A Tale of Two Sectors: Comparing efficiencies between the public and private sectors

1. A Tale of Two Sectors:Comparing efficiencies between the public and private sectors BHF Annual Conference 2009 Barry Childs Lighthouse Actuarial Consulting

2. Topics • What is efficiency • Related issues • Difficulties • Comparing costs • Comparing outcomes • Brief case studies • Conclusions and recommendations

3. Aims To highlight information useful in the ongoing health debate and in particular to try to gain a better understanding of the differences between the public and private sectors

4. What is Efficiency? • There are many types of efficiency: • Technical – Produce a given quantity of output using the least cost combination of inputs* • Allocative – with given resources, it is not possible to make one person better off without making another worse off (Pareto optimality)* (Implies technical efficiency) • Also: Social efficiency, Horizontal and Vertical efficiency * Economics for health care management, Clewer & Perkins

5. Types of Efficiency Social efficiency: “In a society with a very unequal distribution of income, it might not be possible to improve the situation of the poor without increasing taxation of the rich. Thus the poor could be made better off, but only by making rich worse off. Nevertheless it might be considered socially just and desirable in a society concerned about equity” Economics for health care management, Clewer & Perkins

6. Types of Efficiency Vertical and Horizontal efficiency: Those who need treatment Those who don’t • Assuming technical efficiency there are two further types of wastage: • Giving treatments to those that do not need it • Not giving treatments to those who do need it Those who get treatment Horizontal efficiency: the proportion of those needing the service that actually receive it Vertical efficiency: the extent to which services go to those that need them * * Allocation of services in England... Davies B P, 1987

7. Related Issues • Effectiveness - The outcomes produced by the services • Access - Ability to enter the health care system, and be treated at the ‘right’ level • Equity - Treatments are given based on need, not other factors These issues often trade off against each other (eg HIV)

8. Measuring Efficiency A framework for waste in health care; modified from Bentley et all 2008 (sourced from Australian Government National Health and Hospital Reforms Commission, June 2009) Waste Maybe next time... Administrative Operational Allocative Transaction related Other waste Cost ineffective Detrimental to Health Duplication of services Inefficient processed Expensive inputs Errors

9. Some Difficulties • In order to measure relative efficiencies properly one requires a lot of rich clinical and financial data • This does not exist for the task assigned in any comprehensive coherent form • Will focus on what data is easily available and accessible, making adjustments for comparability where possible

10. Comparing Costs Real per capita pa Often used as demonstration of inequity in absolute and in trend terms Multiples range between 4.8 and 6.8 Not a like for like comparison – need to make some adjustments Council for medical schemes reports, National and Provincial budget statements

11. Comparing Costs Real per capita pa Allowance for vat (14%)

12. Comparing Costs Real per capita pa Allowance for vat (14%) Allowance for tender price differences (50% on 30%)

13. Comparing Costs Real per capita pa Allowance for vat (14%) Allowance for tender price differences (50% on 30%) Allowance for solvency (flat spread of R18bn over 10yrs)

14. Comparing Costs Real per capita pa Allowance for vat (14%) Allowance for tender price differences (50% on 30%) Allowance for solvency (flat spread of R18bn over 10yrs) Allowance for public sector to staff up (50% of spend 30% of posts); before OSD

15. Comparing Costs Real per capita pa Allowance for vat (14%) Allowance for tender price differences (50% on 30%) Allowance for solvency (flat spread of R18bn over 10yrs) Allowance for public sector to staff up (50% of spend 30% of posts); before OSD Allowance for OSD (30% on 50%) Could also adjust for capital expenditure and return on capital

16. Comparing Costs Real per capita pa Results in multiples ranging between 1.7 and 2.5. Adjustments don’t take away the real differences, but allow for a more like for like comparison

17. Reasons for the differences • Absolute difference • Private sector spending is the share of wallet those that can afford it choose to spend on healthcare over and above what the government provides. • Same is true for education, security, food, housing • Buying more than just healthcare, luxury over and above quality • Trend difference • Private system is a demand driven system for a price inelastic good (individual budgets) • Public system is a budget driven system based on national affordability (national budgets)

18. Reasons for the differences • Systems have different forms of rationing at the highest level • Private system – prefer not ration at all, buying freedom of choice, freedom of access, almost no waiting lists, access to highest possible quality drugs. • Despite pains of affordability, there has not been mass buy down – could save say 30%+(very roughly) • Funds may run out for individuals (mainly OH) • Competition is often for richest benefits, not lowest costs (peace of mind)

19. Reasons for the differences • Systems have different forms of rationing at the highest level • Public system – rations through protocol driven referrals and structures, waiting lists and access restrictions • but at the end of the day, can run out of money for the whole province (the Free State being the most recent example) • Concerns at management level are to manage funds and budgets (Public finance management act ‘99) not healthcare or outcomes

20. Comparing Costs “To budget is to choose” Trevor Manuel, budget speech 2006 Decision to develop Primary Care facilities over hospitals plays out in the data, especially in recent years More evident in some provinces Proportion of total public health spend

21. Comparing Costs Portion of Provincial Public Health Budget Can be dangerous to underfund hospitals – Health returns on investment in primary care take some time to come through – could lose many lives in the meanwhile.

