1. Issues regarding the Structure of the South African Health Market Prof Alex van den Heever Chair in the Field of Social Security Alex.vandenheever@wits.ac.za

2. Source for Content The contents of this presentation reflect a high level summary of the analysis in a report provided to the Competition Commission in 2012 http://www.compcom.co.za/assets/Healthcare- Inquiry/Review-of-Competition-in-the-South-African- Health-System.pdf

3. What makes markets work? Basis for exchange – Individuals produce products and are able to exchange them for other products Consumers – Understand the product (price/quality) – Have a choice of alternatives – Able to exercise choice

4. When do markets fail? Basis for exchange – Individuals produce products and are unable to exchange them for other products (absence of efficient systems of exchange – money) Consumers – Do not understand the product (price/quality) – Have limited or no choice of alternatives – Unable to exercise choice

5. How do consumers lose control of demand? Product complexity – Price, cost and quality comparisons not possible in real time – Market problems possible despite competition Market concentration – Structural reduction in products choice – National or geographic markets

6. Market manipulation – Collusion to exclude competition from the market Agreements between market participants, including the sharing of information (e.g. prices/costs) Punishment for non-compliance – Payment of kickbacks to intermediaries able to determine demand (agents) – Market segmentation Forcing consumers into market segments on the basis of their ability to pay

7. Correcting dysfunctional/failing markets Ensure an efficient basis for exchange Put consumers rather than product suppliers in control of demand – Effective market signalling Price Quality – Product simplicity – remove need for advice Correcting markets is more than just about price

8. What about efficiency? Allocative efficiency - static Technical efficiency - static Dynamic efficiency - innovation

9. ANALYSIS OF THE SOUTH AFRICAN MARKET

10. Two key “products” Insurance Healthcare What about consumers? – Don’t understand what they’re buying – Don’t understand the pricing or the cost – Have no idea about product quality – Key strategic product purchases are channelled through conflicted intermediaries

11. 3 rd Party Managed Care Diagnostic Specialists Surgical Specialists 3 rd Party Administration Hospital-based and substitute services Medicines and other medical products and services Financing and Risk Pooling Health goods and services Health insurance - unregulated General Practitioner Consumer Information asymmetry Information asymmetry Health insurance - regulated Holding companies Brokers

12. 3 rd Party Managed Care Diagnostic Specialists Surgical Specialists Hospital-based and substitute services Medicines and other medical products and services Financing and Risk Pooling Information asymmetry Information asymmetry Health goods and services Gate keeper Consumer agents Possible conflicts of interest Moral hazard Anti-selection Risk-selection Commercial relationships Health insurance - unregulated Financial sector holding companies General Practitioner BrokersHealth insurance - regulated Consumer 3 rd Party Administration

13. WHAT’S IN THE CONTRACT TODAY

14. Systemic Market-related Issues What is internalised/externalised within contracts between consumers and health insurers? Price Cost Quality What is internalised/externalised within contracts between insurers and health care providers? Price Cost Quality Regulated Insurance Unregulated Insurance Regulated Insurance Unregulated Insurance Markets only compete on factors/signals that are transparent to relevant decision-makers

15. Internalised into Insurance contract – medical schemes RiskMedium PriceMedium Quality of coverageMedium Quality of health care servicesMedium/Weak Quality of healthcare productsMedium/Weak Regulations prevent some risks from being transferred arbitrarily back to consumers

16. Insurance contract – other RiskWeak PriceWeak Quality of coverageVery weak Quality of health care servicesVery weak Quality of healthcare productsVery weak

17. Internalised into insurance contract with HC service providers Derived from the contract between consumers and insurers RiskWeak PriceVery weak Quality of coveragen/a Quality of health care servicesWeak Quality of healthcare productsWeak

18. MARKET OUTCOMES

19. Real per capita changes in medical scheme expenditure and GCI (2012 prices) Source: Council for Medical Schemes data from scheme audited financial statements 1990 – 2012 (adjusted for CPI)

20. Changes in the structure of medical schemes expenditure on benefits (1981-2012) Source: Council for Medical Schemes data from scheme audited financial statements 1981 - 2012

21. Hospital claims (real pbpa) compared to beds per 1,000 and market concentration (HHI) (for private beds) Point at which beds per 1,000 is roughly equal to the US and UK (noting that they have vastly older populations)

22. Changes in total beds in South Africa 1976 to 2010: public and private sector

23. Return on Capital Employed (Mediclinic and Netcare) Source: Anthony Felet, Duncan Lishman and Fatima Fiandeiro, “Do hospital mergers lead to healthy profits?”, 2012, p.11

24. Return on Capital Employed (Mediclinic and Netcare) – 1997 - 2011 Source: Anthony Felet, Duncan Lishman and Fatima Fiandeiro, “Do hospital mergers lead to healthy profits?”, 2012, p.11

25. Average age of Medical Schemes 2000 -2013 Sources: CMS Annual Reports 2003-4, 2004-5, 2005-6, 2007-8, 2009-10, 2010-11, 2012-13

26. Real hospital cost (pbpa) changes from 2001 to 2006 (percentage) (includes medicines) Other causes

27. Non-health expenditure trends from 1974-2010: percentage of Gross Contribution Income (GCI) Source: Council for Medical Schemes data from scheme audited financial statements 1974 - 2010 Major deregulation

28. CONCLUDING REMARKS

29. Ensure that health insurers have the incentive to purchase efficiently – Remove conflicts of interest in markets for advice – Simplify and standardise products – Market transparency on key indicators central to consumer choice – Internalising price and quality into the contract – Deal with regulatory arbitrage – Ensure governance arrangements correctly locate the commercial imperative in the scheme

30. Ensure that insurer incentives cannot be undermined by anti-competitive structures and conduct on the supply side – Market transparency (price/cost/quality) – Conflicts of interest Separate doctors from other products – Accumulation and abuse of market power Market diversification Penalise abuse – Collusion

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