Council for Medical Schemes budget, pricing issues, industry review briefing

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Health

14 September 2010
Chairperson: Mr B Goqwana (ANC)
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Meeting Summary

The Council for Medical Schemes (CMS) briefed the committee on its budget, finances, industry review, pricing issues and risk equalisation system. The CMS was established to regulate medical schemes, to maximise access to coverage from medical schemes, and to protect the interests of the public. It also advised the Minister of Health, carried out the Minister’s instructions and investigated complaints from beneficiaries. There had been a significant increase in claims costs between 2004 and 2009. The system did remain solvent and healthy, although reserves for Restricted Medical Schemes had depreciated. Some administration fees remained high, and that was of concern. Numbers of beneficiaries in restricted systems grew, and the costs also rose, while the numbers in open schemes remained the same, and their costs had declined between 2005 and 2009. There had been an increase in numbers overall between 2000 and 2009. The number of complaints for non-payment of prescribed minimum benefits had increased dramatically in 2009, especially those around unpaid accounts. The budget and financial figures for the CMS showed that strategic functions were now being funded from levies, which resulted in a levy increase, but this was kept down by utilisation also of a cash surplus. The tasks undertaken in 2009/10, and the costs, were outlined. Strategic regulatory functions that were previously funded by transfers from the Department of Health would henceforth be funded through levies. There had been substantial increases in staff costs, training of trustees and rent to accommodate the new staff, due to the need for skilled staff. The budget for legal fees had also increased by 17%.

The CMS was aware that there were problems in the types of contracts entered into, where service providers were allowed to sit together to set prices, and noted that there was essentially a conflict of interest. The use of multilateral contracts to pay providers would remove unfair distortions. In addition, a fair process was needed to set prices where significant market imbalances existed, and the system of Prescribed Minimum Benefits must be addressed, as well as the market imbalance in hospitals. A Risk Equalisation Fund had been used successfully in other countries, to address the fact that the most marginalised members of a fund were often the most vulnerable, as it would allow all members to pay the same amount despite the difference in their health status. A consultative process on this had started in 2005, but although an Amendment Bill was prepared, it had not been considered by the previous Parliament. It was possible to implement this system quickly and at low cost. Other areas of concern needing to be addressed included medical scheme governance and compliance, the demarcation between medical schemes and health insurance products, regulation of brokers to address perverse relationships and conflict of interest, and recommendations to amend the benefits regulations, which were submitted in March 2010.

Members asked what percentage of the total budget went to salaries, what consultation took part in relation to salary increases, asked whether it was cheaper to buy or rent property, and thought that the issue of brokers must be addressed. Members asked how the Council monitored medical aid schemes, why extended families could not always be registered, and why members of schemes still had to be pay at pharmacies. Members asked if the CMS was on top of the industry’s regulation, and what it was doing to ensure that semi-skilled families could afford medical aid schemes..


Meeting report

Chairperson’s opening remarks
The Chairperson noted that the Portfolio Committee was supposed to meet with the Deans of Health Sciences Faculties to discuss the curriculum and criteria used by their institutions to admit students. However, the Deans of the Universities of the Free State, Pretoria, Witwatersrand and Limpopo failed to attend the sitting. He noted that they were summoned on time, and found it unacceptable that the representatives of those institutions were not in attendance.

Mr Khaya Mfenyana, Chairperson of the Deans’ Committee, said that he was ready to give the presentation.

The Chairperson and Committee declined his request. They would, instead, give the Deans of the individual institutions another date to give their presentations, and would expect all to be present.

Council for Medical Schemes (CMS): Budget, pricing issues, industry review and other issues
Dr Monwabisi Gantsho, Registrar and Chief Executive Officer, Council for Medical Schemes, noted that the role of the Council for Medical Schemes (CMS or the Council) was to regulate medical schemes, to maximise access to coverage from medical schemes, and to protect the interests of the public. Dr Gantsho stressed the fact that without adequate regulation, only private interests would prevail, and this would reduce access and accountability.

The Council was mandated by its Act to protect beneficiaries, to measure the quality and outcomes, to carry out instructions conferred by the Minister of Health, to prescribe plans of actions and to advise the Minister, to investigate complaints from beneficiaries, to collect and to disseminate information, to make rules relating to its functions, and to control and to coordinate medical schemes.

Ms Tebogo Maziya, Head of Financial Supervision, Council for Medical Schemes then presented a review of the Medical Schemes industry. She noted the significant increase in claims costs between 2004 and 2009. The graph showed that the provincial hospitals costs had climbed substantially, while the price of medicine increased nominally. The increase in claims costs of General Practitioners had slightly normalised since 2004 (see attached presentation for details).

