On 10 March 2016, the Health Market Inquiry Panel heard submissions from Mediclinic and Life Healthcare, two of three large private hospital groups that make up the significant majority of the private hospital market in South Africa. The third hospital group, Netcare, will make submissions on 11 March 2016.
To date, hospital and specialist costs have been identified by a wide range of parties as a major ‘cost driver’ which has resulted in high and increasing costs to patients in the private healthcare sector. These claims have been consistently repeated by medical schemes, medical scheme administrators, regulators and the WHO and OECD.
Mediclinic acknowledged that the “Constitution is at the centre of the Inquiry” and that the hospital group could potentially “be held responsible for negatively infringing on the right to healthcare services” of patients. In its submission, SECTION27 highlighted that the Constitutional Court has decided that users of the private healthcare system have a right to access to high quality, “affordable” healthcare services. Mediclinic’s acknowledgement came as a surprise given the trend in submissions from market participants to ignore or deny the relevance of the Constitution.
Life Healthcare’s presentation began with a detailed overview of its business operations and the regulatory environment within which it existed. At the conclusion of their presentation and questioning the Chief Justice thanked Life Healthcare for their candour in answering all questions, even when some of the answers reflected a need for improvements in the conduct and operations of Life Healthcare to improve quality of services received by patients.
Healthcare professionals: doctors, nurses and specialists
Healthcare professionals are the most direct point of contact for patients in their attempts to access healthcare services at healthcare facilities in both the public and private sectors. Discussion between Life Healthcare and the Panel touched on many different aspects of how healthcare professionals interact with hospital groups.
With regard to doctors, Life Healthcare emphasised that despite the high and disproportionate number of health professionals working in the private healthcare sector already, both the private and public healthcare sectors simply need more, frankly stating that “if we don’t train more doctors in South Africa then we are headed for a real crisis”. Moreover, it would help if the process of “bringing in foreign doctors” could be “simplified”. In earlier hearings, the HPCSA submitted that this process is efficient and easy to navigate despite complaints by doctor’s groups.
In addition, Life Healthcare said that while doctors work in private hospitals they cannot be employed by them. This is a position that the HPCSA vehemently supported in its submissions to the Panel, suggesting that the result of such an employment relationship would extend hospitals corporate influence and perverse financial incentives to health professionals. “We would like to have the ability to employ doctors” in order to “increase cost effectiveness and quality of care”, Life Healthcare said.
The Panel also asked Life Healthcare whether as a company it collects any data on doctors in full time employment in the public sector who also work in the private sector. A similar issue arose again when Chief Justice Ngcobo quizzed Life Healthcare on nurses “moonlighting”. Life Healthcare’s response was that there is a lot of “anecdotal evidence” of nurses working multiple jobs. The apparent concern is whether those who work across two sectors are capable of providing adequate care to patients .
Judge Ngcobo also asked whether Life Healthcare had enough nurses, and if not “how do you deal with the shortage of nurses?” Unsatisfied with the initial response he asked for specific information on whether Life had enough “sufficiently skilled” nurses “to care for patients in intensive care and high care” environments. Life Healthcare responded frankly “we do not”. Though Life makes efforts to train their own nurses, engages in foreign recruitment and subsidises employees to study at private colleges, some of which are operated by Life itself, there are still shortages, it submitted.
Mostly, Life submitted, nurses from agencies are used to fill some gaps but there are no mechanisms or guarantees put in place by Life to ensure these nurses are not working multiple jobs. Judge Ngcobo also asked whether the closing of public nursing colleges had any impact on Life’s operations. Ultimately, Life’s responses confirmed submissions made to the panel by nurses in earlier public hearings, which emphasised the problem of a shortage of nurses and the potential impact which that has on quality of care in private hospitals.
Judge Ngcobo probed Life’s relationship with specialists. He commented that “without specialists you don’t have a hospital business”. “Specialists attract patients?” he asked, and Life confirmed that this was the case. Life Healthcare acknowledged that the “directive incentive as a specialist” is to take on more cases for more income, though noting that Life itself “[does not] encourage inappropriate admissions”. A member of the Panel noted that “they [specialists] may motivate themselves” to pursue more income in this manner.
