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Hospital costs 'should be 70% lower'
Jocelyn Newmarch - Mail and Guardian
2006-10-26

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

This is the argument of the Council for Medical Schemes, which, along with Netcare, is opposing Medi-Clinics proposed takeover of four hospitals in the Vaal Triangle. Competition Tribunal hearings into the matter were held recently.

The councils argument is based on an analysis by Alex van den Heever, a senior adviser for the Council for Medical Schemes.

Before 1998, hospital costs increased in real terms (after normal inflation is taken into account) at a steady rate. But since 1998 the rate of increase has risen sharply. According to Van den Heever, this is a result of increased market concentration of private hospital groups.

His analysis, based on medical scheme membership data, shows a steep increase in hospital costs while non-hospital costs (such as medicines and doctor consultations) have flattened.

By 2004, hospital costs per beneficiary were 67,9% higher than they should have been, had the 1990 to 1998 trend continued. The 2004 costs are 105,6% higher than the value per beneficiary would have been, had the trend for hospital costs instead followed that for non-hospital claims costs, according to Van den Heevers affidavit.

The only explanation for this would be a structural change in the hospital sector, said Van den Heever. The annual real change per beneficiary had increased nine-fold, from an earlier real increase per beneficiary of only R50 a year in 2004 prices. The real increase per beneficiary is now R460 a year, also in 2004 prices.

But, according to economist Nicola Theron, Van den Heever has not shown a causal link between hospital consolidation and rising costs. She told the tribunal there were several other factors that could have contributed. In 1998, the rand-dollar exchange rate worsened as a result of the emerging market crisis. This would have led to increased import costs for medical equipment.

Prices go up easily, but they dont come down easily, she said, explaining the lag between the improved exchange rate and still-rising costs.

Theron said other causes could include increased input costs, increased demand for services, changes in the products and services that are purchased, new and more expensive technologies, an ageing population and co-morbidity (separate, unrelated medical conditions). Medi-Clinic data showed that demand for hospital services was driven by a range of factors. Among these were an ageing population, a greater burden of disease and HIV/Aids.

Between 2001 and last year, there was an increase in the proportion of patients aged 60 and above admitted to Medi-Clinic hospitals. Older patients need more medical attention and the incidence of co-morbidities, such as diabetes and hypotension, increases. So older patients push up the overall spending on healthcare, said Theron.

A study by economist Mike Schussler for the Hospital Association of South Africa found that labour costs made up 73% of total costs at private hospitals. Theron said an international shortage of nurses, especially theatre staff, means that the local private hospital industry must compete globally on salaries. Cost inflation for nursing staff, according to Medi-Clinic, was much higher than CPIX inflation between 2003 and last year.

Theron said many other countries found that hospital inflation outstripped CPIX inflation, but admitted under cross-examination that she had not studied the healthcare sectors of any other countries.

Van den Heever produced figures showing that the change in age profile of medical schemes beneficiaries, when weighted for cost, explains only 3,6% of the cost change.

The overall real per capita cost change for the period is calculated at 45,5%. This shows that the changes in the beneficiary age profile in the medical schemes cannot explain 41,9% of the cost change actually experienced over the period, he said, in response to Therons evidence.

He said medical schemes specifically limit the use of expensive new technology to situations where they are cost-effective. It is therefore not appropriate to talk in general terms about the impact of new technology on costs.

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