Cosatu Condemns Exorbitant Private Healthcare Costs [press release]

The Competition Commission is currently conducting an inquiry into private healthcare costs in South Africa. This investigation was launched after various groups and members of the public complained about the exorbitant costs incurred when accessing services in the sector.

A number of stakeholders, including COSATU, have submitted their inputs on the above-mentioned subject. Our participation is informed by the primary goal of supporting the introduction of a National Health Insurance (NHI) scheme.

The exorbitant prices charged by the private sector are an impediment to the successful implementation of this policy.


South Africa is currently rated 118 out of 187 countries on the Human Development Index (2013). This is quite worrisome if one considers the amount of money spent on health services in the past couple of years. The country’s health outcomes are very poor when compared to other middle-income countries.

In our view, the primary cause of the difference between expenditure and outcomes is the inequality that exists in the health sector. The Presidency’s (2014) Twenty Year Review highlighted the severity of this challenge by pointing out that “South Africa spends about 8.5% of GDP on healthcare, 5% is spent on 16 percent of the population; while the remaining 3.5% of GDP is spent on 84% of the population.”

These disparities have both racial and class dimensions. This five percent mentioned in the report is mainly spent on the rich White population of the country, whilst the mostly poor African population has to rely on the remaining three percent. The General Household Survey (GHS) of 2012 revealed this inequality by reporting that only 10.4% of the African population had medical insurance and 75% of the White population was on medical aid.

This inequality has been driven by the commercialization of health over the past 15 years. This practice turns public goods and services into products for the sole purpose of generating profit. Our submission explained the primary causes of commercialisation and its negative effects on healthcare by examining the role of the following key institutions.

1. The State and Regulation

COSATU has raised a number of key points on regulation in the health sector. We refuted the argument advanced by conservative economists that the state should create a legislative framework for perfect competition. It is impossible to achieve perfect competition in this sector. The private health care market is characterized by information asymmetry, which allows health service providers to manipulate the diagnosis process in order to generate extra profits.

This then results in users paying large amounts of money for healthcare services which they don’t necessarily need. Information asymmetry has produced negative socio-economic outcomes such as the over-supply of services.

Another short fall of regulation in the post-apartheid era has been the over-emphasis on efficiency. The post-apartheid regulatory regime has been driven by the key assumptions of economic liberalism. According to this school of thought, the primary aim of regulation is to promote competitiveness and efficiency. We argued that health policy regulation has been mainly guided by these goals. Minimal attention has been paid to social equity and equal access.

These regulatory challenges have also had a negative effect on price determination in the sector. Our submission highlighted the minimal role of the state in price regulation. This is major concern because private health care providers are primarily concerned about profit and returns on investments. Therefore we cannot rely on the market to increase access by creating a just pricing system.

COSATU also argues that there is an oversight in the legislation governing access to prescribed minimum benefits. This has allowed healthcare providers to over-charge citizens, and thus defeat the intended purpose of the legislation. The state has also not managed to implement legislation governing the growth and activities of the private sector effectively. This explains the rapid expansion of the private sector’s share in the nation’s health system and pervasive commercialization, which has been mainly driven by the following institutions.

2. Private Hospitals and Specialists

Private hospitals account for 36% of healthcare expenditure (the largest portion). Most studies illustrate that private hospital providers are responsible for the exorbitant charges in the sector. In 2013, South Africa had more than 300 private hospitals and over 3500 private clinics. This expansion has been accompanied by perverse trends which have drastically increased private healthcare costs.

The first is the increased acquisition of beds and complex diagnostic technology, which is not driven by the need for improved health outcomes. It is rather motivated by the fee-for-service principle, which drives private facilities to concentrate on health services that generate the most revenue.

The second factor driving costs in the concentrated nature of ownership in the sector. There are three major groups which dominate the private hospital sector: Netcare, Mediclinic and Life Health Care. These entities own 80% of the private health care facilities in South Africa. More worryingly, 3 out of 4 beds in the private sector belong to these major groups. Their joint market capitalization is estimated to be worth R83, 688 billion. All are listed on the Johannesburg Stock Exchange.

These groups’ market power has denied medical schemes the right to “selective contracting” which could decrease costs. Moreover it has allowed private hospitals to dictate prices to medical aid schemes, which are reluctant to cover the inflated amounts. The end result is increased co-payments that place a greater financial burden on citizens. It is also important to remember that the competition ruling of 2004 barred medical schemes from collective bargaining. This has extended the leverage of these hospital groups in the process of price determination.

The third factor identified in our submission is the relationship between market power and commercialisation. We highlighted this by pointing out the increased profits accumulated by these hospital groups.

In 2013, all three entities increased their profits by: Netcare 7.9%, Life Healthcare 12.7% and Mediclinic 15%. Their returns on capital employed (ROCE) have increased drastically over the years. For example, return on capital for Netcare averaged 15% between 1997 and 2001. Between 2002 and 2011, that number had jumped to 22%. Moreover, expenditure on private hospitals was way above inflation between 2000 and 2010. In this period, the consumer price index (CPI) was 6%, but hospital price inflation was 8.5%. Spending on private hospitals increased by 12.2%, double the rate of inflation.

3. Private Specialists

Private specialists are also responsible for the exorbitant prices in the sector. Some practitioners support the phenomenon of over-supply because of financial gains. This specifically applies to those practitioners who have free or low-cost consulting rooms in private hospitals. These specialists only receive financial benefits associated with share ownership if they promote the increased usage of advanced technology.

The Council of Medical Schemes report indicated that payment to medical specialists amounted to R25.5 billion, comprising 24.5% of total health care benefits paid in 2013. This amounted to a 14% increase from the value paid in 2012. These figures also indicate that the private sector has neglected the primary healthcare approach. It has shifted healthcare to curative measures, which are more costly for citizens.

4. Medical Schemes

Medical Schemes have also contributed to the excessive costs incurred by citizens in the private sector. This has been caused by the following trends:

First, the high levels of concentration in the sector, dominated by the following groups: Discovery, Metropolitan Health and Medscheme. These entities account for over 80% of all medical scheme administration.

Second, large administrative costs which divert resources away from healthcare provision to profit-driven commercial activity. For example, these fees accounted for 90 % of Discovery’s operating profit between 2010 and 2011.

Third, the expansion of co-payments while healthcare benefits are being reduced. It is clear that these extra costs finance the exorbitant fees charged by private hospitals and specialists. Lastly, trustees of various schemes continue to receive high stipends. The CMS reports that in 2013 the total costs of payments to trustees of the top 6 medical schemes was R25 021 000. All these factors have driven the high costs in the sector and subsequently decreased access to healthcare.

COSATU’s Key Recommendations to the Panel

• Recommendations of the panel must compliment the introduction of the NHI

• The state should reintroduce the National Health Price List to facilitate a greater role for the state in price determination

• Regulation needs to address the challenge of information symmetry through non-market mechanisms such as clear standard-setting and using the state’s institutional power to direct provider-user relations towards goals of achieving affordable health care

• The state should implement Sections 36 and 37 of the National Health Act, which can be used to control the growth and activities of the private sector

• A Primary Healthcare approach should be enforced in the entire sector

• Public funds must be used to improve and expand the public sector, as it services the majority of the population. This requires a moratorium to be placed on using state funding for private facilities

• Centralisation of the national licensing system

• The Constitutional Right to healthcare must inform the panel’s recommendations. Competition policy must be understood within this context of improving access to quality healthcare.

• Removal of medical aid tax incentive

• Final solution to this challenge is the introduction of NHI rather than just improving competition.