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Integration can cut costs - Discovery CEO

Sep 26 2012 15:59

Company Data

DISCOVERY LIMITED [JSE:DSY]

Last traded 129
Change -6
% Change -4
Cumulative volume 2311277
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Cape Town - The healthcare industry needs greater integration to bring down medical scheme costs, said Discovery Health [JSE:DSY] CEO Jonathan Broomberg.

Speaking at the Hospital Association of South Africa (Hasa) conference in Cape Town last week, Broomberg said not allowing hospitals to employ doctors was an old-fashioned restriction.

“We cannot understand the rationale, we need lower cost delivery models.”

Broomberg said that medical inflation at 10.9% was almost double general cosumer price index inflation of 5.5%.

"There are multiple drivers of cost escalation,” he said. 

Although hospital costs are a contributor, he said these have moderated over the past four years. Hospital expenditure is a function of how many people are being admitted and cost per healthcare event.

“We’re seeing three fundamental drivers of cost: new technology; new facilities opening; and doctors’ decisions.”  

There has been a 12% rise in the burden of disease over the last four years, he said.

Increased hospital utilisation is a major factor contributing 40% to increased hospital inflation and an average annualised increase in hospital claims of 2.01%. 

Broomberg said Discovery would look to reduce administration costs to 10% of total contributions over the next few years. 

On the demand side, Discovery is seeing a growing problem of adverse selection, as the economy tightens and medical scheme premiums eat up a bigger share of consumers’ wallets.

“It’s easy for members to buy at lower points in schemes and buy up when they get sick,” he said.

“Schemes are getting much less surplus from the young and healthy to subsidise older, sicker members.”

Medical schemes are losing out on the critical period when young healthy members pay in more than they claim, which is necessary to create stability.

In addition, new life-changing technologies are available which schemes were under pressure to fund. For example, a trans-catheter aortic valve implantation cost between R321 000 and R552 000 versus older open heart surgery procedures of R250 000.

Discovery has funded 40 cases of the new technology thus far as part of a pilot project. 

Broomberg also pointed out that 650 000 Discovery members would require R3bn for chronic medication this year, while another 43 000 Discovery members require R3bn funding for biologic, high cost drugs.

“These are life-changing drugs and medical schemes need to find ways of funding them,” he said.   

Broomberg stressed that some modifications to the regulatory framework could assist medical schemes significantly without affecting community rating and open enrolment.

“We believe in these principles, they are fundamentally equitable.

"But we have two legs of three-legged table, and when you have community rating and open enrolment you need a mechanism to protect medical schemes from adverse selection.”

He said the way to do this is to protect schemes by introducing mandatory cover for the employed.

An interim solution would be a risk equalisation framework that allows medical schemes to equalise risks between them would be stabilising. 

Increased waiting periods for new joiners would assist medical schemes to rein in costs. 

Broomberg said new healthcare delivery models could dramatically reduce hospital costs.

A pilot project conducted by Discovery for hip replacements cases reduced average length of stay from 7.34 days to 3 days, and costs from R110 000 to R70 000. 

”We’re all failing in our responsibility if we do not try much harder to change delivery models. There are technically feasible ways to do this and we appeal that these issues be opened up for debate.”

He said healthcare teams need to be integrated and more risk sharing models explored. 

“We can change the cost curve completely.”

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