Xpert Vol 8. 2012 3

The traditional model of managing medical scheme benefits through a combination of benefit

design and managed care funding rules has reached a stage of maturity where greater cost

management is difficult to achieve without sacrificing quality of care. Instead, a different

model is required, with medical schemes partnering more closely with the providers of

medical services.

In this way, financial incentives are aligned and

medical scheme members are more likely to receive

appropriate medical care. There are a number of ways

in which such an arrangement could operate, and this

article illustrates one example where a bold initiative

carried out by Sasolmed and DBC (Documentation

Based Care) is showing promising early results.

Why back surgery?

For the employer, back pain is a significant source of both

absenteeism and "presenteeism" (where employees are

at work but not able to fully perform their jobs). Back

surgery requires a long recuperation period, which

means even higher absenteeism costs for the employer.

Sasolmed saw the cost of back surgery rising year-

on-year, mainly as a result of higher average claim

amounts. For example, in 2009 back-related hospital

admissions cost Sasolmed approximately R34 million

– almost 4% of total claims. The scheme saw in its

claims experience a combined back hospital admission

rate of approximately 7 per 1 000 lives per annum. Of

these more than half were for heavily invasive spinal

fusions or laminectomies. Despite the cost, the back

problems were often not resolved. Approximately 30%

of patients were readmitted within four years of the

initial surgery.

With over 400 lives hospitalised each year for back-

related surgery, Sasolmed was open to alternative

solutions. DBC (Documentation Based Care) approached

Sasolmed and offered conservative out-of-hospital back

rehabilitation as a possible solution. DBC’s protocols,

processes and equipment were imported from Finland,

Tackling Back-Related Claims:A Case Study (Sasolmed and DBC)

Wynand Neethling

BCom (Hons) FASSA

Actuary: Medscheme Health Risk Management

Wynand has gained extensive experience in both the life

insurance and private healthcare industries. He graduated

from the University of Stellenbosch in 1998, after which he

began his career at Old Mutual actuaries and consultants.

In 2004 he moved to the retail risk product development

division where he was instrumental in reviewing and

rebuilding the underwriting and reinsurance processes. He

joined Medscheme in 2009, where he is responsible for

providing actuarial support to key medical scheme clients,

both in South Africa and Namibia.

Xpert Vol 8. 20124

where they have been successfully applied in managing

chronic back pain conservatively.

The protocols typically consist of a six-week intensive

rehabilitation programme delivered by a multi-

disciplinary team at a DBC centre. The team includes a

general practitioner, physiotherapist and biokineticist

and the protocols focus on functional restoration.

Health outcomes, based on a variety of measures

which include pain experienced and a range of motion

and interference with the activities of daily living are

continuously monitored.

DBC was so confident in their methodology that

the company was willing to enter into a risk sharing

arrangement. Since applying financial rewards (and

penalties) is one of the best ways to incentivise the

correct behaviour, Sasolmed was willing to consider

this proposal.

The rest of this article discusses the key aspects of

the arrangement and the reasoning behind them. The

results achieved to date are also reviewed.

Challenges

As with any new initiative, there were challenges to

overcome. Sasolmed’s membership base is highly

concentrated, with approximately 70% of its members

based either in Secunda or Sasolburg. The closest DBC

facilities were in Johannesburg and Nelspruit – more

than 100 km away. This would have been a logistical

nightmare, since the majority of affected members

were blue-collar workers and the treatment requires bi-

weekly visits to DBC practices.

While setting up practices in these towns would have

solved the problem, this solution required a significant

capital investment – a solution which raised a number

of questions:

As with any new initiative, there

were challenges to overcome.

Sasolmed’s membership base

is highly concentrated, with

approximately 70% of its members

based either in Secunda or Sasolburg.

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Ultimately the solution was jointly developed by four parties:

according to the agreed protocols and processes.

provider to Sasolmed.

organisation which is the main party to the risk

transfer contract with Sasolmed, sub-contracting

DBC practices to provide the relevant services.

Finding the solution

A critical success factor was Medscheme’s IT platform.

Over many years Medscheme has invested heavily

in systems and data management and built solid

relationships with key providers, including both general

practitioners as well as specialists. The combination

of general practitioner linking (where a member has

selected a GP of choice within a contracted network)

and specialist referral management (where a member

must be referred by their GP before a specialist visit

would be funded) were key factors in ensuring a smooth

roll-out of the programme.

