Hospitals – they’re making a killing

At the beginning of the year Martin Fisher, a 72-year-old retired professional from the sleepy Western Cape town of Hermanus, became suddenly and violently ill. He was hospitalised for six days in a private clinic in the town.

Upon leaving hospital, he received the bills that his medical policy did not cover. With a sinking feeling, he realised there was no way he could immediately afford to pay the additional out-of-pocket charges that his medical insurance scheme would not cover. Sick and still actively working to supplement his pension, Fisher was overwhelmed with the additional medical fees.

"The medical insurance covered the hospital fees, but this meant I had to pick up the bill for the pathologists, who ran up a R4 300 bill in six days!" Fisher told the Mail & Guardian.

"The ambulance fee is also mine to settle, as is part of the doctor's bill and the entire radiologist account for one x-ray," he said.

"For a proper diagnosis I needed an MRI [magnetic resonance imaging] scan costing R12 000. Because I did not have this amount nothing was done, leaving the doctor guessing as to the cause of the pancreatitis (for which he was admitted). I am paying off the additional bills as best I can, while being grateful for having access to an overdraft."

Fisher is one of the 16% of the population who has a medical aid policy. His story was one of many received by the M&G in response to an online questionnaire about private healthcare. Readers said despite spending large portions of their salaries on medical aid, they still had to pay up to cover medical fees.

Hospitals hold power
But while medical aid schemes have had a bad rap for their part in this scenario, evidence suggests that the power in the private healthcare industry exists with the hospitals.

Private hospitals have increased their prices at almost double the rate of consumer inflation over the past 10 years, and profitability of the three big groups is significantly higher than similar global firms.

Despite rising input costs, all three posted significant profit increases in their most recent financial statements. Netcare increased its operating profit by 7.9%, Life Healthcare's rose by 12.7% and Mediclinic's went up by 15%.

In the past five years, shares at the three large healthcare groups have seen substantial gains.

Life Healthcare Group Holdings shares have increased by 158% (since June 2010 when it was listed), Mediclinic International shares have increased in value by 275% and Netcare shares have rallied by 203%.

The heavyweights
Almost 80% of the private hospital market in South Africa is dominated by the three firms. By number of beds, Netcare has an estimated 26% of market share, Mediclinic has about 25%, and Life Healthcare has 22.2%, according to their own estimates and statistics from the Hospital Association of South Africa.

The market, however, has not always been subject to this triopoly. According to research carried out by economists from Genesis Analytics presented at the Competition Commission conference last year, the private healthcare industry was much less concentrated 15 years ago, when the three firms collectively held only about 55% of the market.

But a number of "creeping mergers" in the sector have since taken place, said Genesis economist Fatima Fiandeiro.

"Some of these mergers were opposed by the Competition Commission but then passed through the tribunal. Each one in and of itself has not been found to be sufficiently anticompetitive — so the tribunal allowed them to go through."

A decade and a half later, the three firms make up about three quarters of the private healthcare market. According to the Genesis report, these mergers not only increased each group's footprint in the market, they also increased their bargaining power.

The result?
According to the Council for Medical Schemes, hospital groups are now in a position to dictate prices to medical aid schemes. Medical aids, in turn, are becoming less and less willing to cover the inflated amounts.

"The result is a pricing regime with stark differences between the tariffs charged by the healthcare providers and the rates the medical schemes were prepared to pay, leaving a greater gap for the insured to either self or co-pay," said a report compiled by lawyers from Edward Nathan Sonnenberg for the Competition Commission last year.

Costs in the industry have raised the concern of Economic Development Minister Ebrahim Patel, who said recently that private medical care was becoming "unaffordable" for ordinary working South Africans. His views are loudly echoed by Health Minister Aaron Motsoaledi, who has appealed to Parliament for pricing regulations.

The Competition Commission announced that an inquiry into the sector would start in September.

Concentrated and profitable
The Genesis Analytics report found that profitability had increased dramatically for the hospital groups in the years after they consolidated.

It documented an analysis of the return on capital employed in the South African operations of Mediclinic and Netcare — the two largest groups. It analysed return on capital before and after 2001, which was the year the first merger was approved.

Between 1988 and 2001, Mediclinic's average return on capital was 14%. Between 2002 and 2011, that had increased to 23%. Return on capital for Netcare averaged 15% between 1997 and 2001. Between 2002 and 2011, that number had jumped to 22%.

The report, quoting economic theorists Peter Davis and Eliana Garcés, suggests that "a market with few firms … may be one where firms can exercise market power through high mark-ups".

Fisher believes he has fallen prey to exactly that. "If there is 'blame' [for my situation] then it must rest with the hospital fees and the absurd charges of the pathologists," he said.

"All the service providers could have been paid by the medical insurance had the hospital and pathologist not overcharged as they did."

The Genesis research went on to find that the average return on sales for all three South African hospital groups significantly outstripped those of their global comparators, in some cases by as much as 50%.

But Fiandeiro cautioned that while market concentration and profitability are linked, the connection is not necessarily a causal one.

