Department of Health
Inquiry
Into the various Social Security Aspects of the South African Health System
Based on the Health Subcommittee Findings of the Committee of Inquiry into a Comprehensive System of Social Security
Title: Policy Options for the Future Covering
14 May 2002
CONTENTS
1 Introduction * 1.1 Purpose *
1.2 Terms of Reference *Tables
Table 2.1: Sources of Comprehensive Public Health Sector Financing, 1996/97-1998/99 (R million, real 1999/00 prices) * Table 2.2: Distribution of healthcare professionals between the public and private sectors * Staff * Table 3.1: Willingness and ability to pay study: Reason for willingness to pay for public hospital services * Table 3.2: Willingness and ability to pay study: Able-to-pay when last receiving care at a public hospital * Table 3.3: Willingness and ability to pay study: Willingness to use and pay for public hospital care * Table 3.4: Willingness and ability to pay study: Support for compulsory membership if Public Hospital Insurance * Table 3.5: Willingness and ability to pay study: Support for compulsory Payroll deduction for covering public hospital costs * Table 3.6: Willingness and ability to pay study: Support for payroll deduction with exemptions for Medical Aid members * Table 3.7: Willingness and ability to pay study: Attitude towards a differentiated public health service * Table 5.1: Evaluation of Alternative Options for Allocating the Health Budget * Table 6.1: Impact on the Government Revenue from a removal of the employer tax deduction (R’billion) (based on 1999 registered medical scheme expenditure and 2000 prices) * Table 7.1: Risk-adjustment systems in 10 countries * Table 7.2: The practice of risk-adjustment in the United States * Table 8.1: Premium penalties for late joiners * Table 15.1 Summary of coverage by broad income category *Figures
Figure 2.1: Real Total Medical Scheme Expenditure on Public and Private Hospitals (1995 prices) 1988 to 1999 * Figure 2.2: Registered medical schemes: Per capita real expenditure and changes in beneficiaries * Figure 2.3: Medical Scheme Beneficiary Changes for Open and Closed Medical Schemes, 1990 to 1999 * Figure 2.4: Medical Scheme Beneficiary Changes for Open and Closed Medical Schemes, 1990 to 1999 * Figure 2.5: Non-medical Cost Trends from 1993 to 2000 (Rands) * Figure 2.6: Medical Scheme Real Cost per Beneficiary and Benefit Trends, 1993 to 2000 * Figure 3.1: Willingness and Ability to Pay Study – Distribution of Respondents by Income * Figure 7.1: Illustration of the Netherlands Risk-Equalisation Fund * Figure 7.2: Price advantage/disadvantage for schemes representing 90 percent of the open scheme membership * Figure 7.3: Possible Institutional Framework for a Central Risk-Equalisation Fund for South Africa * Figure 9.1: Cost drivers in the private health sector * Figure 12.1: Regional Structures for Civil Service Medical Scheme Strategy * Figure 12.2: Framework for Universal Contributory Cover for Civil Servants * Figure 12.3: Timelines for Implementation of a Strategy for Universal Medical Scheme Benefits for Civil Servants * Figure 15.1 Reform Strategy and Approximate Timeline * Figure 15.2: Framework for a Universal Contributory System * Figure 15.3: Implications for Coverage over all Phases *This report provides an evaluation of alternative strategic policy options for the South African health system based on a review performed by the Department of Health and the Health task group of the Committee of Inquiry into a Comprehensive System of Social Security.
Although certain aspects of the review cover existing policy accepted by Government, this report is a consultation document and does not represent a final policy position by the Department of Health.
The review proposes a broad course of action for achieving a move toward a more effective and unified health system. The purpose is to highlight key policy issues as a point of departure for consultation and the preparation of a final position by the Department of Health.
The terms of reference given to the Committee requires the review of a broad number of elements relating to social security. The general objectives of this analysis include:
The specific social security areas that must be covered are:
Each of the specific areas identified above must include the following analyses: (Terms of Reference, 2000, section 2.3).
In addition to the specific analyses indicated above, the Committee is also required to develop a social budget for all the key social security areas. (Terms of Reference, 2000, section 2.4).
The Committee is also expected to enter into a fairly broad consultation process with all stakeholders. (Terms of Reference, 2000, section 2.5).
The specific section relating to health issues is very broad and effectively involves a review of the entire health system with a view to ensuring universal access. As such the terms of reference preclude reviewing issues which do not involve the provision of universal access. This is a significant limitation and implies a prior policy decision in this regard.
There is substantial international evidence that such a policy stance is appropriate and for this reason the limitation is accepted. The issue of the desirability of universal access and how this might be interpreted will however be addressed by the Committee as wide policy discretion is possible here.
Universal cover internationally is provided through a mixture of methods. These include non-contributory and contributory financing systems as well as various service delivery models. The contributory environments typically involve both earmarked taxes or various degrees of compulsion applied to private insurance markets.
The initial sections of the Report, from sections 2 to 4 provide the context for later discussions and recommendations. Section 2 provides an historical review of South Africa’s public and private health sector. Section 3 summarises the results obtained from a number of stakeholder reviews performed by the Department of Health. Section 4 outlines key equity principles that universally underpin health systems policy.
Sections 5 to 12 provide evaluations and policy recommendations. Section 5 looks at the financing of the public health system and linkages to broader reform objectives. Section 6 looks at the tax subsidy provided to medical scheme members, and reviews how this could be altered and incorporated into a more integrated subsidy system linking the public and private sectors.
Section 7 evaluates the need for risk-equalisation within the medical schemes environment and indicates how this can be linked to the reform of the tax subsidy discussed in section 6. Section 8 analyses the current mechanism for dealing with systemic adverse selection within the medical schemes environment, late-joiner penalties, and the option of moving toward mandating membership of a medical schemes as an alternative and ultimate solution.
Section 9 looks at the issue of cost-containment in the private sector and options required to deal with the problem. Section 10 evaluates the need for public hospital reform in order to improve the management of hospitals and to permit them to obtain funding from medical schemes.
Section 10 discusses the option of a state-sponsored medical scheme and how this could influence the development of a low-cost provider market. Section 12 assesses the important question of mandating universal cover for civil servants. The options in this section relate to both to the development of a low-cost provider market (section 10), and the development of a state-sponsored medical scheme (section 11). Section 13 looks at medical savings accounts and their role in the health system.
Section 14 summarises some of the key strategic challenges facing the South African health system, based on international evidence and the reviews provided in this Report. Section 15 integrates all the various issues and recommendations raised in the Report into a strategic reform process.
This document provides information intended to generate comment from the public on a number of key questions affecting the future of the health system. The process needs to ensure that the response from the public extends further than those with a commercial stake in particular directions. The areas that are important for the purposes of feedback to the Department of Health are:
This section reviews the evolution of the South African health system, both public and private. This review provides a backdrop against which certain strategic challenges are identified in section 14, and provides the basis for recommended strategic reforms identified in later sections.
One of the first pieces of legislation enacted of a purely medical nature was the "Contagious Disease Act" (No. 1 of 1856). This was to deal with regular outbreaks of measles and smallpox. In 1867 an epidemic struck Cape Town with a high mortality rate. This resulted in the enactment of the Contagious Diseases Act No. 25 of 1868. In Kimberly the government passed the Medical Tax Act in 1874 as a means of financing the provincial hospital. In terms of this legislation a fee of one shilling was levied upon each "native" worker for medical services on the diamond diggings. The diggers, however, opposed the Act and enforcement was deferred until 1882 when the various companies paid the levy for their "native" employees directly to the Cape government. (Ginwala, 1981).
The first Public Health Act was promulgated in South Africa in 1833 following a smallpox epidemic in Kimberly. For the first time vaccination and notification of infectious diseases was made compulsory in the Cape Colony. Extensive emergency powers were delegated to local authorities by the governor to permit officials to enter premises, and draw up and enforce quarantine regulations. Local authorities were given the power to establish hospitals and departments while the government advanced 50 percent of the costs of expenses and maintenance. (Ginwala, 1981).
The South Africa Act resulted from the National Convention of 1909 which created the Union of the four colonies, Cape of Good Hope, Natal, Transvaal, and the Orange River Colony. The Act made limited references to health care. The four Provincial Councils were endowed with various health and local government laws inherited from the Colonies. Local Authorities, by virtue of previous Colonial legislation and subsequent ordinances and under their local by-laws were responsible for environmental hygiene and measures to deal with outbreaks of infectious disease. There were however overlapping responsibilities and confusion with respect to public health. The influenza epidemic of 1919 exposed serious inadequacies in the existing responsibilities, safeguards and procedures. This resulted in the Public Health Act No. 36 of 1919. (Ginwala, 1981).
In terms of the Public Health Act provincial administrations retained their responsibility of administration of local government and the establishment, maintenance and management of general hospitals and matters relating to charitable institutions and for pauper medical relief. The Act established the Department of Health with executive responsibility. The intention of the Act was to decentralise. The Department of Health was given powers to advise, assist and if necessary coerce the local authorities and provincial administration in fulfilling their public health responsibilities. (Ginwala, 1981).
Local authorities had as their primary role the control of infectious diseases and environmental sanitation. These functions were facilitated by the statutory provision for refunds in respect of certain staff and certain services for infectious diseases. The Act made a distinction between communicable and non-communicable disease. The State took responsibility for persons with a communicable disease through isolation and prevention of spread of infection. Responsibility of a person with non-communicable disease was accepted as part of pauper medical relief at provincial hospitals and district surgeons. For the majority of people provision of health care was an individual responsibility. (Ginwala, 1981).
Private hospitals were subdivided into those that existed for gain and those that did not. The non-profit hospitals were divided into those established for philanthropic reasons and those established to fulfil statutory requirements. Into the latter category fell the Mine and Indian Immigration Bureau hospitals that were developed in response to peculiarly South African arrangements of labour supply. The pre-Union Natal government levied a special tax upon employers of Indians, the proceeds of which were paid into a fund administered by the Indian Immigration Bureau and utilised to establish special hospitals under its control, and relieving the tax-payer of this particular burden. (Ginwala, 1981).
The Union Legislature in 1911 passed the Native Labour Regulation Act which imposed on the gold and other mining industries the duty of providing hygienic housing, adequate diet and hospitals for Native labourers employed by them. Tax was not imposed on the employers, but in accordance with the regulations and its specifications, the employers provided hospitals. Equivalent legislation did not emerge in the instances of secondary industry. (Ginwala, 1981).
Mission hospitals were established in rural areas where no local authority capable of making a financial contribution. (Ginwala, 1981).
The Public Health Amendment Act of 1946 demarcated the functions of the Central Government and the Provinces. The provinces were responsible for general hospital services and outpatient services connected with their institutions while the government was to proceed with extra institutional services by the development of a system of health centres. The Act made provision for refunds to both provincial administrations and local authorities in respect of any outpatient services independent of general hospitals which either would institute. Difficulties in implementing services and funding however arose. (Ginwala, 1981).
In the period after 1948 health policy and planning became more determined by political rather than health criteria. The focus was essentially that of satisfying the needs of the white population. The Tomlinson Report of 1954 for instance recommended a separate "Bantu Health Service" which ended the moves of the Department of Health of the time to create a unitary system. The subsequent development of a homeland system in South Africa further fragmented service delivery and policy through the extension of numerous first tier government structures. In an attempt to co-ordinate the functions of the numerous health departments the Regional Health organisation of Southern Africa (RHOSA) was established in 1979. (van Rensburg et al, 1995, p.57).
The Health Act of 1977 for the first time included Provincial Administrations in the same way that local authorities were involved since the first Public health Act of 1883. Under this Act the Department of Health had the functions of co-ordinating health services rendered by Provincial Administrations and Local Authorities as well as to provide such additional services as may be necessary to establish a comprehensive health service for the population of the Republic of South Africa. (Ginwala, 1981).
According to Van Rensburg et al (1995) despite the fact that the Health Act 63 of 1977 intended to rationalise health care organisations by means of clearer definitions of the duties, powers and responsibilities of the respective authorities; to effect greater co-ordination between the various tiers of authority and to move to a nationally co-ordinated health policy, the Act had no real effect on the fragmentation embodied in the three tiers of authority and services. The provinces remained responsible for hospital services, local authorities were responsible for preventive and promotive care, and the central department was responsible for overall co-ordination. Two new bodies were created to achieve greater overall co-ordination: the Health Matters Advisory Committee and the National Health Policy Council.
The period from 1980 onward continued to be characterised by a high degree of fragmentation in the health services and policy co-ordination. The implementation of the homeland policy and the Tricameral system (in 1983) led to the breaking up of administrations into seventeen different political entities many of which had little political legitimacy. Although the four provincial administrations effectively covered the vast majority of the population, great disparities existed in resource allocations within and between provinces and between the provinces and homeland administrations. Public facilities were also segregated with separate services for the non-white population. In many instances this separation extended to entire facilities with separate white and non-white hospitals.
The Browne Commission, appointed in 1980 concluded in 1986 that there was excessive fragmentation of control over health services and a lack of policy direction, resulting in a misallocation of resources, duplication of services and poor communication between the various tiers.
The National Policy for Health Act 116 of 1990 repealed the sections of the Health Act related to policy-making structures. It made provision for the Minister of National Health and Population Development to determine policy. Three new bodies were established to assist in this, the Health Policy Council, and the Health Matters Committee. The Act attempted to co-ordinate health services and to diminish the role of provincial authorities. (Van Rensburg et al, 1995, p.59).
During 1989 to 1990 the public health system was officially desegregated technically generating a dual system based on income differentials. However, the former structure of the public sector system and its target population resulted in informal barriers to access that have survived the legal barriers. These barriers relate to location, i.e. many public facilities are situated in areas that make services inaccessible to the population now legally entitled to use them, and to the appropriateness of the service, i.e. many of the services and personnel are inappropriate for low-income and socio-economically deprived communities.
In the late 1980s and early 1990s the desegregation of public hospitals resulted in a dramatic growth in private hospitals. This growth in public hospital utilisation was mirrored by dramatic cost increases in medical aid costs experienced in these years.
Subsequent to 1994 the public health system was reformed administratively along the lines of the new Constitution. Nine provincial health administrations were created responsible for the delivery of both hospital and primary health care. The provincial administrations transfer a portion of their budgets to local authorities who also render primary health care services. Overall responsibility for health policy resides with the national Minister of Health supported by the national Department of Health.
Since 1994 a number of significant changes have occurred in the financial arrangements of government in general with major implications for the rendering of health services. These have included the introduction of a fiscal federal system affecting the financing and budgeting of virtually all significant social services, including health, social development and education.
These financial changes have impacted in a number of ways that have relevance to the overall principles and objectives of the health system based on a large number of reports. These include:
The central issue is whether the changes occurring within the public health system reflect explicit policy decisions, or are merely a consequence of structural difficulties in co-ordination and implementation to achieve centrally determined policy objectives. A key issue in this discussion is the role and extent of provincial discretion relative to national policy requirements and whether a proper balance is currently maintained.
For the 1995/96 and 1997/98 financial years the health budget for the country was determined centrally based on recommendations by the Health Function Committee. In the 1997/98 financial year the public sector officially switched over to a fiscal federal system whereby budgets for health were determined by provincial legislatures and not advised by national policy. The funds made available to provinces were allocated through an unconditional (equitable share) grant allocated from the national budget.
According to the recent National Health Accounts review (NHA Review) there has been a systematic overall and per capita decline in public health expenditure since 1996/97. According to the NHA Review this expenditure decline is in part attributable to the peculiarities of the fiscal federal system rather than to any explicit national policy decisions. Various studies as well as the NHA review have pointed out the inability of the health system to achieve national policy objectives with respect to equity as a consequence of the fiscal federal environment. Initial progress toward equity, prior to the introduction of the fiscal federal environment, appear to have reversed in the years since 1996/97. However, a significant contributor to the decline in health budgets appears due to the decline in the overall allocations to provinces. (Thomas S. et al, 2000).
Sources of Finance |
1996/97 |
1997/98 |
1998/99 |
General taxation |
29,244 |
30,972 |
30,908 |
Local authority revenue |
845 |
963 |
996 |
User fees from households |
499 |
418 |
340 |
Provincial Government own revenue |
334 |
578 |
384 |
Donors |
18 |
33 |
68 |
Total |
30,941 |
32,963 |
32,695 |
Source: Thomas S. et al, 2000, p.133
Various problems relating to the budget system for health care were brought to light by the Committee reviews. The problems appear pervasive and impact significantly on the performance of the health delivery system. These are listed below:
The public hospital sector currently charges fees for hospital services to higher income earners. Indigent patients receive free services. The fees charged are highly subsidized and invoiced at point-of-service. Invoices are also submitted to medical schemes. This system is highly inefficient as a source of revenue for public hospitals and needs to be substantially revised. The problems run fairly deep and cannot be resolved merely through improvements to the billing system or the setting of higher fees:
Source: Council for Medical Schemes Statutory Returns 1988 to 1999
The existing financial management system of government is not compatible with any form of contributory system, whether fee-for-service or pre-paid in one form or another. It is more compatible with a tax funded free service. If it is a policy decision to include a contributory component to the public system, as is apparently the case at present, then the appropriate technical reforms are needed.
There has been a substantial shift of key healthcare professionals out of the public sector. Only 45.5 percent of all professional nurses work in the public sector (based o the 1999 estimates). Over the past 10 years general practitioners have also moved out of the public system with a shift from 38.3 percent in 1989 to 22.5 percent in 1999.
At present only 37 percent of all surgery related specialists function within the public sector. Seventy five percent of all anesthetists work exclusively in the private sector.
Table 2.2: Distribution of healthcare professionals between the public and private sectors
Total SA |
Public** |
Private* |
|||||
|
Total no. |
% |
Total no. |
% |
|||
Period: 1989/90 |
|||||||
Medical officer (GP) |
12,889 |
4,936 |
38.3% |
7,953 |
61.7% |
||
Specialist |
5,595 |
1,891 |
33.8% |
3,704 |
66.2% |
||
Pharmacist |
8,262 |
909 |
11.0% |
7,353 |
89.0% |
||
Dentist |
3,111 |
218 |
7.0% |
2,893 |
93.0% |
||
Period: 1998/99 |
|||||||
Professional nurse*** |
90,923 |
41,401 |
45.5% |
49,522 |
54.5% |
||
Staff nurse |
33,039 |
21,008 |
63.6% |
12,031 |
36.4% |
||
Nursing assistant |
51,583 |
22,550 |
43.7% |
29,033 |
56.3% |
||
Total nursing |
175,545 |
84,959 |
48.4% |
90,586 |
51.6% |
||
Medical officer (GP)*** |
15,376 |
3,458 |
22.5% |
11,918 |
77.5% |
||
Specialist*** |
6,136 |
1,741 |
28.4% |
4,395 |
71.6% |
||
Pharmacist |
9,599 |
1,210 |
12.6% |
8,389 |
87.4% |
||
Dentist |
3,482 |
471 |
13.5% |
3,011 |
86.5% |
Sources: *Sodelund et al, 1998, and **PERSAL 1999.
***These data were adjusted to full-time equivalents according to average salary costs and total expenditure for these personnel categories in 1998/99. Many doctors and some nurses only work part-time and therefore the Persal information used without adjustment distorts the actual number employed.
No regulatory supervision of the private health system existed prior to 1956 after which schemes became regulated as Friendly Societies. From 1967 to 1975 medical schemes were regulated in terms of the Medical Schemes Act by both the Department of Health and the Registrar of Financial Institutions. From 1975 onward, medical schemes were regulated exclusively by the Department of Health. The policy underlying medical scheme regulation shifted considerably over time. A review is provided below of the historical evolution of the private health system in South Africa, drawing on a paper produced for the Melamet Commission (1994).
The first "medical scheme" in South Africa was the De Beers Consolidated Mines Ltd. Benefit Society, established in 1889. By 1910 seven such schemes were in existence.
At the creation of the Union of South Africa in 1909, no co-ordinated health system existed in the country. A centralised authority for co-ordinating health activities was only created ten years later in response to the influenza epidemic of 1919. This was incorporated in the Public Health Act, No. 36 of 1919, and resulted in a three tier public sector structure of central government, provincial administrators and local authorities. A system of private practitioners developed outside of the public system but there was no regulation of private sector schemes.
