Director & Senior Economist Presentation to BHF Annual Conference 2007 23rd July 2007 by Tony Twine Director & Senior Economist Econometrix (Pty) Ltd Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Presentation Outline Squaring Medical Inflation in SA The times have changed, but are they going to change back? Affordability, quality and accessibility The AQA principal and economic energy Three government programmes to think about Risk equalisation fund Prescribed minimal benefits Social health insurance the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Alternative Source Of Long-Term Medical Price Data Squaring So far, we have looked at the CPI dataset from SSA We can also find data in the SARB household consumption data tables The SARB data is for Medical & pharmaceutical goods Medical services The SARB data is expressed in Current Rand prices Constant Rand prices the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Current vs Constant Price Spending Data Squaring the Circle Previous chart depicted household spending in current Rands These values allowed for changing prices as and when they occurred They therefore depicted Rands through the till, or consumption values If prices are frozen, inflation is removed from the picture The resulting constant price values represent volume movements of consumption The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Isolating The Implicit Price Movements Squaring the Circle If we divide the current price values by the constant price values, we get The implicit price deflator of the collective goods within the product groups Re-basing both the CPI medical items & the PCE medical items deflator to 1970=100 produces the next graphic The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Why Do The Price Index & Price Deflator Differ From Each Other? Squaring the Circle The price index is made up of a fixed basket of goods of rigid proportions The price deflator has an ever-changing mix of goods in it The price index for medical items reflects price changes only The price deflator for medical consumption reflects both price & component mix changes By dividing the price deflator by the price index, we can isolate the mix effect of the goods & services consumed by households in terms of medical care The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Factors Influencing Medical Inflation In Short To Medium Term Future1 Squaring Probably less benign general inflationary environment for SA Possibility of downward movement of the Rand against major currencies Skills shortages, both in medical & other fields Government interventions to make medical schemes more affordable could accelerate demand growth on private medical care sector Government drive towards generic drugs could have negative impacts on the ongoing presence of pharmaceutical originators Government obsession with affordability could leave quality & accessibility components of benefits exposed & compromised the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City The AQA Principal Squaring The benefits derived from a product or service that is used are a function of Affordability Quality Accessibility Affordability is generally considered to be available income divided by price Quality is a combination of durability, effectiveness, efficiency, practicality and appropriateness Accessibility is the relative or absolute ease of access to the product the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle O Afford The AQA Principle Access Quality Af1 Ac1 Q1 The BHF Southern African Conference 22-25 July’07 Sun City

The AQA Principal Diagram Squaring the Circle Points on each of the axes represent the quantum of each benefit attribute The further from the origin, the greater the quantum of the attribute Connecting the axis quanta creates a “triangle of benefit” The benefit from the product is represented by the area of the triangle of the benefits To increase the area of the triangle, one or more of the points on the axes must move away from the origin The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle O Afford Extending the Benefit Access Quality Af1 Af2 Ac1 Q1 The BHF Southern African Conference 22-25 July’07 Sun City

Extending 1 Attribute may Contract Another Squaring Policy interventions often concentrate on increasing a single attribute In the diagram, this moves such an attribute away from the origin But, unless attention is paid to maintaining the position of the other two attributes, they may be drawn towards the origin This may result in the triangle of benefit not increasing in size because of the intervention Consider the case of an increase in affordability through price cutting, which reduces quality the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring O Afford Finite Resources - Something has to Give Access Quality Af2 Ac2 Q2 the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Policy Interventions cannot increase benefits without adding economic energy Squaring the Circle Imagine the axis points to be marked by pins stuck into the diagram Imagine the triangle of benefits to be defined by a string tied around the 3 pins Moving 1 pin outwards from the origin will draw 1 or both of the other pins towards the origin The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle Afford Af1 O Q1 Ac1 Quality Access Finite Resources = Finite Benefit Perimeter The BHF Southern African Conference 22-25 July’07 Sun City

The Need for economic energy to increase benefits Squaring To increase the area of the triangle of benefits The string needs to be untied The length of the triangle perimeter needs to be lengthened The string needs to be re-tied to define the new perimeter and increased area of the triangle In reality,this requires the adding of economic energy to be achieved Additional economic energy has various forms, such as Increasing income Investing in products and systems Investing in skills creation the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City SWOT Analysis of Three Government Health Programmes Currently Under Development Squaring the Circle Risk Equalisation Fund (REF) Prescribed Medical Benefits (PMB) Social Health Insurance (SHI) Strengths and opportunities as seen by government policy engineers Weaknesses and threats as seen by the private health industry The BHF Southern African Conference 22-25 July’07 Sun City

Risk Equalisation Fund – Strengths and Weaknesses Squaring Strengths Attempts to engage the skilled current ability of funds to discriminate in terms of risk Fund to be run by Council for Medical Schemes Weaknesses Current lack of clarity as to retrospective or prospective nature of REF Relies heavily on the assumption of efficiency/operational strength on council of medical schemes Council is not supposed to hold reserves Relies heavily on calculations made ahead of unfolding financial realities the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Risk Equalisation Fund – Opportunities and Threats Squaring Opportunities Enables the growth of the risk pool Encourages those previously uncovered to enter the medical schemes environment Should create more certainty/uniformity of benefits across the industry Schemes forced to compete on price alone Rewards those most efficient Threats Discourages competition Could entrench inequities which do in the system and individual schemes What happens if those schemes that should pay in cannot do so? System in death spiral? Smaller restricted membership schemes may not survive REF does not alter external risks to the industry at all but re-arranges financial risks within the industry the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Prescribed Minimum Benefits – Strengths & Weaknesses Squaring the Circle Strengths To prevent medical schemes from transferring their high cost risk to public hospitals (dumping) Provides a benchmark cost level for schemes relating to costs that they are forced to cover Acts as a control on the effective risk rating of members Weaknesses Discourages preventative care at primary level Focuses on availability of more expensive secondary & tertiary treatment The BHF Southern African Conference 22-25 July’07 Sun City

Prescribed Minimum Benefits – Opportunities & Threats Squaring Opportunities Could provide better disease profile of population Ability to monitor changes in disease profiles Provides equity between public and private sector Better management allocation of resources within health sector Threats Impedes innovation of benefit design Public private health equity not automatically transferred to equity between schemes the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Social Health Insurance – Strengths & Weaknesses Squaring Strengths Absorbs a large number of people who are currently employed into health funding system Those individuals encouraged to this responsibility for the funding of their healthcare Relieves burden on state by making private healthcare available to members of SHI Weaknesses Medical scheme business opportunities to be reduced Inefficiencies allowed to flourish because of lack of competition One size fits all If successful treasury could cut health department funding, leaving public health where it was the Circle The BHF Southern African Conference 22-25 July’07 Sun City

Social Health Insurance – Opportunities & Threats Squaring Opportunities Systematise cover for high probability risk amongst members unable to detect them themselves Improves access to medical care & private health funding The promotion of public-private-partnerships at supplier level Threats Will require a lot more regulation of the supply side Discourages innovation in benefit design, treatments, medical technology innovation, etc. Until formalised, could cause uncertainty regarding the future of health benefit funding, keeping people out of the system the Circle The BHF Southern African Conference 22-25 July’07 Sun City

The BHF Southern African Conference 22-25 July’07 Sun City Squaring the Circle ~ T H E E N D ~ The BHF Southern African Conference 22-25 July’07 Sun City