22. Quick Detour into Financing FIA study by Econex, Private Hospital Review 2009 Report on FIA and BIA in South Africa, McIntyre & Ataguba Nature of progressivity means wealthy paying majority of the public health budget despite not making use of it much Benefits show money, financing incidence shows burden – progressive, but benefits also skewed

23. Quick Detour into Financing • FIA / BIA paper is first of its kind to measure costs of both public and private services in a comprehensive way, while also measuring funding sources – more of this detailed work is needed. • Rough calculations show that families in the upper quintile (where most medical scheme members reside) paid R1,020 pmpm into the public health budget, against average Medical scheme contributions of R1,241 (80% ratio) – demonstrates good progression. • This represents the current health subsidy (redistribution) level between rich and poor. What remains to be analysed and modelled is the elasticity of this subsidy. Keeping in mind that other sources of tax also contribute significantly

24. Quick Detour into Financing • The Ultimatum game illustrates societies preference for equity very well • There is a sum of money to divide between two players. The first player proposes how to divide the sum between the two players, and the second player can either accept or reject this proposal. • If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal. • Offers of less than 20% are often rejected, despite the fact that the second player would be getting something rather than nothing.

25. Implications for Access Access has improved – more entering into the health system at lower income levels How well is the South African public health care system serving its people? Burger and van der Berg

26. Implications for Access % of respondents who declared they were ill and consulted a health worker in past month by wealth decile, and reasons for those who did not (GHS2002-2007) Adapted from S. van der Berg with permission Similar levels of ‘access’ across income – but not all at same level

27. Implications for Access Preference for primary care, can be at the expense of access to higher levels of care – people may find out what they need but will not be able to get it. Like providing free bicycles for public transport. Efficiency does not mean spending the available money on cheaper items. On the other hand unfettered access to care continuum has upward pressure on costs. Which health workers were consulted by those were ill, by wealth decile, GHS2002-2007

28. Delivery Cost Differences Comparison of cost (R’s) of average cost per visit between primary care providers 98/99 A New face for private providers in developing countries: what implications for public health; 2003, Palmer, Mills, Wadee, Gilson, Scheider Low income focused private primary care model, did show higher costs than public facilities, but also lower waiting times (10-40 minutes versus 50 minutes to 3 hours) and higher compliance with DOH clinical guidelines (97% versus 80%)

29. Comparing Outcomes • Precious little to compare • Really only activity level data from public system, and patient day equivalents not especially useful as an outcome • Some incomplete quality data from the private sector, but not comparable or complete • This means comparisons between the two sectors are largely on cost, with anecdotal (but not unsubstantial) quality comparisons.

30. Comparing Outcomes Life expectancy at birth is very macro level output measure Demonstrates that spending on health has a weak relationship with life expectancy But still appealing to consider as a macro metric South Africa significantly off the curve – lost GDP, lost life years, wasted resources WHO, top 5 spenders removed

31. Comparing Outcomes HIV has a horrifying impact – roughly 12 years of life expectancy Overall RSA result averages two sectors RSA excl HIV/AIDS RSA WHO, top 5 spenders removed

32. Comparing Outcomes Splitting out sectors puts figures closer to frontier (Medical Scheme proxy estimates from RGA Reinsurance) Differentiation driven by income, education and other Social Determinants of Health HIV has dramatic impact, other factors include housing, sanitation and clean water, education (especially education of women) Medical Schemes RSA Public sector WHO, top 5 spenders removed

33. Case Studies for Efficiency There is a market for managed care Closed scheme A – claims shown in nominal terms Changed managed care provider in 2004/2005 Result was drop in hospital and chronic costs to 2002 levels and savings maintained Essentially saved 5 years of inflation – 40% (at 7% infl pa)

34. Case Studies for Efficiency Well structured Public Private Partnerships can efficiently reduce or remove waiting lists (increased access) 44,700 cataracts over 5 years at cost neutral price to NHS Better clinical outcomes than NHS Ran over time at the start (into evening) Quickly managed to bring delivery times down to mid afternoon Similar experiences for Hip and Knee procedures 20-24 10-12

35. Case Studies for Efficiency Public Private Partnerships can improve quality before after Pelonomi Hospital upgrade: Netcare renovated and is operating 270 beds in the complex, agree to return to Department in same good condition once project concludes, shared radiology, trauma and theatres, Department receives % of turnover

36. Conclusions • Efficiency comparisons are difficult due to lack of data as well as completely different structure and focus of the two sectors • There are some indications that private care can be delivered at costs close to public levels, notwithstanding the non level playing field, and provide better quality care; but much more research is required to answer the question posed • HIV continues to distort the picture significantly, and represents the largest single opportunity cost in the economy • Innovative solutions and partnerships can provide win-win efficiency and access solving partnerships between the sectors

37. Recomendations • Require innovative solutions to cross the great divide of inequity, more of the same will not do it • Much more public and private sector data is needed for analysis and model building, for efficiency measurement and solution engineering • Regular consistent measurement along with accountability for defined metrics are the best way to improve results • There is come consensus that the public sector is weak with regard to management skills – there should be an industry level PPP to train managers at all levels • Co-operative approaches between sectors are necessary to find common solutions – both sectors are part of the problem, and both can be part of the solution

38. And to close a video clip from ‘A Beautiful Mind’ – the cooperation epiphany

39. Thank you