Market Inquiry into the private healthcare sector in
South Africa: Characteristics to consider in analysing
South Africa’s private hospitals
June 2016
Dr Paula Armstrong
Economist
[email protected]
Table of Contents
1 Introduction: The need for a private sector healthcare inquiry ....5
2 Private healthcare in South Africa: Characteristics and factors
affecting expenditure............................................................................8
2.1
Diminishing quality of public health services in South Africa and private
healthcare as duplicative and supplementary ......................................................... 8
2.2
Price as an inaccurate signal of market power in private healthcare
markets ................................................................................................................... 9
Market power in South African healthcare services .......................................................... 10
2.3
Private healthcare expenditure is driven predominantly by utilisation ......... 14
Growth in medical scheme beneficiaries .......................................................................... 14
Age of beneficiaries ........................................................................................................... 15
South Africa’s burden of disease ...................................................................................... 18
2.4
Regulatory changes for medical aid schemes ............................................. 18
Adverse-selection .............................................................................................................. 19
Prescribed Minimum Benefits (PMBs) and their impact on expenditure ........................... 19
2.5
Drivers of medical inflation .......................................................................... 20
3 Summary and conclusions ........................................................... 21
Table of Figures
Figure 1: Market concentration of private hospitals (HHI), 2000 - 2012 ............................................... 12
Figure 2: Market concentration of medical schemes (HHI), 2004 - 2014 ............................................. 13
Figure 3: Market concentration of medical scheme administrators (HHI), 2004 – 2014....................... 13
Figure 4: Market concentration (HHI), 2004 – 2014 ............................................................................. 14
Figure 5: Private hospital data: Admissions per age band, 2006–2014 ............................................... 16
Figure 6: Private hospital data: Patient days per age band, 2006–2014 .............................................. 16
Figure 7: Private hospital data: Indexed average expenditure of admissions and patient days, 2014. 17
List of tables
Table 1: Market shares and concentration nationally (bed data, 2012) ................................................ 11
1 Introduction: The need for a private sector
healthcare inquiry
In 2013, South Africa’s Competition Commission (CC) initiated an inquiry into the private healthcare
sector. The CC explains that
Access to health care services is enshrined in the Constitution of the Republic of South Africa
as a fundamental human right. Section 27(2) imposes an obligation on the state to take
reasonable measures to achieve the progressive realisation of this right. Private healthcare
provision takes place within the context of this constitutional commitment to the provision of
universal healthcare services to all people in South Africa. 1
The Terms of Reference state that prices in the private healthcare sector are affordable to only a small
portion of the South African population, and that increasing healthcare expenditure in South Africa has
raised concerns about the functioning of the private healthcare sector. The Inquiry aims to ascertain
the extent to which these price increases are driven by the state of competition in the sector.
South Africa is not the only country to conduct an inquiry into private healthcare provision. In 2012, UK
competition authorities conducted an inquiry into the private healthcare sector. The Office of Fair
Trading (OFT) announced in 2012 its decision to initiate a market investigation via the UK Competition
Commission into the private healthcare market, citing the following characteristics of the sector as
motivation:

Information asymmetries: There is a shortage of standardised, comparable and accessible
information amongst private healthcare facilities, which limits the ability of both patients and
GPs to create competition amongst private healthcare facilities and to drive efficiencies within
the private healthcare market. Funders and patients lack access to information that will allow
them to distinguish between private healthcare facilities on the basis of quality. Specialists are
able to choose the facility at which they treat patients. This means that the facility at which
patients are treated is based largely on contractual and non-contractual incentives offered to
specialists and not on either the cost-effectiveness of the facility or on the quality of the care
provided by the facility. This may result in increased cost of private healthcare facilities without
necessarily increasing the quality of the services provided. 2

Concentration: Private healthcare is concentrated at the national level and in some cases
seems to be extremely concentrated at the local level. Despite the relatively large size of private
medical insurance providers and evidence (for example, the creation of ‘low cost’ networks and
1
Government Gazette. 29 November 2013. 581(37062). Terms of Reference for Market Inquiry into the Private Healthcare
Sector. p 80.
2
Office of Fair Trading. 2012. Private Healthcare Market Study: Report on the market study and final decisions to make a market
investigation reference. p 53.
Page | 5
the delisting of service providers from these networks), the concentration of private healthcare
services means that the buyer power of larger funders is limited, despite their size. Funders are
limited in their ability to direct patients to private facilities for treatment because GPs
recommend which consultant patients should see, and consultants dictate which private
healthcare facility patients use.3