By the beginning of the Second World War in 1940 there were 48 medical schemes. After the War the significant increase in the number of schemes generated a need for some regulation. Consequently in 1950 the Advisory Council for Medical Fund Societies was formed. Its role was to act as a representative for the affiliated schemes in negotiations with the Medical Association of South Africa. Before 1956, however, there was no regulation of the behaviour of medical schemes.
On 31 December 1956 the Friendly Societies Act, No. 25 of 1956, came into effect. All schemes (with a few exceptions) were required to register as Friendly Societies before they could operate. The controls applied by this Act were primarily financial in nature.
The feeling of the Reinach Committee (1962) was that although the registration of schemes would lead to greater stability, more comprehensive legislation would be required to control all other aspects of medical insurance. A consequence of the lack of legislation was that until the late 1960s no uniformity would exist within private sector healthcare. Schemes varied significantly in the coverage they offered.
Requests were made to the House of Assembly to set up a countrywide medical scheme in the 1950s to ensure coverage for the entire white population. In 1959 the private sector took the initiative and started the "Plan for Medical Services". The scheme was initiated, administered and controlled by doctors, and used its own schedule of tariffs which were higher than the preferential tariffs applied to other schemes. The plan offered 100 percent benefits for services offered by medical practitioners and hospitals, but excluded dentistry and medicines. Members had no say in the administration or determination of membership fees or benefits.
Some employee organisations advocated a National Health Scheme while others supported a comprehensive state-supported "existence-protection" scheme which included schemes. However, most were not in favour of amalgamation.
By 1960 there were 169 schemes providing cover for 368,890 members and 588,997 dependants. These schemes served the needs of the white middle class, especially those in urban areas. The importance of this type of scheme can be seen in the rapid growth in coverage that this form of scheme provided for the predominantly middle class white population. For whites, over a period of 15 years from 1945 to 1960, coverage grew from 48 percent to 80 percent of the eligible population.
By 1960 virtually all whites in South Africa had shifted away from the free services provided by government. On the other hand, 95 percent of non-whites were reliant on public sector services, which were largely free. By this time membership of medical schemes had effectively become mandatory for whites due to it being a condition of employment and given that virtually all whites were formally employed. Pensioner members of many schemes received the same medical benefits as ordinary members, but free of costs.
In 1960 three types of scheme existed:
Many medical practitioners shifted into sick and benefit funds due to the large number of patients they were able to access in this way. However, a significant number of medical practitioners also provided full-time and/or part-time health services according to Government or provincial tariffs.
The Advisory Council for Medical Schemes, and virtually all schemes, were of the view that there should be mandatory membership of medical schemes. The basis of the view was that this would ensure the effective spread of risk by admitting the ill and old, as well as the young and healthy, which would result in schemes becoming increasingly viable.
The Reinach Committee, however, did not recommend mandatory insurance on the basis that "mandatory membership by means of legislation was not necessary because most existing schemes had, on their own initiative, moved to mandatory membership." Although it was noted by the Reinach Committee that 55 schemes offered additional benefits such as sick leave payments, mortality benefits, funeral costs and disability insurance, it was felt that medical cover should be dealt with separately.
The Snyman Commission, which incorporated the recommendations of the Reinach Committee, reported in 1962. Some of the important comments and recommendations were:
These recommendations, and subsequent debate, resulted in the Medical Schemes Act, No. 72 of 1967.
The intentions of the Medical Schemes Act, No. 72 of 1967 ("the 1967 Act") were (Hansard, 1967):
The initial Medical Schemes Act resulted in the creation of two important bodies. The first was the Central Council for Medical Schemes, the functions of which were to:
In addition the Act allowed for the appointment, by the Minister of Health, of a Registrar of Medical Schemes who would perform the duties assigned to the position by the Minister or the Secretary for Health.(Original Medical Schemes Act, No. 72 of 1967).
Until this time, much emphasis had been placed on the regulation of tariffs set with the medical profession. The setting of medical fees between medical schemes and the medical profession was always a problem and a source of conflict. The Medical Association often objected to the fees that were set and the arbitration mechanism. This resulted in many doctors choosing to opt out of the tariff of fees system. If a medical practitioner was contracted in, then payment of the account was guaranteed by law. This provided an incentive for doctors to remain contracted in.
In order to resolve this conflict, a Remuneration Committee was set up in terms of the Amendment Act, No. 95 of 1969, to investigate the tariff of fees at least every two years. The objective of this amendment was to improve the arbitration mechanism such that disputes would not result in further doctors choosing to opt out of the tariff of fees system which was regarded as damaging to doctor/patient relationships.
However, the medical profession eventually regarded the Remuneration Committee in a negative light. Allegations were made that the Act was being used to control the medical profession and that the inflexible provisions relating to the Remuneration Committee were financially prejudicial to medical practitioners and dentists. By 1978 the Dental Society and the Medical Association indicated that they were no longer prepared to participate in the activities of the Remuneration Committee. Consideration had been given to regulating against the free choice of doctors to contract out. However, publication of draft legislation to this effect resulted in a further 1,600 medical practitioners deciding to contract out. By this time 3,941 out of a total of around 14,000 medical practitioners had already contracted out.
As a consequence of these conflicts, the Amendment Act, No. 51 of 1978, abolished the Remuneration Committee and the Commission that made recommendations to the Council on fees. Provision was made for the Medical and Dental Council to determine fees. This was allowed on condition that it prevent further contracting out. If not successful the Minister would step in to regulate the ability of the medical profession to contract out.
The Amendment Act, No. 42 of 1980, made provision for contracted in doctors to send accounts directly to medical schemes. This issue had been a constant source of conflict between medical practitioners and government. The previous dispensation only allowed accounts to be sent to patients who had to pass them on to the medical scheme. Medical practitioners argued that this caused extensive delays and reduced the benefit for contracted-in doctors of guaranteed payment.
However, the Browne Commission (1986) recommended very strongly in its interim report that the provision allowing direct payment be scrapped and that the doctor send the first and second account to the patient and only the third directly to the medical scheme. Upon receipt of the account, the scheme was required by law to pay within six weeks.
The Amendment Act, No. 59 of 1984, effectively eliminated the principle of contracting-in and contracting-out. Any profession or supplier of a service was allowed to determine its own tariffs through their respective statutory control bodies. The Representative Association of Medical Schemes (RAMS) was allowed to determine a scale of fees after consultation with representatives of suppliers of services. If a service supplier were to charge fees equal to or less than the fees indicated on the scale of benefits, the medical scheme was required to pay the supplier of the service directly, provided the scheme offered that benefit.
By 1980 it began to be recognised that there were too many medical schemes with a consequent inadequate spread of risk.
The amendments to the Medical Schemes Act in the Amendment Act, No. 59 of 1984, had the following objectives:
The prevention of a "socialised health system" became a recurrent theme in many parliamentary debates over amendments to the Act toward the end of the 1970s and for most of the 1980s. The extension of the private sector was seen as an important mechanism for preventing the government from having to take on any direct additional burdens with respect to healthcare. By this stage government still regulated the minimum benefits which all schemes were required to provide.
The Browne Commission, which reported in 1986, developed a free-market theme where it saw the public interest served through the gradual privatisation of the public health service. This was followed by a White Paper on the Commission which largely accepted its recommendations, and set the scene for the Amendment Act of 1988.
The key recommendations accepted by the government were:
Key recommendations not accepted by government were:
The Browne Commission made various suggestions supporting the application of risk-rating and experience-rating within the Medical Schemes Act :
"Greater flexibility in contribution rate determination should be allowed, enabling schemes to charge different contribution rates for different classes of risk. Provision could also be made for allowing different levels of benefit to be chosen by groups or individuals to satisfy their needs. This will encourage merging of small schemes with larger ones, resulting in increased administrative efficiency. In some cases significant cost savings could be achieved if the member paid small claims himself and was only allowed to claim from the scheme after a specific amount had been paid by himself."
The Browne Commission supported a "free-market" approach to health service provision in South Africa, with the public sector only taking responsibility for indigent patients. It supported the development of health insurance as a complementary form of private health cover, as well as the development of group-related underwriting, i.e. risk-rating. However, it also supported the extension of compulsory medical aid cover through employers although no concrete recommendations were made in this regard.
Measures to curb provider induced cost/expenditure increases were very soft with no concrete measures recommended. Recommendations concerning the introduction of risk-rating were seen as a measure to encourage the merging of smaller into larger schemes.
The Commission regarded risk-rating as having the potential to achieve significant cost saving through making the consumer bear the cost of low-cost high-frequency claims (general practitioner visits). Although these recommendations were apparently not accepted in the White Paper, they were nevertheless introduced in 1989 amendments to regulation.
Prior to 1989, a medical scheme registered under the Act was only entitled to vary the rate of members’ contributions based on their income and their number of dependants. In 1989 a significant modification to the environment was introduced in the form of a change to Regulation 8 of the Medical Schemes Act.
According to the modified regulation, a member’s contributions could be based on: number of dependants; income level; age; geographic area; actual claims experience; extent of cover provided; period of membership; and size of group to which member belongs.
This regulation allowed medical schemes to introduce risk-rating into the management of medical schemes, i.e. schemes were free to eliminate existing cross-subsidies within schemes. Although this was of little immediate significance to employer-based medical schemes, open schemes were affected.
The rationale for the change in direction in thinking was clear : the authorities regarded moral hazard on the part of the consumer as the most important variable in achieving cost-containment. In addition the insurance industry was beginning to perpetuate the view that cross-subsidies within health insurance are unfair.
The Amendment Act, No. 23 of 1993. No Act in 1994 to the Medical Schemes Act introduced further far-reaching changes in legislation. Statutory guaranteed minimum benefits and guaranteed payment for claims were removed from the Act. Schemes would be able to exclude or limit cover for procedures, and risk-rate to a greater extent. However, the Act also gave medical schemes the ability to directly supply healthcare services for members. In essence medical schemes were allowed to own and run clinics and hospitals, employ doctors, nurses, physiotherapists and pharmacists.
Two alternative tendencies were being permitted by the regulatory structure. The first offered medical schemes, through their administrators, the opportunity to compete with insurance products on the basis of risk-rating. Here cost containment occurs through attempting to control consumer behaviour. The second allowed schemes the opportunity to contain costs in the longer term through gaining greater control over the supply of medical services.
An amendment was also introduced allowing schemes to "provide additional cover for members by way of insurance, reinsurance or in any other manner whatsoever or, subject to the provisions of any law relating to insurance, underwrite or provide for such cover". (20B(5)(d). The consequence of this amendment may have been that insurance products got channelled through medical schemes acting as fronts for insurance companies and removing their reserves as profits.
The history of the medical schemes movement and its regulation, shows a drift from solidarity principles which defined the original schemes, to individualising health cover. To some extent this drift was slowed due to the predominance of employer-based schemes which indirectly provided compulsory membership on all employees above a particular income level. Where schemes were able to protect their membership base in this way, insurance products lacked influence. However, at no stage in this development had expenditure trends shown any abatement. From 1989 real per capita expenditure grows more steeply than during the community rated period, while beneficiary increases slow down. The slow-down in beneficiary growth is related to contributions growing faster than real incomes. (Figure 2.2).
Figure 2.2: Registered medical schemes: Per capita real expenditure and changes in beneficiaries
Source: Council for Medical Schemes, Compiled by the Centre for Actuarial Research, UCT
In 1994 the Melamet Commission reported and recommended further deregulation on the basis that insurance products represented the best way of providing health cover. It also recommended that all health cover be governed by a single Act, and that the remaining legislation preventing insurance products from being registered as medical schemes be removed. These recommendations, if implemented, would represent the final stage of a shift from medical schemes to insurance as a way of providing health cover within the private sector.
The philosophy supporting this trend suggested that there was no market failure within the healthcare market, except that resulting from moral hazard on the part of the consumer of healthcare. It recognised no strong requirement for an agency function on the part of the third-party payer, and regarded market forces as the primary factor that would achieve a socially desirable outcome.
The trends that emerged from the 1993 deregulation, however, do not support these views. After 1993 a significant shift occurred within the medical schemes environment, with de-facto for-profit open schemes (medical schemes operating as conduits for insurance companies) strongly incentivising broker organisations to cannibalise restricted membership schemes. From 1993 to 1999 the percentage of people covered in open schemes changed from 49 percent to 71 percent. (Figure 2.3). At the same time substantial increases in administration and other non-medical expenditure begin to occur. Whereas in 1992 non-medical expenditure averaged less than 6 percent of scheme Gross Contribution Income (GCI), by 2000 it grew to more than 13 percent of GCI. (See figure 2.4). From 1992 to 1999 (8 years) there was a 243.5 percent real increase in non-health expenditure with only a 6.5 percent increase in beneficiaries.
Figure 2.3: Medical Scheme Beneficiary Changes for Open and Closed Medical Schemes, 1990 to 1999
Source: Council for Medical Schemes
Figure 2.4: Medical Scheme Beneficiary Changes for Open and Closed Medical Schemes, 1990 to 1999
Source: Council for Medical Schemes
The additional non-medical expenditure emerging within the medical schemes environment apparently reflect profit-taking from schemes (via reinsurance and higher administration fees) and very high and hidden commissions paid by administrators to broker organisations. Whereas in the past higher medical costs caused the increasing costs for schemes, from 1993 the ability of "commercial" open schemes to charge higher tariffs within what appears to be a largely price inflexible environment resulted in an additional layer of cost added to scheme contributions.
Overall, however, during this period benefits declined and the older and sicker membership were excluded from cover to a greater extent. By 1999 no open scheme was permitting anyone over the age of 55 to join as an individual member. Virtually all open schemes applied life-time exclusions for pre-existing conditions, and age-rated and/or experience rated their membership without restriction. As such, by 1999 the majority of medical scheme membership were in an environment which excluded vulnerable groups from cover (e.g. the old and those with chronic conditions), where medical costs continued to rise (due to the retention of fee-for-service reimbursement) and where non-medical costs were driven up (through profit taking and hidden commission costs).
Figure 2.5: Non-medical Cost Trends from 1993 to 2000 (Rands)
Source: Council for Medical Schemes
The net result of the 1989 and 1993 deregulation was a significant increase in cost, a general reduction in benefits within schemes, and the virtual elimination of cover for vulnerable groups within the open scheme environment. These trends are consistent with international experience with voluntary health insurance markets.
The direction recommended by the Melamet Commission was rejected by the new Government and replaced by a strategic direction which emerged from the 1995 National Health Insurance Committee of Inquiry. Although the focus of this report was on a system of National Health Insurance, medical scheme reform featured prominently.
Policy directions that were supported by the analysis adhered to the following four objectives:
The overall system should create a rational system of risk-sharing between as large a group as possible and, in the longer-term, ensure the availability of a minimum level of cover for all within the public and private sectors.
The recommendations flowing from the analysis of industry issues were largely incorporated in the Medical Schemes Act, No. 131 of 1998. The 1998 Act came into effect on February 1999 and key Regulations under the Act came into effect on 1 January 2000.
One year after the introduction of the reforms real per capita medical costs showed virtually no real increase (0.5 percent), while non-medical costs increased by more than inflation (4 percent). Thus the trend in increased non-medical costs continued as before. The effect of the new reforms on medical cost increases therefore appears to be deflationary. However, savings on medical costs were not passed on to members. Increased profit taking, through administration fees and quota share reinsurance (used to move the underwriting surplus of a scheme to the administrator as profit), saw virtually all the improvements from cost-containment disappear as gains to intermediaries (administrators, brokers, managed care companies). (See figure 2.6).
Figure 2.6: Medical Scheme Real Cost per Beneficiary and Benefit Trends, 1993 to 2000
Source: Council for Medical Schemes
(Note: During 2000 certain previously exempted schemes were required to register as medical schemes. This amounted to an additional 500,000 beneficiaries becoming part of the reporting system affecting medical schemes. These were mostly closed schemes covering certain public sector groups or large parastatals, e.g. Transmed, Medcor, etc.. The analysis in this section excluded these new groups to allow comparison of comparable data through time.)
Until 1994 the health system was splitting markedly into a public sector focused exclusively on the indigent or those without medical scheme cover and private sector focused on the young and healthy employed population. The trends were well established by 1994 with a need for substantial intervention to change direction.
The period of medical scheme risk-rating indicates suggests that underlying medical cost increases were not affected by cost-shifting onto individuals. In fact the reverse is true. Increased underwriting and risk-rating increased the growth in private expenditure, slowing down the growth in medical scheme membership.
The views of a range of stakeholders were obtained on various aspects of the health system and possibility of some form of mandatory contribution for health cover. On the whole dissatisfaction was expressed on the current public health service. Many groups, including employers, supported the strengthening of the public sector, particularly access to hospital services, as important for the future. A willingness to contribute over-and-above existing contributions was expressed by many, but only on condition an improvement in the public service occurred first. Many supported the idea of some form of enhanced amenity within the public sector for contributors. There was however limited support for enhanced services offered on a differential basis.
Many groups are willing to pay a small fee (pre-paid) provided the public sector improves its services first. Opposition to payment of such a fee did not emanate from potential contributors, but rather from the national Treasury (blanket opposition to earmarked taxes) and certain (but not all) trade unions (near-poor should not cross-subsidise the very poor). The latter trade unions supported a universal earmarked tax provided they could choose to fund these services in the private sector. Other trade unions supported the idea of a contribution provided they received something in return. They were supportive of these services being in the public sector. Evidence of the functioning and benefits of a low cost contributory system is provided by the clothing workers.
A willingness and ability to pay survey (W&A study) conducted by the Department of Health sampled the views of around 1,000 individuals of varying incomes (figure 3.1) on various aspects of their willingness and ability to contribute to a social health insurance fund focusing on public hospital services.
Figure 3.1: Willingness and Ability to Pay Study – Distribution of Respondents by Income
Source: Department of Health, August 2001.
Over 94 percent of respondents in the W&A study felt it was appropriate to pay for public hospital services. Up to 45 percent felt that public hospital services would improve if there were some form of additional payment. Another 36 percent felt people should pay for what they use. (Table 3.1).
Reason |
Resp |
% |
Public Hospitals provide value for money |
40 |
4.7 |
I think people should pay for what they use |
305 |
36.0 |
Services will improve at public hospitals if we all pay something |
382 |
45.1 |
I believe in Masakhane (civic duty) so it is our duty to pay |
77 |
9.1 |
You have to pay otherwise they send you a lawyers letter demanding payment. |
14 |
1.7 |
Other (please specify) |
30 |
3.5 |
Total |
848 |
100.0 |
Source: Department of Health, August 2001.
Interviewees and stakeholders were not able to give a clear comment on this issue as no contribution level was put to them. However, it was felt that if a pre-paid contributory system were created they would probably voluntarily pay if they had access to improved services.
The W&A study found that 77 percent of respondents were able to pay when last receiving care at a public hospital. Given that 61 percent of respondents come from the income groups R0-R2,000 per month, this indicates that a significant number of low-income groups are able to pay at least something toward their health care.
Able To Pay |
Resp |
% |
Yes |
608 |
76.9 |
No |
161 |
20.4 |
Cant Remember |
22 |
2.8 |
Total |
791 |
100.0 |
Source: Department of Health, August 2001.
The W&A study suggests that 73 percent of respondents are willing to use and pay for public hospitals.
Table 3.3: Willingness and ability to pay study: Willingness to use and pay for public hospital care
Opinion |
Resp |
% |
Willing to use Public Hospital, not willing to pay |
56 |
5.6 |
Not willing to use public hospitals |
166 |
16.5 |
Willing to use Public Hospitals, willing to pay |
732 |
72.6 |
Don’t Know |
55 |
5.5 |
Source: Department of Health, August 2001.
There were differences among government officials as to how they would understand an earmarked tax for health services. The national Treasury saw these as part of the general tax system, and therefore any earmarked tax will have to be off-set by a reduction of budget. Health officials saw an earmarked tax as replacing some tax funding, but also providing new funding. The rationale for new funding arises from the following:
The W&A study found that a significant proportion of the population (90 percent) interviewed were willing to accept a compulsory system of public hospital cover if services were improved. (Table 3.4).
|
No |
Yes |
Don’t Know |
|||||
|
Resp |
% |
Resp |
% |
Resp |
% |
||
Support if the public hospitals stay as they are |
903 |
89.5 |
96 |
9.5 |
10 |
1.0 |
||
Support if public hospitals are improved |
85 |
8.4 |
908 |
90.0 |
16 |
1.6 |
||
Support if scheme members get differential treatment |
402 |
39.8 |
567 |
56.2 |
40 |
3.1 |
Source: Department of Health, August 2001.