"The increased profitability could be the result of improved efficiency in the groups or increased demand in the sectors due to a higher burden of disease," she said. "There are several caveats."

Price increases
Profitability aside, private hospitals have raised the ire of consumers and medical schemes by effecting ongoing, significant price hikes.

A third research report compiled by economics consultancy Econex shows that the increase in spending on private hospitals was more than double the rate of headline inflation between 2000 and 2010.

Over the decade, the consumer price index (CPI) was 6%. Over the same period, hospital price inflation was 8.5%. But spending on private hospitals increased by 12.2% — double that of inflation, and more than 40% higher than hospital inflation rates.

Price increases were flagged by the Competition Commission in its terms of reference for the market inquiry; described as "rising notably above headline inflation".

One of the reasons analysts attach to the price hikes is the market's high concentration level.

"The determination of fees is a negotiation process between the medical scheme administrators and the hospitals. How that plays out depends on the bargaining dynamics between the schemes and the hospital. The concern is that increased hospital concentration has shifted the dynamic in favour of hospitals," said Fiandeiro.

Desired results not achieved
Action by the Competition Commission in 2002 to decentralise collective bargaining by the hospitals in order to increase competitiveness had seemingly not achieved the desired results, said the Edward Nathan Sonnenberg report.

"The problem still remains that the hospitals are charging fees that are too high," said Charles Irons, a pensioner who was recently hospitalised at a cost of more than R20 000.

"I don't know whether there's collusion between the private hospitals — the medical aids and the department of health try to reduce their fees but it doesn't seem to be working."

According to Dr Dumisani Bomela, chief executive of the hospital association — which represents the three large groups and independent hospitals — price increases for 2011 were more moderate than the 10 years before.

"The update for 2011 reflects: hospital spend per beneficiary increased by 7.6%.

"Private hospital price inflation was 5.5% (as reported by Statistics South Africa) for 2011," he said. The 2.1% difference between hospital inflation and price increases was "due to increased utilisation".

In defence of price hikes
In their most recent annual and interim financial results, all three groups recorded an increase in the number of bed days sold to patients. But in each case, their increase in revenue outstripped the increase in the number of bed days sold.

For Mediclinic, the number of bed days sold increased by 3.5%, and revenue increased by 4.5%.

Netcare increased its number of bed days sold by 2.3% while revenue increased by 4.8%, which nevertheless represented "efforts to contain hospital inflation below CPI", said Melanie da Costa, director of strategy and health policy for the Netcare group.

For Life Healthcare, the difference between the two figures was more pronounced. While bed days sold increased by 1.5%, revenue was up by 7% in its March interim results.

Bomela said these increases nevertheless reflect costs that are "very well contained" in light of the growing demand in the industry: "We have had a significant growth in volume … the medical scheme market has shown growth of over 1.5-million people since 2005."

Mediclinic chief executive Danie Meintjes said that the group's income per bed day increased due to price inflation and a change in case mix and utilisation.

Cost pressure
"Utilisation, as reflected in the increase in bed days sold, is driven primarily by ageing populations, increasing medical insurance membership, new technology, consumerism and the increasing prevalence of certain complex diseases," said Meintjes.

"We also experience consistent cost pressure in key input costs, especially staff costs, given the scarcity of nursing staff in particular," he said.

"The department of health has increased salary scales in the public sector significantly. This continues to put upward pressure on private sector costs." However, despite rising input costs, profitability has burgeoned. Netcare's operating profit before capital items rose by 7.9%.

Da Costa attributed this to an "increase in volume with more admissions into hospitals" and "ongoing efficiency initiatives resulting in cost savings".

Adam Pyle, head of investor relations at Life Healthcare gave a similar explanation of the groupz's operating profit increase of 12.7%: "We manage our input costs very carefully and are always looking for ways to become more efficient."

The group did this through methods such as strong consumables procurement, management of overheads and administrative costs, driving administrative efficiencies and waste reduction and recycling, said Pyle.

Fisher, however, is not convinced. "The very concept of making money out of illness makes me sick!" he said.

"Because most people are mystified by the functioning of the body, the medical profession has, at huge cost, become the 'high priest' of health.

"[The private clinic I made use of] is a business without social conscience. It provides exceptionally good medical assistance at a price few can afford."

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Thalia Holmes
Thalia Holmes

Thalia is a freelance business reporter for the Mail & Guardian. She grew up in Swaziland and lived in the US before returning to South Africa.

She got a cum laude degree in marketing and followed it with another in English literature and psychology before further confusing things by becoming a black economic empowerment (B-BBEE) consultant.

After spending five years hearing the surprised exclamation, "But you're white!", she decided to pursue her latent passion for journalism, and joined the M&G in 2012. 

The next year, she won the Brandhouse Journalist of the Year Award, the Brandhouse Best Online Award and was chosen as one of five finalists from Africa for the German Media Development Award. In 2014, she and a colleague won the Standard Bank Sivukile Multimedia Award. 

She now writes and edits for various publications, but her heart still belongs to the M&G.     


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