Barriers to entry: Various features of the private healthcare market combine to create
barriers to entry. These are listed below:

Private healthcare providers may restrict the ability funder to add competitors to
funder network, or increase prices should new entrants enter the network;

Many consultants prefer to treat private patients at single private healthcare
facilities. Patients are insured by different funders and so for new private healthcare
facilities to attract a large enough number of specialists, they need to be on the
main funder networks;

Direct and indirect incentives are paid to specialists by private healthcare facilities
in order to convince them to make use of that facility. This makes it difficult for new
entrants to attract specialists and build a reputation for high quality care as it
becomes difficult to attract specialists who make use of incumbent facilities; and

The trend amongst private healthcare facilities to provide financial incentives to
GPs with local market power as an attempt to encourage the referral of their
patients to private healthcare facilities. 4 5
In South Africa, the CC wishes to understand, amongst other things, whether or not the structure of the
South African private health sector is anti-competitive.
The Panel invites submissions on the impact, if any, of hospital concentration and possible
market power at national, regional and local levels. In particular: are there features that harm
competition amongst private hospitals; does market power arise from possible unilateral
conduct and/or coordination of private hospitals; what is the impact of possible market power
on bargaining between hospitals and medical schemes/administrators; and what is the impact
of possible market power on costs?6
This paper presents the perspective of private hospitals in South Africa. It presents research from a
number of sources and aims to explain the context of private hospitals in the South African private
healthcare system. It collates available information on the characteristics and circumstances in which
3
Office of Fair Trading. 2012. Private Healthcare Market Study: Report on the market study and final decisions to make a market
investigation reference. p 86.
4
Ibid. p 115.
5
The OFT also identifies the concentration of anaesthetists as a potential impediment to competition. However, this paper focuses
on the health sector as a whole. The brief discussions of the factors highlighted by the OFT is therefore limited to information
asymmetries, concentration in private healthcare provision, and barriers to entry and expansion.
6
Competition Commission. 2014. Final Statement of Issues: Market Inquiry into the Private Healthcare Sector. 1 August 2014. p
12.
Page | 6
private hospital services operate in an attempt to provide an overview of factors driving price and
expenditure. Section 2 discusses these characteristics. These include:

The role of the private healthcare sector in ensuring universal access to healthcare services,
as enshrined in the Constitution (section 2.1);

Buyer power in the market for private healthcare services (Section 2.2);

Private healthcare utilisation as a key driver of expenditure (Section 2.3);

The impact of the regulatory environment on medical schemes’ expenditure (Section 2.4); and