If no services were improved only 9.51 percent were willing to contribute. The introduction of mandatory cover of any form must involve a discernable improvement in hospital services. The results are similar where a payroll deduction is proposed (table 3.5).
|
No |
Yes |
Don’t Know |
|||||
|
Resp |
% |
Resp |
% |
Resp |
% |
||
Support if the public hospitals stay as they are |
878 |
87.0 |
110 |
10.9 |
21 |
2.1 |
||
Support if public hospitals are improved |
104 |
10.3 |
874 |
86.6 |
31 |
3.1 |
||
Support if scheme members get differential treatment |
418 |
41.4 |
533 |
52.8 |
58 |
5.8 |
Source: Department of Health, August 2001.
Overall 55.9 percent of respondents in the W&A study felt that members of medical schemes should be excluded from any mandatory payroll deduction versus 34.8 percent who thought they should. (Table 3.6).
|
No |
Yes |
Don’t Know |
|||
|
Resp |
% |
Resp |
% |
Resp |
% |
Support for payroll deduction with exemptions for Medical Aid members |
351 |
34.8 |
564 |
55.9 |
94 |
9.3 |
Source: Department of Health, August 2001.
Funding of the Public Sector:
Apart from the national Treasury, there is a general consensus (employers, trade unions and workers) that the public sector is under-funded which encourages all who can pay to use private sector services.
Tiering (differential amenities or "buy-up options in public sector hospitals):
Although there was some variation in the responses from trade union members, there was a large degree of support for differential amenities. There was however no support for differential services. Table 3.7 reports the responses on the W&A study toward differential amenities.
|
Strongly Agree |
Agree |
Unsure |
Disagree |
Strongly Disagree |
||||||||
|
Resp |
% |
Resp |
% |
Resp |
% |
Resp |
% |
Resp |
% |
|||
Payers should be treated First |
185 |
18.3 |
204 |
20.2 |
47 |
4.7 |
422 |
41.8 |
151 |
15.0 |
|||
Payers should get nicer Wards |
163 |
16.2 |
287 |
28.4 |
40 |
4.0 |
424 |
42.0 |
95 |
9.4 |
|||
Payers should be able to make appointments |
1 |
0.1 |
218 |
21.6 |
365 |
36.2 |
53 |
5.3 |
296 |
29.3 |
|||
Payers should have TV's in their rooms |
133 |
13.2 |
316 |
31.3 |
102 |
10.1 |
369 |
36.6 |
89 |
8.8 |
|||
Payers and non payers should get same care |
358 |
35.5 |
294 |
29.1 |
109 |
10.8 |
162 |
16.1 |
86 |
8.5 |
|||
Won't use public hospitals regardless of improvements |
45 |
4.5 |
33 |
3.3 |
92 |
9.1 |
414 |
41.0 |
425 |
42.1 |
Source: Department of Health, August 2001.
Employers, union representatives and workers indicated that reasonable improvements in the public sector will probably result in their shifting away from expensive private cover. Some unions were adamant that improvements to the public system should precede any introduction of a contributory system. Key problems raised were:
Quite a few respondents (including employers and trade unions) raised the issue of a one off injection of funds to provide a face-lift to public sector services to initiate a contributory system.
There was universal support for a phased approach to implementation with an initial focus on creating a voluntary contributory environment. This could either be via a voluntary SHI or a low cost medical scheme. A few supported the idea that the process should begin with public sector employees.
The inherent logic of revenue retention at the facility level was accepted by all groups, including the national Treasury. However, there was uncertainty amongst other government officials concerning the true position of the Treasury Department.
Employers felt that contributions and not benefits should be defined. Certain trade unions felt they should be allowed to opt for private primary care and a contribution toward public hospital service. Certain trade unions did not want any restriction on their choice of service provider.
There is an understandable variation in what different stakeholders understand by social health insurance. There nevertheless appears to be a fair degree of consistency in how stakeholders interpret their preferences in relation to a number of alternative options.
The following arise from the results:
The goal of equity within the health system is regarded as fundamental and recognised universally as a cornerstone of health policy. However, equity needs to be clearly defined in order for it to have practical value in the determination of health policy.
The distribution of health resources within South Africa, both within the public sector and between the public and private sectors, demonstrate large variations that could be regarded as inequitable. Government policy has to determine when this variation acceptable and when unacceptable.
This section reviews the issue of equity and how an understanding of it can be used to underpin Government policy from a practical point of view.
Amongst the countries of Western Europe there is general agreement that the provision of health care services cannot be left to the unregulated market. If it were, health care would become very expensive resulting in significant and unacceptable gaps in insurance coverage. (Able Smith, 1992, p.217).
Able-Smith (1992, p.218) lists the following specific issues upon which there is consensus amongst the countries of Western Europe:
According to Roemer (1980, p.190), in spite of the counteracting pressures of an entrepreneurial ideology in all countries, the long-term trend appears to be in the direction of achieving greater equity through rational organisation. In other words, the entrepreneurial pressures for regarding health care as a commodity, i.e. a consumer good to be bought and sold in the market place, are gradually being overcome by the social pressures for the distribution of services according to concepts of equity, that is, according to each person’s human needs.
All 32-member countries in the World Health Organisation (WHO, 1985) European Region adopted a common health policy in 1980, followed by unanimous agreement on 38 regional targets in 1984. The first of the targets is concerned with equity:
"By the year 2000, the actual differences in health status between countries and between groups within countries should be reduced by at least 25 percent, by improving the level of health of disadvantaged nations and groups."
Whitehead (1992) produced a discussion paper on the "concepts of equity and health" as part of the programme on Equity in Health in WHO’s Regional Office for Europe. The paper represents an attempt to create a practical tool for policy-makers through distilling the collective wisdom obtained from the Equity in Health programme. The intention was to establish a working definition of equity as understood within the context of WHO’s Health for All Policy. The conclusions of this paper and the inter-disciplinary advisory group that reviewed the initial draft are summarised below.
According to Whitehead, the term "inequity" as used in WHO documents refers to differences in health that are not only unnecessary and unavoidable, but in addition, are considered unfair and unjust. An important criterion used to determine which situations are unfair is the degree of choice involved. Where people have little or no choice of living or working conditions, the resulting health differences are more likely to be considered unjust than those resulting from health risks that were chosen voluntarily. The sense of injustice increases for groups where disadvantages cluster together and reinforce each other, making them very vulnerable to ill-health. From this view Whitehead arrives at the following working definition:
Equity in health implies ideally everyone should have a fair opportunity to attain their full health potential and, more pragmatically, that none should be disadvantaged from achieving this potential, if it can be avoided.
Based on this definition, according to Whitehead, the aim of policy for equity and health is not to eliminate all health differences so that everyone has the same level and quantity of health, but rather to reduce or eliminate those which result from factors that are considered to be both avoidable and unfair. Consequently, equity is concerned with creating equal opportunities for health, and with bringing health differentials down to the lowest level possible.
Whitehead criticises some potential definitions of equity on the basis that they do not satisfy a common sense understanding of equity. For example health services could be based on equal per capita expenditure. However, if this objective were achieved it would make no allowance for differential needs for care in different age and social groups in each region. Consequently such a definition could not be considered equitable. At the other extreme equity could be defined as the achievement of equal health status between all communities, age groups and social groups. This view is criticised as variations in health care services are only one of the many factors contributing to health differences between communities.
Based on the earlier working definition, and accounting for the short-comings of alternative definitions, the following definition is adopted by Whitehead:
The emerging consensus is for a substantial quantity of health care services to be provided on an equitable basis. However, all systems face a budget constraint. Constant improvements in medical technology may effectively increase the needs that can be satisfied using health care. The introduction of new technology often adds costs to a health system without making a major contribution to health outcomes. Furthermore, new interventions, being expensive, cannot be afforded for an entire population, especially in developing countries. In developing countries, given their budget constraint, this often obstructs the development of priority services, as the new technology drains financial resources, which could contribute to a deterioration in the population’s health.
Mahler (1975) draws attention to the increasing disparity between the tendency to expand health care coverage, often to universal access, and the restrictive application of high technologies to specialised curative services. In other words, the higher the peak becomes, the more difficult it is to provide a universal system. Furthermore, the creation of a peak directed towards the few is selected not so much by social class or wealth, but by medical technology itself. (Kleckowski, 1980, p.101).
Consequently, the achievement of equity within the context of a budget constraint implies the conscious application of a limit on the services that are made available on an equitable basis. In addition, the introduction of new services would have to be on the basis that they lower the costs and improve the outcomes of existing interventions. As the wealth of a country increases, it will become feasible to increase the amount of services provided on an equitable basis.
Creating a practical definition of equity for use in developing policy in South Africa has to focus on defining both principles and mechanisms for achieving the goal of equity taking account of substantial disparities in income and relative needs and demands for health care. On the one hand the system cannot unfairly deny services from groups unable to afford the cost of health care. On the other, certain services cannot be denied to groups who are able and willing to pay for them.
The following are therefore a set of guidelines for the purposes of this report that can aid in establishing a useful definition:
The overall level of funding going to health care is determined partially by government policy and partly by voluntary contributions. Where funding is either tax-based or mandatory, services are largely shared. Where voluntary contributions occur services are provided on an exclusive basis. The overall level of funding within tax-based or mandatory systems can have a significant effect on whether services are accessed on a shared or on an exclusive basis. If funding levels are too low, more services will be available in the exclusive rather than the shared public system. Apart from the equity considerations, this could also result in significant organisational inefficiencies and additional costs.
Government can impact on this area by:
There is no apparent strategic focus by Government which attempts to understand the implications of higher or lower levels of funding for the public system.
Income-based cross-subsidies are generally achieved through the tax system, or mandating insurance in a manner that closely follows normal tax principles. In essence people pay according to their means, but receive benefits according to their needs. The following instruments are important within the South African context:
The redesign of the income tax subsidy represents the only viable short- to medium-term measure for achieving minimum required income-based cross-subsidies across the entire health system, both public and private.
Health related cross-subsidies are achieved differently in the public sector settings where services are subject to physical planning process, and insurance environments where access is entitlement-based.
The objective of the public sector is to achieve an equitable distribution of services on a regional basis within budget constraints.
Within insurance-based systems there is a need to protect cross-subsidies from those who are healthier to those who are sicker to prevent their systematic exclusion from cover. Health funds (medical schemes) must also be protected from the consequences of having disproportionately sicker groups of people where this arises.
The public sector has the following instruments:
Within the contributory environments the following instruments are available:
In order for equity to have practical meaning it must be expressed in terms of actual services or conditions which must be provided on an equitable basis. Policy instruments may differ between public non-contributory and private sector settings. Nevertheless, the principles remain the same.
The public sector will have to define minimum services primarily through the establishment of a minimum basic package of services. This can be expressed practically in terms of policy through the establishment of service norms and standards.
The Medical Schemes Act No.131 of 1998 introduced prescribed minimum benefits as a policy instrument for defining minimum allowable levels of medical scheme cover. This involves a positive list of conditions and treatments.
There is no coherent approach as yet to defining the basic essential minimum services between the public and private sectors. Ultimately both systems will need to provide a minimum core set of services which are consistent with one another. Once rationally defined, Government will have to establish clear mechanisms for ensuring that the desired entitlements can be met in an equitable manner in both settings.
Given that South Africa is a developing country, it has to confront great income disparities, and resource constraints. The set of required instruments for achieving a coherent and integrated system of subsidies needs to cater for complex relationships between and within the public and private sector settings. The nature of health care provision is such that it naturally diverges from equity irrespective of whether publicly or privately funded.
Although a proportion of revenue raised for government as a whole is not based on general taxes, no consistent set of principles has been established in South Africa as to how these funds should be raised, managed, and related to general tax revenue. There is furthermore no consistent set of principles underlying the manner in which funds are subject to provincial discretion.
The principles underlying the allocation of the budget arising from general tax revenue as well as that arising from alternative sources is consequently reviewed to determine appropriate principles to guide policy with respect to existing and potential health system environments.
Roughly 80 percent of the health budget is allocated by provincial governments from an unconditional grant allocated from central government. The other 20 percent is a conditional allocation from central government to cater for the "spill-over" problem resulting from the concentration of secondary, tertiary and teaching services within only a few provinces.
The size of the spill-over effect is a significant proportion of the entire budget. It would be expected that a spill-lover problem should be a fairly small percentage of the total budget. The larger the spill-over the more consideration needs to be given to a consolidation of the jurisdictional reach of the health budget.
Gildenhuys (1993, pp.194-196) comments as follows:
Despite the allocation of an equitable share of the unconditional grant to all provinces equity has not been achieved in the provision of health services. Provincial allocations also fail to keep pace with population increases. The budget allocations to health departments show no consistent correlation with underlying population and equity considerations both of which are central to health policy.
Consistent with theoretical arguments, in most countries the budget for redistributive public services are more centralized than for all public services. There has been a trend since the 1930s for central governments to take additional responsibility for redistributive programmes and to expand their scope and magnitude, with Australia, Canada, Denmark, England, and Sweden all joining the United States as illustrations. (Fisher, 1996, p.591).
Responsibility for social security, welfare, and housing is quite centralized, with federal expenditures accounting for at least two thirds of the total in the four major federal systems (Australia, Canada, Germany, and the United States). In all cases, federal expenditures are a greater share of the total for the broad category of social security, welfare and housing than they are for government purchases in general. Education expenditures are the least centralized of the group, although it is much more centralized in Australia than for the other three countries. (Fisher, 1996,p.592).
The ability provincial governments have to undermine allocations to health services arising either from conditional grants or user fees has been identified by the national Department of Health as a problem. Additional revenue from these sources, which should result in a net increase in revenue over budget, are offset through reductions in the general budget allocations at a provincial level.
To the extent that these reductions are consistent with national health policy no problem arises. However, in reaching these allocational decisions provinces are not required to defer to national health policy. This results in a misallocation of resources from what would occur if national policy were to prevail.
Based on the information reviewed strong consideration needs to be given to a greater degree of centralisation of the health budget. No evidence or rationale appears to exist suggesting the budgets be programmed at a central level. However, the ring-fencing of a significant portion of the provincial allocations after determination at a national level appears consistent with both international practice and the current and future needs of the health system.
User fees raised by public hospitals are currently not differentiated from general tax revenue. This is inconsistent with the normal treatment of user charges. Typically where user fees have a strong cost-recovery purpose, they are recovered and utilised at source and are not regarded as part of the redistributable income of government. The non-redistributable nature of user charges relates to fact that general taxes have not made financial provision for the service being sold. As such, fee recovery must cover the costs.
The following are recommendations regarding the principles that should be applied to user charges:
Earmarked taxes are important with respect to proposals for a mandatory contributory environment based on a specific contribution to be made to a public fund for the reimbursement of benefits obtained from public hospitals. Although such a proposal clearly does not take the form of general tax it nevertheless has many of the characteristics of a tax. This is related to two key features:
The justification for an earmarked tax often lies in the application of the exclusion and benefit principles. In exchange for payment, contributors gain access to the services so funded. Non-contributors would be excluded. The application of the exclusion and benefit principles in conjunction with an earmarked tax enhances the willingness-to-pay and improves tax compliance. However, where a new tax is introduced which replaces the funding from a general tax, an offset from general revenues could be considered. Any net improvement in financing would in all circumstances be an explicit policy decision of national Government.
Principles that should be applied with respect to earmarked taxes are:
Various alternative directions for reform of the public sector financing framework are possible. For simplicity they are broken down into four types that broadly reflect directions that can be taken.
If programmed at national level the health budget will be more easily protected from inappropriate cuts and there will be more influence over provincial administrations. However, the over-centralised approach to programming would diminish some of the effective control over policy implementation and resource allocation. This option is generally weak in respect of decentralised service delivery, although it is possible that this could be overcome. On the whole this option is compatible with both the reforms to the medical schemes environment and any potential future social health insurance option: the centralised allocation of health funds allow a single administrative system for allocating the budget; protect the base-line allocations the health system from being undermined by provincial treasuries; and compatibility between the allocation of funds in respect of the contributory and non-contributory environment can be achieved.
With the budget ring-fenced but not programmed a high degree of provincial discretion is permitted within any nationally determined policy framework. Operational decisions, including the programming of budgets are fully dependant on provincial, regional and local governments. This approach is compatible with decentralised models of service delivery and greater autonomy at facility level. It is also compatible with the medical schemes reforms and any potential social health insurance approach directed at public hospitals. As with option 1 the development of a single administrative framework for allocating general budget and social health insurance. It also protects the base-line budgets from being undermined by provincial treasuries when increased revenue occurs from medical schemes.
Where an attempt to ring-fence provincial allocations occurs through the use of national norms and standards a weak form of option 2 results. It does become possible for a national policy framework to be implemented, but its potential effectiveness as a lever is subject to certain difficulties. These relate to changes in norms over time (which now become budget decisions) and enforcement. The risk of unfunded mandates is a potential but avoidable possibility. Compatibility with a policy framework incorporating the contributory system the only key objective achieved is the protection of the base-line allocation to the health system. Options for a unified allocation mechanism for both general tax revenue and social health insurance contributions are not possible.
This option largely reflects the status quo. A key defect of this option relates to the need for ten health departments to separately motivate for budget allocations. The resulting consolidated allocation is less a result of national policy than it is of the adding up of ten individual bargaining processes tenuously linked to any national framework.
When provinces have full discretion over the allocation of budget they have virtually full discretion over health policy in their region. Links to all areas relating to a national policy framework are weak as there are no associated financial flows. This budget framework shows little compatibility with either existing or future policy environments.
Table 5.1: Evaluation of Alternative Options for Allocating the Health Budget
Budget programmed at national level |
Budget ring-fenced (but not programmed) at national level |
Provincial allocations subject to national norms and standards |
Provincial allocations with full discretion |
|
Ability to prioritise national resources toward health care |
High |
High |
Medium |
Weak |
National influence over provincial health policy |
Medium/High |
High |
Medium |
Weak |
Inter- provincial resource allocation |
Medium/High |
High |
Medium |
Weak |
Consistency with decentralised service delivery options |
Weak |
High |
High |
High |
Compatibility with reforms to the voluntary contributory environment (medical schemes) |
High |
High |
Medium/Weak |
Weak |
Compatibility with the introduction of social health insurance directed at public hospitals |
High |
High |
Medium/Weak |
Weak |
Overall the option 2 is most consistent with both current and future policy directions of the health system. It is the least disruptive to the current organisational structure and can be introduced in a phased manner. Although there is a need for improved capacity at the national Department of Health, the focus is on strategic allocations linked to policy rather than interference in operational matters. As such the short-term need does not place an onerous burden on the national department. In the medium- to long-term the national Department of Health would have to develop a more coherent institutional framework around provincial financing linked to strategic policy objectives and any conditional allocations linked to public sector social health insurance options.
Option 4 reflects the status quo and is incompatible with both current and future policy directions. It is the weakest of the four approaches. Without significant changes to the current framework, linking provincial policy to national policy in key areas the public health system will probably diminish in importance over time. Although certain social insurance options will be possible despite these arrangements, i.e. mandating medical scheme cover, low cost private sector facilities will probably develop instead of public sector options. Where public sector services are sold into the contributory environment, differential amenities will inevitably become differential services, as private sector funding will be stable while public sector funding will vary.
It is recommended that option 2, or some variation thereof, be considered in the short- to medium-term. Such an option could be phased over time with the development of other reforms dependant on the restructuring. Although the implementation of this option is an important pre-requisite for social health insurance and related options incorporating the public hospital system, it is just as important for optimising existing policy objectives.
An alternative approach to the full adoption of option 2 is the use of a mix of options 2 and 3.This would involve a reasonable increase in the value of the existing conditional grant going to public hospitals to a level sufficient to achieve base-line budget protection for public hospital services. This would include the use of variable matching conditional grants.