The operational managed care environment was robust

and flexible enough to handle exception cases correctly.

Sasolmed’s Board of Trustees and Principal Officer were

innovative, open to new ideas and willing to take a risk

on these ideas.

DBC was willing to invest in new practices to back

up their confidence in the processes and protocols.

Resilience Health was willing to share in the claims risk

associated with the arrangement.

Key contract terms

The contract included the following key terms:

allowed sufficient time to recoup any initial capital

investment and to address the long-term problem of

chronic back pain. This was crucial since the scheme

could run the risk of a spike in back-related claims

once the programme ends.

Medscheme has invested heavily

in systems and data management

and built solid relationships with key

providers, including both general

practitioners as well as specialists.

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Resilience Health in exchange for a capitation fee.

This includes spinal fusion, laminectomy and back

and neck pain admissions.

defined inflation, but with no allowance for increased

utilisation over time. However, this capitation fee is

then subject to a reduction factor from year two to

six. This relates to the assertion by DBC that their

processes and protocols offer a more cost-effective

solution to treating chronic back pain appropriately.

was required to provide a bank guarantee to cover

any downside risk.

Sasolburg.

the use of DBC.

Processes

A key element to the success of the programme was to

proactively identify members with back pain. As noted

earlier, members who have had back-related admissions

are likely to have further admissions. Medscheme uses

predictive models to identify those members likely to

suffer from chronic back pain.

For example, when a member claims for a health event

that has a high probability of being due to back pain

(such as certain MRI/CAT scans, rhizotomies and facet

blocks) at Medscheme would notify Resilience Health.

Resilience Health would then contact the member and

the member’s doctor to inform them of DBC and the

relevant processes.

A further key element related to working closely with both

members and providers to ensure a seamless integrated

process. Prior to the launch of the programme, there

A key element to the success of

the programme was to proactively

identify members with back pain. As

noted earlier, members who have had

back-related admissions are likely to

have further admissions.

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was a comprehensive member education campaign in

place to ensure members would undergo conservative

treatment as a first resort. Due largely to this member-

centric communication effort, virtually no resistance

from members to the introduction of this programme

was experienced.

Sasolmed’s Clinical Coordination committee (a joint

forum between the medical scheme and representatives

of the general practitioners serving the members) was

instrumental in educating the general practitioners.

This committee also developed the protocols for

general practitioners when handling back pain cases.

Initially there was some resistance from specialists

(particularly orthopaedic surgeons and neurosurgeons)

and physiotherapists. Significant work was required to

convince them and DBC and Resilience Health doctors

visited the majority of specialists involved in performing

back surgery.

Prior to the introduction of the programme, the normal

sequence of events was:

1. Member suffers from back pain.

2. Member consults with a general practitioner and, if

required, is referred to a specialist.

3. Member sees orthopaedic or neurosurgeon.

4. Should the member require surgery, hospital pre-

authorisation is obtained via Medscheme.

5. Member undergoes the procedure in hospital.

As stated earlier, roughly 30% of members were re-

admitted within four years, so in many cases the

member suffered further back pain and the process

repeated itself.

Since the introduction of the DBC programme, the

process has been as follows:

1. Member suffers from back pain.

2. Member either goes directly to DBC or consults

a general practitioner who refers them to DBC for

assessment.

This committee also developed the

protocols for general practitioners

when handling back pain cases.

Initially there was some resistance

from specialists and physiotherapists.

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3. If the member’s condition does not allow

rehabilitation, authorisation for appropriate hospital

admission is provided. Alternatively, if rehabilitation

is appropriate given the member’s condition,

he/she will undergo a six-week course of treatment at a

DBC centre.

4. If the rehabilitation treatment has the desired effect,

the member should not require further intervention.

Alternatively, if rehabilitation is unsuccessful,

authorisation for the appropriate hospital admission

is provided.

Members may choose whether or not to consult DBC

as part of the process, but should they choose not to

consult DBC a R5 000 co-payment is levied for any

admissions for spinal fusion or laminectomy. There have

been relatively few co-payments levied, as members

acknowledge the advantages of conservative treatment.

Approximately 60% of members who have used DBC

consulted with them directly, while 20% were referred

to DBC by general practitioners. The remaining 20%

were referred by specialists.