Medical inflation as it compares to headline inflation (Section 2.5).
Section 3 summarises and concludes.
Page | 7
2 Private healthcare in South Africa: Characteristics
and factors affecting expenditure
This section discusses characteristics that need to be taken into account in any analysis of costs, prices
and expenditure in the South African private healthcare sector. Section 2.1 discusses the important role
that the private sector plays in provision of healthcare services in South Africa, while the remaining
sections discuss factors affecting costs, prices and expenditure in private hospitals.
2.1 Diminishing quality of public health services in South Africa and
private healthcare as duplicative and supplementary
It is widely acknowledged that the quality of public healthcare in South Africa is extremely low and
continues to diminish. Minister of Health Aaron Motsoaledi is repeatedly quoted as naming the declining
quality of public healthcare in South Africa as one of the great challenges facing South Africa going
forward.7 The vast majority of South Africans access the public sector for the provision of healthcare
services. Both public and private healthcare is subsidised by government, through the provision of
subsidised access to public healthcare facilities on a means-tested basis, and tax rebates for members
of medical aid schemes, and so the provision of high quality medical care by the public sector is an
important (and arguably the largest) constraint on the government fulfilling their constitutional mandate
of the provision of healthcare services to all members of society. The private healthcare sector therefore
plays an important role in supplementing the public sector as a provider of healthcare services in South
Africa. Therefore, in the context of a largely failing public healthcare sector, the private healthcare sector
in South Africa has an important role to play in healthcare provision.
Private healthcare services in South Africa are often thought to serve only the upper end of the income
distribution in South Africa. Data from the Council for Medical Schemes indicate that in 2012/20138,
some 8.679 million South Africans were beneficiaries of medical aid schemes, out of a total population
of 52.275 million people.9 This means that roughly 17% of the country’s populations are beneficiaries
of medical aid schemes and therefore make use of private healthcare – a figure accepted and quoted
by the CC.10
However, in addition to this estimate it is important to account for individuals who make use of public
healthcare but who do not belong to medical aid schemes. In order to obtain an estimate of the
proportion of the population that actually makes use of private healthcare services, data from the
General Household Survey (GHS) are used. In 2012, the survey asks whether the main facilities at
7
Motsaoledi, A. 2013. Health Budget Speech, National Assembly, 15 May 2013.
Council for Medical Schemes, 2013.
9
General Household Survey (GHS), 2012
10
Government Gazette. 29 November 2013. 581(37062). Terms of Reference for Market Inquiry into the Private Healthcare
Sector. p 77.
8
Page | 8
which healthcare is sought are public or private healthcare facilities, and whether at least one person
in the household is a medical scheme beneficiary. According to this method of questioning, it is
calculated that 13.2% of the population makes use of private healthcare services despite not belonging
to medical aid schemes. Therefore, multiplying the number of people not on medical aid by 13.2% and
adding the proportion of the population that are medical aid beneficiaries implies that some 28% of the
population make use of the private healthcare system.11
Prior to 2012, the GHS framed the question differently. In 2008, for example, the survey asks people
who were sick or injured in the month prior to the survey whether they were a beneficiary of a medical
aid scheme, and whether they made use of private or public healthcare facilities for treatment. The
method found that some 25.83% of people using private healthcare facilities were not beneficiaries of
medical aid schemes.12 Multiplying the number of people who are not medical aid scheme beneficiaries
by 25.83% and adding those who are beneficiaries brings the proportion of the population making use
of private healthcare facilities to approximately 38%. 13
It is plausible then to say that the proportion of the population making use of private healthcare services
in South Africa lies between approximately 28% and 38%. Importantly, these estimates are likely to
reflect the use of primary healthcare services rather than a broader range of more complex services,
but they demonstrate the problems associated with the assumption that private healthcare services are
used exclusively by beneficiaries of medical aid schemes. Private healthcare is certainly not a service
used only by those at the top of the income distribution in South Africa.
2.2 Price as an inaccurate signal of market power in private healthcare
markets
Market power broadly refers to the ability of sellers to increase the price of a good above a level that is
considered competitive. In competition economics, the generic test for market power is whether a firm
is able to implement a “small but significant and non-transitory increase in price” (SSNIP test) without
losing market share to competitors.14 If a firm is able to do so, then they have market power.
Certain features of healthcare markets render the SSNIP test inappropriate for assessing the extent of
market power. These include:

Medical aid funds pay for the vast majority of private healthcare services and not consumers of
the services themselves;
11
GHS, 2012; Calculations by Econex.
GHS, 2008; Calculations by Econex.
13
These estimates are extremely sensitive to the year of data used. The objective is to illustrate that a larger proportion of the
population that just medical scheme beneficiaries makes use of private healthcare facilities. It is acknowledged the numbers
presented here are valid only for the time period being discussed. Other years are expected to deliver a similar result in the sense
that private healthcare services are accessed by a larger proportion of the population that only medical schemes beneficiaries,
but the exact magnitude of the difference will differ from the estimate presented here.
14
Kaserman, D and Zeisel, H. 1996. Market Defition: Implementing the Department of Justice Merger Guidelines. The Antitrust
Bulletin 41(3). pp 665 – 90.
12
Page | 9