The matching could vary by province depending upon service needs and national policy. Here the Province is required to match a grant allocation with an allocation of their own. Funds would be allocated only if the matching occurred. This approach would prove important when any central allocation occurred from any social health insurance or related fund. Such an approach would allow a single mechanism to be used to allocate both public sector budgets and social health insurance budgets for public hospitals.
The conditional grant system should be combined with the development of a coherent approach to setting minimum norms and standards for provincial health services. Although in these instances no direct control over the budget allocations will exist, provinces will be required to adhere to minimum levels of service delivery. Provinces would nevertheless be free to offer services in excess of the minimum.
Together these approaches should achieve the objectives of recommendation 1 without full ring-fencing at a national level.
According to Price et al (1995), the debate about the tax deduction arose primarily as a consequence of the funding crisis in the public health sector, and perceived inequality between the public and private sectors.
Employees currently contribute a certain portion of their salary to a medical scheme, with employers also making a contribution on their behalf. The Income Tax Act allows the employer’s contribution to be deducted as an expense before tax. On the employee’s side, a deduction is available only where an individuals medical expenses exceed 5 percent of income or R5,000. For pensioners, all medical expenses are tax deductible.
The Melamet Commission wrote that the tax deduction "encourages consumption of health care beyond the point where the costs of obtaining extra cover equate to the value of the marginal benefits received. Price signals are badly muffled. Medical cost inflation is thus encouraged." (Melamet Commission, 1994, p.44).
Price et al (1995) concluded in their evaluation that given "… the scarcity of health care resources in any country, the prime responsibility of government with respect to funding should be to improve the health care of the poorest in society. The very structure of the private health sector in South Africa goes against this principle, since it distributes health care resources predominantly according to ability to pay. The subsidisation of this sector by the government is not consistent with the principles of health care funding by the state. The current specific concessions allowed in South Africa are furthermore inequitable across income groups with high earners receiving a greater subsidy than low earners on medical aid, while self-employed individuals (including the whole informal sector) receive almost no subsidy at all."
A 1995 study (Price et al, 1995) estimated the net impact on the central revenue through the removal of the employer tax deduction. The analysis took account of the various offsetting influences. The study also assessed the extent to which an inflexible demand for medical scheme cover will impact differently on the Central Revenue Fund. The least flexible is 0 percent where the individual reduces private health consumption by the value of the lost subsidy. The assumed marginal tax rate used is 32 percent. Scenario 1 assumed the employer contribution is 50 percent while scenario 2 puts it at 75 percent. The analysis does not include the tax subsidy for out-of-pocket expenses, exempted medical schemes and pensioners. The analysis suggests that the net impact on government revenue of any reduction in the tax subsidy would range from R3,2 billion to R5,9 billion. Given the inelastic demand for medical scheme cover, the true impact could be of the order of R4 to R6 billion based on the extent of the employer subsidy.
Reduced consumption of private medical care |
|||||
100% |
75% |
50% |
25% |
0% |
|
Scenario 1 |
3,284 |
3,443 |
3,602 |
3,760 |
3,919 |
Scenario 2 |
4,927 |
5,166 |
5,403 |
5,641 |
5,880 |
Scenario 1 |
549 |
576 |
603 |
629 |
656 |
Scenario 2 |
824 |
864 |
904 |
944 |
984 |
Based on Price et al, 1995)
A microsimulation run by the National Institute of Economic Planning (NIEP) was performed for the Committee to estimate the total medical deduction allowable under income tax. The value was estimated at R7,9 billion and included both the individual’s contribution as well as the employer contribution. The amount was broken down according to the following family types:
The per capita value of coverage in the public sector ranges from just over R300 (2000 prices) in provinces such as Mpumalanga and Northern Province to around R500 in Gauteng and Western Cape excluding conditional grant allocations. When conditional grants are taken into account, in 2000 public sector per capita expenditure averages just over R700.
According to the evidence the value of tax subsidies in respect of private health care expenses exceed per capita expenditure in the public sector. In certain provinces this amount is significantly less than the estimated R1,127 available as a subsidy in the private sector. In fact the total value of the subsidy is higher than the total budget spent by the Gauteng Health Department, which effectively covers in excess of 7 million people.
The NHI Committee (1995) identified serious problems with the existing tax regime. "The Committee recognises serious inequity and distortions resulting from present tax policies regarding medical scheme contributions. These disproportionately reduce the price of high-cost packages, encouraging inefficient use and allocation of medical resources. In addition, if mandatory cover is extended to all employees, the current tax treatment of contributions would result in decreases in employees’ after tax income, and would affect disproportionately on the self-employed."
Price et al (1995) recommended that tax concession be restructured as follows:
Taking note of its findings and the above recommendations the NHI Committee proposed the following measures:
The existing subsidy framework has to date been considered within a fairly narrow policy framework. Furthermore, the outcomes of the policy have drifted away from the achievement of any rational public policy objectives. It is fairly clear that the subsidy policy has had an impact on the way in which the private health system has evolved. It is just as clear, however, that the concession in its existing form has had little impact on the fundamental problems of the private health system and the health system as a whole. Although it may have initially played an important role in supporting social solidarity goals within the system of private medical scheme cover, these have been substantially eroded. The subsidy in its current form promotes inefficiency and inequity rather than countering these trends.
The problems can be summarised as follows:
Consideration needs to be given to bringing the tax concession policy into a consistent overall strategic health policy framework. This would imply that it ceases to be an implicit policy area within the domain of tax policy. Health care is functionally related to both population and income in a stable way. Revenue insecurity only creates instability in this framework and promotes inefficiency. A restructuring of the tax concession should therefore promote transparency and certainty in revenue flows. It should also comply with public health policy in relation to equity.
A revised strategic framework should take consideration of the following:
Given that certain reforms would need to be phased in and integrated with other reforms sequencing and prioritisation is important. The following lists reforms that could be considered initially and those that would emerge in conjunction with a broader more integrated reform process:
During the 1990s the policy relevance of risk-adjustment mechanisms has increased as many countries seek to make their health insurance markets more competitive and to ensure high risk individuals and groups have access to cover. Countries that have taken this route include Belgium, Columbia, the Czech Republic, Germany, Ireland, Israel, the Netherlands, Poland, Russia, Switzerland and the United States. (van der Venn et al, March 1999).
South Africa is one of the only countries in the world with a community-rated open enrolment environment that lacks a system of risk-equalisation. This lack is however related more to the recent introduction of the introduction of community rating rather than a policy oversight. It is a policy reform therefore that must be placed high on the policy agenda.
As noted earlier in this Report the NHI Committee recommended that a risk-equalisation mechanism be introduced as part of a system requiring the mandatory membership of medical schemes. It was also recommended that medical scheme contributions be income-based, thus resulting in an automatic income-based cross-subsidy, provided a risk-equalisation mechanism was in place. The risk-equalisation mechanism effectively creates a much larger risk pool out of a number of smaller independent risk pools. However, the NHI Committee proposals did not make technical recommendations on how to provide for an income-based cross-subsidy mechanism in the absence of mandating income-based contributions, if this proved not to be feasible in the short-term.
As the medical schemes environment will remain a central feature of the health system, there is a need to ensure that key objectives of a national health system can be realised through the private system. These are:
Whereas tax-based health systems provide very broad risk-sharing and income-based cross-subsidisation, individual medical schemes reduce the risk-pooling effects quite dramatically. The only approach capable of achieving the protection of key cross-subsidies between schemes involves the use of a risk-equalisation fund into which contributions are paid by below average risk schemes and from which funds are paid to above average risk schemes.
In the absence of risk-equalisation, certain schemes will obtain windfall gains from a below average risk pool, creating incentives to risk-select. As risk-selection ultimately results in the systematic exclusion from cover of vulnerable risk groups, this cannot serve the final objectives of the health system.
Risk-equalisation is a mechanism for achieving equity and efficiency in regulated private insurance markets. Its purpose is to prevent competition from occurring on the basis of risk selection. In doing so it serves to foster competition on the basis of healthier criteria such as cost and quality of health care services.
There are a number of risk-equalisation models proposed and operating internationally. Each country has a unique system of delivery and consequently different forms of risk-equalisation are used that suit the country in question. These range from public sector formula-based resource allocation systems to risk-equalisation between competing health funds or insurers.
Within private markets mandatory community rating and open enrolment is usually required to protect cover within voluntary and mandatory contributory environments with multiple funds or insurers. However, these measures are unstable on their own and risk-equalisation is regarded as essential to protect the environment.
Risk-equalisation also become central to any government instituted income-based cross-subsidies. This is either offered as a direct subsidy or through the impact of mandating income-based contributions to health insurers. Which option is preferable would depend on the circumstances prevailing in any particular country.
Risk-equalisation should improve efficiency and reward those with lower costs. To achieve this risk-equalisation models must be based on objective risk factors or diagnostic information, not actual treatment, utilization or expenses incurred.
According to van den Ven et al (March 1999, p.3) risk-adjusted premiums are the norm, not the exception, in competitive markets, and in the absence of regulation, health plans will tend to charge premiums that differ across both observable risk factors and benefit packages designed to attract specific risk types.
"This raised the question: is this fair? … risk-adjustment premiums can easily differ by a factor of ten or more for demographic risk factors such as age, and factors of 100 or more once health status is also taken into account. Almost universally, people agree that premiums which reflect such large differences are not fair, and that cross-subsidies are needed." (van de Ven et al, March 1999, p.3)
Van de Ven et al (March 1999, p.13) raise the following problems with permitting cream skimming in voluntary open health insurance markets.
The larger the predictable profits resulting from cream skimming, the greater the disincentive to for health plans to respond to the preferences of high-risk consumers.
The larger the predictable profits arising from cream skimming, the greater the chance that cream skimming will be more profitable than improving efficiency. At least in the short-run, when a health plan has limited resources available to invest in cost-reducing activities, it may prefer to invest in cream skimming rather than in improving efficiency. Efficient health plans, who do not cream skim applicants, may lose market share to inefficient health plans who do, resulting in a welfare loss to society.
While an individual health plan can gain by cream skimming, for society as a whole, cream skimming gains nothing. Thus any resources used for cream skimming represent a welfare loss to society.
Therefore, according to van de Ven et al (March 1999, p.14) regulations that are intended to increase access to coverage for high-risk individuals may instead induce selection efforts with the following unintended effects:
"Risk-adjustment" can be used to mean different things in different contexts. There is therefore a need for a definition. Van de Ven et al (1999) define risk-adjustment to mean "the use of information to calculate the expected health expenditures of individual consumers over a fixed interval of time (e.g. month, quarter, or year) and set subsidies to consumers or health plans to improve efficiency and equity."
Risk-equalisation is a zero sum game and it is important that stakeholders recognise this: there will be some winners and some losers. As such the initial implementation of a risk-adjustment model needs a carefully planned transition. It is essential that stakeholders have a clear understanding of the objectives and structure of the model.
The criteria for the selection of an appropriate risk-equalisation mechanism from the Briefing Paper on Health Insurance Regulatory Framework in Ireland published by the Department of Health in July 1994 are as follows:
The adjustment procedure should also be reliable (minimum error) and not vulnerable to manipulation. It should further not compromise the right for privacy of insurers and the insureds.
In developing or implementing risk-adjustment it must be decided how the information will be collected and used. Payments that are calculated at the beginning of the prediction period will use only prior information. Prospective systems estimate risk premiums for each insurer’s portfolio, based on risk factors or on prior utilisation for that insurer’s portfolio. (Ellis et al, March 1999).
Advantages for Prospective system (Society of Actuaries, June 1995):
Disadvantages (van Vliet et al, 1992)
Van Vliet et al (1992) suggest that the following risk adjusters should be included in a per capita risk-adjustment formula:
Other factors can, of course, be included: family history, lifestyle factors (smoker, non-smoker status, sporting activity, race). However there is a trade off between an improved prediction and complexity. The greater the complexity, the higher the administration costs, and possibly a difficulty in understanding the process. (Wilson et al, Summer 1998).
It is not necessary to predict all the variation in costs for a medical scheme. A majority of the cost-variation is random and unpredictable (hence not a basis for risk selection). Thus, the adjustment procedure must be such that the marginal benefit to the insurer of identifying individuals to risk select is less than the marginal cost of obtaining the necessary information. (Wilson et al, Summer 1998).
Payments can be calculated retrospectively, at the end of the period using information that becomes know during that period. Such a retrospective system involves the redistribution of the observed risk in terms of the actual claims costs experienced by insurers over the relevant period. Prior utilisation patterns will be a key factor in the process. Retrospective and prospective systems can however also be used in combination.
Age and gender provide a good starting point for risk-equalisation but are insufficient as much scope for risk selection remains. To improve on age and sex, prior utilization could be considered as a risk factor. This, however, tends to reward past spending and will undermine efficiency.
A further type of model is a Health status model, which is based on indicators of the insured’s health, depending primarily on medical records and past history. This, of course, might raise privacy questions. The rationale for diagnosis-based risk-adjustment models is that certain diagnoses predict future health care expenditures.
Health Status models are better predictors of costs than pure demographic models. Examples include:
A further approach is to consider "self-reported measures" from surveys. The advantages of this route are the information is not dependent on medical providers; no history of claims is needed; and socio-economic variables (lifestyle, taste, employment) can be taken into account. However these surveys are often costly, response rates can be low, and there are confidentiality and accuracy concerns. The most common type of information collected in this manner is perceived health status. (NERA, 1995).
Mortality has been suggested as a risk adjuster because of the high health care expenditures prior to death. Views differ on its importance. One argument raised is that the excess costs associated with the high costs of dying are unpredictable. Another view suggests that a dummy variable indicating death during the observation period should be included in any subsidy formula. Here health plans should be retrospectively compensated with a prospectively determined payment per death. Belgium currently uses death as a retrospective adjuster based on the average number of deaths per 1000 enrolees in prior years at the health plan level. (van de Venn et al, March 1999, p.31).
Disability and functional health status are also good predictors of future health expenditures. Indicators of functional health status reflect someone’s ability to perform various activities of daily living and the degree of infirmity. Disabled and functionally impaired persons appear to have around twice the health care expenditures of those who are unimpaired. (van de Venn et al, March 1999, p.31).
Table 7.1 provides a list of 10 countries with risk-equalisation funds excluding the United States which has a further 10. In addition to the 10, Australia has a risk-equalisation system operated by its health regulatory authority. There is relatively significant variation in the institutional set up between each of these countries. Local conditions are therefore important in establishing the ultimate shape and form of such a mechanism.
The Netherlands have a very well developed risk-equalisation system initiated in 1991. It incorporates both risk and income cross-subsidies. Figure 7.1 provides an illustration the various inter-relationships.
Figure 7.1: Illustration of the Netherlands Risk-Equalisation Fund
Table 7.1: Risk-adjustment systems in 10 countries
Belgium |
Columbia |
Czech Republic |
Germany |
Ireland |
Israel |
Netherlands |
Russia |
Switzerland |
United Kingdom |
|
Risk adjusters |
age/gender region disability unemployment mortality |
age/gender |
age |
age/gender disability |
age/gender hospitalisation both weighted with current expenses |
age |
age/gender region disability |
many different regional experiments |
age/gender region |
age/gender prior utilisation local factors |
Restrictions on premium contributions |
Community rating |
Zero premium contribution |
Community rating |
Community rating |
Community rating |
Zero premium contribution |
Community rating |
Zero premium contribution |
Community rating per region |
Zero premium contribution |
Risk-sharing |
Proportional risk sharing, at least 85% |
no |
no |
no |
See risk adjusters above |
Severe diseases (6% of expenses) |
Outlier risk sharing and proportional risk sharing |
Many different regional experiments |
no |
Outlier risk sharing |
Number of Health Plans |
6 |
24 |
26 |
1,200 |
2 (until 1997:1) |
4 |
25 |
100s |
166 |
2,500 (early 1996) |
Modality A or B |
A |
B |
B |
`B |
B |
A |
A |
A |
B |
A |
Open entry for new health plans? (subject to certain conditions) |
No |
Yes |
yes |
yes |
yes |
yes |
yes |
yes |
yes |
Yes |
Open enrolment every month/…/year |
quarter |
year |
year |
year |
year |
half year |
year |
year |
half year |
no open enrolment guarantee |
Is long-term care included in benefits package |
yes |
no |
no |
no |
no |
no |
no |
no |
no |
no |
Mandatory or voluntary membership |
M |
V |
M |
M |
V |
M |
M |
M |
M |
V |
Year of implementation |
1995 |
1994 |
1993 |
1994 |
1996 |
1995 |
1991 |
1993 |
1993 |
1991 |
Source van de Ven et al, 31 March 1999
Table 7.2: The practice of risk-adjustment in the United States
Medicare programme, HMOs in 1997 |
Medicare, proposed for HMOs in year 2000 |
Federal Employees Health Benefits’ Programme (FEHBP) |
New York State |
Health Insurance Plan of California (HIPC) |
Minnesota Buyers Health Care Action Group |
Washington Health Care Authority |
|
Risk adjusters |
Age/gender region (county) institutional status welfare status |
Age/gender region (county) Welfare status Principal Inpatient Diagnostic Cost Groups (PIPDCDGs) |
No risk-adjusters Each consumer’s subsidy is based on 60% of the average premium of the six largest plans |
Age/gender region |
Gender Number of children 120 marker diagnoses risk-adjustment only applies if plan scores deviate from one by around 5% |
ACGs |
Age, gender employee status since 1989 DCGs Announced for 2000 |
Restrictions on premium contributions |
Community rating |
Community rating |
Community rating |
Community rating |
Premium contribution depends on age, region and family/single within a rate band (! 10%) |
Premium contributions set by competitive bidding |
Premium contributions set by competitive bids |
Risk-sharing |
no |
no |
no |
Condition-specific risk sharing |
no |
Stop loss for catastrophic individuals |
yes |
Number of Health Plans |
100s |
100s |
100s |
? |
28 |
15 |
3 |
Modality A or B |
A |
A |
A |
B |
B |
A |
A |
Open entry for new health plans? (subject to certain conditions) |
yes |
yes |
yes |
yes |
yes |
yes |
yes |
Open enrolment every month/…/year |
month |
Month, with proposed transition to year |
year |
? |
year |
year |
Year |
Is long-term care included in benefits package |
no |
no |
no |
no |
no |
no |
no |
Mandatory or voluntary membership |
V |
V |
V |
V |
V |
V |
V |
Year of implementation |
1972 |
2000 |
1960 |
1993 |
1992 |
1997 |
1989 |
Source van de Ven et al, 31 March 1999
Review of Recommendations and Comments
Advisory Group on the Risk-Equalisation Scheme which evaluated risk-selection and the need for risk-equalisation within Ireland provides the most recent formal review internationally. Various of the comments from their Report are provided below.
"The Advisory Group concludes, based on its own deliberations and on the basis of the arguments made and evidence presented to it, that risk-equalisation is essential to underpin community rating" (Advisory Group on the Risk-equalisation Scheme, 1998, p.30)
"The Advisory Group agrees, therefore, that a Risk-equalisation Scheme is a necessary feature of the private health insurance market. It has arrived at this conclusion because of:
"Without risk-adjustment methods, rating structures being considered in state and national reform proposals are likely to provide incentives to carriers to avoid high-risk individuals in order to maintain the most competitive premiums, and individuals will continue to face premium or contribution choices that reflect risk selection rather than medical and administrative efficiency. The Academy considers risk-adjustment a necessity if rating restrictions do not allow up-front matching of premiums or contributions with the relative risk factors of the purchasers." (American Academy of Actuaries, May 1993).
"… if a government imposes community rating on a competitive industry (health insurance or otherwise), it has an obligation to support community rating by some form of equalisation." (Walter Neuhaus, Laboratory of Actuarial Mathematics, University of Copenhagen. In Advisory Group on the Risk-equalisation Scheme, 1998, p.30).
"… an effective prevention of cream skimming is a necessary condition in order to reap the fruits of a competitive health insurance market with a regulated premium structure." (Prof. van de Ven, Department of Health Policy and management, Erasmus University, The Netherlands. In Advisory Group on the Risk-equalisation Scheme, 1998, p.30).
"As a precondition between the sickness funds it was found necessary to implement a risk structure compensation. By that financial equalisation the different kinds of funds should get equal opportunities in the coming competition. In addition, cream skimming by selecting good risks should be prevented." (Dr Doris Pfeiffer of Verband der Angestellten Krankenkassen of health care reforms in Germany.
