Getting to grips with healthcare inflation

Luke Woodhouse, CFO of Bonitas Medical Fund

The South African healthcare sector is influenced by some unique factors such as inflation, unregulated pricing and the fluctuating exchange rate. While these remain relatively stable year on year, the dynamics evolve in line with changing circumstances.

In August it was announced that the Consumer Price Index (CPI) slowed down to 4.6% in July, from 5.1% in June this year. This is the lowest since July 2021 when it was also 4.6%.

That is good news for South Africans generally and a harbinger of a possible interest cut rate. Does this mean we can expect healthcare costs to be reduced? "Unfortunately not," says Luke Woodhouse, CFO of Bonitas, "medical inflation is a different animal and there are unique factors which result in each year’s inflation."

Globally, healthcare inflation is typically higher than CPI. In South Africa, annual salary increases are usually based on CPI. However, the cost of healthcare will typically increase between CPI+2% and CPI+4% each year. Healthcare therefore becomes more expensive.

What are the main drivers of healthcare inflation?

• Chronic diseases and lifestyle: The rising prevalence of chronic/lifestyle diseases such as diabetes, hypertension and obesity increase the demand for healthcare services, contributing to higher medical costs
  
• Cost of medical technology and drugs: Medical inflation often reflects the rising costs of medical technologies, treatments and pharmaceuticals
  
• Ageing population: South Africa, like many other countries, has an ageing population. Older people typically require more medical care, leading to increased demand and higher medical costs
  
• Specialised medical skills: The cost of these is high and specialists often charge more for their services because of their expertise and the significant costs associated with their training and equipment
  
• Private healthcare costs: These are unregulated in South Africa, so healthcare providers can, and do, set their prices independently leading to a higher health CPI
  
• Administrative costs: Including those associated with insurance claims, billing and other tasks
  
• Limited competition in healthcare: This can lead to higher prices as the fewer the providers, the more they can charge for their services
  
• Exchange rate fluctuations: Many medical supplies and pharmaceuticals are imported and when the Rand weakens, the costs increase
  
• Increased utilisation: As medical schemes cover more services and as people become more health-conscious, the utilisation of healthcare services increases, driving up costs

Demand and supply
"Demand and supply also play a significant role in medical inflation vs CPI," says Woodhouse. "Changes in lifestyle and medical innovations have increased life expectancy, which means people require medical products and services for longer, increasing the strain on the healthcare sector. In countries with a high incidence of chronic diseases – such as HIV/AIDS, diabetes, heart disease and tuberculosis – pressure is even more severe.

"Although healthcare inflation slowed during the Covid-19 pandemic, industry data suggests that since 2023, healthcare inflation has started to rise to levels equivalent and beyond pre-pandemic levels. Patients who chose not to access healthcare facilities during the pandemic are now comfortable to reschedule elective procedures. Furthermore, patient health is likely to have deteriorated during the pandemic when patients were hesitant to be screened and book consultations with their doctors. These factors are resulting in a catchup of healthcare servicing. This in turn drives a higher demand for healthcare servicing and ultimately healthcare inflation.

On the supply side: Factors such as a low Gross Domestic Product (GDP), high inflation and high interest rates increase the cost of healthcare. Supply chain disruptions and labour shortages in the sector have a further detrimental effect."

Unemployment
Unemployment, particularly youth unemployment in South Africa is also a contributing factor. Younger members are the lifeblood of medical schemes and without a consistent intake of younger members, cross-subsidisation across the broader risk pool is compromised

Managing and improving members’ health
To counter healthcare inflation and continue growing their membership base, private medical schemes across the world are investigating ways to improve the health of their members and reduce healthcare costs.

Through the Bonitas managed care initiatives, focused on preventing and managing lifestyle behaviours, the estimated saving was R1.7bn in 2023. Poor diet, smoking and lack of exercise are the three lifestyle factors that contribute to over 80% of chronic conditions. Mental health issues are rising exponentially in South Africa and this too has been addressed through various mental health programmes to treat and manage the condition.

This is done through promoting healthy activities and behaviours, investing in preventative measures (such as healthcare screenings and vaccinations), developing disease-specific managed care programmes and negotiating preferential rates with network healthcare providers.

Bonitas strategic response to rising costs
Woodhouse says, "These include strategic purchasing, healthcare screening, managed care, Fraud, Waste and Abuse (FWA) detection and recovery, as well as offering integrated value to our members. We negotiate with service providers for more favourable rates, including hospitals, GPs, pharmacies and specialists. For example, our hospital spend in 2023 was R6.9bn and we realised a savings of R475m through strategic purchasing for our members."

Fraud, waste and abuse
"In terms of FWA, we have realised an estimated saving of R1.2bn through changed behaviour since the commencement of the programme. Banked recoveries reached R52.3m which, in fact, is only a small portion of the value achieved, as service providers who engage in FWA, are less likely to continue if they are held to account."

Woodhouse says, "We cannot completely mitigate these rising healthcare costs but by continuing to create value through innovation, encouraging screening for early detection of disease to help our members manage their health through our unique managed care programmes and being a strategic purchaser, we can strive to maintain the fine balance between reducing costs and remaining a sustainable scheme."