Who is to “blame” for rising healthcare costs?

In this tough economic climate many South Africans are feeling the pinch as their household debt rises and disposable incomes fall. An over-taxed middle class are naturally feeling cheated as they are being forced to fork out for Nkandla, e-tolls, SAA and other government-run black holes. This picture is particularly gloomy considering Eskom can’t keep the lights on. Consumers are thus naturally looking for ways to get more bang for their buck and have largely welcomed the enquiry into private healthcare.

All across the world healthcare systems are under pressure from rising costs. As a result, spending on healthcare has been elevated to one of the main policy issues under examination by most advanced country governments. The OECD states, “The ratio of public health expenditure to GDP has been rising steadily for several decades. Since 1970, on average across OECD countries, the expenditure to GDP ratio has increased by 3.5% to reach around 7% in 2010”.

Health expenditure in South Africa has risen from 7.4% of gross domestic product (GDP) in 1995 to 8.8% in 2012. Rising healthcare expenditure in South Africa is thus not a unique phenomenon and is certainly not only confined to the private sector. In fact, government is primarily responsible for rising health expenditure. Public health expenditure as a proportion of GDP has risen from 3% in 1995 to 4.2% in 2012. In contrast, private health expenditure as proportion of GDP has remained virtually static increasing by 0.1 of a percentage point from 4.5% in 1995 to 4.6% in 2012. More specifically, public health expenditure as a proportion of total health expenditure has risen from 39.6% in 1995 to 47.9% in 2012.

Many factors account for rising healthcare expenditures. Average life expectancy at birth in South Africa has increased from 52.7 years in 2002 to 59.6 years in 2013. Moreover, according to the United Nations Population Estimates, as a result of South Africa’s aging population the median age is expected to increase from 23 years in 2000 to 32 years by 2050 – this is a good thing. But as people age there is an increased probability that they will require chronic care which in turn raises expected medical care expenditure. In general terms, an 80-84 year old individual has monthly average costs about nine times those of a 45-49 year old, whereas a 5-9 year-old individual has a cost of about 3% of the total costs that a 45-49 year old individual can expect to pay.

Health spending also tends to rise with income because health care is what economists refer to as a “superior good” – as income goes up, people not only consume more healthcare, they increase the per cent of their income they spend on healthcare.South Africans are getting richer – once again this is a good thing. Real GDP per capita increased from $9,331 in 1995 to $12,041 in 2013 (an increase of 29%). At the same time real health expenditure per capita increased from $427 to $982 (an increase of 130%). As a proportion of income, real health expenditure per capita increased from 4.6% to 8.2%.

If one agrees with the simplistic notion, which suggests that since 17% of the population is covered by a medical scheme, the government must cater for the remaining 83%; the inordinate focus on the private healthcare sector appears unwarranted. This is especially true given the fact that public health expenditure is rising much more rapidly and is further complicated by the fact that the government-run sector is largely in shambles – when it comes to healthcare, taxpayers are paying more and getting less.

What’s more puzzling is that whilst the vertically integrated state monopoly Eskom has enjoyed a nominal average annual increase of 29 per cent over the last four years, and still cannot provide a reliable supply of electricity to consumers, the pharmaceutical industry is subject to the mere 5.82% increase announced by the Minister of Health, despite his own advisors recommending an increase of almost 9%.

Might the competition commission’s enquiry into private healthcare not simply be a ruse to shift the focus away from a largely dysfunctional government-run sector and an attempt to provide justification for further price controls in the private sector before the proposed National Health Insurance scheme is introduced?

The government may be able to shift costs but it can never avoid them. If it introduces a policy of forcing A to pay for B’s medical care and forcing B to pay for A’s, while A and B may be tricked into thinking that someone else is paying and that they are receiving free medical care, in reality neither are. Ultimately, such a system encourages both A and B to overspend on health care. Neither takes responsibility for their own medical care requirements because they are under the illusion that someone else is paying. This is why, whenever possible, we should favour systems that encourage individuals to decide for themselves where and how to spend their hard earned cash.

Innovations in medical technologies and healthcare delivery systems are key to reducing overall healthcare costs - not government policies that provide “free” healthcare for all. Private companies must be free to compete.Government should remove all the restrictions, barriers to entry, and government-created delays that hamper private healthcare and reduce competition. Open private competition that improves health care quality and delivery, increases patient choices and accessibility, and drives down costs.

This article was first published in the November/December edition of Medical News.


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