She pointed to the very high real increases experienced in medicines, specialists and hospitals. Supplementary and Allied Health Professionals had shown through a 13% increase while medical specialists had showed an 8% real increase. Private hospitals showed a 7.5% real increase.

The Council found that solvency trends had been affected by Government Employees Medical Scheme (GEMS), but the system remained solvent and healthy. The reserves as a percentage of gross contribution income, for the Restricted Medical Schemes depreciated from 60.0% in 2005 to 40.0% in 2009. Overall solvency had slightly depreciated from 40.0% to 34.0% in the same time period, while the GEMS had climbed from 9.4% to 11% from 2007 till 2009.

Ms Maziya stated that some administration fees were very high, and that was particularly prevalent in Discovery Medical Aid schemes. That concerned the Council, as the norm should be that administration fees should be considerably lower in larger schemes. The statistics had also indicated that the number of beneficiaries had continued to grow in 2008 and 2009, despite the ramifications of the economic recession. That aided in demonstrating how slight structural adjustments to the system could grow participation. She noted that the number of beneficiaries in restricted schemes grew from 2 053 in the year 2000 to 3 ,253 by the year 2009, while on the other hand, the number of beneficiaries in open schemes had stayed practically the same – at 4 676 in the year 2000 to 4 815 in 2009. The overall number of beneficiaries in schemes grew from 6 730 in the year 2000 to an impressive 8 ,069 by the year 2009.

Ms Maziya alluded to the fact that not all of the effects of GEMS were positive. The Council also highlighted that the GEMS was impacting on the cost of open schemes and that a Risk Equalisation Fund (REF) would have mitigated that impact. To illustrate that point she noted that the figures showed that in 2005, GEMS costs were actually higher than they were in 2009, but whilst this was dwindling, the open schemes price, per beneficiary, rose nominally but the price of restricted schemes rose even more steeply. Ms Maziya concluded that the number of complaints for non-payment of prescribed minimum benefits had increased dramatically in 2009, with a large figure for unpaid accounts.

Mr Dan Lehutso, Chief Financial Officer, Council for Medical Schemes, presented the budget and the finances. He started off by announcing a nominal budget increase of 17% from R70.1 million to R81.7 million. The Council had made the decision to fund strategic functions from levies, rather than general taxes. That resulted in a 18.6% levy increase from R15.42 (plus R2.74 for REF) to R18.49 per member per year. The impact on members was kept smaller because of an R11.5 million cash surplus and an increase in the number of members.

Mr Lehutso stated that during the financial year 2009/10, specific tasks conferred on the CMS by the Minister of Health were performed in the interest of medical scheme beneficiaries. These included the operational regulatory functions, the strategic regulatory functions and strategic projects. He presented comparative figures for each of these (see attached presentation for details). He informed the Committee that the strategic regulatory functions previously funded by transfer from the Department of Health were, with effect from the financial year 2010/11 to be funded through levies. The Council’s high cost budget items were salaries, rent, legal fees and trustee training. The costs of salaries and rent had increased, and there were a lot of legal challenges. He further pointed out that the high costs attributed to trustee training were incurred in recognition of the fact that highly skilled personnel were required to run the affairs of the Council to safeguard against failure.

Mr Lehutso further added that the total salary bill had now increased by 11%, up to R51.8 million due to new positions and stringent marked demands. He stated that the 8 new positions were necessitated by increases in complaints, the maturing of accreditation function, the apparent additional requirements on strategic projects, and the creation of more capacity in research and monitoring. He pointed out that the 8% general increase in costs was due to high inflation. The budget had been considered in February, but the CMS was competing with the industry for specialised skills. In order for the Council to accommodate extra staff, an additional part of the building was needed, and the new rental costs for this space came to R4.4, million compared to the previous R3.4 million, an increase of 29%. The budget for legal fees had increased by 17% from R3.2 million to R3.7 million, and he explained that in order to ensure compliance with the Act, the CMS considered that it was necessary to get expert legal advice and enter into litigation to protect members. In terms of the CMS’s Trustee Training programme, he explained that the trustees had a fiduciary duty to manage the R80 billion industry in the interest of members. The budget for this therefore had increased by 32%.

