There is a far greater crisis looming in health care than many people realise. The crisis does not concern only the over-stretched, under-resourced and too often badly managed public health sector but also private sector health care, including medical schemes.
Increasingly, decent medical care is becoming unaffordable. Year after year, medical scheme contributions increase, on average, by between two and three percentage points above inflation. Last year, contributions increased by 11.1 percent, while the consumer price index (CPI) was 7.1 percent - a difference of four percentage points. (The trend continues this year - see related article "Medical scheme members in for hefty increases")
And then there are the "silent increases" of reduced benefits.
The biggest contributors to increases in claims (and therefore medical scheme contributions) were again private hospital and specialists' costs, the Council for Medical Schemes's annual report for last year shows.
As the costs rise, so more and more people are thrown into the over-stretched public health sector. In the end, only the rich will be able to afford private health care and medical scheme membership.
The recently published annual Sanlam Employee Benefits Benchmark Survey on retirement found that many pensioners cannot |afford the medical scheme benefits they need.
About 75 percent of pensioners receive less than R10 000 a month, according to the survey. They cannot afford to belong to the top medical scheme options; others cannot afford to belong to a scheme at all.
And, in a climate of falling interest rates and volatile and flat equity markets, the pressure on pensioners is likely to increase.
A simple example: most pensioners who belong to defined-benefit retirement funds are guaranteed only the pension they receive on the day they retire. If the fund has sound investment performance, they are granted increases. On average, these increases are about 75 percent of CPI. So the combination of above-inflation medical scheme contribution increases and below-inflation income increases is quickly felt.
However, the problems of affordable health care go much deeper. There is also the sustainability of healthcare companies, particularly those that chase short-term, ever-increasing profits that are linked to unacceptably high incentives for senior executives. In the end, these issues go to the heart of the sustainability of the economy.
The issues are also part of the cause of the scenes witnessed on the streets of the country in one of the worst strikes in recent history. The fundamental reason for the strike is that people cannot afford an adequate standard of living, including reasonable health care.
The South African Savings Institute (Sasi) held a workshop recently on the savings crisis in South Africa and the impact it is having. The problem is that most people cannot, for numerous reasons, afford to save. Most people worry about how to reduce their debt.
Add the loss of 500 000 jobs in the recession and you can see why last year about R300 billion was saved but R330 billion was "dis-saved" (withdrawn for one reason or another). This inability to save highlights another problem - the disparity of wealth in South Africa.
Extraordinary profits
Let us look at Discovery Holdings, which includes the administrator of the country's largest medical scheme and a life assurer.
Discovery Holdings recently rewarded its shareholders with a 36-percent increase in profits. Total profits declared for the year are an impressive R2.54 billion. Granted, about half these profits come from non-medical scheme operations, but they also come following a year of recession.
I am sure Discovery and others will argue that its extraordinary profits contribute to improved returns on retirement savings, thereby assisting pensioners, because pension funds invest in shares such as Discovery, thereby participating in the profits.
The problem is that significant amounts are filtered out by things such as the huge pay packages that go to senior executives by way of cash and shares.
In the process of generating these profits, Discovery's senior executives have become exceptionally wealthy.
For example, Adrian Gore, the founder and head of Discovery, last year reached number 10 on the Sunday Times South African 2009 Rich List, with assets of at least R1.45 billion.
Think of the striking nurses, who earn a minuscule fraction of what senior executives throughout the broader healthcare industry earn. Nursing staff also face enormous increases in healthcare costs, reducing their already low salaries.
South Africa is among the worst countries in terms of the Gini Coefficient, which is a measure of the gap between the number of wealthy people and their wealth and the number of the poorest people and their income. In other words, most South Africans live in poverty, |while comparatively few live with immense wealth.
An indication of this was provided at the Sasi workshop: 72 percent of working South Africans earn less than R12 500 a month. Not many of these low-income workers can afford medical scheme contributions, let alone save; and if they can, it is at the lowest levels.
With this disparity between rich and poor, it is not surprising that ordinary South Africans are in debt, do not save and go on strike.
The danger is that companies such as Discovery and private hospital groups will see their profits and therefore their share prices implode as fewer people are able to afford scheme membership. But this is hardly likely to slow the relentless pursuit of profits and fat executive packages.
In the pursuit of corporate |profits, the other victim is ethical and moral behaviour.
Take Discovery as an example, because its financial results were announced simultaneously with the release of the Council of Medical Schemes's annual report. There is room for concern over governance issues.
Discovery has introduced some marvellous innovations, including:
- Its Vitality programme to |pro-actively improve the health of its members and thereby reduce medical costs;
- Impairment assurance, which, because it pays out based on your ability to perform daily tasks rather than your ability to do a job, closes many of the gaps in traditional |disability assurance; and
- Initially taking the moribund life assurance industry and its too many "anti-consumer" products |by the throat and separating the different needs of risk life assurance and investment. This overturned a structure that had resulted in consumers losing hundreds of billions of rands in penalties when they could not afford to pay the premiums and simultaneously losing their risk cover against things such as death and disability.
But Discovery is allowing the unacceptable to creep in, particularly since it launched its investment and life assurance wings. For example:
- Discovery Life claims to have superior products and that intermediaries want to join its ranks to sell these products. The question then is: why does its life assurance business step up the abhorrent system of offering its product-floggers multi-million-rand recruitment incentives in the form of cash and share options? These packages do not conform to the spirit of the regulations governing commissions and they encourage mis-selling in the industry as a whole as other companies join what has become a bidding war.
You, the consumer, become a potential victim as advisers shift allegiance to the highest bidder and then switch you into what will become increasingly more expensive products (although in many cases the higher cost will be well hidden in the early stages).
- Discovery Life's products have become increasing complex, less transparent and integrated, with the best outcome dependent on many factors, including using what may be unsuitable products.
The net result is that the products can favour the young and healthy over the old and unhealthy, many of whom will not be able to afford the contributions and premiums in the future, leaving them stranded in their hour of need - and they will find out only years from now, when it happens.
Change of heart needed
Discovery is by no measure the worst offender when it comes to unethical behaviour. Private hospital companies, in the sole interests of profits, may be tempted to cut costs, including nursing costs, which could in turn threaten the safety of patients.
The proposed national health insurance system is hardly likely to solve the problems of the healthcare industry.
At the Sasi conference there were suggestions that the only way to solve the savings crisis is to solve the underlying problems of the economy, and the only way to do that is via a social compact between organised labour, business and the government.
The same applies to the healthcare industry. Let us hope that someone takes the initiative before we become a very poor and sickly nation, albeit with a handful of healthy and very wealthy people.
- Next week: A bit of ethics and morality would help.