Costs and prices
The Panel and Life Healthcare discussed extensively costs and pricing in the hospital environment and the sector more broadly. Dr Bhengu questioned Life’s presentation which created the impression of “seemingly haphazard tariffs” and expressed some doubt that this was possible. Other Panel members pushed further, interrogating Life on the impact of its tariffs on those companies which Life had acquired. The question was put even more directly later when Life was asked whether they were “pricing to the maximum of what the market can bear” or taking into account costs for itself and patients.
This line of questioning was perhaps prompted by the many submissions made to the Panel about hospital costs being a cost driver in the sector. The Panel asked Life Healthcare “Why are medical scheme membership fees continuing to rise?” if hospital-related costs are not the cause as others had suggested. Life explained that “there are underlying cost drivers” citing nursing as the “biggest” input cost. Overall, Life noted that it is a “combination of utilisation and other cost drivers” that has this effect but they assured the Panel that “we do look at trying to keep costs at CPI level”.
Competition and the private hospital market
Since the Health Inquiry was initiated by the Competition Commission in terms of the Competition Act, its primary focus is to determine whether the high costs in the private healthcare sector are caused, even in part, by anti-competitive practices, market structures or outcomes which can contribute the existence of high and increasing prices. The Panel’s questioning on costs and pricing therefore appeared to focus on potential competition concerns that emerged from written and oral submissions.
For instance, the Panel asked Life whether the hospital market effectively used a version of the old Reference Price List that was set aside by the courts. Life Healthcare accepted that “the underlying structure may not have changed” although the old price list was no longer applicable and health professionals were no longer allowed to collectively determine tariffs. This was followed up by a question whether it is the case that in Life’s contracts “all prices at all hospitals are the same”.
Another example of a competition issue was “occupancy rates” in hospitals which Life suggested was one of the issues that resulted in increased utilisation, which was in turn driving costs. The Panel asked whether Life, like specialists, may have “an incentive to keep a high occupancy rate”. The gist of the question is whether or not it is possible that patients are perhaps being admitted unnecessarily or kept in hospital unnecessarily because of perverse profit incentives. Life insisted that though “occupancy is important” to hospital groups the real question is what kind of things are being done to increase occupancy. Life emphatically stated that it does not support “doing the wrong things” to increase occupancy.
The question of occupancy is also connected to the broader issue of increased utilisation which many market participants have told the Panel is a major cost driver. The Panel connected “occupancy” and “admission” to “length of stay” asking Life whether it agreed with the WHO / OECD’s submissions to the Inquiry that “length of stay” and costs were both particularly problematic in South Africa compared even to other wealthier countries. Life, as other market participants, noted methodological objections to the WHO report including the definition of “length of stay” used and how it varies from country to country.
Another potential competition issue related to Life Healthcare’s ability to “negotiate with bigger and smaller medical schemes”. Life responded that it is “less about size and more about information” and ability to negotiate of the particular scheme. Some small schemes, Life submitted, manage to negotiate with big hospital groups effectively if they are prepared. This answer should be understood in the context that Panel members have previously suggested that even some state-funded regulators such as the Council for Medical Schemes and the HPCSA did not have sufficient power when dealing with large medial scheme administrators and hospital groups.
A final issue, relating directly to competition, is the presence or absence of certain hospital groups in particular geographical regions in South Africa. One panellist suggested that there may be a “regional division” of markets that suited all hospital groups even if it was not the product of an agreement to divide the market. An example that emerged during Life and Mediclinic’s presentations is Life’s very strong presence in the Eastern Cape which is the only province in which Mediclinic has virtually no presence. Mediclinic, who have 49 hospitals in the country told the Panel directly that the Eastern Cape was the “only province” in which it does not have a “good geographical distribution”.
Overall, many of these questions were deliberately left open or without complete or satisfactory conclusions, so as one Panel member noted “not to pre-empt” upcoming hearings. However, Professor Fonn did note that it is “a bit disconcerting for a consumer” that even when input costs decrease the price remains the same for patients.
Quality of care
An issue on which Dr van Gent focused throughout the day was what he described as an undesirable situation in the private healthcare sector in South Africa in which hospital groups failed to report sufficiently on the quality of their services. He asked Life Healthcare at the outset “what part of the context in SA explains that you are not obliged or incentivised to publish information on quality?” He observed that in some other countries hospital groups did this voluntarily, in the absence of regulation. He followed this question up by asking “when is Life going to publish information on quality?”.