Asymmetric information gives rise to moral hazard; and

The possibility of supply-induced demand arises in medical treatment (often as a result of
asymmetric information).
These factors dictate that patients don’t respond to change in price in the way that the basic dynamics
of supply and demand dictate. The role of price in determining the demand and supply of services is
therefore distorted in the market for private healthcare. Patients make use of services on the basis of
characteristics other than the price (for example, the distance from and therefore the time taken to travel
for healthcare). In South Africa, for example, the choice of hospital very often depends on which
specialist a patient is referred to by their general practitioner, and therefore on the hospital at which the
specialist practices. Patients may also be more or less willing to travel further for more complex
healthcare services.
It is clear then that the use of price as an indicator of market power amongst private healthcare service
providers is not easily justified. In order to understand market power, it is important to understand the
relationship between buyers and sellers of private healthcare services.
Market power in South African healthcare services
The extent to which private healthcare facilities (as sellers of private healthcare services) are able to
set prices above a competitive level depends on the extent of their market power relative to medical
funders (as buyers of private healthcare services). Here we investigate the extent of concentration
amongst private hospital groups and amongst medical funders. We then examine the implications of
this for market power.
2.2.1.1
Price determination in South Africa’s private healthcare market
Private hospital price negotiations happen on an annual basis between private hospital groups and
medical schemes and medical scheme administrators. Following the CC’s 2004 abolishment of
collective bargaining amongst the Hospital Association of South Africa (HASA), the Board of Healthcare
Funders (BHF), and the South African Medical Association (SAMA), hospital groups negotiate
individually with funders and prices agreed upon at a national level are applicable to all hospitals within
the group.
2.2.1.2
Seller power
An analysis of market shares of different players provides an indication of the extent to which individual
players have market power. For this purpose, we make use of market shares amongst private hospitals
in South Africa with reference to bed numbers. The data used in this section are obtained from the
Hospital Association of South Africa (HASA) and have been supplemented in some cases by an
investigation by Econex.
Page | 10
The Herfindahl-Hirschman Index (HHI) is used as a measure of concentration within an industry. It is
calculated according to the following formula:
𝑁
𝐻 = ∑ 𝑠𝑖2
𝑖=1
where 𝑠𝑖 is the market share of firm i is the market, and N is the total number of firms in the market.
Therefore, if the market only consists of 1 firm, then the HHI with take a value of 10 000. Markets in
which the HHI has a value between 1500 and 2500 are considered moderately concentrated, and
markets with an HHI above 2500 are highly concentrated.
Table 1 presents the market shares and concentration indices for private hospitals in South Africa in
2012 (as this is the last year for which complete data are available), while Figure 1 presents graphically
concentration indices for private hospitals from 2000 to 2012.
Table 1: Market shares and concentration nationally (bed data, 2012)15
Group
Number of beds
Market share
HHI
Netcare
9143
26.42%
699
Life Healthcare
8209
23.73%
563
NHN
7198
20.80%
433
Mediclinic
7005
20.25%
410
Clinix
1294
3.74%
14
Total16
34600
100.00%
2124
Source: HASA, Econex calculations
Table 1 illustrates that in 2012, the private hospital market was moderately concentrated. As we see in
Table 1 and Figure 1 below, the private hospital market became less concentrated between 2000 and
2012 with the HHI decreasing gradually from 2 386 in 2000 to 2 124 in 2012.
15
It is acknowledged that this data is 4 years old and as such is somewhat dated in the analysis of concentration. However, this
is the most recent complete count of private hospital beds in South Africa. The bulk of the data for the calculations were provided
by the Hospital Association of South Africa (HASA). However, additional research was conducted by Econex was conducted to
ascertain a more complete indication of bed numbers in the private hospitals. The most recent ‘complete’ count available is
therefore 2012.
16
This table only presents bed numbers for the 5 biggest hospital groups in the NHN and does not include smaller independent
and non-NHN hospitals. Therefore, the number of beds in the 4 hospital groups presented here do not sum to the total in the last
row.
Page | 11
Figure 1: Market concentration of private hospitals (HHI), 2000 - 2012
2 500
2 386
2 000
2 124
HHI
1 500
1 000
500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: HASA, Econex calculations
In order to assess the extent to which these concentration levels are likely to confer market power to
sellers of private healthcare services, it is necessary to consider the degree of concentration amongst
buyers of private healthcare services, medical schemes and scheme administrators.
2.2.1.3
Buyer power
Using data from the Council for Medical Schemes (CMS), concentration indices are calculated for both
medical schemes and medical scheme administrators in South Africa. This is done because both
medical aid schemes and scheme administrators are central to price negotiation. Most of the time,
annual tariff negotiations happen between private hospitals and administrators. It is therefore important