Mr Alex van der Heever, Advisor to the Council for Medical Schemes, addressed the Committee on the Council’s strategic priorities. He highlighted that the Council entered into two types of contracts. Bilateral contracts involved directly contracting between parties. Unilateral contracts would stipulate that the provider would set fees for patients, and that the scheme then decided independently how much it would reimburse to its members. He explained how this worked. The service provider would set fees and charge the patient in terms of a unilateral contract. The medical aid schemes would make direct payments to the provider, in terms of the bilateral contracts. The schemes would then reimburse the patient according to the benefits that the patient and medical aid scheme had agreed in their contracts. Mr van der Heever added that the private system was more exposed to collusion against the patient than schemes that were due to balance billing. He stated that patients were not always able to negotiate the terms of their benefits when a unilateral contract was used.

Problems emerged when providers were allowed to sit together to set part of the price. Providers would actually determine the full price, and that could create a situation of conflict of interest. He stated that the Reference Price List (RPL) process permitted this collusion without consideration of the budget constraints of medical schemes and those of private households. He added that, even without a final published RPL, much of the damage had already being incurred. Mr van der Heever suggested that if schemes used a multilateral contract to pay the providers this in turn would remove unfair distortions in those transactions.

Mr van der Heever said that with regards to the CMS’s strategic priorities on hospital pricing, the private hospital market in metropolitan areas (which constituted more than 50% of the medical scheme population) had, by 1999, become very concentrated. He pointed out that only 12% of the private hospital beds were outside of the three main hospital groups by 2006. He went on to look at the real cost trends of private hospitals. He stated that there was an exponential rise in real cost for private hospitals from 1998 up until 2004, but that between 2004 and 2009 the cost had remained constant, due to positive structural changes by the Council. He added that the start of the exponential rise in 1998 coincided with the period of market concentration.

Mr van der Heever stated that in order to remedy some of the problem with the schemes, a fair process was needed to determine prices set outside of unilateral contracts, that could take into account schemes and household affordability constraints. He added that a fair process to set prices where significant market imbalances existed was also required. There was a need to protect the system of Prescribed Minimum Benefits (PMBs) . He also stated that there was a clear market imbalance in hospitals and this needed to be addressed.

Mr Boshoff Steenkamp, Project Specialist, Council for Medical Schemes, noted that a further strategic priority of the Council was the Risk Equalization Fund (REF). He pointed out the racial breakdown of medical schemes. The graph showed that the number of black South Africans within schemes had risen by a million members since 1991, the number of coloured South Africans had slightly dwindled by an estimated 500 000 from 1991 to 2007, but the number of white and Asian South Africans within schemes remained virtually unchanged. Mr Steenkamp stressed that the absence of risk equalisation unfairly discriminated against older and sicker members of medical schemes, and thus jeopardized medical scheme cover of almost 600 000 beneficiaries. He emphasised that those marginalized members were in fact the most vulnerable, as they were, in most instances, unemployed and susceptible to ill health.

He pointed out that there were many low risk beneficiaries in the system to cross subsidise the high-risk beneficiaries. The statistics showed that out of about 3 million medical schemes beneficiaries; 2.6 million were in the medium risk categories, compared to a mere 284,672 beneficiaries in extremely high risk. He stated that the reason why the REF was required was that the age and health status of the beneficiaries should correlate, as costs were largely driven by those factors. He added that the age structures differed between different schemes, either by design or by historic predisposition. He stated that the REF allowed all members to pay in accordance with the risk faced by the entire industry, meaning that all members paid the same amount despite the difference in their health status. The absence of REF resulted in an unfair variation of PMB costs faced by members, with costs per beneficiary standing at R303 for the industry, R261 for low risk beneficiaries and R497 for high risk beneficiaries. Many countries had tried and tested the risk equalisation mechanism and it had proved to be a positive step. Furthermore, work had continued on a system of risk equalisation over the past seven years. The Department of Health (DoH) and the CMS had begun a consultative process in 2003. An international review panel recommended implementation in 2005. The Minister of Health had instructed the CMS to prepare for a system of risk equalisation and the Cabinet instructed the DoH to prepare legislation in 2005. However, the Amendment Bill was not considered by Parliament in 2007.

Mr Steenkamp informed the Committee that REF could be implemented quickly, and at a low and affordable cost. He pointed out that the first six months would be taken up with schemes adjusting their systems and data quality, but by the second year the first financial transfers could be made. He warned the Committee that continued delays in the implementation of the REF harmed the industry considerably, as risk rating would continue until the amendments were effected. This put the most vulnerable, sicker and older beneficiaries at risk of no longer being able to afford to continue their membership. He reiterated that in other countries, similar problems had been addressed through risk equalisation systems and that in South Africa a shadow system had been in place for five years. Mr Steenkamp emphasized that the REF was a low cost intervention that addressed a major systemic concern. 

