1. Health System Trends and Issues
Portfolio Committee: Health
13 March 2001

2. Per capita health expenditure/outcomes (WHO)

3. South African Health System
Serves 39 million
Expenditure = R27,2 billion
Per capita = R695
Public Sector
Private sector
Roughly R7 billion of private sector expenditure results from the tax subsidy. The subsidy thus amounts to around R1000 per person per annum in the private sector. This exceeds what is being spent per capita for the public sector population.
Total Expenditure
R60-R70 billion
Serves 7 million
Per cap = R5,714
Per cap tax subsidy = R975

4. Social Exclusion

5. Per Capita Public Health Expenditure 1996/97 to 2000/2001
By contrast with the private sector, from 1996/97 to 2000/2001, public sector per capita expenditure has declined in real terms. There is therefore a significant mismatch between what is occurring in the two environments.
One result of this shift is that health service providers are moving out of the public sector while its served population is increasing in size and getting sicker.
Source: Department of Health (NHA)

6. Real Per Capita Costs 1982 to 1997 (i.e. after removing inflation)
Professional services: %
Drugs: %
Hospitalisation: %
Administration: %
Total: %
Medical costs in the private sector had increased by an estimated 351% from 1982 to (Based on Registrar data). This is after accounting for normal inflation.
Administration costs have increased by 283% over this period. In 2000, administrative expenditure is estimated at R4 billion. Given that this is only for 7 million people it can be compared to the Gauteng Health Department which spends approximately R4 billion on hospital services and has a total budget of around R6 billion.
Drug and hospitalisation costs have increased dramatically over this period and are largely responsible for the financial instability of the private sector.

7. Medical Scheme Beneficiary Changes 2000

8. Medical Scheme Beneficiary Changes 2000

9. Medical Scheme Age Structure: Open vs Closed 2000

10. Selected Index for South Africa

11. Average Claim by Age Centre for Actuarial Research Average Claim4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88
Age of Beneficiary
Centre for
Actuarial Research

12. Medical Scheme Age Structure: September 2000 & OHS98

13. Price adv./disadv. due to risk profile (open schemes reflecting 90% of membership) 1999
Price disadvantage
Price advantage

14. Key Factors Affecting the Year Ahead
Policy directions
Consolidation of the Act
Social Security Committee of Inquiry
End of Amnesty Period
Expect growth in membership: initial figures at the Office already suggest this
Aggressive competition for members
Still dominated by anti-competitive strains resulting from broker involvement
Some cost-containment and new business models starting to feed through

15. Key Factors Affecting the Year Ahead
Economic growth slow
Decline in restricted membership schemes
Consolidation of open scheme market (largely due to broker behaviour)
Development of regional strategies in moves away from fee-for-service
Governance of schemes likely to begin influencing intermediary behaviour (this will be enhanced through further policy changes)
Increased transparency

16. Public sector Private sector Cover Burden of disease Finance Providers
Indigent (pop. growth)
Low-income (pop. growth)
High income (no change)
Good risks (no change)
Poor risks (decrease)
Burden of disease
HIV/AIDS
Infectious
Communicable
Chronic
HIV/AIDS (limit cover)
Infectious (na)
Communicable (na)
Chronic (reduce cover)
Finance
Total
Per capita
Tax subsidy
Providers
Medical
Nursing
Pharmacy
Prior to 2000 the private sector was attracting the majority of providers, while not accepting any poor risk groups or responsibility for major public health needs. Its population base was not increasing, while that of the public sector grew with normal population growth. Unlike the private sector the public sector faces real per capita budget cuts.
The net result of this environment is a serious erosion of the public health system, of general cover for acute conditions, and a deteriorating burden of disease. The ability of the public sector to respond to major public health problems, e.g. communicable and infectious diseases, is deteriorating dangerously.

17. Compatibility with Public Hospital System
Cannot retain revenue at source
Costs do not equate to revenue
Requires fee-for-service billing
Alternative contracts very difficult to implement
Budget principles have not been defined
Redistributable portion
Retained portion

18. Explicit Policy Decisions
Public hospitals will not be free for higher income groups
Medical schemes, and private sector as a whole, will have to be compatible with public sector goals and cannot undermine the public sector
The health system will ultimately be funded from a system of:
General taxes
Earmarked taxes
Medical schemes
Other social insurance funds (RAF, COIDA)