to understand the extent of concentration amongst both medical schemes and administrators in order
to understand market power.
Another important distinction to make when considering medical funders is the distinction between open
and restricted medical schemes. In restricted medical schemes, there is virtually no competition for
members since membership of companies’ in-house medical scheme is a condition of employment if
such a scheme exists. However, open medical schemes compete directly with each other for members.
Concentration measures are therefore presented for all medical schemes and for open medical
schemes separately.
Figure 2 shows the HHI for medical aid schemes, and Figure 3 shows the HHI for medical aid
administrators for the time period 2004 to 2014.
Page | 12
Figure 2: Market concentration of medical schemes (HHI), 2004 - 2014
3500
3137
3000
HHI
2500
2000
1500 1309
1449
1000
500
922
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Open medical schemes
All medical schemes
Source: CMS, Econex calculations
Figure 3: Market concentration of medical scheme administrators (HHI), 2004 – 2014
2500
2202
2000
HHI
1500
1175
1000
500
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: CMS, Econex calculations
2.2.1.4
Countervailing power of funders
Of relevance in Figure 2 and Figure 3 is the substantial increase in the level of concentration of medical
schemes (particularly open medical schemes) and administrators. The concentration of medical
schemes increases from 1 309 in 2004 to 3 137 in 2014, while that of administrators increases from
1 175 in 2004 to 2 202 in 2014. For comparative purposes, we plot the concentration amongst private
hospitals, open medical schemes and medical aid administrators in Figure 4 below. 17
Econex. 2014. ‘Buyer power’ of funders in tariff negotiations with MCSA. A study conducted by Econex on behalf of Mediclinic
South Africa.
17
Page | 13
Figure 4: Market concentration (HHI), 2004 – 2014
3500
3137
3000
HHI
2500
2202
2194
2000
1500
1309
1000
1175
1983
500
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private hospitals
Open medical schemes
Medical scheme administrators
Source: CMS, HASA, Econex calculations
The stark contrast in the rapidly increasing level of concentration amongst open medical schemes and
the diminishing level of concentration amongst private hospitals is noteworthy. The balance of power in
the private healthcare market would have been significantly affected by these changes in the
concentration of buyers of private healthcare. This results in strong buyer power and therefore
countervailing power for medical schemes and administrators in annual bilateral negotiations between
private hospitals and funders.
2.3 Private healthcare expenditure is driven predominantly by utilisation
This section draws from research conducted on behalf of HASA on utilisation and its relationship to
expenditure in private hospitals. A full and thorough analysis of the relationship between utilisation and
expenditure is available in Kean and Erasmus (2015) referenced below.
Growth in medical scheme beneficiaries
Over the period 2000 to 2013, medical scheme membership has increased from approximately 7 million
to 8.75 million.18 The main drivers behind this growth were the growth in formal employment and the
introduction of the Government Employees Medical Schemes (GEMS) in 2006. In addition, the
promulgation of the Medical Schemes Act in 2000 (discussed below) mandated, amongst other things,
open medical schemes and community rating, i.e. nobody applying for medical aid membership could
Kean, H. and Erasmus, M. 2015. Private hospital expenditure and relation to utilisation – observations from the data. Econex
working prepared for the Hospitals Association of South Africa. p 8.
18
Page | 14
be rejected, and all members are charged the same premium per scheme option, regardless of their
risk profile. The implications of this are discussed here.
Age of beneficiaries
Internationally, aging populations have implications for medical expenditure since older people in
general require more care than younger cohorts of the population due to higher prevalence of health
conditions. Young children similarly generally require more medical attention than older children and
young adults. In addition, and relevant in understanding private healthcare expenditure, is the age
distribution not only of the medical scheme population, but also of those actually admitted to private
healthcare facilities, as this latter group may differ in significant ways from the former. 19
Figure 5 below illustrates the importance of considering the age of patients admitted to private hospitals.
Data provided by South Africa’s largest private hospital groups, Netcare, Mediclinic and Life Healthcare
show in the left panel the number of admissions in 2014, and the growth in admissions amongst different
age groups between 2006 and 2014, and in the right panel the proportion of total admission constituted
by patients in different age groups in 2006 and 2014.
Figure 5 shows that the growth in admissions is substantially larger for the oldest two age groups than
it is for the rest of the distribution despite the fact that younger age groups have shown double digit
growth (left panel), and that while the proportion of total admissions amongst younger age groups has
fallen or remained stagnant between 2006 and 2014, this has increased for the two oldest age groups. 20
Taking into consideration the actual time spent in hospital rather than simply admissions, Figure 6
presents similar measures for patient days, therefore accounting to some extent for the amount of care
