Discovery Health preliminary views on the provisional report of the Health Market Inquiry (HMI)

HMI FINDINGS AND RECOMMENDATIONS ON BROKERS

The HMI finds that:

• Brokers play an important role in advising members and assisting them to navigate scheme complexity. Stakeholders submitted that brokers improve consumer welfare, grow medical schemes and strengthen competition.
• A significant proportion of members appear not to know that they have a broker or who their broker is. This could be due to employees joining through their employer, and these employees not being aware that their membership falls under the auspices of their employer’s broker.
• Individuals are also not always aware of the role the broker can and should play, including assisting with claims.
• Broker training and engaging with brokers is an effective means for the administrator to improve a broker’s understanding of the scheme’s product, including the benefits and networks. 
• Brokers have a role to play in ensuring members are aware of governance issues for schemes such as encouraging AGM attendance.

The HMI recommends that:

• Brokers should be remunerated on an opt-in basis (which requires annual explicit consent) with full disclosure of fees to members, and schemes should charge a lower premium (net of broker fees) to members who opt out of having a broker.  
• Brokers that are marketers of a certain medical scheme, or have a close/exclusive relationship should earn lower commission than “independent agents”.

Discovery Health comment:

We are glad that the HMI has recognised the important role played by brokers in advising members and assisting them, including in the selection of scheme cover and in accessing benefits. It is not clear what evidence base was used to conclude that members are often unaware of having a broker, but we do not believe it is appropriate to debate this point.

It is clear that the HMI and the Department of Health and Council for Medical Schemes (via the MSA Amendment Bill) are focussed on the need for explicit member consent, and it will be critical for all interested stakeholders to engage with the policy makers to ensure that the mechanisms for this consent are practical and feasible. For example, it does not make sense to require that consent be obtained every year – a better approach would be that consent should be obtained once, and that a member can withdraw their consent at any time thereafter. It will also be important to propose workable solutions for consent in the corporate environment, where it will simply not be possible to obtain consent from all current employees, but may well be possible for new joiners.

The HMI proposal that scheme premiums should transparently reflect broker fees (and other expenses) seems reasonable and in line with practice in other financial services sectors. However, it is not clear whether the proposal to reduce scheme premiums for members not appointing a broker is supported by the CMS and National Department of Health (NDOH), nor whether this is feasible from a payroll and billing perspective.

HMI FINDINGS AND RECOMMENDATIONS ON SCHEME BENEFITS AND CONSUMERS AND ROLE OF ADMINISTRATORS

The HMI finds that:

• Scheme options are highly complex, and consumers cannot effectively compare options, and are therefore confused. This is in part due to the incomplete regulatory environment. The HMI does not agree that option complexity reflects innovation by schemes.
• Schemes demand almost no accountability from administrators to manage supply-induced demand and moral hazard.
• Schemes and administrators are not using buying power effectively, although the HMI clearly recognises that Discovery Health (DH) is the only administrator that does exercise power against hospitals and has achieved lower hospital tariffs than other administrators.  
• There is limited evidence of value based contracting by medical schemes.
• Anti-selection has adversely affected medical schemes and it is not clear whether current measures provide additional financial offset to schemes.

The HMI recommends that:

• Scheme options be restructured to include a base benefit option which is standard across all schemes, and that this option would be risk equalised across schemes. Schemes would then be free to provide supplementary options which may be risk rated.
• The PMB package for the base benefit option would be regularly reviewed (at least every 3 years) with more detailed information provided to members on accessing PMBs. PMBs need to include more out of hospital cover to reduce incentives for admissions.
• A discount to encourage younger members to enter earlier should be considered.
• Trustees should demand more accountability from their administrators to manage claims inflation.
• Schemes need to be more actively encouraging AGM participation by members and members should be made more aware of the CMS.
• Voting for scheme trustees should take place over a longer period, with electronic voting allowed, and trustee elections should be completed prior to the AGM.

Discovery Health comment:

We agree that scheme options are complex and that members are not always clear on how their options work. We maintain our view that the major drivers of this are regulatory – in particular, PMB regulations, and also that product innovation in approaches to manage risk do lead to option complexity (eg network options etc). We also feel that such complexity highlights the importance of the role of advice in helping members to understand scheme options and navigate this environment.

