Profit vital to private hospitals

Heart of the matter: Private hospitals are financed by investors, who demand a good return on their investment. (Oupa Nkosi, M&G)

Heart of the matter: Private hospitals are financed by investors, who demand a good return on their investment. (Oupa Nkosi, M&G)

With reference to the recent article titled "Hospitals — they're making a killing", Mediclinic would like to address a few fundamental aspects of private healthcare costs.

First, service providers such as pathologists, radiologists and all doctors are independent entities and are not employed by private hospitals. Their bills are generated independently from the hospital, hence the reimbursement amount for each of these providers is not affected by the amount of the hospital bill.

So, a significant out-of-pocket payment for the radiologist (for the MRI as referred to in the article), for example, is not as a result of the amount billed by the hospital.

Hospital tariffs are negotiated upfront and, in the most part, set for a year, whereas this is not the case for doctors and other service providers.

As such, there will often be a difference between what the service provider charges and what the scheme is willing to pay, because it was not agreed upfront, and it is not as a result of hospital prices.

The article refers to the positive trend in hospital profitability as an indication of high concentration and market power.

Hospital tariffs
Here, we would like to reiterate that hospital tariffs are set through annual negotiations between medical schemes (usually their administrators) and hospitals, and these negotiated tariffs remain fixed throughout the year.

In fact, the medical-scheme-administrator market is more concentrated than the private-hospital market, with the top three medical scheme administrators potentially able to negotiate on behalf of 80% of Mediclinic's medical-scheme turnover.

Businesses in the private sector are financed with capital provided to them by shareholders who require a return on their investment. Businesses need then to generate profit in order to provide their shareholders with this return.

Profit not distributed to shareholders is reinvested in the business as capital. For public entities, on the other hand, capital is provided by the state, hence no return on investment is required.

It is, therefore, only reasonable that hospitals in the private sector should generate profit in order to access the capital required to build hospitals.

Said plainly, no profit equals no investors equals no private hospitals equals no need for medical schemes equals no choice for citizens.

Flawed comparative analysis
The article draws from research done by Genesis to state that the profitability of three private hospital groups in South Africa outstripped those of their competitive comparators by as much as 50% in some cases.

Mediclinic has reviewed this research and noted that the comparative analysis of South African hospitals with other comparators was methodologically flawed.

However, the Genesis report is correct in noting that the trend in increased profitability could be attributed to other internationally recognised factors such as "improved efficiency in the [hospital] groups or increased demand in the sector due to higher burden of disease".

The industry has experienced an increase in the number of medical-scheme members, a higher burden of disease and an ageing profile, which has led to a higher demand for hospital care and observed increases in the number of bed days sold.

However, although these have supported an upward trend in hospital revenue, it does not necessarily imply that profitability has increased. In addition, these factors drive overall medical inflation, of which the hospitals see only a portion.

Medical schemes have access to detailed statistics pertaining to all the factors that contribute to this rise in costs, such as community rating and open enrolment.

Prices remain contained
Ultimately, private hospital tariff increases are driven by increases in underlying input costs such as equipment costs and nursing salaries (which increase at rates higher than the consumer price index), but prices have remained contained despite high medical inflation.

Mediclinic would like to reiterate its commitment, with the partnership of our supporting doctors, to ensure that our patients are able to access cost-effective, quality healthcare comparable to care offered in other private facilities worldwide.

We are driven to find ways to make healthcare more affordable. We look forward to the Competition Commission inquiry (into the private healthcare sector) as we believe that there are current legislative constraints that, upon review, could make private healthcare more affordable and therefore accessible to more citizens.

The private-hospital sector is a national asset and, although Mediclinic Southern Africa supports the government's policy to increase access to affordable, quality healthcare services for all citizens, this policy can be realised only through the skills and ability of all role players — and not at their expense.



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