Calculation of initial capitation fee

The initial capitation fees were based on the average of

in-hospital back-related claims costs over the four-year

period from 2006 to 2009. This long period was used to

reduce volatility by using a longer-term average. Claims

in each year were adjusted for inflation in order to obtain

comparable numbers in real terms.

Back-related claims included the full hospital cost plus

any associated in-hospital provider costs and prosthesis

costs, using the Medscheme Hospital Account Summary

(HAS) database referred to above.

Allowance was made for the impact of a large group

of young, low-income employees who joined Sasolmed

during this period, as this group was expected to

generate lower back-related costs than existing

members, on average.

The capitation fee was adjusted to allow for the actual

start date of the contract (August 2010). As there is a

fairly regular seasonal variation in back-related claims,

a full-year average would not have been appropriate for

the first five months (August to December 2010).

A decision was also made to limit the maximum amount

per claim, with Sasolmed retaining the excess to avoid

distortions in the capitation fee and profit calculations.

It was also assumed that claims exceeding this limit

were due to complications that would not be reasonably

controllable. These often included motor vehicle accidents

and were not directly relevant to the programme.

Calculating annual increases in capitation fees

At the beginning of each calendar year, the capitation

fees are increased to allow for inflation. This inflationary

adjustment is carried out according to a formula defined

in the contract which is based on:

respect of prostheses)

No allowance for increased utilisation is made in the

calculation of this adjustment. From year two to six, a

constant reduction factor is applied to the capitation fee

after the inflationary adjustment is added.

The large claim limit is also indexed for inflation each year.

Aligning financial incentives

The purpose of the incentives was to transfer only

the back-related risk. The current cost of back-related

hospital admissions was therefore determined which

would form the "income" for the risk-taker (Resilience

Health). This "income" would be used to fund all

back-related costs, including in-hospital costs and

rehabilitation costs.

The initiative faced a significant challenge in that

Resilience Health did not have significant capital at their

disposal. The total in-hospital back claims for Sasolmed

amounted to approximately R34 million per year.

Transferring these funds to Resilience Health would

have created a significant financial risk to Sasolmed

had Resilience Health become unable to meet their

obligations under the contract.

To avoid this risk, it was decided to use a virtual

capitation fee arrangement, in place of the traditional

approach. Under this arrangement Sasolmed initially

funded all in-hospital back-related claims as well as the

out-of-hospital rehabilitation costs. At the end of every

quarter, a profit/loss calculation is performed and the

net result paid by the relevant party.

If a profit was generated, this would be paid to Resilience

Health, while a loss would be paid to Sasolmed.

The purpose of the incentives was to

transfer only the back-related risk. The

current cost of back-related hospital

admissions was therefore determined

which would form the "income" for

the risk-taker (Resilience Health).

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The calculation included an allowance for outstanding

claims (both in– and out-of-hospital), based on

methodology as agreed between the parties. The profit

calculation is always carried out on a cumulative basis,

to allow any over- or under-estimation from previous

periods to be corrected.

The profit/loss for the period to date was calculated as:

the notional capitation fees

less in-hospital claims

less out-of-hospital rehabilitation claims

= profit or loss

From this profit or loss, any payments already made

under the contract was deducted, and only the balance

is payable to the relevant party.

Advantages to Sasolmed

The annual increase in capitation fees makes no

allowance for increased utilisation. This is normally a

significant additional source of claims cost increases

and should be seen as a cost saving to the scheme.

From the second year, a constant reduction factor is

applied to the capitation fee after the increase has been

calculated, so that the scheme sees a real reduction in

their back-related claims costs over time.

If the programme achieves its promise of better health

outcomes, members should also be more satisfied with

the services received, and be less likely to complain

about related matters. This therefore assists Sasolmed

in meeting its goal of providing valued employee

benefits to its members and their dependants on behalf

of the employer.

Results to date

As at the date of writing there have been seven

quarterly profit calculations. Of these six were positive

and one negative.

Figure 1 below shows the real hospital claims per life for

each month (adjusted for inflation to be comparable).

