The problem with pricing healthcare in a market economy is that it doesn’t behave like a commodity whose “value” is arrived at through the process of supply and demand.
A scarce resource faced with unlimited demand, the dynamics are further complicated by inequalities in society and acknowledgement of healthcare as a human right.
Markets assume sufficient access to information that allows buyers and sellers to make rational decisions. In the healthcare context, buyers are people in need of care while sellers are the service providers including doctors, dentists, pharmacists, specialists and hospitals.
The key difference between the healthcare market and other exchanges of goods, services and commodities is that demand does not fall when prices rise. There are many reasons for this, among them the fact that insured buyers enjoy generous budgets. And there’s little price sensitivity because not much is paid out of pocket at the point of purchase.
In short, the healthcare market disputes the accepted notion in economic theory of demand driven through “consumer sovereignty”. If the basic premise of demand is interaction between producers and consumers in relation to price, healthcare does not follow the law of demand on the basis of a lack of knowledge and information, and the very construct of health delivery: Doctor says you have this condition and you need this treatment.
In the context of healthcare, therefore, it becomes useful to view the concept of need and demand in a less absolute sense. Instead, healthcare should be seen in the context of achieving a stated objective. This assists with resources allocation and facilitates a different approach to the issue of cost, which determines allocation and accessibility.
That healthcare differs from other commodities is evident in many parts of the world where costs are high and rising, despite efforts to reduce them. Medical services remain restricted or rationed and many patients receive care that falls short of accepted standards. There are wide and inexplicable differences in cost and quality among providers and across geographic areas within countries. These factors are hardly indicative of a well-functioning market.
To better manage health allocation and to sustainably improve delivery quality and price in economies today, it is instructive to go beyond traditional rules of economic theory to consider cause and effect issues.
Determination of pricing is a critical factor and, in this regard, South Africa has come full circle from a largely regulated approach in the Sixties to late Seventies, to a structured relaxation of regulation culminating in a Competition Commission ruling against any form of price-setting.
The adoption of the National Health Act and the Taylor Committee recommendations emphasised the need to consolidate health planning between the public and private sectors. This process also highlighted the need to move from a voluntary private system to a compulsory, inclusive model.
Implementation has proceeded at a very fragmented pace, with price determination currently aimed at addressing the needs of a profit-driven market. The result has been continued uncertainty in terms of healthcare delivery.
Where medical schemes are concerned, a fundamental tenet is that they operate on a not-for-profit basis. Regulated under the Medical Schemes Act and administered through the Council for Medical Schemes, they operate as mutual societies in the interests of their members. This includes ensuring adequate funding for members’ current and future needs.
However, big business has developed innovative ways of extracting profit from medical schemes in the form of non-healthcare expenditure incurred in managing the affairs of the scheme. Costs include administration, marketing and communication, reinsurance and other operational expenses. They amount to translating medical scheme costs into profit under the guise of operational expenditure.
In the case of the country’s most successful medical scheme, Discovery Health Medical Scheme, administration costs for 2006 amounted to R2,1-billion. This amount was paid over to the fund’s administrator, Discovery Holdings.
Unfortunately legislation does not prescribe a cap on these expenses or an indication of what they should amount to. This, together with unquestioning consumers, means there are vast differences in the costs associated with running different medical schemes, which is surprising since all operate under the same legislation requiring the same minimum standards. Equally surprising is that administration costs have no relation to scheme size. So much for economies of scale.
Healthcare is a basic right. It may be a privilege to want a little better than the state is able to offer if we pay a little more, but it is time to question the allocation of resources and the extent of private sector profiteering if we’re to build a more equitable healthcare dispensation.
Neil Nair is Fund Officer of the Samwumed Medical Scheme