"Recommendation: A central fund, or re-insurance scheme, should be set up to provide the insurance funds with a risk-adjustment service … Even if funds are not allowed to risk-select, but are required to accept all comers, the distribution of high- and low-cost individuals … will be uneven across funds. The function of the central fund is therefore to compensate funds with a large proportion of high-cost individuals by transferring money to them from funds with a low proportion of high-cost individuals." (National Economic Research Associates, "The Economics of Health Care Reform: A Prototype", May 1993. in Advisory Group on the Risk-equalisation Scheme, 1998, p.30).
"The Advisory Group’s initial consideration, therefore, was whether a Risk-equalisation Scheme is necessary. The overwhelming majority of respondents felt that some form of Risk-equalisation was necessary to underpin community rating. The Society of Actuaries in Ireland and the Department of Health and Children, in particular, produced an impressive range of technical support for this view.
"The Society is firmly of the view that risk-equalisation is fundamentally necessary where health insurance is community-rated. Where community rating and competition co-exist, community rating may be undermined if some or all insurers in the market practice preferred risk selection (sometimes referred to as ‘cherry-picking’ or ‘cream-skimming’). (The Society of Actuaries in Ireland" in Advisory Group on the Risk-equalisation Scheme, 1998, p.32)
"A risk-equalisation mechanism is necessary to protect insurers who are required to operate in the community rated open enrolment environment from the potentially catastrophic effects of acquiring a portfolio of disproportionately poor risks. The risk-equalisation mechanism reduces the incentive for insurers to practice preferred risk selection (this incentive is, in fact, significantly greater for community rated than for risk rated insurance, since a portfolio of good risks does not necessarily imply any reduction in premium revenues)." (VHI in Advisory Group on the Risk-equalisation Scheme, 1998, p.30).
"The Advisory Group firstly considered whether a scheme of risk-equalisation based only on age and gender might be appropriate. … It has the benefit of being totally objective, is very simple to apply and requires minimal data (in the form of number of policyholders and claims costs analysed by age and gender) to be applied. If there are differences in the claims management efficiencies of different insurers, it ensures that that no health insurer will have to share profits which it has made as a result of its own claims management efficiencies and cost controls with any other insurers. It would, therefore, provide significant encouragement to competition. However, the Advisory Group accepts that age and gender are not sufficient to account for differences in health risk, and recognises that there is a substantial level of actuarial research in existence demonstrating the limited extent to which age and gender alone can predict health care costs, when non-randomly selected populations are studied. (Advisory Group on the Risk-equalisation Scheme, 1998, p.36)
Figure 7.2 provides results of analysis carried out for the Committee which show substantial variation in risk pools within the open scheme environment in 1999 representing 90 percent of the total number of beneficiaries. The cost-weighted demographic profile of the individual medical schemes are compared with the cost-weighted profile of all open schemes, closed schemes, and all schemes (market). Initial indications are that the various risk profiles have not changed significantly in 2000.
The variation in risk profile implies substantial cost differences for schemes unrelated to their efficiency in managing costs. As this analysis only measures the age and sex cost variation more subtle measures such as chronic members by age could exacerbate the variations shown. Whether by chance or design, the South African medical scheme market indicates an unfair distribution of risk between schemes, which has implications for both equity and efficiency.
There is a clear advantage for open relative the closed medical scheme environment where a higher percentage of pensioners exist. Thus risk selection targeted at the closed scheme market will provide a profitable short-term strategy for commercially oriented open schemes. The advantage ends, however, once closed schemes have been eliminated.
Figure 7.2: Price advantage/disadvantage for schemes representing 90 percent of the open scheme membership
Source: analysis performed for the Committee of Inquiry based on the Statutory Returns of Registered Medical Schemes for the 1999 financial year
Based on both international practice and the evidence available on the South African health market serious consideration has to be given to the implementation of a system of risk-equalisation amongst medical schemes. Without such a system inefficient schemes will be in a position to undermine efficient schemes. In order to assess the viability of such an option for South Africa some analysis was done for the purposes of this report. This cannot however be regarded as a complete assessment.
This assessment looks at five areas central to a risk-equalisation process:
Based on international evidence the following criteria have been considered for the South African situation:
As the validity of using age, sex and chronic conditions is generally well accepted internationally the value of using death as a method of refining the calculation was assessed analytically.
The issue of benefit levels is also important, as these can vary by scheme. The risk-equalisation process must therefore create a rational link between the benefits to be subject to an equalisation process and those that can be excluded.
The South African medical schemes environment is predominantly made up of open schemes. Open schemes typically charge flat-rate contributions, i.e. they are not income-based. There is therefore no income redistribution possible via the contribution. Although it can be mandated that schemes charge income-based contributions in South Africa, this will substantially destabilise the existing market.
Income-based cross-subsidies can however be achieved through allocations from an earmarked or general tax into a risk-equalisation fund. The risk-equalisation fund therefore allocates both the income- and the risk-based cross-subsidies. An earmarked tax for this fund is more appropriate than a general tax contribution, as it establishes a clear link between a shared risk-pool and the contributory environment.
Within the South African context this option should be considered in conjunction with the removal of the current tax subsidy. (See section 6). The following steps could be considered in converting from the existing subsidisation of the private sector to an approach more consistent with health policy:
In many countries the regulator of the private medical scheme environment operates and runs the risk-equalisation fund. A separate statutory authority is also possible. However, due to the close relationship between the regulation of solvency, community rating, open enrolment and prescribed minimum benefits to the operational requirements of such a fund.
Legislation can be created separately or part of the Medical Schemes Act No. 131 of 1998 which establishes the governance structure and operational requirements of the fund. The legislation would therefore include the following:
The central feature of any risk-adjustment system is a risk-adjusted premium subsidy from the risk-equalisation fund to each consumer or to high-risk consumers only. In most countries the risk-equalisation fund pays the subsidy directly to the consumer’s health plan (medical scheme) and thereby lowers the consumer’s premium contribution.
The institutional implications for a South African proposal require consideration of the following institutional issues:
In its final form the risk-equalisation fund would look fairly similar to that of the Netherlands with some important differences. These differences include the possibility that: it will take some but not all contributions directly from the covered population; and that it may receive some subsidy initially from general taxes.
Figure 7.3: Possible Institutional Framework for a Central Risk-Equalisation Fund for South Africa
The strategy adopted by the Washington State Health Care Authority (HCA) was to initially adopt a demographic model based on age, gender and member status (main member, spouse, or dependent) in 1996. This was later refined to include health-status in 1998. In 2000, the HCA moved to a more complex health status model including more health-status factors. From the HCA’s experience it is also suggested that roles and time lines are clearly defined, so that issues can be addressed early and continuously. The HCA’s time line was as follows (Wilson et al, 1998):
It is proposed that if a risk-equalisation fund is established in South Africa that a similar process be adopted. Criteria could initially be based on demographic information and be improved over time to include more information.
The longer the absence of a risk-equalisation mechanism the longer pricing instability will exist within the medical schemes environment. There are no reasons for delaying the implementation of this important instrument. It should therefore be prioritised for immediate development and implementation.
The introduction of the Medical Schemes Act No.131 of 1998 included provision for a system prescribed maximum penalties that may be applied to scheme applicants who join a scheme for the first time only late in life. These penalties are applied as a surcharge on the scheme contribution and are intended to encourage earlier and continuous membership of a medical scheme.
From January to March 2000 an amnesty on the application of these penalties was in operation. The amnesty had the intention of permitting people formerly excluded from cover from joining without penalty. Those therefore who had been excluded from cover potentially against their will were therefore given a chance to join.
As it became clear that many administrators and brokers were deliberately barring and delaying access for members during the amnesty period, the amnesty period was extended, through an amendment to the regulations, until April 2001. At the end of the amnesty period the prescribed maximum penalties were applied.
Various concerns have however arisen concerning the application of the late joiner penalties and their potential negative implications for unfairly excluding people from cover and whether the penalties are sufficiently well designed to achieve their objective.
Regulation 13 (1) provides that a "medical scheme may apply premium penalties to an applicant or dependant of a late joiner and such penalties must be applied only to the portion of the contribution related to the member or any adult dependant who qualifies for late joiner penalties."
Table 8.1: Premium penalties for late joiners
Number of years an applicant was not a member of a medical scheme after age 30 |
Maximum penalty |
|
1.05 x contribution 1.25 x contribution 1.5 x contribution 1.75 x contribution |
A number of concerns relating to the regulations occur and are as follows:
Various countries including Australia and Ireland, both of whom have similarly regulated voluntary health insurance environments, have introduced late joiner penalties. These developments are fairly recent and appear quite successful in encourage early and continuous membership within voluntary environments.
The Australian approach has been termed "unfunded lifetime community rating" (ULCR). The objective of the ULCR system are limited and is "aimed at attracting greater numbers of younger people into private health funds." (Trowbridge Consulting, November 1997, p.i).
"The structural framework essentially comprises a central age at entry and an age step prescribed for all health funds. Each fund would set its own base rate for the central age. For each individual member, the age step would be applied to the base rate for a number of years by which the certified age at entry is below or above the central age." (Trowbridge Consulting, November 1997, p.iii).
The feasibility and desirability of a system of ULCR should comply with the following:
The following was recommended as the appropriate framework for Australia (Trowbridge Consulting, November 1997):
Late joiner penalties are required in instances where membership of health insurance is voluntary rather than mandatory. Within a mandatory environment all people become members if they fall within specified qualifying criteria such as income or employer size.
The introduction of a mandatory environment is superior to a system of late joiner penalties as it is administratively simpler and fair from a life-cycle point of view. However, a legislated mandate may not be feasible for one or other reason. Under such circumstances adequate measures need to be in place to encourage long-term membership.
Prior to the introduction of a mandatory environment for membership of medical schemes the problem of adverse selection needs to be appropriately managed. However, the use of these measures should not be permitted to lead to unfair discrimination against particular individuals and groups or to permanent barriers to entry for late joiners.
It is suggested that the following be taken into account in revising the system of late joiner penalties where voluntary membership predominates:
The introduction of a risk-equalisation system will also significantly reduce the systemic risk faced by an individual scheme from any late joiner. Once a risk-equalisation mechanism is put in place, the system of penalties could be re-assessed downward.
The medical scheme environment should move ultimately to legislated mandatory membership where feasible. To the extent that this can be achieved, the need for a system of late-joiner penalties will fall away.
The private sector is characterised by systemic cost increases significantly in excess of general inflation and economic growth. This is primarily due to the combination of third-party payment with fee-for-service reimbursement.
Excluding administrative costs, real costs have increased by 249.7 percent from 1974 to 1999. The largest increases have been in hospital services (560.3 percent) and medicines (302.1 percent). Medical scheme expenses unrelated to actual medical services have increased by 444.8 percent in real terms from 1974 to 1999 and have increased faster than medicines.
Systemic cost increases in private markets for health are a universal phenomenon where voluntary health insurance predominates. The only long-term viable approach for containing cost increases, while simultaneously guaranteeing quality, is through global budget options and capitation.
Given these cost increases serious policy consideration has to be given to assisting in the development of a market less susceptible to systemic cost increases. Although internationally many such measures are standard, in South Africa very little effort has been put into considering a domestic framework for cost containment.
Measures typically range from supply-side interventions, such as limitations on the number of private hospital beds, services to the introduction of new technology. This section focuses on key cost drivers in the private sector and proposes measures to counter them.
Factors causing cost increases in the private sector result primarily from an imbalance of power and information between consumers and suppliers of health care. This imbalance is caused both by the need to purchase health care through risk-sharing mechanisms, and because health care goods and services are very personal and options for choice of supplier are limited.
Three broad cost drivers can be identified which result in systemic cost increases within the context of health insurance.
The demand for health insurance/medical scheme cover is linked to the price (premium/contribution) charged. However, the full price is rarely faced by the direct purchaser. Many employers subsidise the premium/contribution which implies that year-on-year changes in price (premium) appear less onerous than they actually are. In addition, the tax subsidy for employers can serve to diminish the full impact of price changes. This provides greater scope for medical schemes to increase contributions higher than would be the case if members were more price sensitive.
As a consequence of the insurance for medical services, medical scheme members face zero point-of-service costs. The result is over-consumption of medical services in cases where the consumer of health care services has significant discretion. This primarily affects primary care services, and over-the-counter purchases of medicines. Access to other services will be screened first by service providers.
Supplier induced demand is the most important contributor to health cost increases. Service suppliers, within fee-for-service systems, have strong financial incentives to: over-supply services (increase the volume of visits, load scripts, etc.); over-charge for services (due to the weak bargaining position of patients); and to introduce new technology at high cost. The weak position of the purchaser of health services (medical scheme) to intervene in the supply of medical services effectively results in the supply of services close to what the market will bear. Within South Africa the degree of market concentration in the provider market (hospitals in particular) exacerbates this imbalance.
Interventions aimed at achieving cost containment in the private market for health care have to address these key cost drivers in order to materially impact on costs in the market. Interventions can be broken down as follows:
Figure 9.1: Cost drivers in the private health sector
Certain of the regulations governing health professions are preventing the development of staff model health services within the private sector. The following review is based on information provided by external stakeholders:
The Health Professions Council (HPC) Ethical Rules:
The use of a name of a practice of –
Sharing fees with any person or practitioner who has not taken a commensurate part in the services for which the fees are charged.
Charging or receiving fees for services not personally rendered, except for services rendered by another practitioner with whom he is associated as a partner, shareholder or locum tenens.
Practising in partnership or association with a person not registered in terms of the Act
Practising in or as a juristic person not exempted in terms of S54A of the Act or registered in terms 54A of the Act but not complying with such conditions of exemption.
It is therefore recommended that the above rules be fully reviewed so as to permit staff model private service providers to operate. Without an adjustment to these rules, it will prove very difficult to contain costs in private healthcare, or to develop low-cost options.
These rules are also questionable from a Constitutional perspective as they restrict the trading of health professionals without a clear rational public purpose. As such, irrespective of whether or not these provisions exist in legislation, they could in any case face a legal challenge if any attempt is made to enforce them.
Containing costs within the private sector requires the creation of closed networks and a degree of vertical and horizontal co-ordination in the forming of contracts. Given the specific problems peculiar to private markets for healthcare, competition regulation needs to become more specialised for the area. If this is not possible in terms of general legislative provisions, competition may need to be specifically regulated in terms of the revised Health Act.
Supply-side controls are an effective method of limiting cost increases resulting from supply-induced demand. Measures include:
Supply-side measures can lead to unintended inefficiencies (refusal of needed services) or inappropriate price rigidities. There is also the possibility that different areas of the health system may be regulated differently and inconsistently when it comes to supply-side measures (e.g. pharmaceutical manufacturers, pharmacists, medical schemes, private hospitals). Supply-side measures may also fall foul of the Constitution if carried out in a manner that is arbitrary and unfair.
To be affective, supply-side measures, where they control the introduction of new facilities, or the location of service providers, requires both clear and uniform criteria in combination with a regional approach. In the absence of uniformity, the application of policy in this area may be regarded as arbitrary.
To achieve the required consistency a clear policy framework on supply-side cost containment must be implemented. Such a framework will require co-ordination between all areas of health policy and the health system that have a role to play or will be affected. The role of provincial and local government, as well as various regulatory authorities will need to be defined.
The power imbalance between purchasers and providers of health services provide the underlying scope for over-servicing, over-pricing and inefficiency. Medical scheme related cost drivers include the following:
Solutions to the cost-containment problems resulting from risk-selection are largely the domain of measures designed to contain discrimination on the basis of health status. Once these have largely been removed, competition between schemes can only occur through more competitive pricing of the medical services covered. This includes the measures introduced thus far: community rating, open enrolment, and prescribed minimum benefits. Additional measures include: risk-equalisation and broadening the range of prescribed minimum benefits.
The cost increases occurring here are a combination of weak corporate governance and market-incentives resulting from risk-selection described above. Dealing with this problem can include the implementation direct limits on administration fees which now exceed 25 percent of the contribution, excluding reinsurance. Consideration however has to be given to a package of related interventions including:
Broker activity needs to become more transparent with balancing of the powers between medical scheme members and the broker. Areas of reform which can improve the functioning of the broker market are:
The rational use of highly specialised services or expensive diagnostic services can be encouraged through the use of more market-sensitive interventions in addition to direct controls. An important option open to government arises through making strategic use of public sector services and facilities.
The reform proposals concerning differentiated amenities within public hospitals (see section 10) will have the effect of creating an alternative provider to the private sector for general hospital services. This intervention, if implemented would guarantee the availability of reasonably priced service, and stimulate competition between private hospital.
The "ethical" constraints placed by the Health Professions Council rules need to be fully reviewed to permit the creation of lower cost staff model healthcare service providers in the private sector. Unless these options are permitted, only highly inefficient fee-for-service approaches, or variants thereof, will be allowable in the private market.
Intensive care units are under-supplied in the public sector and over-supplied in the private sector. A consequence of this is increased pressure by private hospitals to keep medical scheme members for unnecessary periods in high care or intensive care. If the public sector expanded its intensive care capability with a view to offering this capacity to medical schemes at reasonable cost, services can be improved for both public and private patients within public hospitals. Competitive pressure would also be placed on the private hospital system to more appropriately price and utilise these services to maintain market share.
Many academic hospitals are in a position to provide very specialised services not normally or easily provided in a private sector setting to medical schemes. Economies of scale can then be achieved in running of specialised units with benefits for both public and private sector patients.
An area of significant abuse in the private sector involves over-servicing and over-pricing radiology services. Expensive equipment such as magnetic resonance imaging equipment (MRIs) and CAT scans are over-used. Consideration can be given to the strategic purchasing of this equipment for the public sector and offered to both public and private sector patients. These arrangements could lead to a reduction in current over-servicing, and a significant reduction in cost for medical schemes.
Dialysis and related services are heavily rationed in the public sector. Such services are also very expensively available in the private sector. With an expansion in dialysis services offered by the state and sold to medical schemes on a cost-recovery basis, with some surplus built in for cross-subsidising public patients, will result in an expansion of the overall; availability of dialysis in the country. This could be achieved without increasing the overall cost of dialysis.
A significant need is developing for home-based care of people suffering from HIV/AIDS. Such services are rare in South Africa at present. Consideration needs to be given to an expansion of such services within the public sector for the use of both public and private sector patients. This will reduce the cost of treatment at public and private hospitals and improve the quality of life of many sufferers.
Palliative care services are not offered easily in the for-profit market. However, the need is great generally. Given that palliative care involves the lower cost treatment of terminal patients, many people could benefit from continuous and appropriate care in a lower cost setting. This will both reduce costs for public and private patients, but also improve the quality of life of patients and family members.
Inadequate attention has been given by both the public and private sectors to the advantages of good quality step-down facilities. As such many people in both environments reside longer in very high-cost setting. Within the private sector these costs can be out of all proportion to the marginal treatment cost of the patient. The introduction of both private and public sector step-down facilities, making use of significant spare capacity in the public sector, needs to be seriously considered. Expansion of public sector step-down services will find a ready market from medical schemes. The issue of step-down facilities needs to take account of new licensing requirements, accreditation of such facilities and the maintenance of minimum quality of service standards. Such services can be used for rehabilitation and palliative care.
Currently drug prices vary considerably between the public and private sectors. Public sector prices are kept low through the bulk purchasing of the government. Consideration needs to be given to making certain drugs available nationally, either free, where this is merited, or on a cost-recovery basis. This can be considered in the areas of chronic medication, HIV/AIDS, and medications on the essential drug list. This intervention can serve not only to dramatically bring down the cost of treating certain conditions, but eliminate the incentive for medical schemes to discriminate against certain classes of patient (e.g. chronic sufferers, people with HIV/AIDS). Such an intervention will be both market sensitive and have significant implications for the achievement of public health objectives.
The implementation of a coherent strategy aimed at achieving cost-containment while simultaneously achieving key public health objectives needs to become a priority area of government. Certain of the interventions need great care and a high degree of co-ordination to be successful. For this reason a strategic task team should be considered to be established which can establish a national policy framework and implementation plan.