Mr Steenkamp noted that the CMS had met with the Minister of Health and was working with the DoH to address other areas of concern. These included medical scheme governance and compliance, the demarcation between medical schemes and health insurance products, regulation of brokers to address perverse relationships and conflict of interest, and recommendations to amend the PMB regulations, which were submitted in March 2010.

He summarised that the CMS believed that the medical schemes industry was sound, but in order to ensure the continued protection of the public, urgent intervention was required in certain areas. These included the improvement of compliance through training and enforcement, the protection of the PMB framework, the intervention in price negotiations, the implementation of the REF and strengthening of the government’s regulation over brokers and managed care.

Discussion
Ms A Luthuli (ANC) stated that there had been some positive changes in medical schemes since 1994. She asked what percentage of the total budget was allocated to salaries.

Mr Lehutso replied that 64% of the budget was allocated to salaries, as the Council was attracting highly specialised professionals in order to effectively regulate a R84 billion industry. He stated that the salaries were paid from the levies and not by the government.

Ms Luthuli commented that the issue of brokers was perceived as an added burden on the beneficiaries, as they were squeezing a lot of money out of the members. She called for an end to the services of the brokers.

Mr van der Heever answered that the medical aid schemes were deregulated before 1994 and that it was only after 2000 that regulation gained headway. He added that legislative amendment was still required in order for some coherence to be fully established. The problem of brokers was one of a structural nature. The fact that brokers had the task of advising members and were also marketing for medical aid schemes created obvious conflicts of interest. Members of medical aid schemes should only pay for advice if they needed it, and not as a standard procedural service.

Ms M Dube (ANC) wanted to know how the CMS monitored medical schemes registered with them. She further wished to know why members were not always allowed to enlist their extended families who were over the age of 18 and were unemployed.

Mr Craig Durham, Head of Legal Services: Council for Medical Schemes, answered that the mandate of the CMS was to protect members that belonged to medical aid schemes. The principal member’s interest and the interests of their immediate families were at the forefront of the CMS mandate. He added that members of the extended family were entitled to benefits from medical aid, if the principal member could prove the nature of the dependency.

Ms Dube asked whether it was better to lease additional accommodation instead of purchasing a property, and also asked who was maintaining the buildings.

Mr Lehutso answered that it was cheaper to lease the building, and that the landlord was responsible for the maintenance. However the CMS was responsible for the cleaning services, which it had outsourced and was paying for.

Ms Dube also asked whether there was any consultation with regard to the 8% salary increases.

Dr Gantsho answered that there were four levels of consultation that needed to be completed for salary increases, which were consultation at the levels of the Council, the DoH, the Minister of Health and the Minister of Finance. He added that the consultation was thorough.

Ms T Kenye (ANC) asked the Council what was the purpose of belonging to a medical aid scheme if the members still had to pay out of their pockets at pharmacies. She also asked as to who was paying the salaries of the CMS.

Mr van der Heever answered that the pharmaceutical companies had free reign to charge for medicines obtained from pharmacies, and that this particular problem needed yet to be rectified.
He stated that, in terms of the PMB, people did not always know what they were paying for. He empathised with the beneficiaries that medical scheme rules and regulations were often far too complex.

The Chairperson alluded to the fact that the CMS was established in order to regulate a somewhat dysfunctional industry. He wished to know whether the Council was “on top of its game” in terms of regulating that industry.

Mr M Waters (DA) asked what the CMA was doing in order to ensure that semi-skilled families could afford medical aid schemes. He also asked the Council for some clarity on the REF.

The Chairperson encouraged Dr Gantsho and his team to feel free to recommend a plan of action that would take positive steps to rectify the problems tabled.

Mr Steenkamp answered that Council had started with public consultations from 2008. The Council had established 13 clinical advisory committees and an economic model was created. However it was realised that the benefits were going to become too expensive, and this first model had to be abandoned. He pointed out that a set of PMBs were created and recommendations on this were submitted in March 2010. The PMB regulations were not yet in force, but a multilateral task team was established, which led to the creation of a Code of Conduct for Medical Schemes. He concluded by emphasising that there needed to be better communication between medical schemes and patients. He also noted that the CMS would look forward to working further with the Committee on its recommendations.

The meeting was adjourned.


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