Life’s response to this question was varied. One problem, they indicated, is the lack of “standard metrics for quality”. Another reason given was the lack of interest of medical schemes and administrators in this information. Despite this, Life also noted that it does do some “quality reporting” and international quality “comparisons”, for example with regard to mortality rates and neonatal care. The information that is published by Life, though, is “on a group basis, not on a hospital basis”. Van Gent even suggested that it should be in each hospital groups’ own interests to indicate to patients that the quality of services they provide is high and better than that of their competitors.
At this stage Dr van Gent repeated the question about when Life would begin to publish, on a hospital basis, data on quality. To this Life’s representative responded “I don’t know”. Later in the day Mediclinic would answer the same question with an assurance of publication “within the next year” for the first time. Life’s representative told the Panel that from his own personal perspective “this is something we certainly need to rectify as a group” and repeated the need for information to be “appropriate and correct” and “allow consumers to make informed decisions”.
Dr van Gent ultimately observed that the situation was an example of a “prisoners’ dilemma” which is a common coordination problem. Different parties must coordinate in their mutual best interests without sufficient assurance from any party that other parties will comply, he explained. This requires “collective action” Van Gent said and requires each party to take leadership even in the absence of regulation requiring as much. Life’s representative committed to the Panel that “we will push hard for collective action” on an industry level to ensure patients have access to the information that they need.
The CEO of Mediclinic South Africa, Koert Pretorius, led Mediclinic’s oral submission to the Panel. The presentation focused on Mediclinic’s business model, the regulatory framework, expenditure and the interaction between the hospital group and various stakeholders in the private healthcare sector. Mediclinic was founded in 1983 in Stellenbosch and was listed on the Johannesburg Stock Exchange five years later. The hospital group has grown its business by developing new hospitals and acquiring other hospital groups. Due to limited growth opportunities in South Africa, Mediclinic began to expand into the international market and bought a minor stake in a hospital in Dubai in 2006. The expansion into the global market was funded by capital raised by Mediclinic’s shareholders and acquiring debt in the respective countries. Mediclinic primarily operates acute care hospitals and has 52 hospitals and 2 day clinics in South Africa, but presently enjoys a presence in five countries. In South Africa, Mediclinic is one of the three major hospital groups which accounts for over 70% of the private hospital market. ER24, Medical Human Resources and Medical Innovation are three of Mediclinic’s subsidiaries involved in the provision of emergency care services, training of nurses and the manufacturing of hospital equipment respectively, and it currently has six training centres in South Africa.
According to Mediclinic, private hospitals are highly regulated. A range of legislation is applicable to its operations, including the Constitution of South Africa, the National Health Act, the Competition Act, the Medical Schemes Act and provincial Regulations.
Mr Pretorius acknowledged that the obligations envisaged in section 27 of the Constitution apply to private health establishments.
Though he applauded the establishment of the Office of Health Standards Compliance (OHSC), which inspects health care institutions, ensuring that they comply with stringent standards of quality health care, Mr Pretorius noted that the functions of the OHSC are limited as the the norms and standards which will regulate inspections has not been enacted. Mediclinic criticised the South African Nursing Council, saying that its failure to timeously provide a scope for nursing has hampered the training of nurses.
Mr Pretorius echoed the sentiments of the National Health Network regarding licensing; saying that each province followed its own approach and that the criteria used to adjudicate applications was not transparent or consistent. Each province adjudicates applications and this impacts on the ability to expand the business. Mr Pretorius expressed the view that there should be consistency in the interpretation of the criteria for licensing.
Mediclinic stated that its hospitals provide infrastructure, clinical services, support services and separate accounts. Doctors manage clinical processes, admit patients and also have a separate account for the services they deliver and that specialists such a radiologists act on the instructions of referring doctors. Mr Pretorius admitted that the system is complex and difficult for any user to navigate.
Mr Pretorius stated that the composition of the hospital account includes fee income and pharmaceutical items. Fee income includes accommodation charges multiplied by the number of days spent, the theatre bill and equipment. Pharmaceutical items include medicines and surgical items. Medicines are regulated by the Single Exit Price and no dispensing fees are charged. Surgical bills are charged at cost using the acquisition price model. Mr Pretorius noted several times that Mediclinic makes no profit from pharmaceutical items.