Cost containment within the private sector needs to be seen within the context of broader structural reforms making the health system more accessible and appropriately prioritised in terms of services. Cost increases are resulting in incentives to discriminate against poor health risks and to exclude people from insurance. An increased and unfounded burden results in the public sector. The careful and strategic use of public sector services can turn this situation into an advantage. Direct controls on the supply of services, the correcting of perverse private sector arrangements, and the intelligent expansion of appropriate services will together improve the functioning of the health system. Partial interventions, however, will easily be circumvented. Interventions must therefore be well planned, co-ordinated and implemented in combination, to achieve their full effect.
The public hospital plays a central role in South Africa’s health system. Public hospitals serve the needs of the vast majority of the population. They also take responsibility for the teaching and training needs of the county’s health service personnel. Public hospitals have typically operated within a bureaucratic environment with key operational decisions made centrally by provincial or national health departments.
This environment appears to have diminished the responsiveness of public hospitals to environmental change both within the public and private health arenas. The evidence points strongly to the fact that public hospitals are not well placed to take advantage of alternative revenue sources or to benefit from any future mandatory contributory environment.
The purpose of this section is to provide a specific proposal concerning the future reform of public hospitals. The intention is to propose a design that would be consistent with both current and future policy needs. The proposal is based on a review of policy options to date, discussions with key role-players in the Department of Health, selected hospital CEOs, external consultant support, and the Treasury Department.
During 1995 and 1996 a project to evaluate the reform of public hospitals was commissioned and made a number of recommendations relating to:
The central thrust of the final report was that public hospital management should be significantly decentralised. It further recommended that the policy of revenue retention would be enhanced by this decentralisation. An important recommendation involved the establishment of differential amenities within public hospitals to enhance fee payment. Revenue retention was seen as likely to be enhanced through both the introduction of revenue retention and differential amenities.
The Hospital Strategy Project found that provincial governments were not regularly updating or managing their tariff schedule adequately. They consequently recommended that a better, and possibly simpler, tariff system be adopted and regularly updated.
Attempts have been made by the national Department of Health to introduce this framework. However, implementation remains minimal and ineffectual at this stage. The following processes are noted:
In conjunction with the Department of Health, the Committee of Inquiry held a number of workshops on public hospital reform. Various specific problem areas with public hospitals were highlighted and reported on below.
There are currently no incentives for public hospitals to identify private patients. As the fee revenue goes to provincial treasuries public hospital managers find it logical to turn away private patients where possible. Private patients result in uncompensated costs for public hospitals.
Increasingly medical schemes have different tariff schedules. It is becoming important for them to negotiate differential tariffs to use their market power more effectively.
Specialist services can be maintained for both public and private patients. Renal units, cardiology, burns, etc. are examples of services which medical schemes would wish to contract for without any need for a differential amenity. The broader patient and funding base will serve to preserve these services for public sector patients.
Most treasuries appear unhappy about separate trading accounts for public hospital own revenue. It appears treasuries would like to redistribute these funds away from health services. This would be the only logical explanation for disallowing separate trading accounts.
According to results from the Willingness and Ability-to-Pay study, most people are only prepared to pay for public hospital services, whether directly or through any form of prepayment, if there is an improvement in the public hospital system.
In the absence of a coherent revenue retention system many informal arrangements outside of the health system are starting to occur. The University of the Witwatersrand has established a PTY Ltd company (Wits Consortium) which is a wholly owned tax exempt company. Wits Consortium has purchased its own dialysis facility and is negotiating directly with medical schemes. Funds are then distributed to doctors on the Wits staff establishment. This option currently only benefits Wits staff, but does not benefit the public health system in any explicit way. Pharmaceutical trials are also being operated through Wits Consortium on public hospitals without adequate compensation for staff time used or patient expenses.
The lack of a formal system around revenue retention and proper hospital autonomy is resulting in backdoor mechanisms which are damaging the performance and morale of public sector staff. Public hospitals are "privatising" to the detriment of public patients. This implies that many public hospitals are effectively cross-subsidising the private sector – where publicly employed staff who serve private patients and are reimbursed by medical schemes. There are signs that this is occurring on a large scale.
The redistribution of revenue has to be balanced against the incentive to collect it in the first place as well as the need to cover any costs incurred.
The public sector is well positioned to provide services to a substantial portion of the private market, at reasonable cost if they were able to engage more flexibly with the private medical schemes. It is near to impossible at the moment for a hospital to negotiate and implement contracts with medical schemes. Too much has to happen at the provincial level – and they don’t have the time or the inclination.
Increased autonomy and interaction with the private sector could change the public sector character of public hospitals. This could be avoided, however, if a coherent policy environment were created.
Being able to sell public sector hospital services to private medical schemes should result in a dramatic decline in costs for the private sector.
There is currently no clear policy framework within which public/private partnerships (PPPs) are set up. As a consequence PPPs are largely ad hoc.
There is a general concern about equity in the allocation of resources, but there is no clarity as to what the redistributional objectives are. They are not explicit.
The public health system has not engaged strategically with the intentions and opportunities raised by the Medical Schemes Act reforms.
There are general concerns about the arbitrary nature of engagements with provincial treasuries. No clear guidelines or principles relating to budgeting or to revenue retention are evident. They largely appear to make them up as they go along.
All revenue generation objectives can currently be undermined without much difficulty by provincial treasuries. This applies to any future social health insurance proposals as well as to conditional grants.
The ability to manage must be decentralised to the hospital level. This needs to be a prior consideration to revenue retention. The inability to generate revenue from private sources is a symptom of over-centralisation.
There was a feeling that the decentralisation process utilising European Union consultants could not get the job done due to a lack of political will. The problem is centralised authorities appear unwilling to relinquish direct controls.
Various PPP proposals involve the dual management of public faculties with the private sector directly managing a portion of the hospital. Such systems should not be permitted, as the hospital CEO should have full control over the entire facility. This would not preclude options which recognise this.
The centralisation of the capital budgets for public hospitals results in low levels of maintenance expenditure. Public Works departments have their own agendas and time scales for delivering. Their procurement processes are also dubious. If the funds were allocated directly to the hospital, and the hospital were in control of the procurement process, public hospitals would be maintained far better than at present. Capital backlogs are occurring primarily because the public hospitals themselves have little direct control over capital and maintenance expenditure.
There is a need for comprehensive global budgets for public hospitals. This coupled with greater autonomy will substantially change the performance of public hospitals. Many of the existing problems will resolve themselves.
There appears to be no point in introducing a system of social health insurance in the absence of hospital autonomy and where treasuries can undermine health department budgets.
There is currently no direct link between national health policy and the funding of public hospitals. If the current system is maintained there is little chance of this situation changing.
The option of centralising health budgets coupled with the decentralisation of operational control to the lowest level possible should be considered. The centralisation/ring-fencing of the budget protects the health budget within the confines of national health policy, while the decentralisation of operational control ensures the efficient management of those funds.
The current state of public hospitals affects revenue generation. Basic amenities need to be improved generally. This needs to be coupled with an up-front investment in differential amenities.
Although differential amenities are supported, differential services should not be introduced into the public sector. The latter should not preclude the possibility of permitting a private hospital patient to opt for their own doctor. Here the public hospital will be reimbursed for the facility fee, while the doctor would be reimbursed separately by the patient or medical scheme. This approach is consistent with most major industrial country systems, such as Australia, United Kingdom and France.
The need for public hospital decentralisation has been long acknowledged as an essential part of the reform process. However, elements of hospital reform are happening outside of a broader reform context. Decentralisation cannot be seen separately from revenue retention, differential amenity options and certain reforms in the financial and budgeting framework. Without this reform process, it is unlikely that consistency with the Medical Schemes Act and potential mandatory contributory environments can be achieved. Although these latter reforms will impact on coverage and the direction of the overall health system, without public hospital reform, the public hospital system will merely not participate in the evolving system.
It will also be important for this new environment to be established in national rather than provincial legislation, with areas of provincial discretion clearly specified in the Act. The Act should also provide for transitional arrangements with some flexibility built in to permit the national Department of Health to implement the process in a reasoned manner. A co-operative process with the Treasury Department would be essential.
Based on previous recommendations and the current review it appears unlikely that a mandatory or voluntary contributory system will want to make use of public hospitals unless some degree of differentiation occurs. Based on the consultation process engaged in by the Committee the following guidelines and preconditions are suggested for differential amenities:
The financial framework consistent with a decentralised public hospital model needs to ensure that the CEO or hospital manager has full control over financial matters. Although consideration will have to be given to transitional measures, an ultimate structure is presented here which gives the appropriate degree of autonomy:
The emphasis of the above framework is to shift the key operational workload and decisions onto the hospital. The key role of the provincial Department of Health shifts exclusively to policy development and monitoring of compliance. Decisions concerning staff, equipment and capital programmes will then be based on health service priorities and not budget control. Budget control now becomes the clear responsibility of the CEO, as the accounting officer, and the hospital board who have a fiduciary responsibility to ensure the solvency of the institution.
The decentralisation of hospital accountability and responsibility suggests a far more meaningful role for the hospital board and CEO. The following provide a range of the roles and responsibilities that should ensure appropriate governance if introduced:
The Provincial Department of Health:
The provincial Department of Health will liase directly with the hospital concerning all matters affecting health policy. To ensure a direct relationship with the hospital, at least one or two department officials could sit on the hospital board of major hospitals. The Department of Health will take responsibility for negotiating the medium-term contracts and reporting process for all public hospitals. The department would need to develop policy in the following key areas:
The Hospital Board:
The CEO:
A key performance factor in the health system involves the quality and motivation of personnel. This requires appropriate remuneration policies, career advancement opportunities and adequate oversight and discipline. To achieve the right mix the hospital should be given as much scope as possible to determine its human resource strategy. This will include the ability to determine flexible contract arrangements for medical and nursing staff who may wish to work part-time in the private wards or in the private sector. However, the establishment of staff privileges should at all times be at the discretion of the CEO. If contract arrangements are abused or conduct inappropriate, the privileges could be withdrawn.
As the CEO will have the ability to enter directly into contracts with the private sector, the development of direct contracts with medical schemes for specialised services or differential amenity wards will be greatly improved. The contract will be entered into with the CEO and the funds will be paid directly into the hospital bank account.
Special arrangements in terms of billing, tariffs and reporting can be negotiated directly. If up-front capital is required to develop a new service, in terms of such a contract, the funds could be obtained either through borrowing against future revenue or through a grant from the provincial health department. The latter will usually occur if there is a consequential improvement of services for non-paying patients.
The flexibility of these arrangements should not impact on the public character of the hospital provided a consistent policy environment has been created to ensure this. Over time, the more flexible operational and revenue environment could lead to a basic improvement in the quality of public hospitals, removing the necessity for explicitly separate amenities.
This report finds that the current regulation and governance structure of public hospitals is inconsistent with existing reforms such as those relating to the medical schemes, and all future options relating to a potential social or national health insurance system. It also finds the current structure harmful to effective service delivery irrespective of the revenue source. review process looking at public hospital consistency with the Medical Schemes Act and potential Social Health Insurance options came to the conclusion that:
The 1995 NHI Committee recommended that mandatory contributions "would not necessarily have to go to an existing medical scheme, but may be channelled via a new state sponsored hospital plan…". The manner in which this proposal is stated suggests an option more along the lines of the Public Hospital Fund proposed in 1997. However, the idea of a State Sponsored Medical Scheme has been proposed in various submissions and by the Central Bargaining Chamber of Government. Such schemes have been implemented in various regulated private insurance environments such as Australia and Ireland to bolster the not-for-profit community-rated open-enrolment environments. In both these countries, once the health insurance environment had fully matured, these state-sponsored schemes have been privatised. South Africa consequently needs to consider the opportunities that one or more state-sponsored scheme could offer to the consolidation of health current health policy.
A state-sponsored medical scheme would be in a position to achieve a number of basic health policy objectives. These are:
The group targeted for cover would be low-income groups employed in the formal sector. With the conversion of the tax subsidy into an explicit per capita subsidy, low-income groups would benefit most. As such the size of the target group will be strongly influenced by any subsidy policy introduced.
The benefits offered would be as follows:
The estimated contributions for a family of four will be around R500 per month. Current low-cost medical scheme options affordable to families of four with a monthly income of less than R4,000 per month range from just over R400 to around R800 per month.
Great difficulty is experienced in developing contracts between medical schemes and public hospitals. As discussed elsewhere in this Report, much of this difficulty arises from inflexibility in the public sector system, and the lack of a specific regulatory dispensation for public hospitals. Correcting for this inflexibility should create the opportunity for contractual arrangements between a state sponsored scheme and other medical schemes.
The development of these options in conjunction with a state-sponsored scheme should have spin-off benefits for other medical schemes in two areas:
There are roughly 400,000 civil servants covered by medical schemes out of a total of 1 million. Medical scheme cover is available to civil servants on a voluntary basis and they are not compelled to take up membership. For those that do, two-thirds of their contribution is subsidised. Those without cover fall typically into lower income categories.
The group in cover makes use of open medical schemes, where substantial intermediary costs (brokers) and excessive administration fees are paid. A risk pool with 1 million principal members is so large, however, that consideration has to be given to options where the combined purchasing power of such a group can be maximised to obtain more cost-effective cover. Substantial savings are however possible, through:
Any group-related solution to bringing all civil servants into medical scheme cover will invariably impact on potential models of service provision in the private and public sectors. Depending on its structure it could also serve to dampen upward trends in administration and other intermediary costs.
Medical scheme coverage for civil servants has emerged from a period in which Government as an employer played only a small role in actively planning health benefits for members. Consequently, coverage is incomplete, expensive and increases each year by around twice the general inflation rate. The public sector as an employer is experiencing significant cost increases that it has no influence over.
The reform of medical scheme cover for civil servants presents an opportunity to Government to generate socially acceptable and viable forms of health cover and provision generally within the medical schemes environment. The management and reform of cover for such a large group will inevitably expose inefficient and over-priced private sector business models; both in terms of health service provision, administration fees and markets for intermediary services.
Coverage of a group as large 1 million principal members and a further 2 million dependants requires strong oversight by Government as an employer, strong representation by employees, as well as strong governance of whatever form of cover is eventually chosen. A designated structure should therefore be considered that serves this purpose.
This structure would need to be representative (employer and employee) and potentially have, inter alia, the following responsibilities:
As voluntary membership of medical schemes results in adverse selection, it is appropriate to move toward mandating cover for all civil servants. However, in introducing such a mandate, acceptable cover would have to be created for lower-income civil servants (i.e. those presently without significant cover). It would be inappropriate generally to compel civil servants to join poorly managed and over-priced medical schemes.
Existing open medical schemes do not have the specific interests of public sector employees in mind when decisions are made concerning benefit costs, payment of intermediaries, and the type and quality of administration.
As the majority of civil servants presently not covered are low-income earners, the cost and benefit management of their cover will be essential to creating acceptable and affordable options for them. The most feasible method for ensuring that cover can be obtained at reasonable cost for this group, and even civil servants in general, is to establish a dedicated low-cost restricted membership scheme for public servants.
This scheme would be registered with the Council for Medical Schemes and focus on the needs of public servants and their dependants. In this way the interests of civil servants will be reflected in the decisions of scheme management.
The Medical Schemes Act makes provision for the governance structures of all medical schemes. Schemes must have at least 50 percent of the board of trustees elected from the scheme membership. This permits the appointment of government and employee representatives (who must be scheme members) as well as generally elected membership onto the board of trustees.
The establishment of a restricted membership scheme of this type will ensure that that the buying power of upward of 500,000 principal members can be used to purchase cost-effective administration services and high quality, low cost medical benefits.
This scheme could eventually be opened up to general enrolment and even become the "state-sponsored" scheme discussed in section 11.
Low-cost medical scheme options can be defined in various reports as those offering an "essential" package of benefits (as discussed in the monograph), and costing less than R1,000 per month for a family of four with earnings of R4,000 per month or less. Note that in 2001, 53.7 percent of medical scheme members earned less than R4,000 per month.
An analysis which considered 166 options from 32 open schemes, identified 41 options as fulfilling the low-cost criteria. (Ranchod et al, 2001a and 2001b).
The most important way low-cost options improved affordability in recent years was to use capitated primary care.
The industry will probably need to break through the R500 per month barrier in product design in order to satisfy the goal of affordable healthcare.
It is in the area of hospitalisation benefits that most work needs to be done in the development of low-cost options. It is our opinion that a key element of contracting with either public or private sector hospitals will be to enter into risk-sharing arrangements, rather than traditional fee-for-service.
Our recommendation for low-cost option design is to consider the following:
The selection of an administrator is by law determined by the independent management of the medical scheme and not any other party. A scheme with upward of 2 million beneficiaries will be strongly placed to negotiate reasonable administration costs.
One important benefit of a restricted membership scheme will be the removal of any need to pay commission-related fees to brokers operating within the open scheme environment. Many administrators are paying at least 6 percent of Gross Contribution Income (GCI) just to prevent brokers from removing members from their scheme. This is equivalent to the value of a full administration service.
Many open schemes are expensive and do not provide reasonable cover for health benefits. The reduced cover is often difficult for the general public to see, something that is not necessarily accidental. It is therefore recommended that the co-ordinating structure discussed in section 12.3.1 establish accreditation criteria to qualify a set number of open medical schemes that can serve as alternatives for the restricted membership scheme.
Employees could either be restricted to the accredited schemes. Alternatively the subsidy could be limited to only those schemes which have been accredited. Such accreditation should occur on a provincial basis, to take advantage of schemes that have established lower-cost relationships with hospital and primary care network providers.
A contribution subsidy is presently paid by the employer as a fixed 2/3 of the gross contribution payable, irrespective of the scheme chosen. This subsidy should be capped based upon the general desirability of the scheme chosen and the circumstances under which it is chosen. Consideration could therefore be given to subsidising member contributions taking account of the following:
The post-retirement subsidy is contingent upon the subsidy provided to current employees. The primary question for Government is whether this post-retirement liability needs to be fully funded or dealt with on a pay-as-you go basis. Pre-funding the liability does not appear a logical route to follow, given that this approach will not in any way alter the underlying risks associated with liability. Such an approach will merely attract intermediary charges, and administration fees. This approach is however different to approaches required by employers in the private sector, where the liability is reflected on their balance sheet, and where some uncertainty may arise concerning the ability of the employer to fulfil its obligations.
Schemes that wish to implement capitation options, or negotiate cost saving approaches with service provider networks, are best able to do so if their membership is strongly concentrated within designated regions.
As scheme membership could be made available to civil servants via a limited accredited group of open schemes, and a specific restricted membership scheme, consideration needs to be given to a regional approach to both strategies.
Where schemes are accredited, these could be specific to each province. Thus the three accredited schemes in the Western Cape may be different to the three schemes selected in Free State. This would allow Government to utilise those open schemes that are able to incorporate regional approaches in their product design. This could also form part of the accreditation criteria.
The restricted membership for civil servants could also be regionalised with options created that are province specific. Thus the scheme remains a national scheme, but civil servants join the option appropriate for their province. It will therefore become a condition of employment that members must join the option designed for their province.
Regional representation in the formulation of medical scheme strategies will be very important to ensure legitimacy and to make recommendations on alternative strategic approaches. This should probably not occur within the scheme(s) but occur instead through the central co-ordinating structures set up to oversee the civil service policy as a whole.
Figure 12.1: Regional Structures for Civil Service Medical Scheme Strategy
Removing the artificial cost advantage one scheme may have over another due to their demographic profile is best managed through a risk-equalisation fund/mechanism. The medical scheme arrangements created for the civil service should become subject to the risk-equalisation approach discussed in section 11.
The development of a low-cost restricted membership scheme for civil servants will create a sound basis for the general development of low-cost medical scheme cover. It will achieve this through allowing the development and testing of low-cost primary care and hospital options that would prove difficult to achieve within the existing open scheme market.
The civil service restricted membership scheme could eventually be made available to general enrolment. This scheme could either become the state-sponsored medical scheme discussed in section 11, or operate alongside it. The extension of this scheme into the open market will provide the opportunity for members of traditional schemes to take advantage of pre-negotiated regional network arrangements and benefit options.
The strategic approach would see the establishment of a government co-ordinating structure, with provincial representation from both the employer and employees. This structure would determine the subsidy system for all civil servants. It would also set up and see to the registration of the restricted membership scheme and develop its benefit options. The co-ordinating structure would also develop, negotiate and implement the accreditation mechanism for a limited number of medical schemes per province. (See figure 12.2).