We strongly disagree that our scheme clients such as Discovery Health Medical Scheme (DHMS) demand no accountability from DH to manage healthcare costs including supplier induced demand. We experience significant (and appropriate) pressure from all of our scheme clients to do whatever we can to mitigate claims inflation.

We are pleased that the HMI has acknowledged that DH is the only administrator to effectively wield strong countervailing negotiating power with the major hospital groups and other suppliers, which is one key driver of the lower claims costs we are able to achieve for our scheme clients. This ultimately benefits members through lower contribution increases.

The recommendations on restructuring scheme options are not new, and in some respects are consistent with the recently released Draft Medical Schemes Act Amendment Bill. We are generally supportive of this approach, although the detail will be critical.

Anti-selection continue to be a key risk for open schemes in an environment where the social solidarity framework has been incompletely implemented. We will use the opportunity to comment on the HMI Report to push hard for further measures to protect schemes against adverse selection. Such measures are for the benefit of existing scheme members, and are important in ensuring the ongoing sustainability of the scheme.

HMI FINDINGS AND RECOMMENDATIONS ON DISCOVERY HEALTH MEDICAL SCHEME (DHMS) AND DISCOVERY HEALTH (DH)

The HMI notes that:

• DHMS is the dominant open medical scheme, and there is inadequate competition in the open schemes market.
• There is lack of effective competition in the administrator market. DH and Medscheme between them dominate the administrator market with 76% market share. Although there is some evidence of competition between administrators e.g. DH and Afrocentric and competing for restricted schemes, no existing players are challenging the existing dominant players, and no competitors are entering to challenge DH.
• DH has shown sustained profitability, earning profits that are ‘multiples higher than its competitors’.
• Much of DH’s success can be attributed to competent management but that is not enough to explain the large and persistent gap to competitors.
• This gap may therefore be due to DH charging ‘excessive fees’ relative to its scale.
• DHMS is ‘locked in’ to DH and that the DHMS Vested model raises some competition concerns.
• DH is the only administrator that applies some countervailing power to hospital groups (better than Medscheme and MMI), and there is clear evidence that DH (and GEMS) have managed to achieve lower hospital tariffs.

The HMI recommends that:

• Competition in the schemes market should be increased by the introduction of ‘regional’ schemes, which could be protected from volatile claims risk through reinsurance.
• There were no recommendations making specific reference to DH or DHMS, nor any specific recommendations regarding the contractual relationship between schemes and administrators.

Discovery Health comment:

DHMS market share and competition in the open schemes market

DHMS’s large size and market share has been hard earned, with each corporate employer and individual member joining one by one. This growth is simply due to DHMS offering a better product – with the widest range of options in the market, at the lowest premiums, all of which is backed by consistently high service levels and very effective sales and marketing capabilities of DH. Over 1,000 members join DHMS every working day because DHMS plans are on average almost 17% cheaper than the major competitor open schemes.

We do not agree that there is limited competition in the open schemes market – there are 22 open schemes, and competition between the 8 major open schemes is fierce and consistent. Such competition is beneficial for members and drives DH and DHMS to continuously innovate.

Administrator market competition

We do not agree with the HMI that there is lack of competition in the administrator market. In the open scheme environment, competition occurs at the level of the scheme itself, and competition between the major 8 open schemes is intense. In the restricted scheme market, there is intense competition through tender processes for contracts for closed schemes. Since 2008, DH has competed in 17 such tenders and has won 16 of these. We believe that this is due to our ability to provide a better total administration package, including highly competitive administration fees, lower claims costs and superior service.

Regional schemes to increase competition

This is an interesting proposal which we will need to apply our minds to carefully.

DH profitability and fees

Discovery Health has always worked hard to ensure maximal transparency on both the fees we charge our medical scheme clients, and on the profits we earn as a result. We consistently disclose a significant amount of segmental information on Discovery Health’s financial performance each year as part of the financial results announcement of Discovery Ltd, even though we have no obligation to do so. We are proud of the continued growth and success of our business over the past 26 years, and believe that the revenues and profits we earn reflect an outstanding business which has been grown life by life on an entirely organic basis.

