Laura du Preez: Personal Finance, 30 September 2006

Healthcare provider networks are likely to develop into more consolidated managed healthcare systems that will be used to contain the cost of providing you with healthcare, Charles Mbekeni, the director of managed care at Prime Cure, told the recent Discovery Health/Personal Finance Health Focus seminars

CHARLES Mbekeni, who represents Prime Cure - a managed care organisation consisting of 38 medical centres around the country, as well as a network of about 1 900 general practitioner (GP) practices - says healthcare networks have been developed to meet the need to contain the cost of ever-increasing real (after-inflation) healthcare expenditure.

He says the reasons why healthcare costs continue to rise include technological innovations, changes in demographics as people live longer and the number of pensioners increases, and the relative price effect - as medical inflation tends to outstrip consumer inflation.

Mbekeni says the consequences of this are that as the cost of medical scheme cover has risen, there has been a decrease in the proportion of people who enjoy this cover. Those able to afford this cover have experienced a reduction in their benefits and/or an increase in co-payments and deductibles, he says.

These cost escalations have led to members opting for cheaper benefit options, known as buy-downs.

Rationing healthcare

To contain costs, healthcare has to be rationed, Mbekeni says, and this raises wide-ranging debates.Schemes have tried to incentivise consumers to use healthcare services judiciously by introducing cost sharing, such as co-payments and deductibles, or by limiting their indemnity - putting a limit on the amount they will pay for, for example, an organ transplant, he says.

However, schemes can also reduce costs by limiting your choice of healthcare providers, but ensuring that you always have access to the healthcare you need. This can be achieved by making fixed payments to providers, such as health management organisations (HMOs), and insisting that members use these providers. HMOs sometimes own healthcare facilities and pay doctors to work at these facilities. In other cases, HMOs contract with independent service providers.

Alternatively, Mbekeni says, members could be given incentives to use selected providers, such as preferred provider organisations.

Schemes can also contain costs by delegating the clinical decision-making process to a health professional - using your GP, for example, as a gatekeeper who will only refer you to a specialist, if he or she deems it medically necessary.

In the private healthcare industry, networks are organised in different ways. For example, Mbekeni says, you get Individual Practice Associations (IPAs), which tend to negotiate with schemes and they are often regional.

Managed care organisations also establish networks by contracting with sole practitioners or IPAs. Some of these networks have a wide geographic spread in order to ensure accessibility, Mbekeni says.

Major policy issues

There are a number of major policy issues that could result in an increase in the number of medical scheme members using networks. These include the Risk Equalisation Fund (REF), which is intended to equalise the cost of providing certain minimum benefits across schemes so that schemes will no longer compete for healthy members, but rather compete on the basis of the cost and quality of the healthcare they provide.

Mbekeni says when this happens, it will become necessary for schemes to make use of the efficiencies inherent in managed care.

Proposed changes to the way that schemes pool their risk, forcing them to identify common benefits across options and set a price for these benefits that applies to all members, is also likely to result in more schemes contracting with providers, Mbekeni says.

He also says initiatives, such as the Low Income Medical Scheme investigation and changes to the tax subsidies for scheme members, are aimed at lowering the cost of scheme cover and increasing the number of people who can afford cover. This could potentially increase the number of people using provider networks.

What networks can offer

Mbekeni says networks are capable of offering schemes:

• Preventive programmes to stop members from getting ill. The pre-scribed minimum benefits do not place an emphasis on preventative care and networks will have to introduce this so that consumers see some benefit in using a network.
• Disease management programmes to ensure that chronic diseases are properly managed.
• Utilisation management to monitor the use of various benefits by beneficiaries
• The ability to integrate services, for example, primary care and ancillary healthcare services.
• Advanced information technology systems - to integrate clinical, financial and other administrative systems.

Mbekeni says that in future it is likely that healthcare provider networks will become more complex. This will result from the development of alliances between different service providers.

Laura du Preez: Personal Finance, 30 September 2006

MEDICAL schemes are earning enough income from their reserves to record surpluses even though their contribution income is not enough to cover members' claims and other expenses.

This is according to the Council for Medical Schemes' annual report, which shows that schemes recorded operating deficits totalling R356 million last year.

However, when investment and other income are taken into account, overall schemes have recorded net surpluses totalling R2.3 billion.