received by patients. Similar patterns to those observed for admissions data are seen for patient days,
indicating that in addition to an increase in admissions between 2006 and 2014, utilisation amongst
older age groups has also increased more rapidly than it has for the rest of the age distribution. 21
19
20
21
ibid. p 15.
Ibid. p 17.
Ibid. p 18.
Page | 15
Figure 5: Private hospital data: Admissions per age band, 2006–201422
350 000
41% 45%
20%
40%
18%
35%
16%
30%
14%
25%
12%
20%
10%
15%
8%
10%
6%
5%
4%
0%
2%
-5%
0%
300 000
29%
250 000
200 000
19%
150 000 15% 14%
12%
9%
100 000
8%
50 000
-2%
0
18%
15%
13%
12%
Growth in admissions, 2006-2014 (right axis)
% of total admissions, 2006
Number of admissions, 2014 (left axis)
% of total admissions, 2014
Source: Kean, H. and Erasmus, M. (2015).
Figure 6: Private hospital data: Patient days per age band, 2006–201423
1800000
60%
1600000
50%
1400000
40%
1200000
1000000 29%
800000
600000
400000
25%
23%
52%
29%
40%
15%
30%
22%
19%
15%
20%
20%
20%
14%
13%
10%
14%
9%
10%
200000
0
0%
5%
0%
Growth in patient days, 2006-2014 (right
axis)
% of total admissions, 2006
Number of patient days, 2014 (left axis)
% of total admissions, 2014
Source: Kean, H. and Erasmus, M. (2015).
Finally, having considered the number of admissions and the amount of time that patients spend in
hospital, an analysis of actual expenditure on patients in different age groups is considered. In Figure
Kean, H. and Erasmus, M. 2015. Private hospital expenditure and relation to utilisation – observations from the data. Econex
working prepared for the Hospitals Association of South Africa. p 17.
23
Ibid. p18.
22
Page | 16
7, the expenditure per admission (in the left panel) and per patient day (in the right panel) are presented.
Expenditure is indexed to the average and so any value less than one indicates expenditure below the
average, and any value larger than one indicates higher than average expenditure.
Figure 7: Private hospital data: Indexed average expenditure of admissions and patient days,
201424
1,2
1,8
1,19
1,14
1,6
1,1
1,56
1,47
1,4
1,27
1,2
1,04
1,0
0,95
1,05
1,0
0,9
0,90
0,88 0,89
0,88
0,8
0,76
0,68
0,8
0,77
0,6
0,4
0,44
0,51
0,7
0,6
0,2
Expenditure per admission, indexed to the
average
0,62
Expenditure per patient day, indexed to the
average
Source: Kean, H. and Erasmus, M. (2015).
The left panel of Figure 7 shows that expenditure on admissions for patients under the age of 1, patients
aged 55 to 64, and patients older than 65 years old is significantly above average (56%, 27% and 47%
above average for these age groups, respectively). A similar trend is observed for expenditure per
patient day, with expenditure per patient days being 19% and 14% percent higher than average for the
55 to 64 age group and for patients over the age of 65. 25
This research shows then that utilisation has increased, and that this increase has been largest amongst
older age groups. It further shows that utilisation amongst older age groups (i.e. the number of
admissions per 1 000 beneficiaries) is higher than amongst younger age groups 26 and is increasing at
a faster rate than beneficiaries are increasing, which means that expenditure has increased at a faster
rate than beneficiaries. This needs to be taken into account when analysing expenditure in private
healthcare. Increasing levels of utilisation amongst older age groups has a substantial impact on
expenditure and this is likely to continue.27
Kean, H. and Erasmus, M. 2015. Private hospital expenditure and relation to utilisation – observations from the data. Econex
working prepared for the Hospitals Association of South Africa. p 19.
25
Ibid. p 19.
26
Ibid. p19-22.
27
Ibid. p 23.
24
Page | 17
South Africa’s burden of disease
The burden of disease faced by the medical scheme population is also relevant to consider in any
assessment of expenditure on healthcare. Increasing prevalence of chronic disease amongst South
Africa’s medical scheme population has been observed in the last 5 years. 28 The prevalence of
concurrent disease is also becoming more common, with the CMS reporting that the number of
beneficiaries diagnosed and treated for multiple chronic conditions increased by more than 25%
between 2012 and 2013. In fact, the number of beneficiaries treated for at least four chronic conditions
increased by 78% between 2012 and 2013.29
In addition to chronic diseases, South Africa also faces a very high burden of disease, often referred to
as the ‘quadruple burden of disease’.
“South Africans are facing . . . a ’quadruple burden of disease’: The first burden is the HIV/AIDS
pandemic; the second is that of injury, both accidental and non-accidental; the third consists of
infectious diseases such as tuberculosis, diarrhoea and pneumonia, and the forth is the growing
prevalence of lifestyle disease related to relative affluence.” 30
Analysis of private hospital data31 showed an interaction between aging and disease, and that this
interaction was particularly strong amongst “lifestyle diseases”. In addition to the fact that older people
are admitted more frequently and for longer periods, the research found that utilisation driven by disease
amongst older age groups is increasing substantially over time, even after controlling for beneficiary
numbers.32 This will have a significant impact on private healthcare expenditure.
2.4 Regulatory changes for medical aid schemes
Institutional changes for medical schemes were introduced in 2000 which, although they occurred more
than a decade ago, have had a significant impact on the level of expenditure on private healthcare. The
enforcement of the Medical Schemes Act in 2000 33 had the following implications:

