By Dr Paula Armstrong

The Competition Commission’s Health Market Inquiry (HMI) Panel commenced its inquiry into the state of competition in the private healthcare sector on 6 January 2014. On 5 July 2018, the Panel released its provisional recommendations, inviting stakeholders to make submissions before 7 September 2018, with a view to publishing a final report and recommendations on 30 November 2018. Econex has been briefed to submit research and provide input on the process by a large hospital group, Mediclinic SA. In this post, I have summarised some of the high-level findings and recommendations put forward by the HMI panel.

  1. The Panel considers there is strong evidence of supplier-induced demand (SID),[1] with healthcare utilisation driven in part by practitioners charging for services on a fee-for-service (FFS) basis. According to the Panel, SID is driven by doctors providing additional and sometimes unnecessary services, and by hospitals who drive utilisation through intensive care unit (ICU) admissions. The Panel found positive correlation between risk of admissions and a hospital being present within a specific geographic area. This is the first time the HMI Panel has indicated its findings on SID.
  2. With regards to healthcare funders, the Panel finds there to be a very low level of competition amongst healthcare funders. The panel considers the fact that Discovery Health (DH) and Discovery Health Medical Scheme (DHMS) have enjoyed substantial profits over the last ten years while other schemes and administrators have experienced substantially lower profits, to be evidence that the market is not functioning as it should. Competitive market conditions would not have allowed such substantial profits to endure. The Panel is concerned that medical schemes compete to attract the most “attractive” members of the population to improve their risk pools, rather than competing based on value in their offering. The Panel also finds that there are few incentives in place in the medical scheme environment to ensure that funders are held accountable to members.
  3. Medical practitioners are the central decision makers in the healthcare markets. They have access to information in the healthcare system and as such, have a considerable measure of market power. Competition between medical practitioners happens within specialities and most specialists operate in individual practices. Most specialists also bill on a fee-for-service basis. Regulatory constraints on the professional organisations of specialists means that there is very little integration and cooperation across specialities and amongst practitioners in different parts of the healthcare system. In addition, there is no regulatory requirement for practitioners to report on quality and outcomes.
  4. The private hospital market in South Africa is highly concentrated with the three corporate hospital groups[2] comprising 90% of the market based on admissions, and 83% of the market based on beds according to the Panel. This gives the three groups “must-have” status amongst medical schemes during tariff and network negotiations, and therefore diminishes the countervailing power of medical schemes and administrators. Although day hospitals are becoming increasingly prevalent in South Africa, most hospitals are acute hospitals.

Justice Ngcobo explained that the recommendations must be understood as a “package” of recommendations. The Panel in turn discussed the following high-level recommendations:

For funders, recommendations seek largely to improve transparency and competition. All medical schemes must have a base option which covers catastrophic expenditure, some primary healthcare benefits, and certain preventative healthcare benefits. This option is the minimum cover provided to beneficiaries, and the option must be standardised across the industry to facilitate comparison across schemes, and this must be the minimum cover across all options. In addition, there must be increased standardisation in options across different schemes to facilitate comparison across schemes by prospective members, therefore enhancing competition in the industry. In terms of medical scheme governance, remuneration must be explicitly linked to performance criteria amongst principal officers and members of the executive.

Supply-side recommendations include the establishment of a supply-side regulator. The regulator will have four primary tasks: healthcare capacity planning; economic evaluation; pricing unit/ management of pricing mechanisms; and measurement and regulation of quality and outcome measures.

The tariff vacuum that has resulted from the prohibition of collective bargaining is largely understood to be driving price increases in private healthcare. To remedy this situation, tariffs will be set according to one of two models. In the first model, tariffs in the private sector will be set by the regulator’s pricing unit following research and engagement with stakeholders. Should the tariff be unacceptable to stakeholders, it will be decided by an independent arbitrator. Alternatively, funders and providers will enter multilateral negotiations, with the regulator validating the negotiated price. In the case that the regulator does not validate the final tariff, an independent arbitrator will have the final say. Regulated tariffs for Prescribed Minimum Benefits (PMBs) will be binding, and regulated tariffs for non-PMBs will be recommendations.

As a remedy to the high level of concentration in the healthcare industry, the Panel recommends that certificates of need replace the current licensing system. The National Health Act provides for certificates of need, and regulations must be promulgated to facilitate the establishment of this system. This will achieve the redistribution and rationing of healthcare services in South Africa. Analysis informing certificates of need will be conducted at a national level and will be devolved to the provinces to implement. National healthcare need (rather than healthcare need amongst medical scheme beneficiaries) will inform certificates of need; the Panel indicated that the participation of the National Health Insurance (NHI) Fund as a purchaser of services in the private sector means that the availability of healthcare facilities should respond to the healthcare needs of the population.

The regulator will establish a forum in which standardised data and information on quality and outcomes can be kept and assessed. Quality must form the basis on which private healthcare providers compete with each other for services purchased by consumers. The Office of Health Standards Compliance is envisaged to work closely with the regulator. Standardised coding amongst practitioners will be facilitated and managed by the regulator.

Although the Panel is cognisant of the potential for designated services provider (DSP) and preferred service provider (PSP) arrangements to have an exclusionary effect, the Panel is largely positive about the competition and efficiency effect of designated and preferred services providers. To remedy exclusionary effects, they call for greater transparency in the appointment of DSPs and PSPs. Specifically, they recommend that open tender processes be followed and that DSP and PSP contracts be set at a maximum of two years.

Health Professions Council of South Africa (HPCSA) regulations governing provider relationships in the private healthcare sector affect the competitive incentives faced by providers and constrain the ability of practitioners to form multi-disciplinary practices. These multi-disciplinary models are innovative models that do much to manage utilisation and enable healthcare providers to provide a better level of care. They also in turn facilitate the establishment of alternative reimbursement models (ARMs) which effectively align the incentives of funders and providers in terms of managing the cost of healthcare provision. The current HPCSA regulations prohibit the kind of coordination and cooperation required to establish multidisciplinary practices, and the Panel recommends that these regulations be revisited and adjusted to allow practitioners to offer a more value-driven model of healthcare.

The future of private healthcare in South Africa remains unclear and much debate can be expected in the months ahead.

[1] Econex has published research on SID in the private healthcare sector, available here and here.

[2] Netcare, Life Healthcare and Mediclinic.

Author/s: Dr Paula Armstrong

Nothing in this publication should be construed as advice from any employee of Econex and should be seen as general summaries of developments or principles of interest that may not apply to specific circumstances.