The Competition Tribunal last week approved the merger between Afrox Healthcare (Ahealth) and Bidco. This will shift a quarter of the private hospital market share into the hands of an empowerment consortium, led by Tokyo Sexwale’s Mvelaphanda Holdings and Jakes Gerwel’s Brimstone.
It is likely to have minimal benefits for the 6,9-million consumers who are members of medical aids that are paying out increasingly exorbitant medical fees — partly because of a cartel between the three major private hospital groups, Netcare, MediClinic and Afrox Healthcare, say industry experts.
The merger hearing shed new light on the lack of competition in the industry, which has seen costs soar. The industry says it competes on quality, not price, but the Council for Medical Schemes (CMS), a statutory body established to oversee the management of medical schemes, has started industry-wide research into the cost of private health care. Said registrar Pat Masobe: ”Something needs to be done to bring rationality into the pricing of hospital care.”
The merger was approved by the Competition Tribunal on Wednesday, 15 months after it was first filed with the Competition Commission.
The deal will change the complexion of the private health-care industry, not its anatomy. Eighty percent of the industry is dominated by the three major groups: Ahealth, Netcare, MediClinic and independent hospitals.
Most of their income comes from medical schemes, and they receive more than one-third of the almost R50-billion that flows annually through the schemes. The private hospital group’s cash cow is the membership of these schemes, a largely stagnant group which the hospitals are wringing harder every year for extra money.
Over the past six years consumers have experienced a 94% increase in theatre fees, a 45% increase in ward costs (6,4% above inflation). Medical benefits have increased by 84%, compared with non-hospital medical expenditure, which grew by 29,3%, according to the CMS.
Rand Merchant Bank (RMB), which has provided some of the funding for the empowerment deal and will have a 10,1% holding in Bidco, admitted in a report to the Competition Commission last month that South Africa’s three private hospital groups ”have operated as a cartel over the past three years rather than aggressively winning market share through price wars and aggressive advertising campaigns”. The RMB report analysed the risk factors associated with funding the deal, finding them to be minimal.
”The strategic behaviour of these groups has historically been characterised by conscious avoidance of price competition — the possibility of one of the primary service providers breaking ranks and initiating a price war is in our view unlikely,” the report said.
Heidi Kruger, head of corporate communications at the Board of Health Funders of Southern Africa, which represents medical schemes, admitted that prices in the private health-care sector are excessive. ”At present we have above average increases in hospital fees and do not have a proper framework on which to base prices,” she said.
But Kurt Worrall-Clare, an advocate and spokesperson for the Hospital Association of South Africa (Hasa), said the criticism that the three hospital groups are anti-competitive and collude in setting prices is ”simplistic”.
Hasa represents about 95% of the hospitals in the private sector. In 2003 the Competition Commission forced Hasa, the South African Medical Association and the Board of Health Funders to scrap a list of benchmark tariffs for private and psychiatric hospitals that they published on an annual basis, which essentially fixed medical costs through deals between the hospital groups and their industry bodies.
Worrall-Clare said the competition between the groups has increased markedly since then.
”In the last three years we have seen medical schemes enter into specific relationships with specific hospital groups. Common business sense tells you that the moment you have preferential relationships between a provider and a funder, there must be competition,” he said.
Stephen Harrison, senior specialist of policy and special projects at the CMS, disagreed. ”Our feedback from medical schemes is that they have limited opportunity for negotiating preferential, differential agreements with private hospital groups.”
He said the three hospital groups are generally concentrated geographically, particularly in smaller and outlying towns. This meant that medical schemes are restricted to a monopolistic market in these areas.
”If the medical scheme is unwilling to accept the price that the hospital puts forward, the members will very often have to make a down payment when they visit a hospital in that area. It is difficult for a medical scheme not to accept the terms on which hospital services are provided or to pay less then what is suggested,” said Harrison.
”The very size and concentration of the hospital groups means that some [anti-competitive] dynamics are in play without collusion between the hospitals.”
Rick Hogben, the chief executive of Ahealth, said in the Competition Tribunal hearings last month that ”the basis of competition between private hospitals is about several elements, of which price is not really one”. The basis of competition is in the calibre of ”the doctors, the facility and the quality of care” at the different hospitals, he said. ”All of these are driven by or lead to the initial referring doctor.”
Hogben said price is an insignificant competition indicator because of the nature of the risk associated with quoting individual patients competitive prices for services.
Hogben said the hospital groups have moved away from the traditional ”fee-for-service” structures towards fixed fees for procedures and per diem hospital rates, which increases risk-sharing between the funders and the private hospitals.
Harrison said the argument that competition between hospitals and hospital groups lies in the aptitude of staff and the standard of the facilities is questionable. Over the next eight months, the CMS will be researching the ”suggestion that there are links between specialists and specific hospitals that determines which hospital a patient goes to. It’s not really a competition for members, it’s a competition for specialist allegiance.” This cuts the consumer out of the benefit loop and allows for even greater profiteering.
Worrall-Clare said that medical inflation, which is on average four percentage points higher than the CPIX, has been driven by, among other things, input costs, such as drugs, surgical materials and technology. These have ”risen higher than inflation over the past few years — this falls outside the control of private hospitals”, he said. Drugs and surgical products, which comprise 45% of the average hospital account, are largely imported. ”Despite the fact that the exchange rate has improved [since 2001], price reductions commensurate with the improvement in the exchange rate have not been forthcoming,” he said.
He also attributed rising hospital fees to an ageing medical scheme membership.
The CMS is developing a national price reference list for hospitals, which will make price benchmarking between hospital groups and funders more transparent for consumers.
The private hospital groups have been given four months to submit individual reports, through independent consultants, about their costs — overheads, labour and material. The use of the list is voluntary, but it will tighten the largely unregulated private hospital market.
‘It’s worth it’
The angry scar down Lesley-Anne Burton’s navel is a result of a R100 000 operation in a private hospital. The same operation — with the same doctors and level of treatment — would cost less than half that amount in a public hospital.
The proctocolectomy, an operation to remove Burton’s colon, was carried out in the public hospital because at the time she was unemployed. Two further operations to reconstruct her colon from her small intestine were completed in a private hospital by the same doctor.
Burton (25) first fell ill last July. Her colon had become inflamed because of severe ulcers that caused diarrhoea, weight loss, bleeding and dehydration. Left untreated, the condition could have become fatal.
Burton’s invoices for the public hospital procedure — including theatre and ward fees for 10 days, drugs and doctor’s fees — show costs of about R13 000. Her medical aid statements for the private hospital procedure, including a week-long stay in a semi-private ward and fees for the same doctor, amounted to about R70 000.
Although her premiums are in the region of R1 500, she says they are worth it because the surgery would have put her in debt for years.
For Burton, the quality of treatment between the two sectors differed only in how the staff managed patients, the fact that facilities in the private sector were superior and the food was more edible.
Her medical aid claim forms, when compared to the public health invoices, indicate that private hospital fees are almost double those of public facilities. The private hospital also charged for all extras — from medical equipment to cotton balls and oxygen.
However, she believes introducing competitive pricing in the private health-care sector may lead to a drop in the quality of care. — Nawaal Deane