Mediclinic said that hospitals are labour and capital intensive and that capital input is not directly factored into tariff escalation cost. The group cited nurse salaries, repair and maintenance of equipment, electricity and water, catering, laundry and other fees as some of the operating costs of hospitals. Further they wanted the Panel to recognise that developing a private health establishment according to the regulations was expensive and that medical equipment, which is largely imported, is a significant capital cost.
The Panel asked questions about the use of more cost effective models such as Day Hospitals and why South Africa is behind the curve. Mr Pretorius said that in the early 1990s, medical schemes did not incentivise day clinics. Doctors found it inconvenient to travel between day hospitals and other hospitals. This led to the development of a co-located day clinics, which turned out to be more cost effective as costs of administrative functions, technical teams could be shared between the main hospital and day clinic. Mediclinic has 6 licences to develop day clinics.
Stakeholders: Patients, Service Providers, Funders & Support Staff
Mr Pretorius stated that Mediclinic’s core business is caring for patients and that their strategic objective is to ‘put patients first’. He asserted that they deliver value of care through superior clinical quality, by maximising the patient experience and managing cost efficiency.
The group discussed the tools used to communication with patients, including access to their pre-admission form, explanation of hospital billing, general private tariff schedule (not per scheme) and a doctor search by hospital available on the website, noting that all this information can also be accessed from the hospitals directly. Mediclinic stated that they act as an agent of patients and provide information relating to medical aid benefits to patients. Mediclinic also brought to the attention of the Panel their clinical quality initiatives that are aimed at maintaining and monitoring quality at their hospitals.
Mediclinic noted the shortage of healthcare professionals in the country. Doctors enjoy clinical and business independence, deciding when to admit and discharge a patient. Although decisions relating to the recruitment of new doctors were made in conjunction with supporting doctors, the final decision was made by the hospital group. Additionally, Mediclinic submitted that the decision was based on the capacity of the hospital and the needs in the community.
On the issue of shareholding by medical professionals, Mediclinic said that it inherited various models of shareholding in its acquisitions. Mediclinic supports shareholding by health professionals. In 2012, it formalised a shareholding model, which includes partnerships between doctors and hospital, formal and structured participation in hospital management and, consequently, joint accountability regarding the management of quality and cost efficiency. This mechanism has been successfully used to attract and retain doctors, who may hold an aggregate of up to 25% of shares in a hospital. Doctors pay for shares at market value and is not linked to any incentives. The programme also complies with the HPCSA rules on shareholding.
In engagements with Panellist, Professor Fonn, Mediclinic explained its innovative Integrated Staffing Model for nurses, which uses scientific methodology to allocate nurses to a ward, theatre, intensive care unit or emergency unit and which was developed in collaboration with nurses. For every patient, acuity evaluation is conducted and the nurses are allocated taking account of numbers and skills mix needed. Professor Fonn requested some of the data showing how nurses have been allocated over a period of time.
Mediclinic negotiates tariffs on a national basis with medical schemes and makes no distinction between PMBs and non-PMB conditions. Mr Pretorius noted that these negotiations may be influenced by the size of a scheme, and the networks arrangement, and that smaller schemes sometimes were more open to innovation and, for example, negotiating alternative reimbursement models. Dr Nkonki asked whether hospitals are involved in developing formulary medicine lists relied on by medical schemes. While Mediclinic is not involved in developing formularies, it does come up in tariff negotiations with the schemes. The concern was that patients tend not know what they will be liable for when in hospital because of the variation in formularies amongst schemes.
Drivers of Cost
According to Mediclinic, the drivers of expenditure in hospitals are the price of hospital services and pharmaceuticals; in other words, the quantity of medical services and intensity of medical services. The hospital group said that the reason that hospital inflation was higher than CPI is that hospitals are admitting sicker and older patients and illustrated the impact of age and burden of disease on costs through examples. Mr Pretorius attempted to dispel the idea that hospitals are a cost driver in the industry, arguing that bed occupancy had increased, which made them more efficient but that the quadruple burden of disease and utilisation needs to be addressed saying that ‘unfortunately the provision of healthcare costs money’.
Mediclinic said that hospital tariffs are based on the input cost and capital expenditure which have increased, and cited the salaries of nurses and cost of development of hospitals as examples of inflationary costs. Mr Pretorius concluded that hospital prices are reasonable and cited a comparative study which showed that the ‘cost of admission in a private hospital is only 5.8% higher than in the public sector’.
