By Helanya Fourie

Healthcare inflation seems to be the flavour of the month, if the number of queries that we have received on this Research Note is anything to go by. This could be due to the focus that there has been on prices in the private healthcare sector through the Competition Commission’s Health Market Inquiry (HMI), the recent release of the NHI White Paper, or simply because firms or researchers want to get a better grip on what drives prices in the healthcare sector. We’ve put together a quick post presenting updated health inflation estimates and a brief overview of how healthcare is included in the Consumer Price Index (CPI) basket.

The CPI basket represents, in prescribed proportions, the items that a typical household spends its income on. StatsSA publishes the CPI index monthly as Publication P0141. The basket is made up of 12 main expenditure groups, each with its own subcategories. These groups and their weights are: Housing and utilities (24.62), Food and non-alcoholic beverages (17.24), Transport (14.28), Alcoholic beverages and tobacco (5.82), Recreation and culture (5.16), Household contents and services (4.35), Clothing and footwear (3.83), Restaurants and hotels (3.09), Communication (2.63), Education (2.52), Health (1.40), and Miscellaneous goods and services (15.05).

The Health category in the CPI basket is made up of two subcategories – Medical products (38%) and Medical services (62%) – and importantly (since 2008) does not include medical schemes contributions. In the Health expenditure group in the CPI basket, medical products primarily include expenditure on pharmaceuticals, and medical services include expenditure on outpatient and hospital services. Spending on hospital services is however only a small portion (4.6%) of expenditure on medical services, since if you rely on the private sector hospital costs are typically borne by your medical scheme. If you rely on the public sector, hospital costs are typically free of charge.

Average medical inflation between 2003 and 2017 (to date) was 6.2%, compared to average headline inflation of 5%. This is roughly in line with international norms, that suggest healthcare inflation to be two or three percentage points above headline inflation. After a spike in health inflation in 2009, it seems to have stabilised with average health inflation settling at 5.7% for the period 2010-2017 (to date).

As mentioned earlier, since 2008, medical scheme contributions have been included under Insurance in the expenditure group for Miscellaneous goods and services. Insurance related with health makes up half of this group in the CPI basket. The figure below illustrates that price increases for medical scheme contributions seem to be between three or four percentage points above health inflation. This can be driven by different factors, including non-healthcare related expenses such as managed care of administration services, changing demographic and utilisation patterns, or factors like reserve requirements or historic losses.

Economists love saying “you can’t manage what you can’t measure”. Hopefully, a better understanding of where to look for price changes in healthcare can help us in the journey towards high quality and affordable care for all.

Author/s: Helanya Fourie

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.