Open enrolment in medical aid schemes was introduced, meaning that medical schemes were
not allowed to refuse anyone membership. Community rating was also introduced, according
to which all members were charged the same premiums, regardless of their risk profile.
28
Council for Medical Schemes (CMS). 2015. Prevalence of Chronic Diseases in the Population Covered by Medical Schemes
in South Africa. January 2015.
29
Ibid. p 21.
30
South Africa Competition Commission. 2013. Terms of Reference for Market Inquiry into the Private Healthcare Sector.
Government Gazette, 29 November 2013. Notice 1166 of 2013. p 77.
31
Kean, H. and Erasmus, M. (2015). Private hospital expenditure and relation to utilisation – observations from the data. Econex
working prepared for the Hospitals Association of South Africa. p 26 - 29.
32
Ibid. p 28-29.
33
Medical Schemes Act. No. 131 of 1998. Regulations made in terms of the Act were promulgated in 1999 and enforced in 2000.
Page | 18

Prescribed Minimum Benefits (PMBs) were introduced.34 It is mandatory for medical schemes
to cover these benefits in full. This include treatment of any life-threatening emergency
condition, a set of 270 diagnoses as well as 25 chronic conditions. 35
This institutional context has significant implications for utilisation rates and medical scheme
expenditure. These are discussed.
Adverse-selection
Importantly, although the Medical Schemes Act stipulated open membership, it does not stipulate
mandatory membership. This results in adverse selection. Discovery Health Medical Scheme36 explains
that adverse selection refers to low-risk people either dropping out of or simply not joining the insurance
pool which leaves the insurance pool consisting of predominantly high-risk individuals. Medical aid
premiums are set according to a risk pool containing both high-risk (sick) and low-risk (healthy)
individuals. Individuals have better information about their risk status than insurers, and so low-risk
individuals opt not to take medical cover and therefore not contribute premiums, while high-risk
individuals opt to take medical insurance. This results in an unsustainable pool of premiums since over
time, premium revenue is unlikely to be sufficient to cover the claims of a membership of pre-dominantly
high-risk individuals.
The increasing age profile and higher burden of disease amongst South Africa’s medical scheme
population are the result of adverse selection. Research finds a significant difference in the age
distribution of the medical schemes population in comparison to that of South Africa’s population as a
whole, with medical aid membership increasing around maternity years and again in older, more
disease prevalent years.37 Further evidence of adverse selection is the inflation in open medical
schemes premiums relative to those of closed medical schemes, indicating a higher exposure to highrisk individuals amongst open medical schemes.38
Prescribed Minimum Benefits (PMBs) and their impact on expenditure
The objective behind the introduction of PMBs was to ensure that everyone who contributes to a medical
aid scheme receives a minimum level of medical cover. The PMBs provided for are hospital-centric in
nature and therefore increase beneficiaries’ access to private hospital services and hence utilisation.
Patients consequently have the incentive to make use of private hospital services.
34
Section 29 (1) and Regulation 8 of the Medical Schemes Act.
With the exception of emergencies, care must be sought at designated service providers for these to be covered in full by
medical schemes.
36
Discovery Health. 2014. Submission to the Private Healthcare Inquiry. p 40.
37
McLeod, H. and Grobler, P. 2009. The Role of Risk Equalisation in Moving from Healthy Voluntary Private Insurance to
Mandatory Coverage: The experience of South Africa.
38
Oxera. 2012. Private Healthcare Markets in South Africa. p 20.
35
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The introduction of medical scheme regulation therefore resulted in increased utilisation, which in turn
has driven up private healthcare expenditure.
2.5 Drivers of medical inflation
Health accounted for 1.39% of the total CPI basket in 2014. 39 Health in the CPI basket is comprised of
medical products (51%) and medical service (49%). Medical services is itself comprised of out-patient
services (97%) and hospital services (3%). 40 Importantly, the health basket does not include medical
scheme contributions. As discussed later, medical scheme contributions carry a weight of 7.12% in the
total CPI basket – substantially higher than that of health. 41
Between 2009 and 2012, health inflation was consistently higher than headline inflation (comparing
