Government - the culprit behind high private healthcare prices
The private health sector is one of the most regulated sectors in South Africa so the announcement by Economic Development Minister Ebrahim Patel during his budget vote that the Competition Commission will be investigating the private health care sector is a curious development.
"Following discussions with Minister Motsoaledi," Mr Patel stated, "I am pleased to announce that the Competition Commission will conduct a market enquiry into the private health-care sector. As ordinary working South Africans will know, private medical care is becoming unaffordable. The enquiry will use new powers under section 6 of the Competition Amendment Act of 2009 and will examine the pricing, costs and the state of competition in the sector."
Consider the implications of current competition law. If everyone in the private healthcare sector voluntarily charged the same price, they would be fined for collusion, no matter how philanthropic the intentions. Or, if one market participant charged more than its competitors, it would be fined for price gouging. And, should it charge less than its competitors, it would be fined for predatory pricing. But if government prescribed the prices to be charged, as it has already done in the pharmaceutical sector causing many small-scale pharmacies outside of major urban areas to close their doors, it would not be considered to be in conflict with competition law.
Surely if we are to improve our healthcare industry and make it accessible to all, the answer is straightforward - government has three fingers pointing right back at itself urging it to repeal the insidious pieces of legislation that restrict competition in the private sector. That would be the surest path to decreasing prices.
Some critics argue that three hospital groups account for approximately 85 per cent of the market and are thus an oligopoly. But the Competition Commission implicitly approved the mergers that have lead to the current situation. More importantly, we need to recognise that the substantial consolidation in the number of private medical care providers is largely due to government legislation.
Stringent licensing requirements need to be met before anyone can establish or even expand an existing hospital. Strict rules and regulations determine the minimum size of each room in the hospital, from the reception room to the operating theatres, changing rooms and wards.
These regulations restrict competition and prevent smaller or new competitors from entering the market and encourage consolidation when there is a need to expand. Government limits the competition in the hospital sector and then orders an investigation into a lack of competition. The solution is simple, set up objective rules which, if met, allows for the setting up of more hospitals, clinics, and medical facilities without restriction.
In terms of the ethical rules of the Health Professions Council of South Africa (HPCSA), private hospitals are prevented from appointing doctors and other health professionals, with the exception of nursing staff. Since private hospitals cannot appoint doctors directly, they offer incentives to attract healthcare professionals to establish various practices within hospital premises. These incentives may cause the price of services to rise.
Moreover, since government holds a monopoly on the training of doctors in this country, the available supply is severely and artificially restricted, which raises the price that doctors and specialists can charge. Doctors and specialists should be allowed to work wherever they choose without restriction or being tied to the public sector and the private sector should be allowed to train doctors, which would not only increase the available supply to the private sector but also the public sector.
In 1998, government adopted the Medical Schemes Act (MSA) to introduce "social solidarity" in the private medical schemes market. The Act ushered in four main amendments: open enrolment, community rating, statutory solvency requirements, and a comprehensive package of hospital and outpatient services that all schemes are compelled to provide regardless of the individual's age, sex or health status.
This minimum package of benefits is commonly referred to as prescribed minimum benefits (PMBs). Each of these amendments resulted in an increase in the cost of providing medical scheme coverage, which invariably needed to be borne by the consumer.
As a result of these amendments, a substantial number of medical schemes in the market consolidated since they could no longer compete effectively on price. The number of schemes dropped by one-third from 144 in 2000 to 97 in 2011, which translates into an average rate of decline of four medical schemes per year over the 12 year period.
Despite the reduction in the number of medical schemes, there has been a 26.9 per cent increase in the number of lives covered by private medical aid schemes, from 6.7 million to 8.5 million, over the period 2000 to 2011. In addition there are an estimated 1.8 million people covered by private health insurance contracts.
This large and growing number of people seeking private medical insurance options, and the substantial rise in out-of-pocket payments at private health facilities, reveals that people would prefer to attend private rather than government-run medical facilities. It should be noted that people voluntarily choose to contribute towards health insurance options over and above their mandatory contributions to government-run medical facilities through the taxes they pay, and voluntarily choose to attend private medical facilities.
The aforementioned competition-destroying pieces of legislation are just some of the factors that contribute to higher prices in the private medical sector. Another important aspect is that our population is aging. Life expectancy at birth has increased from 52.7 years in 2002 to 59.6 years in 2013. As people age there is an increased probability that they will require chronic care which in turn raises expected medical care expenditure. New innovative technologies that cause people to live longer also raise the price of medical care.
Once again, the solution is simple: remove the barriers to entry for new medical schemes; remove all the regulations that prevent actuaries from devising innovative schemes to meet the requirements of a larger pool of members; and remove the suffocating costs that are imposed on medical schemes at the whim of regulators.
Any investigation will consume a significant amount of hard earned taxpayer resources. The answers to these questions are already in the public domain. Private companies are playing by the rules that government has created. It is not possible for the private healthcare sector in its entirety to conspire to raise prices. It is the government imposed rules of the game that are responsible for reduced competition and higher prices.
Jasson Urbach is a director of the Free Market Foundation and of the Health Policy Unit. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.
Click here to sign up to receive our free daily headline email newsletter