One purpose of the HMI was to assess whether any market players have dominant or unequal market power, allowing them to charge higher prices than competitors and impacting consumers negatively. This raises the question of whether Discovery Health’s higher profitability than its competitors is due to it charging materially higher fees to its clients than its competitors do. However, publically available data demonstrate clearly that this is not the case, and we do not agree that DH charges excessive fees relative to the scale of DHMS.

The fees paid by DHMS to DH for administration and managed care fees are almost exactly the same as the weighted average of all 22 open schemes when measured as a percentage of Gross Contribution Income (“GCI”). When measured on Rand per average beneficiary per month (Rpabm), the fees paid by DHMS are 3.8% above the weighted average. When measured on a proportion of GCI basis, the fees paid by DHMS are 0.17% below the average of all open schemes. DHMS administration expenses and managed care fees rank 14^th lowest out of 22 when measured on pabpm and 10^th lowest out of 22 when measured as a proportion of GCI.

In the open schemes market, the two main local competitors to Discovery Health are Medscheme (administrators of Bonitas and Fedhealth) and MMI Group (administrator of Momentum Health). The weighted average administration expenses and managed care fees charged by Medscheme and MMI are comparable to those charged by Discovery Health.

Discovery Health’s higher profitability relative to competitors is thus not due to it charging higher fees, but is a result of a number of business factors including continuous innovation and greater operational efficiency driven by large investments in advanced systems and customer service technologies.

DHMS’s Vested model raises competition concerns

We do not agree that DHMS’s vested model raises competition concerns. The true yardstick for consumers to assess the value they receive from their medical scheme administrator is not the administration fees paid, but the scheme premiums, which is the actual ‘exit’ price paid by consumers for their benefits and services.

The members of Discovery Health Medical Scheme benefit from significant savings and value relative to all of the other major open medical schemes. As you are aware, when compared on a like for like basis, DHMS premiums are on average 16.4% lower than the next eight competitor schemes. This is due to a combination of effective procurement and claims and fraud risk management by Discovery Health, as well as due to the impact of Vitality on the demographics and claims experience of DHMS. This value is captured in the DHMS Value Metric, which shows that, in 2017, for every R1.00 spent by DHMS on administration and managed care fees, members received R2.10 in value from the activities of Discovery Health.

In our view, the evidence therefore strongly supports the Vested contractual relationship between DHMS and DH, as members have always and continue to benefit from this, and it is hard to see how members would be better off in the hands of DH’s competitors.

HMI FINDINGS AND RECOMMENDATIONS REGARDING SUPPLIERS OF HEALTHCARE

The HMI finds that:

• Practitioners are key drivers of health expenditure overall and peer review mechanisms have limited effect.
• There is evidence of specialists acting in collective ways that have driven up costs.
• There has been a failure to properly explore multi-disciplinary models of care delivery and the fee for service model stimulates over servicing.
• There is evidence of supplier induced demand including increases in the number of private hospital beds driving admission rates and inappropriately high rates of ICU admissions.  It was also noted that facilities are competing to attract specialists (with factors such as new technology).
• There is not an under supply of specialists but rather an inefficient use of their time.
• The private hospital market is highly concentrated with 3 hospital groups dominant. They have exhibited sustained profitability and there has been a low tendency to adopt alternative modes of delivering hospital care. The NHN exemption appears to have been effective from a competition perspective.
• There has been inconsistent application of licensing processes across the provinces which has led to an oversupply of hospital beds.
• Provider networks are a promising tool for promoting an effective outcomes based approach.
• There is lack of transparency in pricing and lack of reporting on outcomes and the overall lack of publicly available information affects decision-making by consumers and practitioners.

