Why medical aids are so expensive

by: Mr. Barry Childs
mg.co.za: 27 Jun 2014

Greater collaboration and sharing of information between stakeholders will lead to reductions in costs.

Healthcare is complex. Our bodies are the most complex machines we know of, and our brains and minds work in ways we do not yet fully comprehend. Despite rapid advances in medicine it remains an imperfect and growing science. This article unpacks just some of the mysteries of the healthcare system.
When health problems arise – whether medical emergencies or the development of a chronic condition – treatment costs can be extremely expensive and often too much for a typical household’s income. The solution to this is the pooling of funds earmarked for healthcare expenses so that subsidies exist between the healthy and the sick and between people at different income levels.
This happens in different ways in different environments. In South Africa, healthcare expenditure for the majority of the population is funded through a portion of general taxes collected.
For those who prefer treatment from so-called private providers, and can afford the premiums (either themselves or with a subsidy from their employer), the pooling of healthcare funds is done through medical schemes. There are some families who pay for private healthcare out of their own pockets, without having pooled their funds. Some lower-cost, more predictable treatments are also funded out of pocket or from savings accounts which are not pooled funds.
The funding and provision of healthcare services is very complex, with many interrelated stakeholders. At the center of the system are the patients who must navigate this complex system with imperfect knowledge of their health condition, what treatment may be required, who to go to for treatment, the outcomes that might be expected and what costs to expect. Information is more accessible now than ever before, but navigating this information is complex and potentially risky.
Mixed role
Enter the healthcare provider, who must act as the patient’s adviser on what treatment may be required and, usually, provide the advised treatment. This mixed role means that trust between doctor and patient is of critical importance. The doctor’s aim is to provide the optimal treatment for his or her patient. Along the treatment pathway are a variety of other service providers that supply diagnostic results, supporting care, and the facilities and equipment required for treatment and medicines.
Money to pay for these treatments comes from the pooled funds (medical aid) savings accounts or out-of-pocket money. It is the medical scheme that stewards these pooled contributions for members and reimburses treatment costs to providers according to the benefits of the members’ particular option choice.
Medical schemes operate as not-for-profit entities governed by the Medical Schemes Act 131 of 1998. There are two types – those open to the public and those in which access is restricted to a specified employer or industry. Schemes are assisted in their task by administrators and managed care organizations. Medical schemes as financial products are complex and difficult to compare, making the choice between one scheme and another complex.
Patients typically don’t know what their health needs are until they arise. Here the financial adviser plays a key role in helping members to choose the ideal medical scheme and benefit option (for members of open schemes). In return for this and ongoing support, services advisers receive monthly commission.
Managed care organizations are tasked to ensure that people get the right care subject to the scheme’s rules and agreed rationing mechanisms. These rationing mechanisms are a source of friction in the healthcare system. This is because the pooled funds are not unlimited. Someone has to direct how benefits from the fund are disbursed.
Optimal treatment not always funded
It is impossible for the doctor to have sight of the overall pool of funds or make these sorts of rationing decisions for each patient seen. Restrictions placed on funded treatment frustrate doctors and patients alike because, in some cases, the optimal treatment, in the doctor’s opinion, is not funded by the medical scheme.
In some cases this is because the treatment is not deemed an efficient use of the pooled funds. For instance, the additional “quality-adjusted life years” that a treatment will add to a particular patient’s life may cost much more for one form of treatment than another. Because doctors are mainly concerned with optimal treatment and not with cost (this is admittedly a generalization), there is a disagreement on the course of action and funding required.
Patients frequently feel frustrated by these decisions. They have a strong sense of entitlement to benefits by virtue of having contributed to the medical scheme, often for many years.
Another role of the managed care organization that gives rise to some tension is to negotiate prices with healthcare providers (although some schemes perform this function on their own).
One of the key questions that arises is: Why are medical schemes so expensive? And: Why do contributions keep rising faster than inflation?
Fundamentally medical scheme contribution increases are driven by increases in prices and changes in utilization (more patients claiming for treatment and/or more intense treatment).
Looking at medical scheme data over a decade, it is clear that increases in utilization are a much bigger driver of cost increases than changes in real prices (above the consumer price index). Contributors to increases in utilization include:
• Increases in medical technology, making treatment more palatable and accessible to patients;
•Increased demand purely because of the pooling of funds. This detaches the purchasing decision from household income that would typically manage and limit expenditure;
• Increased demand arising from increased supply of healthcare services, which arises when providers open facilities or start providing treatment in under-serviced areas, increasing access to healthcare treatment;
• Changes in the risk profile of medical scheme members. Whereas the average age of medical scheme beneficiaries has remained relatively constant over time, the age distribution of members has changed with more births and older members, both of which increase costs in the system. This is also reflected by increases in the burden of chronic disease in the medical scheme environment, some of which may be because of improved reporting, but the majority of which is certainly as a result of the rise of the so-called lifestyle diseases;
• Fraudulent claims (resulting in excessive cost in the system); and
• Changes in risk profiles, which are in turn driven, in large part, by anti-selection. This is an actuarial term which means that members join the pool of funds only when they expect to need treatment, and in many cases, when they expect to extract more in benefits than they contribute to the scheme. It is clear this causes harm to the stability of the pooled funds.
The role of the industry regulator is critical to consider. The Medical Schemes Act is founded on the principles of social solidarity entrenched in three pillars – open enrollment, ensuring medical schemes must accept anyone who wants to join; prescribed minimum benefits, which ensure all schemes and options provide at least this minimum set of benefits; and community rating, which requires all members to pay the same price for medical scheme cover (differentiated only by beneficiary type, scheme option and, in some cases, income level).
Pillars of solidarity
These pillars of solidarity provide the social protection envisaged, but it is clear that, without counterbalancing regulations to ensure sustainability, the current incomplete regulations also drive the anti-selective behavior raised above.
Unless the medical scheme regulatory reform envisaged during the early 2000s can be completed, costs will continue to rise. The likelihood of such reforms taking place are uncertain, given the current focus on the department of health’s 10-point plan and the development of a National Health Insurance system.
What then what can be done in the meantime?
Key to keeping the industry sustainable, despite incomplete regulation, is greater collaboration between all stakeholders. No one role-player can have a sufficient impact on its own. All the parties discussed briefly above play a role in the functioning of the system.
Members need to ensure they are sufficiently knowledgeable about their benefit entitlements. It is critical that members engage in managing their own healthcare through better nutrition, exercise and limiting unhealthy vices. Members should also play an active role in the governance of their selected medical scheme.
Providers need to be better informed on treatment costs so that they can assist in developing treatment protocols that play a role in rationing. Providers also need to know how their methods of treatment compare to others in terms of costs and outcomes.
Medical schemes, administrators and managed care organizations need to ensure they foster constructive relationships with providers, working with them to improve the system, not against them. They also need to ensure that benefits are well understood by members.
There is a common thread – better use of information. Through appropriate information sharing, benchmarking and analysis, stakeholders will be better placed to manage the risks in the industry.
Transparency and comparability will drive more efficient use of resources. Members empowered with appropriate information will be able to make better choices about their healthcare, and providers will better understand the resource implication of their treatment decisions.
We are encouraged to be working with a wide range of industry stakeholders where progressive discussions of this sort are beginning to take shape.

Barry Childs is an actuary and chief executive of Lighthouse Actuarial Consulting and CareGauge. This article is the second in a series of opinion pieces Bhekisisa is running on how to curb private healthcare costs. Bhekisisa does not necessarily endorse the views represented

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