1 Private hospital tariffs CMS presentation to the Health Portfolio Committee 27 July 2011 2 Contents Introduction Economic considerations Unique characteristics of the healthcare market Why not deregulate? Not a perfect market Information problem Agent problem Third party payer Moral hazard Risk selection Adverse selection Hospital cost trends Concentration of hospital market Market power Countervailing power Proposed solutions Statutory health pricing authority Note that private healthcare facilities will be regulated by the Office of Standards Compliance (Which will not deal with pricing) 3 INTRODUCTION Why is the CMS concerned? 4 The CMSs involvement The CMS has a specific interest in the cost of healthcare, to protect the members of medical schemes we must be concerned with Cost containment The governance of medical schemes Member access to benefits In this presentation we will explore cost trends and cost drivers, and explain these by considering competition dynamics, private hospital behavior and ownership 5 After sharp increases in from 2000 to 2005, real claims costs have remained stable from 2005 6 the cost drivers are hospitals and specialists (CMS Annual report, 2009) 7 private hospitals showed particularly sharp increases, peaking again in 2009 ? (2009 prices) 8 the public and private sectors make up our health system There is only one health system in any country, though there may be different actors The private sector serves an important health system objective: improving access to care Often not in isolation of public sector priorities Objectives however, are different; profit is important in the private sector, while improvement in health status is critical for the public sector Both public and private sectors rely on same pool of human resources The public sector often responsible for training medical professionals and maintaining standards and ethical conduct 9 Any failure to address the central systemic cost factors on the supply-side of the health system will lead to a continued deterioration in access to healthcare through medical schemes. The consequences will be significant for the country, for while the industry will remain extremely profitable, it will do so at the cost of access to healthcare for all 10 ECONOMIC CONSIDERATIONS Unique characteristics of healthcare markets 11 the healthcare market does not meet the requirements for normal competition Requirement for normal competition Comment No barriers to enter or exit the market Hospitals requires large amounts of capital and skills It takes many years to train as a healthcare professional Many regulatory interventions (training, registration, practice standards) Perfect information Demand for health care is a derived demand arising from the demand for health The public have no knowledge on what is required to treat an ailment, the healthcare professional Zero transaction costs The costs of choosing a different hospital is huge This becomes difficult when someone is not well Homogeneous products Due to its very nature, healthcare has to be customised to meet patient needs Other: Non-increasing returns to scale, infinite buyers and sellers, perfect factor mobility, profit maximization 12 imperfect information in healthcare renders the normal considerations in achieving a balance ineffective Consumer sovereignty is challenged Information on what to purchase has to be done through an agent the healthcare professional Lack of sovereignty worsens with the severity and complexity of the condition (toothache easy to self-diagnose and choose treatment, not so with cancer) Hospitals and other providers are in an advantageous positions in respect of access to information Ascertaining costs and benefits of treatment is not simple Judging whether or not treatment has been beneficial often beyond the consumer again needs the advice of a healthcare professional Information about costs and effectiveness of hospital services provided often not available in public domain Third party payer The one receiving treatment often not directly responsible for payment Moral hazard: Consumer apathy, provider responds rationally Providers select and supply health, creating demand 13 information problem has dire consequences for the consumer Asymmetry of information causes increased prices for health services, because it gives market power to the holder of better information This renders the consumer powerless to negotiate a price 14 HOSPITALS IN SOUTH AFRICAN CONTEXT 15 hospitals operate in a complex environment, but important areas must be considered Hospital costs are a key cost driver, and the rising trend is important Challenges for consideration Market concentration Medical arms race Non price competition Detrimental relationships 16 The private hospital market in metropolitan areas (50%+ of medical scheme population) was concentrated by Market becomes concentrated Only 12.3% of private hospital beds were outside three main hospital groups by 2006 17 private hospitals derive market power form market concentration, medical schemes and administrators are weak in comparison Scheme HHI (2006) = 1,005 Scheme Administrators HHI (2006) = 1,489 18 Private hospital real cost trends (2009 prices) Coincides with market concentration ? 19 Cost of debt Return on Investment Observations: The return on investment has grown from 10% to north of 20%. (Note: The acceleration in returns corresponds to the concentration of the market.) The cost of debt has dropped significantly since With the return on investment rising and the cost of debt falling the gap between blue and red has widened significantly. This gap represents the economic value which shareholders have enjoyed in increasing amounts over the last few years. Private Hospital Return on Investment 1988 to 2007 20 The medical arms race: Non-price competition Internationally established phenomenon Hospitals compete for specialists Specialists exercise discretion on directing patients to hospitals Only specialists and hospitals know costs of their services hence an ability to channel patients towards high-cost interventions Hospitals attract specialists through high-tech medical facilities and service offerings South Africa has a very high concentration of state-of- the-art technology employed in healthcare Result: High costs of care 21 Hospitals have vertical relationships with various other stakeholders in the supply chain Specialists Laboratories Radiologists Allied health professionals 22 increase in costs not explained by ageing in the population neither do the increased burden of disease, progression of the HIV pandemic, improvements in technology, less invasive procedures, better outcomes, or lower risk of procedures 23 PROPOSED SOLUTIONS FOR CONSIDERATION Healthcare pricing authority 24 Necessary interventions in the private healthcare environment Correct market power imbalance in ffs negotiation through central bargaining Remove vertical relationships between hospital groups and their supply chain: Pathology Radiology Pharmacy and pharmaceuticals Medical devices Consumables and surgicals used in-hospital Rebates 25 Necessary interventions (continued) Conflicts of interest through ownership links, shares, and other inducements, with: Specialists Emergency transport General practitioners Market concentration and proliferation in the major areas through greatly improving the hospital licensing system: Diversity in hospital ownership through the licensing system Minimum level of hospital licenses held by non-profit hospital groups Preference to staff-model hospitals Population-based criteria for the licensing of new private hospitals. 26 Statutory pricing authority Commission Management of negotiation chamber Technical Review of Prices Advice to Minister Independent Arbitration Courts (review but no appeal) Courts (review but no appeal) Should be completely independent to achieve the trust of all stakeholders Research Arm Compliance Investigations Enforcement Should consider the role of the RPL & Pricing Committee Provide information to other agencies where appropriate 27 THANK YOU