The HMI recommends that:

• A Supply Side Regulator for Health (SSRH) should be established under the National Health Act. The SSRH would be an independent public entity and oversee proper healthcare resource planning and monitoring. There are detailed reporting requirements for facilities and a new licensing framework under SSRH.
• A moratorium on new beds for the 3 large hospital groups should be considered.
• To allow members to make informed decisions based on quality of care, the Outcomes Measurement and Reporting Organisation (OMRO) should be implemented.
• The CMS should include metrics on supplier induced demand in its published reports and work with stakeholders to determine appropriate format and frequency.
• The HPCSA must undertake a review of its ethical rules to encourage group practices and global fees and consider the competition perspective in general.  Specific rule references have been provided.

Discovery Health comment:

Our submissions to the HMI highlighted to challenges of managing supplier induced demand as well as the need to promote alternative reimbursement models to align incentives and promote quality and affordable care. 

The proposed amendments to the HPCSA rules are an urgent and necessary measure to get this process underway and deliver immediate value to members. While we are concerned by the proliferation of regulators, the consolidation of functions, particularly with regard to licensing of facilities and monitoring of providers in general, under the proposed SSRH is promising. Industry collaborative initiatives such as the HQA are already acting in a way that is consistent with the recommendations regarding the phased implementation of outcomes measures. This is critical for ensuring that members are receiving value for their medical scheme premiums.

HMI FINDINGS AND RECOMMENDATIONS REGARDING PROVIDER PRICING

The HMI finds that:

• Fees for service (FFS) models dominate the industry. This means that funders and patients bear the entire financial risk, which is clearly not sustainable.
• FFS tariffs are a reflection of market failure as they do not consider quality of care and they promote supplier induced demand.
• A review of the 2004 Competition Commission order is not required but collective bargaining should be facilitated by the SSRH.
• Provider networks have a net positive impact on competition and are beneficial to consumers in terms of treatment with no balance billing.  They also benefit providers due to contractual certainty.

The HMI recommends that:

• There are two proposals for addressing tariff setting:
  • Regulated pricing: all stakeholders can make submissions on tariffs.  The SSRH will then publish FFS tariffs which are only binding on PMBs. There would be an appeal mechanism to an arbitrator for stakeholders.
  • Multilateral forum: formal engagement/bargaining process between all stakeholders, leading to tariffs being set by the multilateral forum, governed by the SSRH, which would also only be binding on PMBs and a reference point for other benefits.  There would be a process if agreement cannot be reached and provision for appeals to an arbitrator.
• Development of alternative reimbursement models should be encouraged.
• To ensure that networks are beneficial to consumers, provider network agreements need to promote transparency in terms of pricing, health outcomes and location. Reasonable access to providers on a network should be a key consideration. Contracts need to measure and reward quality care. Balance billing should not be allowed under network contracts.

Discovery Health comment:

The HMI findings have confirmed that it is utilisation factors rather than simple price escalations that have driven the rising costs of healthcare cover.  A key factor has been the requirement to cover PMBs at cost and the challenges in identifying and managing PMBs in general.  The proposals with respect to published tariffs as a maximum reimbursement level for PMBs and a reference point for other benefits is consistent with our submission to the PMBs.  We also stressed the importance of bilateral negotiations and the need to encourage alternative models for contracting and reimbursement and so we welcome these proposals, although we need to clarify the precise details of where the binding FFS tariffs would apply, vs bilaterally agreed tariffs. In our view, the ideal model would be for binding FFS tariffs to apply to individual providers for PMBs, but not to corporates, where agreements should be reached on a bilateral basis.  In terms of the HMI tariff setting proposals we would support a multilateral forum which accommodates broad stakeholder input.  DH will continue with initiatives to develop innovative contracting mechanisms that facilitate the sharing of data on quality of care and support best practice in service delivery.

THE WAY FORWARD

Stakeholders have been asked to provide comments on the provisional findings and proposed recommendations by the deadline of 7 September 2018. Discovery intends to study the report in detail, and make a comprehensive submission. All comments will be considered, with the HMI Panel expecting to release the final report by 30 November 2018. Recommendations in the final report will considered by relevant parties, including the Competition Commission and the Department of Health.

Discovery believes that the HMI provisional findings provide a number of positive recommendations to build South Africa’s healthcare system and we welcome the opportunity to contribute to this process.