Tariff structure setting of the private sector

Health Portfolio Committee, 27 July 2011

Background Information

Private hospitals constitute approximately 26% of total hospital beds in South Africa

Source: SA Health Review 2010; HASA Health Annals 2010

Medical scheme membership closely linked to formal employment

Source: Council for Medical Schemes (CMS) annual reports and StatsSA labour force surveys

Points of clarification

Doctors

Doctors are independent practitioners and do not work for private hospitals – HPCSA rules do not allow this.

Only doctors can admit patients into hospitals

Business of private hospitals

Pharmaceutical products

Surgical products

Design; build and maintain facilities, employ nurses and pharmacists, provide medical technology and hotel and admin services

Pharmaceutical products must be sold at Single Exit Price as set by the Minister of Health

Surgical products are sold at cost (acquisition price) to patients – no profit mark-up

The role of private hospitals

Capital CostsOn average, it costs roughly R2m per bed to build and equip a multidisciplinary

acute care hospital

Background to tariff setting

Current tariff setting facts

Individual annual negotiations between every hospital group and every medical scheme administrator or scheme

Negotiated tariffs apply equally to PMBs and non-PMBs

5 administrators/schemes negotiate collectively for >70% of medical scheme lives

Different hospital groups have different unique pricing models (including alternative reimbursement models) – this according to medical schemes

Medical schemes’ hospital networks have significantly increased in popularity

Thus no pricing “void” or “free for all”

Thus no “gaming” of PMB regulations by private

hospitals

Thus balanced negotiating power exist

Thus no “one size fits all” tariff schedule in play

Thus fierce competition for network participation

Only ONE question is of importance in the price reform debate...

Are private hospital prices too high given their input costs?

60%-70% of operating costs are wages

Source: Lighthouse Consulting: Period: 1999-2009; Basis: Hybrid Index (HASA, NTC, StatsSA)

Wage inflation has exceeded CPI in 7 out of the last 9 years

Source: Stanlib (the real wage increases reflect the increase above CPI)

Regarding nursing salary inflation

Severe global shortage of nurses a well documented fact

Developing countries such as SA particularly hard hit

Public sector OSD salary adjustment and continued salary increases well in excess of CPI is forcing private hospitals to follow suit

The private hospital industry trains more nurses than the public sector. This adds to cost pressure.

Regarding inflation on capital expenditure

R 139,000

R 997,000

R 2,000,000

R -

R 500,000

R 1,000,000

R 1,500,000

R 2,000,000

R 2,500,000

Above inflationcost pressure

Source: Mediclinic

Capital expenditure inflation: Cost per newly built bed

“Notwithstanding the above mentioned cost pressure, private hospital weighted average prices increased by only 1.7% per

annum in excess of CPI between 1999 and 2006”

Source: Private Hospital Review 2008, Chapter 5

Hospital price inflation well contained

Source: StatsSA, May 2011, page 22

Hospital PRICE inflation = 5.8%

Medical insurance inflation (includes PRICE and UTILISATION) = 10.2%

Definition of utilisation: private hospital services purchased

Approximately 40% of a hospital bill is a pass through to patients – no mark-up

60%

26%

14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1

After adjusting for VAT ; drugs and surgicals

Hospital tariff Drugs and Surgicals Vat

Total Hospital Bill

Noprofit

Legislative Price Reform Processes

Erroneous perception that private hospital

industry is unwilling to engage with respect to pricing and tariffs.

Hasa has consistently provided the Department with information and

engaged in various processes initiated by the Department such as

the RPL process

Reference Price List (RPL) process

HASA welcomed the cost benchmarking or Reference Price List (RPL) regulation of 2007 as it would correct outdated benchmarking models and regulate the process for the first time.

HASA obtained approval from the Competition Commission to take part in the RPL process.

Deloitte and PWC developed the hospital cost benchmarking and return on investment model respectively at a cost of approximately R20m.

The RPL tariffs were published with no consideration of HASA’s input regarding the methodology to analyse hospital costs or actual hospital costs.

Equally the submissions by other service providers were ignored, e.g. emergency service providers and medical specialists.

More than 20 provider groups took the Department to court. HASA went to court because it wants a scientifically calculated RPL and not because it wanted to remove the price determination framework.

Judges verdict on the RPL regulation

RPL declared invalid and set aside

Court ruled that the former health director-general had failed to comply with the Constitution and had acted in a manner that was procedurally unfair. “No suitable methodology was established for private hospitals or private emergency services, yet fees were published for these parties” , a process the judge described as "irrational and unreasonable".

Following the court’s ruling, the Department of Health elected, against the judge’s recommendation, not to re-draft the RPL regulations. Instead, the Department opted for a new process which moots centralised bargaining – the very same price negotiation process which lead to stiff industry fines in 2004 due to transgression of the Competition Act.

Central Bargaining Discussion Document

Department published a discussion document which proposes central bargaining early in November 2010.

Both HASA and its members submitted written responses to this document, with the members submitting more comprehensive responses given their freedom to do so from a

competition law perspective.

Discussion Document is inconsistent: At times it seems to suggest that the interim phase does not constitute a contravention of the Competition Act, whereas at other stages it (correctly) accepts that in the absence of a “delineated exemption” it would expose the

parties to the process to risk.

No feedback on submissions have been received

Cost benchmarking ie RPL is critical to inform collective bargaining

Three important price determination principles

1. The process must be transparent and fair.

2. Tariffs must be calculated using scientific methodology that takes into account the true costs of operating a hospital.

3. The pricing process must be overseen by an independent regulator

Other important points

Impact of increased purchases of private hospital services

Increased purchases of hospital services (utilisation) contributed 40% of the increase in scheme hospital claims

between 1998 and 2006 *

Utilisation driven by ever increasing burden of disease

Utilisation driven by significant anti-selection; the healthy opting out of medical cover and the sick opting for

cover

New technology drives utilisation; new fixes for old cures; can operate on the elderly; new drugs replacing old; etc.

See Private Hospital Review 2008, Chapter 5

See IMSA Policy Brief 3 (Prof. McLeod);

Econex NHI Note 2

Discovery presentation, ASSA Health Event, May

2011

See Private Hospital Review 2008, Chapter 7

* Latest industry figures

Why you cant compare public and private hospital prices

Overwhelming part of public hospital revenue comes from governmental budgets

No central database for public hospitals with patient level information (theatre time, ICU days, general ward days, drugs administered, etc.) to

enable accurate pricing

Private hospitals pay VAT, public hospital do not

Public hospitals obtain pharmaceuticals at state tender prices, mooted to be between 50% and 70% cheaper than private sector prices

Public hospital prices thus do not have to cover expenses

and cost of capital

Accurate scientific pricing not possible in public sector at

present

The playing field is not level

The playing field is not level

Private hospitals can only access capital from the market – have to pay interest and shareholder returns. Public hospitals funded by taxpayers

who do not demand such.The playing field is not level

If private hospitals were to reduce prices to remove all profit (which is not

realistic, but illustrative), payments to private hospitals would decrease to

about 27.9% of medical schemes’ gross contribution income.

If there is a commensurate reduction in medical scheme contribution rates, the average medical scheme beneficiary

who paid R890 per month in 2009 (according to the CMS), will pay only

R63 less per month, i.e. a reduction of 7%.

A simple reasonability check shows the flaw in focus on prices, whilst ignoring utilisation

Payments to private hospitals make up about 33.0% of medical schemes’ gross contribution income of R84.8 billion for 2009.

The way forward

HASA remains committed to engagement with the Department