Figure 1: Real hospital claims plpm

0

10

20

30

40

50

60

70

80

2008

01

2008

07

2009

01

2009

07

2010

01

2010

07

2011

01

2011

07

Real Cost plpm (Smoothed) Real Cost plpm (Unsmoothed)

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Xpert Vol 8. 2012 11

Smoothed claims in Figure 1 are taken as the average

per life per month for each year from August to July (to

correspond with the start date of the contract).

Table 1 below shows the reduction (adjusted for

membership) in claim frequency observed in the year

following the introduction of the programme.

Table 1: Reduction in claim frequency

Spinal

fusionLaminectomy

Back and

neck pain

Reduction -36% -13% -11%

Projected profit/savings

Looking ahead and based on the experience to date,

we can estimate the ultimate profit Resilience Health

is expected to earn from the arrangement, as well as

the cost savings Sasolmed is expected to realise. To

calculate these figures, some assumptions are required:

programme had not been introduced, assumed at

2% p.a. from 2010 onwards.

in the claims frequency of 5% p.a. is assumed from

2012 onward.

Figure 2 below illustrates the results of this projection

graphically.

The blue area in Figure 2 represents the savings to Sasolmed

resulting from the introduction of the programme.

The red area in Figure 2 represents the profit made by

Resilience Health in exchange for accepting the risk

under the programme.

The purple area in Figure 2 represents the cost of

rehabilitation claims.

Based on the assumptions, over the course of the

six-year contract (ignoring discounting), Sasolmed

is expected to save approximately R48 million while

Resilience Health is expected to show a profit of

approximately R20 million. These results are sensitive to

the assumptions made above, and a range of outcomes

are possible depending on how actual experience differs

from the assumptions made.

Resilience Health’s profit is particularly sensitive to the

hospital admission rate assumption, from 2012 onwards.

Table 2 below illustrates how their profit varies based on

different values for this variable.

Table 2: Resilience Health profit sensitivity

Change in claim

frequency paProfit (Rm)

-10.0% 37.0

-7.5% 28.6

-5.0% 19.9

-2.5% 10.4

0.0% 0.4

2.5% -10.3

5.0% -21.7

A reduction of approximately 1% p.a. from 2011 levels

is required going forward for Resilience Health to break

even over the remainder of the contract.

Sasolmed’s savings are relatively protected, since the

capitation fee increases are predefined. The key variable

here is the assumed level of utilisation from 2010

onward, had there been no programme. Table 3 below

illustrates how the scheme’s savings would vary based

on different values for this variable.

0

10

20

30

40

50

60

-5 -4 -3 -2 -1 1 2 3 4 5 6

Ran

d M

illio

ns

Year (1 = 1st year of intervention)

Claims w/o intervention

Capitation Fees

Hosp Claims & Rehab

Hospital Claims

Figure 2: Projected profit/savings

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Table 3: Sensitivity of scheme savings

Utilisation p.a. Profit (Rm)

0.0% 31.1

1.0% 39.2

2.0% 47.6

3.0% 56.2

4.0% 65.1

In this context, even if there were no future utilisation

increases, Sasolmed would realise a saving of more than

R31 million, due to the reduction factors applied to the

capitation fees.

Further benefits

To date, more than 170 Sasolmed members have avoided

intensive back surgery (spinal fusion and laminectomy)

and over 1 000 members have undergone conservative

back rehabilitation through DBC. Assuming a two-month

recovery period, the employer has saved approximately

28 working years in terms of employee productivity.

Sasolmed is likely to see other back-related costs

reduce over time, including, for example, the medication

required for ongoing treatment, radiology costs and

physiotherapy costs. These benefits have not been

quantified as part of this exercise. It is also noted that

the incidence of hip replacements has reduced by 40%.

However, it is unclear whether this is related to the

programme or not.

Risks to the scheme

The key risk of the arrangement is the entire deal

unravelling and that the savings will not be realised.

If the back admission rate does not reduce, Resilience

Health is unlikely to be able to fund the downside risk.

The maximum protection Sasolmed has is the bank

guarantee of R3,5 million.

These risks are however mitigated by monitoring the

programme monthly, including monthly draft profit

statements – even though these are only settled quarterly.

Summary

In summary, collaboration by the various parties has

resulted in what appears to be a win-win situation:

admissions (at least 170 fewer)

Conservative back treatment appears to reduce the

incidence of members requiring back surgery, and

significantly reduces the overall cost of treating chronic

back pain.