Inflation

Health Minister Manto Tshabalala-Msimang has approved a 6,5% maximum increase on prices of medicines, announced in a Government Gazette published last week. The earliest that consumers will see price hikes will be at the beginning of May, 16 months after the last round of price increases.

It seems you cannot open a newspaper or financial journal anywhere in the world without finding articles about the unacceptable cost of private healthcare, or the high rate of medical inflation. In South Africa, these articles are embedded with doom and gloom the very survival of the private healthcare system is called into question on a regular occasion.

Hospital costs are now almost 70% higher than they should be, because of the increased market dominance of a few private hospitals.

The draft medicine price regulations constitute the most fundamental shake-up of the private healthcare sector in decades - and threaten the super-profits traditionally earned by most corporates operating in this sector. Not only should they occasion an immediate reduction in the price of medicine, if introduced as envisaged on May 2, they should also curb annual increases in medicine prices and thereby help rein in medical inflation, which has raged at double digits throughout most of the 1990s. A pricing committee of 13 technical experts chaired by University of Cape Town health economics professor Di McIntyre developed the regulations. They are entirely consistent with what exists in most European Union countries and in Australia, fundamentally free-market economics. Discovery Health estimates that the regulations could cut a staggering R4bn (roughly 40%) off the medical schemes industry's annual drugs bill. If passed on to members, that would translate into an 8,5% reduction in annual contributions. Though the means to achieve this involve the state fixing the price of medicine and interfering in the free market to regulate profit-taking in the distribution chain, the advantages clearly outweigh the disadvantages. The pros are cheaper medicine and a transparent pricing system where the factory-exit price of a drug is known and the mark-ups added by middlemen are limited to a ceiling set by government. This will prevent undue profit-taking in the distribution chain; and because it will no longer be more profitable to sell higher-priced drugs, the market should shift as a whole towards cheaper generic drugs. The downside is that any discounting of the factory-exit price will not be allowed. This will eliminate volume-based discounting, a function of free markets the world over. Among the hardest hit will be New Clicks, Dis-Chem and other big pharmacy and hospital groups, which will no longer be able to use their size and buying capacity to negotiate better wholesale prices than their smaller competitors. However, the reality is that in the past bulk discounts have seldom been passed on to the consumer, allowing some players to make unreasonable profits on the sale of medicine, reportedly of up to 350%. The problem is that though savings on drugs of 40% are achievable, the various players in the industry who stand to lose out under the new system - private hospitals, pharmacists, dispensing doctors, wholesalers and drug manufacturers - are unlikely to give up a collective R4bn without a fight. It's the job of civil society, large medical aid administrators, the health department and the pricing committee to ensure that players don't buck the new system. For this to be credible and transparent, the future watchdog role of the pricing committee needs to be clarified. In terms of the regulations, its future role is limited to setting the annual amount by which drug manufacturers will be allowed to increase their factory-exit prices - and issuing public warnings if it feels a new drug is unfairly priced. This role should be adequate, provided the industry players work together to implement the new system in the interests of making private healthcare more affordable and sustainable. This goal is in every player's best interest. Whether the corporates can rise to the challenge remains to be seen. (Source: The Financial Mail, 23 January 2004)

Predictions by open medical schemes - schemes whose membership is open to the general public - that aspects of the Medical Schemes Act would threaten their very survival are proving to be alarmingly accurate. The report, published this month, notes that schemes have been involved in frantic maneuvering to avoid the worst effects of the Act's concept of universal healthcare. Merger activity has increased and is expected to continue at a brisk rate as schemes seek to grow and diversify their risk pools. The worsening solvency situation has arisen despite the fact that increases in medical scheme contributions have once again outpaced the consumer price index. Gross premiums received by the major medical schemes increased 21.1% to R17.5-billion in 1999. Despite this, 87% of schemes surveyed posted underwriting losses for the 1999 year. The average value of claims increased during 1998 and 1999 from 91.4% of premiums to 97.3% in 1999. Private hospitalisation, optical services and medicines were some of the main reasons for this inflation. Imported inflation - the Rand depreciated 25% during 1999 - was most evident in chronic medication and the cost of hospital equipment. (Source: Business Times, 8 April 2001)