19. Provincial Legislature
Budget vs Policy
National Legislature
Decides budget allocations to National Departments and Provincial Government as a whole
Cabinet (National)
Health MinMEC
Develop policy, but do not determine budgets
Health PHRC
Provincial Legislature
Cabinet (Provincial)
Implement national and provincial
policy within budget allocations
Health MEC
Decides budget allocation to Health
Health HoD

20. Relationship to Alternative Sources of Funding
Funds allocated according to
draw-down schedule
Provincial Treasuries
Conditional Grant
Fees
Budget but
not funds
Unconditional grant
Provincial Health Departments
Contract
Social Health Insurance?
Budget but
Not funds
Medical Schemes
Hospitals
Service

21. Budget (general taxes) Medical scheme Contributions (voluntary)
Tax subsidy
(R6,8 billion)
Per cap = R975
Medical Schemes
(risk rated)
Lose cover
Funded utilisation
Public Hospital Basic
This is a representation of the South African health system prior to 2000.
Public sector:
The public sector allocates funds to hospital and primary care through a process of competitive budgeting. No norms and standards apply and provinces and local government are free to vary allocations at their discretion. Although conditional grants exist for hospital care, these are easily circumvented through budget reductions out of the unconditional portion.
A tax deduction, valued at roughly R7 billion in 2000 (i.e. R1000 per person) is made available to the private sector. This is higher than the R970 per person available to people in the public sector. It is also inequitable in that higher income groups benefit more than lower income groups.
Private sector:
Prior to 2000 medical schemes could risk rate and prevent poor risk groups from getting cover. The public sector was the default environment where no other provider was available. Apart from this, when cover ceased, the public sector was obliged to provide services on an unfunded basis.
Private Hospital fee-for-service
Public Primary Care
Private Primary Care

22. Budget (general taxes) Medical scheme Contributions (voluntary)
Tax subsidy
(R6,8 billion)
Per cap = R975
Medical Schemes
(community rated,
open enrolment)
Funded utilisation (ffs)
Public Hospital Basic
In 2000 the Medical Schemes Act was introduced. Although membership of medical schemes remain voluntary, new legislation protecting access and transferability has been introduced.
The tax deduction has remained in place primarily as it provides an incentive for employer cover. While employers provide a mandatory environment for employees, which protects risk pools and accommodates some income cross-subsidization, this subsidy serves some purpose.
However, many employers have chosen to move into the open scheme flat-rate contribution environment. Here there is no cross-subsidy or protection of risk pools via an employer mandate. For this reason the tax subsidy has become largely redundant and inequitable.
Two significant alternative directions are possible for moving to an integrated national health system. Alternative 1 is consistent with the proposals resulting from the 1997 task team, and alternative 2 is consistent with the proposals of the 1995 NHI Committee Report.
Private Hospital fee-for-service
Public Primary Care
Private Primary Care

23. Budget (general taxes) Medical scheme Contributions (voluntary)
Ring-fence
Allocations?
Tax subsidy
(R6,8 billion)
Per cap = R975
Low Cost Capitated
Medical Scheme
(voluntary)
Medical Schemes
Fee-for-service
(voluntary)
Contracted
Capitated
ffs
Public Hospital Basic
Proposed Reforms Alternative 1
Public sector:
Norms and standards:To protect minimum allocations to public hospitals and primary care capitation-based minimum norms and standards need be introduced. These are consistent with the Constitution and do not require a Money Bill.
Second tier:A second tier within public hospitals is created to contract with private medical schemes. The existence of minimum capitation-based norms and standards protects the base allocation to hospitals and PHC. The existence of norms and standards also prevent any circumvention of conditional allocations.
Private sector:
State sponsored medical scheme: A state sponsored medical scheme is introduced offering a full comprehensive set of services. This scheme will target the low-income market and the public sector. Its primary care will be obtained from the private sector, and the hospital services from the second tier public hospital environment.
Market response: In response to the emergence of a second tier public sector service, the private sector will be compelled to accelerate moves to introduce a second tier private capitated hospital service. This will contract with medical schemes and also directed at the low-income market. Surplus bed capacity in the private sector is around 40%.
Unresolved issues:
Adverse selection: A degree of adverse selection will remain in the environment encouraged by indirect attempts to cream-skim.
Income-related cross-subsidies: Virtually no income-related cross-subsidy exists in the private sector. This is exacerbated by the tax subsidy.
Public hospital reimbursement: Although norms and standards may exist, the method of budgeting for individual institutions will require improvement.
Private Hospital fee-for-service
Public Hospital (Private/SHI)
Private Hospital capitation
Public Primary Care
Private Primary Care