-service payment system. "One approach, which works quite well in primary care, is the 'capitation' system, in which a health professional or group is paid a fixed fee per person per year, to look after a defined, registered population. For instance, in England you have to register with a GP in your area. They get paid a fixed amount per month regardless of whether they see you or not. So they are not being given an incentive to tell you to come back every week. Actually they do better if they keep you healthy, so that you stay away from the practice."

Hospital groups say they should be allowed to employ doctors so they could be paid a fixed amount instead of a fee-for-service. Government is reluctant to permit that, ostensibly for fear it may not compete on salaries. But doctors equally reject the idea. Archer says it would be "dreadful" and would create perverse incentives. "Doctors would be completely beholden to hospitals and would be told, as employees, to keep beds full."

Another consideration is "anti-selection" against medical schemes. The Medical Schemes Act requires that schemes accept all applicants and charge the same premium, regardless of age or health risk. These provisions are known as open enrolment and community rating.

Says Broomberg: "The system creates an incentive for people to lapse their health cover when they don't need it; typically in young adulthood, and then join again later when they expect to need cover, for example when they are planning a family."But this pattern robs schemes of these young adults who contribute more than they claim, and this is putting pressure on schemes and causing premiums to increase."

Thus SA has only two of the three main pillars for health care: open enrolment and community rating. Absent is mandatory cover. The NHI is a step in that direction. But it will be years before it's fully implemented. All this would require a new architecture for our health-care system, says Sven Byl, head of health care & life sciences at KPMG. That would include a move away from a hospital-centred system and focus on primary and preventative care.

"In countries where there's poor integration between acute care and community services, health-care costs are generally high. A chunk of medical aid benefits goes to hospitals because that's the design of our system. In many other countries, payment is spread out between various elements of the delivery mechanism," says Byl.