year-on-year inflation). However, in 2013 while average year-on-year headline inflation was at 5.7%,
health inflation was a percentage point lower at 4.7% and remained below headline inflation in 2014. 42
For the period 2003 to 2013, health inflation was just 0.81 percentage points higher than headline
inflation.43 For this period then, health inflation exceeded headline inflation only marginally.
Important to consider when comparing headline inflation to health inflation is that the basket according
to which headline inflation is calculated does not reflect the operational costs faced by providers of
medical services (such as malpractice insurance, nurses’ salaries, imported medical equipment, to
name a few). If the prices of these components change at a rate that is either faster or slower than
headline inflation, then health inflation and headline inflation will differ.
A further point to consider is the extent to which the Department of Health regulates the price of medical
products. The Department publishes annually the maximum allowed increases in the single exit prices
(SEP) of pharmaceuticals purchased by pharmacies and retailers. Retailers may then add a dispensing
fee (for which a maximum is regulated).44
As mentioned earlier, medical scheme contributions are not included in the health CPI basket, but fall
under “miscellaneous goods and services”, specifically “insurance connected with health”. Medical
scheme contributions carry a weight of 7.12% in the over CPI – significantly higher than that of health.
Earlier sections of the paper have discussed the drivers of medical scheme contributions, such as an
aging medical scheme population, the burden of disease, the introduction of PMBs, and open enrolment
in medical schemes. These factors must be taken into account when considering increased spending
on private hospitals.
39
Erasmus, M. and Fourie, H. 2014. Rising Prices in the Healthcare Sector: Unpacking Health Inflation. Econex Research Note,
December 2014. p 2.
40
Statistics South Africa. 2013. The South African CPI Sources and Methods Manual: Release v. 2. February; Statistics South
Africa (2013). Consumer Price Index 2012 Weights (Total country). Statistical Release P0141.5.
41
Erasmus, M. and Fourie, H. 2014. Rising Prices in the Healthcare Sector: Unpacking Health Inflation. Econex Research Note,
December 2014. p 3.
42
ibid. p 5.
43
ibid. p 5.
44
ibid. p 7.
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3 Summary and conclusions
The private sector has a crucial role to play in ensuring that the South African population has access to
healthcare services. Estimates show that between 28% and 38% of the population make use of the
private healthcare system and not 16% as estimated by the CC. The accessibility of the private
healthcare sector is therefore greater than what is assumed at the outset of the inquiry.
When considering price negotiations between private hospitals and medical funders, it is clear that
concentration amongst funders has grown substantially in recent years and that funders have a
significant amount of buyer power. Hospital groups are therefore constrained in their ability to increase
prices above a level that may be considered competitive. Furthermore, expenditure on private hospitals
by medical schemes is driven predominantly by utilisation, which in turn is a function of an aging medical
schemes population and South Africa’s high burden of disease. The regulatory framework around
medical schemes has also resulted in adverse selection, and the stipulation of PMBs (many of which
are hospital-centric) has contributed substantially to the aforementioned expansion in utilisation.
Finally, medical inflation as it is measured in the CPI basket has been shown to increasingly mirror
headline inflation. In recent years, it has even dropped below headline inflation. Claims that medical
inflation has increased at rates in excess of headline inflation appear to refer to medical scheme
contributions. Determinants of these premiums are largely related to regulation governing medical
schemes which, as discussed, has resulted in adverse selection.
Taking these factors into consideration, it appears then that higher levels of expenditure on private
healthcare are not the result of anti-competitive behaviour amongst private healthcare providers (in
particular hospitals). This paper has considered an admittedly limited list of characteristics, but the
analysis presented and summarised here indicates that factors other than anti-competitive behaviour
are responsible for increased expenditure on private healthcare (hospital) services.
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