Why is Discovery medical aid so expensive?

Discovery’s latest Medical Inflation Index has broken down exactly what goes into determining medical aid scheme price hikes.

One of the major findings of the index is that medical inflation – costs on both the supply and demand side of the industry – continues to track well above CPI.

A consumer price index measures changes in the price level of market basket of consumer goods and services purchased by households.

This is the key driver of high medical aid increases – with costs for medical services rising, as well as the demand from clients on the medical aid services.

This index is based on data from the Discovery Health Medical Scheme (DHMS), which includes the claims of approximately 2.8 million lives, representing 32% of the total medical scheme population, and 56% of the open medical scheme population.

DHMS data indicates that, between 2008 and 2018, medical inflation (defined as the annual increase in claims received by medical schemes) has increased by an average of 11.3% per year – approximately 5.3% above the Consumer Price Index (CPI).

Both supply and demand side elements of utilisation have increased, although the demand side increase has played a more prominent role in the 2017-2018 period, Discovery said.

It added that the ageing of the medical scheme population, as well as the increase in the incidence of chronic diseases, have played a major role in the increased demand side utilisation levels.

Explaining inflation 

Medical inflation is a function of both changes in the price of healthcare services (for example, the fee charged by a GP or specialist for a consultation, or the tariff charged by a hospital for a one night admission), and changes in the volume of healthcare services used by members of medical schemes (for example, the increase in the number of GP consultations, or the number of hospital admissions).

“Take the simplified example of a medical scheme with 100 members. In year one, 20 of these members visit their GP.

“Each GP visit costs R400, so the medical scheme pays out GP claims to the value of R8,000 over the course of the year.

“In year two, the cost of a GP visit increases to R425 (a tariff increase of 6.3%), and the number of members visiting the GP increases from 20 to 22 members (an increase in utilisation of 10.6%).

“As a result, the medical scheme ends up spending R9,350 on GP visits in year two,” Discovery said.

The claims of the medical scheme, therefore, increased by 16.9% from year one to year two, with 6.3% of the increase due to the increase in GP tariffs and 10.6% due to the increase in the utilisation of the GP benefit, it said.

“To ensure that it has sufficient income to pay all claims, the medical scheme would need to increase its premiums the next year by 16.9%.”

Demand-side inflation

Out of the total 4.8% increase in utilisation per year, 2.9% was due to demand-side factors, Discovery said.

“One of the major causes of increasing demand for healthcare is the ageing of the medical scheme population,” it said.

“With each year of ageing, healthcare claims increase by approximately 2%-3% per year, since older individuals have higher rates of illness and use more healthcare services.

“Medical schemes are ageing for a number of reasons. Economic growth is slow, leading to fewer young people entering the workforce and joining a medical scheme.”

At the same time, affordability pressures lead many young people to stay out of medical schemes until they are older, Discovery said.

“In the nine months from January to September 2018, open medical schemes grew by less than 5,000 lives on a net basis.”

The second factor driving demand is the sustained and significant increase in the incidence of chronic diseases, such as diabetes or high blood pressure and cancer within the medical scheme population, Discovery said.

“South Africa is very much part of the global pandemic of chronic diseases of lifestyle. Currently, at least one in four members of the Discovery Health Medical Scheme are registered for one or more chronic conditions, a 61% increase since 2008.

“Each of these members claims about four times more than a healthy member. Cancer is a significant contributor to demand-side inflation. Since 2010, the number of DHMS members with cancer has doubled.”

Supply-side inflation

On the ‘supply side’, healthcare costs for medical schemes increase due to changes in the clinical practice of health professionals, and increased supply of healthcare resources (for example, new hospitals, medicines and medical technologies), Discovery said.

“Unlike information technology, new medical technology in healthcare typically comes at a much higher cost than the technology it replaces.

“Similar trends are seen in the rapid emergence of high-cost medicines, particularly for the treatment of cancer and certain chronic conditions such as Multiple Sclerosis and Rheumatoid Arthritis,” it said.

Using melanoma as an example, historically a course of chemotherapy for melanoma cost approximately R6,500, Discovery said.

“More recently, an immunotherapy treatment known as Yervoy has been used to treat metastatic melanoma. A treatment cycle of Yervoy costs more than 100 times as much as the historical chemotherapy treatment (approximately R880,000).

“The introduction of these high-cost medicines has resulted in a three-fold increase in the number of claimants that cost DHMS more than R1 million per year in the last five years.”

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