Tariff structure setting of the private sector

1. Tariff structure setting of the private sector Health Portfolio Committee, 27 July 2011

2. Background Information

3. Private hospitals constitute approximately 26% of total hospital beds in South Africa Source: SA Health Review 2010; HASA Health Annals 2010

4. Medical scheme membership closely linked to formal employment Source: Council for Medical Schemes (CMS) annual reports and StatsSA labour force surveys

5. Points of clarification

6. The role of private hospitals Business of private hospitals Design; build and maintain facilities, employ nurses and pharmacists, provide medical technology and hotel and admin services 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 Pharmaceutical products Pharmaceutical products must be sold at Single Exit Price as set by the Minister of Health Surgical products Surgical products are sold at cost (acquisition price) to patients – no profit mark-up On average, it costs roughly R2m per bed to build and equip a multidisciplinary acute care hospital Capital Costs

7. Background to tariff setting

8. Current tariff setting facts Individual annual negotiations between every hospital group and every medical scheme administrator or scheme Thus no pricing “void” or “free for all” Thus no “gaming” of PMB regulations by private hospitals Negotiated tariffs apply equally to PMBs and non-PMBs 5 administrators/schemes negotiate collectively for >70% of medical scheme lives Thus balanced negotiating power exist Different hospital groups have different unique pricing models (including alternative reimbursement models) – this according to medical schemes Thus no “one size fits all” tariff schedule in play Medical schemes’ hospital networks have significantly increased in popularity Thus fierce competition for network participation

9. Only ONE question is of importance in the price reform debate... Are private hospital prices too high given their input costs?

10. Source: Lighthouse Consulting: Period: 1999-2009; Basis: Hybrid Index (HASA, NTC, StatsSA) 60%-70% of operating costs are wages

11. Wage inflation has exceeded CPI in 7 out of the last 9 years Source: Stanlib (the real wage increases reflect the increase above CPI)

12. 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.

13. Regarding inflation on capital expenditure Capital expenditure inflation: Cost per newly built bed Source: Mediclinic

14. “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

15. 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

16. Approximately 40% of a hospital bill is a pass through to patients – no mark-up No profit Total Hospital Bill

17. Legislative Price Reform Processes

18. 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

19. 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.

20. 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.

21. Central Bargaining Discussion Document Department published a discussion document which proposes central bargaining early in November 2010. 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. 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. No feedback on submissions have been received Cost benchmarking ie RPL is critical to inform collective bargaining

22. Three important price determination principles 1. The process must be transparent and fair. 2. Tariffs must be calculated using scientific methodologythat takes into account the true costs of operating a hospital. 3. The pricing process must be overseen by an independent regulator

23. Other important points

24. Impact of increased purchases of private hospital services See Private Hospital Review 2008, Chapter 5 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 See IMSA Policy Brief 3 (Prof. McLeod); Econex NHI Note 2 Utilisation driven by significant anti-selection; the healthy opting out of medical cover and the sick opting for cover Discovery presentation, ASSA Health Event, May 2011 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 7 * Latest industry figures

25. Why you cant compare public and private hospital prices Public hospital prices thus do not have to cover expenses and cost of capital 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 Accurate scientific pricing not possible in public sector at present Private hospitals pay VAT, public hospital do not The playing field is not level Public hospitals obtain pharmaceuticals at state tender prices, mooted to be between 50% and 70% cheaper than private sector prices 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

26. 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. 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%.

27. The way forward HASA remains committed to engagement with the Department