Figure 12.2: Framework for Universal Contributory Cover for Civil Servants
The implementation of such a reform would require fairly detailed planning. However, it should be possible to achieve this in a period of roughly three years. (See figure 12.3).
The development of universal medical scheme cover for civil servants is probably one of the most important immediate health system opportunities within the short-term. It will provide the impetus for the creation of low-cost models of health service provision in the private market, and help develop opportunities for public hospitals to make surplus capacity available to medical schemes.
Within a broader reform context, the proposed restricted membership scheme for civil servants could ultimately be made available for general enrolment and take on the role of the state-sponsored medical scheme proposed in section 11.
Medical savings accounts became a feature of the medical scheme environment during the 1990s. Although the regulatory environment did not make provision for them, many commercially oriented schemes began introducing them as a means of risk-rating groups and providing incentives for the out-of-pocket purchases of a range of health services where there is greater consumer discretion.
With the introduction of the Medical Schemes Act No.131 of 1998, medical savings accounts were permitted, but subject to a limitation on the value of the contribution that could go to one.
Most health goods and services are not subject to a high degree of consumer discretion as they are provided on the recommendation and supply of a doctor or other medical professional. For this reason the funding via a risk pool is justified, as services are demanded on the basis of medical necessity rather than personal preference.
Some medical scheme administrators have motivated for the use of medical savings accounts on the basis that they encourage cost savings.
Medical savings accounts do not occur internationally on any significant scale and are generally not supported by government policy. Shifting the risk onto consumers has also not been shown to result in any fundamental shifts in health care services. On the whole they are regarded as measures to reduce the life-cycle and risk-related cross-subsidies typically occurring within large risk pool arrangements.
Within the United States attempts by commercial lobby groups to get federal support for medical savings accounts was partially blocked by the Democrats in 1996. Democrats opposed medical savings accounts fearing they would only appeal to the healthy and wealthy, leaving those with less money and more health problems behind in an increasingly costly risk pool. The net result of the debate was the limitation of medical savings accounts to a demonstration programme. (Families USA, August 1996).
There is no evidence internationally that shifting costs onto consumers encourages more rational purchasing of needed medical services. Consumers will however respond to medical goods and services that are preferred and not needed. However, by their very nature such goods and services are not insurable, and should be purchased on an out-of-pocket basis.
The policy-related justification for medical savings accounts is very limited, and all evidence suggests that it is counter-productive. Information from the Council for Medical Schemes also indicates that medical savings accounts are not being used in accordance with the provisions of the Act. (This is based on information supplied by the Finance section of the Council for Medical Schemes).
A further concern arises from the potential substitution of a large portion of the overall medical scheme contribution from risk-contributions into non-risk contributions (savings accounts), resulting in reduced risk-pooling within medical schemes. Hidden benefit reductions have most probably occurred for essential medical services through the substitution of a portion of contribution from necessary toward unnecessary health care services.
No objective evidence could be found that self-insurance reduces cost trends of necessary medical services. Cost reductions only occur through strategic and selective purchasing of health goods and services on a collective basis, i.e. public health systems and health insurers, where alternatives to fee-for-service are used. Collective purchasing logically only occurs for services within a risk pool. Individual purchasing of needed health services fragments purchasing power as well as access to services.
Administration companies charge unusually high administration fees for managing medical savings accounts, sometimes upward of 10 percent of contribution. The reconciliation of individual entitlements and interest accruing and charged is essentially unregulated at present. Given that medical savings accounts are essentially the personal savings of an individual, many individuals are likely to be financially worse off than if they placed the funds in their own personal bank account.
The Industry Commission in Australia evaluated medical savings accounts within their private health insurance industry. They listed the following concerns with such an approach (Industry Commission, 1996).
The most problematic deficiency was that unlike other adaptations to community rating systems, "there is no pooling of risks between individuals. Medical savings accounts are based on the premise that much ‘insurance’ is really inter-temporal smoothing. But how much is ‘much’? The Commission sought, but was unable to obtain, information on the amount of savings needed to meet most people’s lifetime health costs."
"Some individuals’ lifetime health costs will be low and others high. The latter’s savings may be insufficient to meet their health costs. Moreover, a person might get chronically ill when young, before sufficient savings had been amassed."
"MSA’s do not take into account the fact that persons needing more than average care would be grossly under funded … Savings schemes are no substitute for the creation of risk pools which allow individuals to share their risk exposure (although they may assist in creating sufficient savings to buy insurance in retirement)."
"Another problem is posed by those people with low lifetime health costs. They would leave an excess in their savings account at death. What is the appropriate policy for such undepleted savings?"
"Medical savings accounts raise issues about transitional arrangements, portability, prudential requirements and, to a much lesser extent, sovereign risks, similar to those posed by lifetime rating."
"Low income people are able to save less, and so could meet fewer exigencies than others. This is also true for people who opt in and out of the workforce (say because of child rearing)."
"Medical savings accounts would appear to require a completely different set of skills than those possessed by current insurers."
Medical savings accounts are clearly problematic in a number of important areas of policy and consumer protection. It is therefore recommended that the current policy be revisited with a view to phasing them out of medical schemes, or at the least substantially diminishing their impact on risk pools and contribution costs. The focus of health policy needs to be on risk-sharing and cost containment. None of these key health policy objectives can be achieved through medical savings accounts.
The strategic challenges facing the South African health system provide the context for reform. They highlight deficiencies from a holistic perspective rather than as problems affecting the public or the private sector. The relationship between the public and private sectors is not neutral with strong feedback effects operating between the two.
When contrasted with the key reform objectives of a health system, many cannot adequately be met by the current policy framework in South Africa. Important areas raised are summarised below based on views expressed by the World Health Organisation (WHO, 2000).
Many countries are still making inadequate efforts in terms of responsiveness and fairness of health contribution with respect to the provision of health services. The impact is most severe on the poor who are driven deeper into poverty by the lack of financial protection against ill health.
The ultimate responsibility for the overall performance of a country’s health system lies with government, which in turn should involve all sectors of society in its stewardship.
The careful and responsible management of the well-being of the population is the very essence of good government. For every country it means establishing the best and fairest health system possible with available resources.
Publicly financed healthcare systems remain the backbone of health care in most countries.
The route of prioritising only primary health care as the route to achieving universal coverage is now under severe criticism. The alternative approach calls for an understanding of "basic" health care which requires the delivery of essential health care, defined mostly by criteria of effectiveness, cost and social acceptance.
Defining "basic" essential health care implies an explicit choice of priorities among interventions, respecting the ethical principle that it may be necessary to ration services, but that it is inadmissible to exclude whole groups of the population.
Health policy and strategies need to cover the private provision of services and private financing, as well as state funding and activities.
Oversight and regulation of private sector providers and insurers must be placed high on national policy agendas. At the same time it is crucial to adopt incentives that are sensitive to performance.
Incentives within unregulated private insurance markets for health care are so skewed that the normal rules of competition do not work.
Monopoly power on the part of service providers results in higher prices, lower output, and lower product quality.
When physicians are reimbursed on a fee-for-service basis they are given powerful incentives to provide more services than are necessary.
According to international experience no single payment system is optimal. For this reason most countries adopt mixed systems.
Pre-payment is regarded as the best form of revenue collection for health services, while out-of-pocket payments tend to be regressive and impede access to care.
The main challenge in revenue collection is to expand prepayment, in which public financing or mandatory insurance will play a central role.
In the case of revenue pooling, creating as wide a pool as possible is critical to spreading financial risk for health care, and thus reducing individual risk and the possibility of impoverishment from health expenses.
Achieving greater fairness in financing is only achievable through risk pooling – that is – those who are healthy subsidise those who are sick, and those who are rich subsidise those who are poor.
Insurance schemes designed to expand membership among the poor is an attractive way to channel external assistance to health, alongside governmental revenue.
Governments need to promote community rating (i.e. each member of a community pays the same premium), a common benefit package and portability of benefits among insurance schemes, and public funds could pay for the inclusion of poor people in such schemes.
In middle-income countries the policy route to fair prepaid systems is through strengthening the often substantial mandatory, income-based and risk-based insurance schemes, with increased public funding to include the poor.
Strategic purchasing needs to replace much of the traditional machinery linking budget holders to service providers. Selective contracting and the use of several payment mechanisms are needed to set incentives for better responsiveness and improved health outcomes.
Within insurance environments it also matters how revenues are combined so as to share risks: how large they are; whether competition exists between pools; and whether, in the case of competing pools, there are mechanisms to compensate for differences in risk and capacity to pay.
Linkages between policy development and implementation:
The decentralisation of the health budget within the context of fiscal federalism implies the decentralisation of health policy. Although institutional provision is created for the development of national policy, there is very little direct connection with provincial health systems. As a consequence most national policy implemented at a provincial level only relates to relatively minor issues that can be informally agreed to by all provinces at a national level.
Decentralisation of operational responsibility and accountability:
The public health system combines a decentralised policy development process with highly centralised levels of operational responsibility. There is clear evidence that this division of responsibility between policy and operational responsibility is perverse and dysfunctional.
Raising revenue from voluntary and mandatory contributions:
The approach to financing public health services, and hospitals in particular, makes it virtually impossible for effective cost-recovery to occur when services are provided to higher income groups. In order to prevent the under-funding of public health services, when they serve people not provided for in the general budget, cost-recovery must occur. The current system of public finance makes no provision for efficient cost-recovery options within the public service.
The federalisation of health funding and policy creates a potentially fatal disjuncture preventing the serious consideration of mandatory contributory options (i.e. social or national insurance) designed around the use of public sector services. By their nature such systems would require centralised institutions which raise the funding and reimburse health services. Without a unified system allocating the health budget to provinces, the required centralisation of the contributory system would clash irreconcilably with the fiscal federal system.
As provinces would receive the money conditionally from the contributory system, but have discretion over the funding from general taxes, differences will occur between basic services and enhanced services provided through the contributory environment. Without resolving this issue a contributory system dedicated to the public sector will prove discriminatory and serve very few public policy objectives.
User fees:
The application of means tested user fees for hospital services to uninsured patients using public hospitals is both discriminatory and operationally flawed. Apart from the fundamental inability of public hospitals to apply the exclusion principle, which is a prerequisite for any system of user fees; and to do means test assessments at point-of-service, which no systems reform could make work. The sheer volume of patients seen makes individual billing of uninsured patients in all settings (public or private) administratively impossible.
The introduction of a revised policy on hospital tariffs (the uniform patient fee system or UPFS) although an improvement upon previous tariff systems is a palliative measure and will achieve little in the way of cost-recovery for the public hospital system and public policy in general. The tariffs do serve some purpose in charging medical schemes, or social insurance funds such as the Road Accident Fund (RAF). However, public hospitals themselves will see very little of the increased revenue, and structural flaws relating to billing out-of-pocket patients, the application of the exclusion principle, and the application of the means test cannot be overcome merely through adjusting the tariffs.
Budget Allocations:
The allocation to the health service is declining in real terms on a per capita basis. This results in staff reductions and capacity problems. The reduced quality of service available in the public sector creates a privatisation by default, with only the private health system as an alternative. The absence of any real choice of sector for higher income groups results in the monopoly pricing of both medical services and medical scheme contributions. Public sector budget cuts appear to be one of the most significant contributors to increases in overall health spending.
Equity:
The achievement of equity on an inter-provincial basis is virtually impossible due to the existence of the fiscal federal system. Furthermore, the strict division between the public and private sector disallow any coherent subsidy framework that can span both systems in a coherent fashion.
Human Resources:
The rigidity of the centralised system of human resource regulation has resulted in a significant deterioration in morale and capacity within all elements of the public sector. This has had a more severe impact on the health system which is already complex and multi-disciplinary. Staff retention in critical areas of the health service is now difficult both as a consequence of inadequate budget, remuneration and career opportunities. Options that allow staff to work in both environments simultaneously are currently very difficult to operationalise and control.
Cost increases:
The private sector is characterised by chronic cost increases linked to the fee-for-service reimbursement of providers, an oligopolistic service provider market (which prevents cost containment resulting from competition between service suppliers). Recent trends also show that people are in a weak bargaining position relative to open medical schemes. As a consequence consumers face an inelastic demand for medical scheme cover, which is abused. This takes the form of over-charging administration fees, the extraction of underwriting surpluses from schemes using quota share reinsurance agreements, and the paying of excessive commissions to brokers in competition for market share.
Links to the public sector:
It is likely that a market for lower cost public sector services would develop, given cost pressures driven by over charging in the private sector. However, the inability to contract due to public sector inflexibility is a key constraint despite a willing market for public hospitals.
Low-cost contributory environment:
The development of a low-cost market for medical scheme cover is hindered by the following:
Risk-Selection:
There is evidence that a significant degree of residual risk-selection continues to exist in the medical schemes market. In the absence of any system of risk-equalisation, this will result in instability between medical schemes.
Tax Subsidy:
The value of the tax subsidy toward the private health system is substantial and is estimated at R7,8 billion. It currently lacks a clear public policy objectives with associated identifiable positive outcomes. The subsidy therefore needs to be reconsidered within a broader subsidy reform framework.
Demographic Structure of Medical Schemes:
The demographic structure of medical schemes imply a differently structured health system to that of the general population. This creates concerns about the resulting efficiency of the health system as a whole given the substantial resource allocation bias in favour of the medical scheme market.
Intermediaries:
Intermediaries do not always act in the best interests of scheme members and the public at large. This includes instances where administrators abuse their influence over schemes under their management; where brokers blackmail administrators into paying kickbacks to retain members; and where managed care arrangements are merely structured to extract additional fees from schemes. The shift of members between schemes is largely induced by broker activity, rather than active decisions of members. Thus schemes are incurring substantial increased costs, for no added value to the environment. Overall non-medical expense related expenditure, which includes administrative expenditure and broker fees, is the fastest growing cost-driver in the private health market.
Unfair Discrimination:
There is evidence of significant discrimination against people with chronic conditions in open medical schemes. Currently the prescribed minimum benefits do not protect members from this form of abuse. As most people who suffer from chronic conditions are in older age cohorts this amounts to unfair discrimination on the basis of age.
The introduction of a mandatory contributory environment in addition to the non-contributory tax funded public health system has been the ultimate objective of health policy since 1995. Such a contributory system can take the form of dedicated social health insurance (SHI) fund for contributors only. It could also take the form of national health insurance (NHI) where both contributors and non-contributors benefit from a universal system.
National Health Insurance versus Social Health Insurance:
From an organisational point of view the implicit and explicit subsidies required within the overall health system remain identical irrespective of whether the regulated contributory and non-contributory systems remain separate.
National health insurance is not an option that emerges overnight as an alternative to social health insurance. Instead it becomes feasible within market economies where formal employment levels are high. Prior to this mixed systems are inevitable.
Future Paths for South Africa:
Regulated private insurance coupled with various social health insurance options and government subsidies represent the middle-income country route toward building a universal system.
National health insurance, or the complete nationalisation of the private sector, cannot be seriously considered as reasonable options for South Africa.
National health systems and insurance can be based upon single or multiple payer systems. The choice of system largely depends on historical developments and local conditions. Whichever system prevails makes little difference to the underlying equity principles and objectives.
Although many of the elements of a unified and integrated health system exist in South Africa, at present they do not result in a functional and integrated framework. If these deficiencies are not addressed, the health system as a whole will continue to increase in cost, while simultaneously reducing and becoming increasingly unfair in the allocation of cover.
The ultimate responsibility for the overall performance of a country’s health system lies with government, which in turn should involve all sectors of society. A government has the responsibility for establishing the best and fairest health system possible with available resources. Health policy and strategies need to cover the private provision of services and private financing, as well as state funding and activities. The oversight and regulation of private sectors has to form part of the overall government response and must be high on the policy agenda.
Central Objectives
The public sector system must remain the backbone of the overall health system and should be protected from chronic under-funding.
The private sector can provide an effective environment for achieving increased levels of funding over and above tax-based allocations. However, as the private market for health care suffers from chronic market imperfections, public sector involvement is required to ensure that funding levels are socially optimal and not merely what the market will bear.
The reform strategy outlined in this section integrates the information from previous reform processes and the analyses of earlier sections in this report and encapsulates it within a rational reform path. To a large extent reforms recommended in earlier processes remain intact. This section provides a prioritisation of those reforms pivotal to the achievement of fundamental health systems reform.
Elements of the reform process which need to be prioritised in the short- to medium-term are identified and divided into four phases. The achievement of the final phase is seen as a fairly long-term objective which will not be fully realised within the next ten years. It is important however to reflect this final phase here to provide clarity on the ultimate direction of the health system.
Government policy is clearly complicated by the peculiarities of the health market which necessitates intervention if health goals are to be achieved. Further complicating Government policy is the fact that no clear formula exists to achieving its goals. The level of economic development and the maturity of existing institutions affect the available options and opportunities. There is therefore an ongoing obligation on Government to carefully assess policies on their merits.
Although the level of economic development and existing institutions influence reform options, they need not undermine the achievement of policy goals that address the underlying obligations of Government.
Within this section various institutional arrangements are suggested. These are given suggested names consistent with their function. Ultimately, if accepted, these functions could be arranged quite differently from an institutional point of view. This would however not diminish the need for the functions themselves.
Applying some of the key principles identified thus far the following obligations on the state can be identified with respect to social security (which includes health care) and health care in particular:
Access to a basic set of services must be guaranteed to all and not be based on the ability of any individual or group to pay.
Although access to a basic set of services will be guaranteed for all, those able to contribute, whether in the form of taxes or mandatory contributions, should be required to contribute. As far as possible contributions need to be made over in a pre-paid form and, where essential basic services are concerned, with user fees and co-payments eliminated.
The central objectives of a final system are clearly those underpinning all of health policy. The objectives underlying the desired structure and institutional framework may be more specific and should include:
Financing:
Service provision:
Institutional framework:
It is the recommendation of this Report that in the medium- to long-term South Africa move toward a National Health Insurance system compatible with multiple funds and a public sector contributory environment as defined in the 1995 NHI Committee Report. Initially the environment should continue to be strictly differentiated between a private contributory environment and a general tax funded public sector environment. Over time this strict differentiation can diminish with a broader contributory environment emerging, replacing general taxes as a revenue source. The ultimate elimination of general taxes as a key revenue source is unlikely for a fairly long time, and may in fact not even be desirable as policy objective.
Four phases are envisaged defining important linked reform measures. The phases guide the evolution of health system toward the achievement of a universal contributory system.
Phase 1: Development of the enabling environment for greater integration:
The current health system is incompatible with the introduction of or integration with contributory environments. The overall system of cross-subsidies is fragmented and not structured in accordance with strategic policy goals. Furthermore, the strict partitioning between the public and private sector spheres negatively affects the operational effectiveness of both environments.
The priorities within phase 1 therefore need to focus on putting in place an enabling environment for more substantive and far reaching policy reforms.
Phase 2: Implement preparatory reforms:
In conjunction with the establishment of the enabling environment, a number of reforms of strategic importance should be implemented. These need to focus on the creation of regulated risk pools, and major enhancements to the regulation and subsidisation of the medical schemes environment. The objective is to improve the quality and cost-effectiveness of cover within the voluntary contributory environment (medical schemes).
The phase 2 reforms serve to enhance the voluntary contributory environment in order to facilitate the establishment of a mandatory environment emphasised in phases 3 and 4. The greater the degree of cover, and the acceptability of the contributory environment, the less the disruption involved in establishing any future mandatory environment.
Phase 3: Implementation of the initial mandates:
Once the preparatory reforms of phase 2 are in place, the groundwork would have been established for the implementation of the first statutory mandates. Given the income distribution in South Africa, the mandates should begin with higher income groups. Where lower income groups are concerned, this phase should focus on further development of the voluntary contributory environment.
Phase 2 would have seen the initiation of a state-sponsored medical scheme. Phase 3 should focus on the development of a contributory scheme for non-medical scheme members. This will help to establish the institutions in government that would ultimately manage a public sector contributory scheme within a National Health Insurance framework. Thus two contributory mechanisms will exist: the first based on medical schemes; and the second a dedicated public sector contributory fund.