The council's annual report says that while an operating deficit "is always a concern", it believes these deficits are a reflection of the fact that most medical schemes have attained reserves equal to 25 percent of gross contribution income and may now be reducing the build up in their reserves.

In other words, medical schemes are using money building up in their reserves, in excess of 25 percent of contributions that they are required by law to hold, to subsidise their operations.

The report notes that schemes' reserves grew by 14 percent to R23 billion last year and, as a result, the average solvency ratio (the reserves expressed as a percentage of gross contribution income) was 39.1 percent - way above the 25 percent required. Last year, the average reserve level was 37.3 percent.

The average solvency ratio of open schemes (that admit anyone as a member) was 29.6 percent last year, while restricted schemes (where membership is restricted to certain groups, such as the employees of an employer) had an average solvency ratio of 63.5 percent.

Eighteen open medical schemes and six restricted medical schemes did not meet the required solvency ratio in 2005. The council's report also notes that 19 schemes had pronounced changes in their operating results. These 19 schemes included the following open schemes: Community Medical Aid Scheme (Commed), Discovery Health Medical Scheme, Eclipse Medical Scheme (which has subsequently decided to close), Meridian Health, National Independent Medical Aid Society (Nimas), NBC Medical Scheme, Pathfinder Medical Scheme, Pharos Medical Scheme and Selfmed Medical Scheme.

According to the annual report, gross contribution income increased by 5.2 percent from R51.5 billion in 2004 to R54.2 billion last year. At the same time, claims paid increased by 12.2 percent from R40.8 billion to R45.8 billion.

Most of the money that schemes paid as claims was paid to hospitals (35.3 percent or R16.1 billion), but this was a 2.6-percentage point decrease on the proportion of claims paid to hospitals in 2004. The report notes that, in real terms (after inflation), spending on private hospitals appears to have stabilised, albeit it at very high levels.

Following the implementation of the medicine pricing regulations, there was a significant decrease in the amount spent on medicines - R7.2 billion was spent on medicines, which was 8.8 percent less than the amount spent in 2004. Medicines accounted for 15.7 percent of schemes' expenditure of benefits.

Benefits paid to general practitioners increased by 28 percent to R3.6 billion and accounted for eight percent of benefits paid by schemes, while claims paid to specialists increased by 15.2 percent and accounted for 20.5 percent of the claims paid. Benefits paid from medical savings accounts made up R5.3 billion or 11.7 percent of the benefits paid.

"Medical savings account contributions and claims have … jumped by 133.9 percent and 153.8 percent respectively since 1997. These data show that schemes are increasingly shifting benefits from the risk pool into medical savings accounts.

"Put another way, it would appear that members are effectively funding more benefits out of their own pockets rather than being funded through the risk pool," the report says.

Non-healthcare expenses rose again - this time by 9.6 percent from 2004 to R7.8 billion. Non-healthcare expenses include administration fees (up 10.4 percent), brokers' fees (up 21.5 percent), managed care fees (up two percent) and bad debts (down 5.2 percent).

The council's report states that in 30 open schemes and 27 restricted schemes, the overall administration expenditure exceeded 10 percent of gross contribution income.

The council regards 10 percent as a reasonable amount for non-healthcare expenses.

The report notes that non-healthcare expenditure has outpaced both contributions and claims since 2000.

Other findings in the report include the following:

• The average increase in contributions for all schemes for 2006 was 5.96 percent, while the average increase in contributions on open medical schemes was 6.88 percent and on restricted schemes it was 4.81 percent. The report notes that the average annual increase for medical scheme beneficiaries has been declining since 2001.
• The numbers of both principal members and beneficiaries of medical schemes increased slightly last year. The number of principal members increased 3.5 percent to 2 812 083, while the number of beneficiaries increased by 2.6 percent to 6 835 621. The number of dependants registered per member dropped by 1.3 percent, but the pensioner ratio (number of pensioners to other members) also dropped from 6.7 percent in 2004 to 6.3 percent in 2005.
• The average age of all beneficiaries on schemes dropped from 32 years to 31.7 years.
• The council's complaints division handled 1 833 complaints during 2005/6. Unpaid accounts were the biggest source of complaints (37.59 percent), followed by benefit exclusions (16.69 percent) and misunderstandings with schemes (10.58 percent).
• The number of registered medical schemes decreased from 133 to 131 in 2005. Of these medical schemes, 47 are open schemes and 84 are restricted schemes.