Mediclinic made brief comments on the OECD / WHO report which ranked private hospital prices in South Africa as the ‘least affordable’ compared to OECD countries. Mediclinic said that they had been advised by experts that the samples in the study are not comparable, purchasing power parity adjustment is insufficient, the growth and demographic profile of medical scheme beneficiaries is not controlled and that the conclusions are not substantiated due to the flaw in analysis. Mediclinic undertook to provide its more detailed analysis of the OECD report to the Panel in due course.
The Panel asked about how the decision to purchase new technology was made and what incentives were at play, for example purchasing equipment to attract specialists. Mediclinic set out what it called a ‘rigorous process’, which considered cost effectiveness and health outcomes. The process is centralised and standardised. Experts consider clinical reasons for the purchase, for example if it is a new tool of trade and results in better health outcomes than current equipment.
Mediclinic concluded that an effective public sector would contribute to the efficiency of the private sector. Mediclinic hopes that a focus on regulation reform will ensure stability and viability of medical scheme risk pools and remove barriers to development of integrated delivery models.
Quality of care
Dr Van Gent led the Panel’s questioning, beginning with the monitoring and reporting on quality of health care services, a topic that has been raised with most stakeholders in the public hearings. Mr Pretorius said that Mediclinic had taken a strategic decision to realign their values, to put patients first. An important component of that was to provide information to patients, including information about quality. Mr Pretorius echoed the Life submission that the lack of a regulatory framework for the measurement and publication of information, it was difficult to contemplate publishing information on quality. However, Mr Pretorius did suggest that such a move in the industry would be welcomed by Mediclinic, provided it involved an independent body that scientifically determined standards, clinical indicators and methodology for measurement and for publication. Ultimately, the public should be able to compare the quality of care at different hospitals. Mr Pretorius agreed with Dr van Gent that the Hospital Association should have a role to play as do schemes, government, hospitals and doctors. Dr van Gent commented that he had personally led an initiative involving a collective effort and suggested that collective action was needed.
Like he did with Life Health Care, Dr van Gent pressed for a commitment that Mediclinic would consider such an initiative and asked for asked for an update before the end of the inquiry because the Panel might want to include such an initiative in the report.
Mr Pretorius indicated that Mediclinic does share quality information with doctors and that most doctors prefer no to be outliers and improve. However, Dr van Gent suggested that publishing this kind of information would also serve to incentivise doctors to improve.
Dr van Gent and later Judge Ngcobo noted the provisions of the National Health Act, which refer to obligations to ensure that information is made public. Mr Pretorius noted that in some of the other countries in which they operate, publication of quality information was required, again reiterating that an independent body playing that role would be a welcome step. Dr van Gent commented that in his experience, doctor initiated models produced accurate data and worked quicker.
Judge Ngcobo noted that Mediclinic should apply its mind to the provisions of the National Health Act concerning patient information, read with the section 90(1) of the NHA empowering the Minister to make regulations. Mediclinic representatives undertook to do so.
Barriers to entry
The Panel has expressed interest in the barriers to entry of a range of players in the sector. Dr Bhengu asked how transparent the process of granting practice rights is, whether the factors are known by any doctor who might want to seek practice rights in the group hospitals. These are apparently on the website. The factors considered include capacity within the hospital, the mix and number of doctors by discipline. The primary focus is on general surgery, orthopaedics, gynaecology, infernal medicine and paediatrics.
Dr Bhengu went on to address whether race played any part in the awarding of practice rights, which include admission rights, rooms etc. Mr Pretorius answered that Mediclinic does not look at race at all when appointing or granting rights. Dr Bhengu asked pointedly, ‘isn’t that the problem, not considering race?’ he then referred to the Mediclinic website and commented that of the 141 doctors at Morningside Mediclinic, seven were African doctors. Dr Bhengu explained his train of thought, stating ‘So the question is by not considering race, one of our best exports, is missing an opportunity to contribute to transformation’.
On Friday 11 March, the panel will hear submissions from Netcare and the National Department of Health.
For more information contact:
Umunyana Rugege at Rugege@section27.org.za
Tim Fish Hodgson at Fish@section27.org.za
Luvo Nelani at Nelani@section27.org.za