Phase 4: Implementation of National Health Insurance:
The last phase envisages the implementation of a universal contributory system which would to a substantial degree replace general tax funding a source of revenue. General tax as a supplementary source of revenue may nevertheless prove desirable. The final phase essentially envisages the establishment of a contributory environment for all groups and individuals assessed to be in a position to contribute toward the health system. These contributions would not replace medical scheme contributions, but rather fund a proposed subsidy provided to medical schemes. All contributions and general tax allocations should ultimately be made directly to a Central Equity Fund (CEF) which would in turn allocate them to the public sector and medical schemes based on a risk-adjusted equity formula.
A Public Sector Contributory Fund (PSCF) should be considered to become the national funding authority for the public health system. This would enable the consolidated allocation of all funds directly allocated by the national Department of Health. Phases 1 through 3 would have seen the centralisation of key components of the health budget (including the establishment of a contributory system dedicated to funding public sector services), and the establishment of capacity to fund provinces via improvements in the capacity to manage the conditional grant system. The end phase of these enhancements should see the creation of the PSCF to take responsibility for and manage the allocation of funds from general tax revenues and contributions allocated through the CEF.
Figure 15.1 Reform Strategy and Approximate Timeline
Public sector reform pre-requisites for the introduction of a contributory component to funding public sector services require the:
Private sector funding reforms required as pre-requisites for the introduction of a mandatory environment for medical scheme membership are the:
Complementary measures to the above would include:
Centralisation (ring-fencing) of the key components of the Health budget:
Centralising the allocation of the health budget creates a coherent link between national policy objectives and provincial service delivery. It also establishes a required direct relationship between the budget allocation process and any future contributory system dedicated to using public health services. This could be phased in over a number of years as the capacity of the national Department of Health is improved to revise the current allocation system.
If no central ring-fencing of the health budget occurs the viability of any future social health insurance option dedicated to funding public health services will experience difficulties for the following reasons:
However, it should be noted that the use of matching conditional grants in conjunction with minimum norms and standards could achieve many of the objectives without the full ring-fencing of the public health budget. This less onerous approach could therefore be considered in the short- to medium-term if full centralisation is perceived as too risky. Irrespective of which option is adopted, the establishment of a dedicated unit with the required expertise to allocated current and future conditional grants should nevertheless be established.
Establish an expert unit to manage the conditional grant system:
Ensuring the achievement of an equitable distribution of physical health services requires careful management of the conditional grant system. Both allocation criteria and conditions need to be established centrally. This role should not extend to the micro-management of provincial administrations, but should instead attempt to achieve designated broad service targets within a coherent national framework with mutual consent. This unit should ultimately be incorporated into the proposed PSCF.
Decentralisation of public hospital management:
The current inflexible regulation of public hospitals affects both their management of revenue sourced from general taxes and their ability to access the private sector contributory (medical scheme) environment. Hospital decentralisation needs to extend to their having strong boards, a CEO as the accounting officer, and the holding of their own bank accounts. Hospitals need to be placed in a position to enter into and manage contracts directly, subject to the oversight of provincial health authorities and the relevant hospital board.
Implement a coherent uniform policy with respect to enhanced amenities:
In order to reinforce the contributory system, enhanced amenities need to be introduced into the public system. It is proposed that this focus on, but not be limited to, hospital services.
As access to particular services and amenities will depend on whether or not someone is part of the contributory environment, a smart card identification system is important, if not essential. If such a card is not produced at a public facility, however, no-one will be denied cover. They will only be denied access to the enhanced amenity.
Public facilities should at all times retain their public sector identity. No separate facilities offering only enhanced amenities should be created as this will impact on access and equity. Over time the system of enhanced amenities may fall away once the need for an inducement to pay ceases to be important.
Initially enhanced amenities will apply and be developed with respect to medical schemes. However, the development of a public sector contributory system for low-income groups would also develop around the enhanced amenity.
Financial injection to enhance the public sector services:
In order to implement a system partially reliant on voluntary contributions, basic improvements to the facilities and services are required. Otherwise contributions will not be forthcoming. These improvements must not be confined to the enhanced amenities.
Establish a process to develop and implement minimum service requirements for the public system:
To ensure the consistency of the conditional grants, a national policy framework for public services, integrating all levels of care, is required. As the conditional grant system is effectively the implementation arm of public health policy, this process should focus on the establishment of service requirements and norms and standards.
Human resources:
Staffing arrangements also need to come under tighter management, but allow for greater flexibility to serve both the public and private sectors. These contracts should be limited to scarce personnel only, and probably to specified institutions.
Remove residual risk-selection:
The removal of residual risk-selection requires a number of smaller reforms in conjunction with a risk-equalisation process. The risk-equalisation mechanism is discussed further below. The other reforms required include:
Increase coverage generally:
This can occur through a number of measures:
Effective regulatory environment for intermediaries:
A system which ensures appropriate economic rewards for intermediaries needs to be considered. A substantially improved approach to consumer protection is also required.
The public and private sectors define their benefit entitlements differently. The public sector establishes services which provide comprehensive cover for an undefined range of conditions. The conditions covered may be qualified through the use of protocols.
The regulatory environment for private sector has moved toward the creation of positive lists of services for which cover is provided. The Medical Schemes Act No. 131 of 1998 now specifies a positive list of conditions and treatments which must be covered by schemes.
Government has to move toward defining what it regards as basic essential services which everyone must be covered for. Although these may be defined differently between the public and private sectors, there must be convergence on the approaches adopted in the two environments.
Ultimately both the public and private sectors need to provide a minimum core set of services. Within medical schemes these would be regulated as prescribed minimum benefits. Within the public sector a similar process would occur and be framed as minimum norms and standards.
Revise the subsidy system:
The tax system is currently the most important vehicle for achieving most of the risk-pooling required to generate income-related cross-subsidies. Consideration has to be given to using the system of general taxes to achieve income-related cross-subsidies in the medical schemes environment.
The Medical Schemes Act No.131 of 1998 provided for the introduction of a limited number of risk-related cross-subsidies within the medical schemes environment. However, there are various structural deficiencies which need revision and include:
Revision of the Budget System:
The budget system needs to be revised to ensure that the regional allocation of health services is equitable. Furthermore, the value of subsidies given to the private sector should not exceed that provided for people covered through the public sector.
Tax subsidy:
The tax subsidy currently contradicts health system objectives. A revision of the overall system along the lines begun through the Medical Schemes Act must be considered, which achieves greater risk pooling and converts the tax subsidy into an explicit risk- and income- adjusted subsidy. The achievement of these cross-subsidies will require the creation of a risk-equalisation fund.
The existing tax subsidy should be phased out and an explicit on-balance sheet subsidy phased in. The subsidy would initially be funded from general taxes but could gradually replaced by an earmarked tax. The subsidy would take the form of a risk-adjusted per capita allocation in respect of everyone in a medical scheme, or who participates in any public sector voluntary or mandatory contributory environment.
Introduce a system of risk-equalisation:
A system of risk-equalisation is required both to balance the uneven risk pools (i.e. schemes with above or below average proportions of older or sicker people) between medical schemes and to distribute the explicit subsidy that replaces the tax subsidy.
Various measures are possible to reduce service costs within the private sector using either direct limitations on the supply of technology, or through market oriented measures such as central purchasing by the public sector for both public and private sectors.
Supply controls:
Currently under-utilised or not consistently utilised are a number of measures that are essential to containing the ballooning of costs on the supply-side within the private sector. Internationally there is careful management of the introduction of new technology, and the geographical distribution of services. Over-concentration leads to supply-induced demand which private sector funders find difficult to control. Government has to implement a coherent framework which aims to directly limit excessive concentrations of providers and new technology.
Medical Scheme Administration Fees:
Open medical schemes are experiencing significant increases in non-medical expense related costs. Consideration needs to be given to capping administration costs at reasonable levels. Annual increases should also be limited to ordinary inflation.
Market-related measures:
The rational use of highly specialised services or expensive diagnostic services can be encouraged through making these services available to the private sector at cost through the public sector. In certain instances, services could be provided universally free of charge where appropriate. Tuberculosis and HIV/AIDS services would be examples.
Areas that can be seriously considered for sale to medical schemes on a cost-recovery basis to the mutual advantage of both environments are:
Removal of bottlenecks constraining the development of managed care:
The development of improved selective contracting within the private sector requires that schemes be permitted to determine the terms and conditions of service suppliers in contracts entered into on a willing buyer and seller basis.
Medical schemes must be placed in a position where they can include volume and price in the same contract. Only in this way can appropriate risk be shared between the scheme and the service provider.
The shifting of risk onto insured members or individuals has proven to be an inferior and discredited strategy. It is only when adequate risk-sharing between funders and providers exist that genuine efficiencies can be realised.
To prevent provider collusion from preventing the development of appropriate selective contracting a legislative framework that deals with competition needs to be introduced into the Medical Schemes Act and enforced by the Council for Medical Schemes.
Establishing a consistent competition dispensation for the health system needs to be developed in conjunction with the Competition Commission.
This phase needs to expand cover within the voluntary contributory system (medical schemes) and consolidate reforms to improve the system of cross-subsidies.
The full implementation of a risk-equalisation system, begun in phase 1, is required. The risk-equalisation fund will be a statutory authority reporting to the Minister of Health. Its key functions will be two-fold:
The risk-adjusted subsidy should replace the existing inefficient and inequitable tax subsidy provided to employers and individuals. Ultimately, the risk-equalisation fund will be expanded into the CEF implemented in phase 4.
The tax subsidy, currently valued at R7,8 billion will need to be replaced by a more efficient and explicit subsidy to medical scheme members. This subsidy should initially be funded from general tax revenue. In phase 4 of the reform process the revenue source could move toward a universal mandatory contributory system.
The aggregate value of the subsidy will be determined according to the value of public sector services not utilised by individuals receiving cover in the private sector. The difference in the value of the original tax subsidy and the revised subsidy will be used to improve the public sector budget. The distribution mechanism for the subsidy should be the risk-equalisation fund.
The implementation of a state-sponsored medical scheme targeted at low-income groups and the informal sector would have the following objectives:
Not only will such a scheme create downward pressure on costs within the private market, it will assist in the development of a low-income contributory environment.
Currently just under 50 percent of civil servants are on a medical scheme. The first phase of any move toward a mandatory contributory environment should therefore begin with moves to bring civil servants under some form of cover. This can be achieved through an employer mandate requiring membership of one of a limited number of accredited medical schemes. Although this measure can take the form of an employer and employee bargaining process (as opposed to a statutory one) aspects of it can be reflected in legislation in accordance with a broader statutory framework.
There are two major objectives to this phase:
The first measure represents the final phase in the reform of the medical schemes environment, while the second establishes the basis for a subsidised low-income contributory environment.
The mandatory medical scheme membership for high-income groups will reduce adverse selection and stabilise medical scheme membership. This move really only becomes socially acceptable once major efforts have been made to bring private sector cost increases under control and to ensure adequate risk-equalisation between schemes. This measure represents the final phase of the medical scheme reform process initiated through the introduction of the Medical Schemes Act No.131 of 1998.
The mandate should initially focus on groups that are largely in membership already. As such the mandate should involve limited disruption to employer costs and employee benefits. Qualifying groups for the mandate need to be based on a combination of employer size and minimum income levels.
By this phase a fairly sustainable and good quality low-income scheme environment could have evolved based on reforms introduced in phases 1 and 2. This would have been achieved through the following:
The lower-cost environment should provide employers with greater choices for more affordable cover for good quality services. The mandatory environment also diminishes the need for late-joiner penalties.
The existing system of user fees for higher income groups using public sector hospitals needs to be replaced by a form of pre-payment. For individuals within a medical scheme this issue will already have been resolved. A pre-payment system exclusively for public hospital utilisation for low-income groups outside of the mandatory framework is required for those who may not wish to, or be unable to afford, medical scheme cover.
Pre-payment would qualify individuals for access to enhanced amenities within public sector hospitals. For non-contributors access will only be permitted to basic amenities. In terms of this system, everyone will be entitled to a free state service whether or not they make a contribution. The pre-payment system merely provides a vehicle for "buying up" within the state system and thereby incentives payment.
To minimise the risk for the state system, and the sustainability of the medical schemes environment, the mandatory medical scheme membership for high-income groups needs to be implemented together with the creation of the low-income contributory system.
The final stages of the reform process will involve the implementation of a universal contributory environment. Despite the universality, a degree of flexibility will continue to exist between funding environments and provider choice. Choice of funding environment will become more limited the lower the income of an individual or family. However, the flexibility of the third-party purchaser (public and private) to contract with different providers will be high. This will increase price competition between providers and serve to preserve the sustainability and affordability of health care services generally.
The final phase of the reform process would seek to combine the public and private sectors under a single universal contributory system. This system would directly fund the basic public health sector service, a differentiated public service for non-medical scheme members, and subsidise members of medical schemes who would be able to top-up their subsidies with their own contributions to their medical scheme.
The proposed environment would effectively integrate the regulated multi-fund (medical schemes) and a public sector managed and controlled system. The universal contribution would be distributed via a proposed Central Equity Fund (CEF) which would evolve from the risk-equalisation fund established in phase 2.
To cater for adverse selection issues within the medical schemes environment, higher income groups will be required to join a medical scheme. They would however be free to choose their scheme. This would already have been implemented in phase three.
Lower income groups, including the informal sector, would have the option to choose between a medical scheme or access the enhanced public sector amenities via the PSCF. Contributions for the low-income formal sector workers will be mandatory where they exceed a statutorily determined level.
Both the CEF and PSCF should operate within a statutory framework established by the Minister of Health.
In this way the public and private systems become integrated within a unifying framework that permits public policy to coherently influence equity and access to health services irrespective of where they are situated (i.e. public or private sector) or their revenue source.
The continued existence of the medical schemes environment will be essential, as these vehicles provide an established and functioning contributory environment which, if regulated to achieve minimum equity and access guarantees, can ensure that adequate resources are available within the overall health system.
Medical scheme revenue would be derived from two sources:
To prevent or contain perverse trends in the distribution of physical resources resulting from the medical schemes environment, supply-side management of any escalation or maldistribution of private sector resources needs to become an established regulatory function of national and provincial government.
Figure 15.2: Framework for a Universal Contributory System
The CEF should initially start out as the institution created to manage risk-equalisation between schemes as well as allocate a risk-adjusted subsidy to medical schemes. The initial subsidy would be an explicit allocation from general taxes (as described in phase 2) replacing the existing tax deduction. This system would:
The CEF would have the following functions:
The health system could move entirely away from a general tax-funded system toward a universal contributory system. Within such a framework some allocations from general taxes to deal with any revenue instability would initially remain. If this occurs consideration could be given to the allocation of a fixed percentage of revenue from VAT and corporate taxes supplementing the contributory system.
Contributions would be required on a mandatory basis from specified income classes within qualifying employer groups. Certain employer groups may be excluded, i.e. those below a specified number of employees. For groups falling outside of the mandatory net, voluntary membership would nevertheless be possible. Non-contributors would be entitled to utilise the basic amenity service of the state free of charge. They will however not have access to enhanced amenities. Although some free-riding will occur it should not be financially significant.
The CEF would not attempt to manage provider reimbursement itself but merely fund institutions in the public and private sector that are specialised to perform this complex function. Within the public sector the responsible institution will be the national Department of Health, via the PSCF. In the private sector, medical schemes would directly fund services.
With respect to the private sector, the CEF would perform a risk-equalisation and income-cross-subsidisation function. The schemes would continue to directly manage the reimbursement of service providers. Funds involved in the risk-equalisation process would come directly from medical schemes.
A Public Sector Contributory Fund (PSCF) should be established to manage the reimbursement of provincial health departments. This authority would not deviate from the equity allocation distributions established by the CEF, but focus on and be empowered to ensure the equitable regional distribution of physical health services.
The PSCF would flow from reforms initiated in phase 1 where specialised capacity in the form of a national Department of Health unit is created to manage and distribute the health allocations as conditional grants to provinces.
The PSCF would determine the allocations to provinces as conditional grants. It would also establish the associated conditions in conjunction with the national Department of Health. It would however not determine the actual provincial budgets, as these will be set by the provincial governments.
The determination of allocations to provinces would be a technical and not a policy exercise. Policy decisions would be the exclusive responsibility of the Department of Health.
The PSCF will need to take into account factors such as the physical distribution of health care service providers and personnel in the determination of allocations and conditions. Progressively achieving an equitable distribution of health resources would need to occur through negotiations with the provinces and the development of a consistent funding framework.
The PSCF would also need to determine the allocation of funds in respect of enhanced amenities via the conditional grant mechanism. The proposed system should form part of the existing budget system and cycles.
Medical schemes should be able to directly contract with the public health system where desired. They should also be in a position to pay funds directly to the PSCF in respect of pre-paid or utilised services in the public sector. Where such payments are made, the PSCF should adjust the provincial allocations and conditions accordingly.
All residents should be entitled to a subsidy equivalent to the risk-adjusted per capita average of all contributions received into the CEF. This subsidy should be available irrespective of whether the individuals are covered through the medical schemes environment or through the PSCF.
This subsidy system will evolve from the recommended changes to the tax subsidy system which forms part of the short- to medium-term reform process.
This approach will permit individuals to opt out of the public sector provider system without impacting on the degree of income- and risk-related (i.e. healthy to sick) cross-subsidisation underpinning the allocations of the CEF.
The functioning of health systems are extremely sensitive to the financial framework within which they operate. Unstable revenue sources that have no relationship to changes in service demand are as problematic as revenue sources very sensitive to demand changes. To be effective health systems must operate with sustainable revenue sources, a reasonable degree of sensitivity to demand changes, and a variety of provider reimbursement mechanisms.
The South Africa public sector budget system does not provide sufficient flexibility to ensure the financial sustainability of the public health system. The current framework appears to have generated structural under-funding of the health services and their associated capital requirements. The public health system is also unable to respond to demand changes resulting from higher income groups (with and without medical scheme cover) using public hospitals due to rigidities inherent in the budgeting process.
The envisaged framework outlined in phases 1 through 4 requires that certain principles be established in implementing the reform process. The following are recommendations on a number of principles:
Coverage changes over the four general phases with the gradual expansion of the contributory system. The public sector basic amenity is the non-contributory environment offered free to all below a certain income level. Higher income groups move from a voluntary contributory environment into mandatory options for both medical scheme membership and a final National Health Insurance (NHI) contribution.
By phase 3 the user fee system for public hospitals is eliminated and replaced by a combination of mandatory medical scheme membership and a voluntary contributory system for an enhanced differential amenity. Middle- and upper-income groups will largely be compelled to join a medical scheme during this phase. Public sector schemes will be able to contract for the differential (enhanced) amenity. Phase 4 creates a mandatory contributory environment which includes low-income groups. From that stage on, low-income contributors will access enhanced amenity services.
Figure 15.3: Implications for Coverage over all Phases
Table 15.1 Summary of coverage by broad income category
Phase 1 |
Phase 2 |
Phase 3 |
Phase 4 |
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Public sector: basic amenity (free) |
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Low-income |
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Middle-income |
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High-income |
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The various phases outlined in this framework reflect the need for careful planning and prioritisation of interventions. The reform process is complex and multi-dimensional. Significant technical work and consultation will be required in virtually every phase and step of the process. This complexity should be recognised as inherent to health systems reform and a degree of openness and flexibility permitted to fully develop the reforms for implementation.
A pivotal recommendation of this Report is that the reform direction and approach developed and proposed in the 1995 NHI Report remains valid and should continue to be the basis for further reforms. In the long-term this requires that South Africa move toward a National Health Insurance system over time making use of multiple funds in the form of regulated medical schemes, coupled to and compatible with a universal contributory system.
It is a finding of the report that the Medical Schemes reforms initiated in 1998 (Medical Schemes Act No.131 of 1998), based on the 1995 NHI Report, are an essential component of a stable health system. These reforms prevented the large-scale removal of high-risk groups from cover and have been instrumental in starting the drive toward lower cost medical service models in the private sector.
The reform process has to take into account the need to look at a phased approach whereby key enabling measures are implemented and the base established for the longer-term reforms. This Report has grouped the reforms into four phases:
Phase 1: Development of the enabling environment:
Phase 2: Implement preparatory reforms which include:
Phase 3: Implement initial mandates and develop voluntary low-cost contributory options for low-income groups:
Phase 4: Implementation of National Health Insurance:
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