Your Life at Stake: False Assertions About Hospital Costs

Private medical schemes will no longer exist in a decade or so, predicted Health Minister Aaron Motsoaledi at a gathering of the National Editors’ Forum in Cape Town. The reason was escalating costs, he said, and then went on to compare with anecdotal evidence the huge cost differences between public and private hospitals.

Private hospitals, for example, he said, charge up to R15,000 for a circumcision while township clinics charge only a ‘few rand’. A private hospital charged R150,000 for a spinal decompression whereas the Steve Biko Academic Hospital in Pretoria charged only R30,000.

Well, for the ordinary, everyday, thinking South African, this anecdotal guide to the relative costs of public and private hospital treatment simply will not do.

Yes, it is true that private medical scheme rates are growing faster than other categories of medical expenses (and CPIX). However, this is not due to the logic of private medical care per se, it’s due to the conditions forced on the medical scheme industry by the state. For example, they are not allowed to risk rate or exclude certain pre-existing conditions. They are forced to offer fairly generous minimum benefits to all. These measures very quickly raise costs to levels way above those that a private medical scheme would institute if left alone.

The comparative costs quoted by the Minister illustrate why science regards anecdotal evidence as useless. The examples don’t compare like with like and were probably chosen to be maximally misleading. No doubt the circumcision example compares straightforward circumcisions involving normal foreskins, to the most complicated and expensive circumcision operation carried out in a private hospital. The same goes for the spinal decompression. For example, a procedure which puts in artificial discs and involves cutting through the abdomen and moving aside organs to insert expensive hardware is doubtless much more expensive than the more common practice of fusing the vertebrae without an abdominal invasion. And most unforgivably, the Minister was quoting what was charged to the patient (or their medical aid) and not the true cost of the procedure. On top of that, he simply omitted to include in his calculation the huge state subsidy that finances public health. The huge state subsidy financed by taxpayers’ money. Does this possibly mean that all public health care is after all actually being funded by the private sector?

To do a fair comparison, we have to compare overall hospital costs per patient, after controlling for the following: differences in the reason for treatment (type of problem), the severity of the condition (number of days admission involved), the risks involved (extra procedures or expertise necessary to counter these), as well as the fact that at public hospitals patients do not have to pay VAT but at private hospitals patients do have the additional expense of funding government by paying this tax.

Innovative Medicines South Africa (IMSA) just happens to have conducted such a study. In a raw comparison, before introducing the controls mentioned above, it found, on average, that private hospital costs were 1.438 times more expensive than public hospital costs. This is the result of the sort of unadjusted, like versus unlike comparison that the Minister used to select his examples from.

However, after equating like for like, they found that private hospital costs were 1.053 times that of public hospital costs.

This figure doesn’t take into consideration the differences in the quality of medical care and associated services, like food and bedding. A substantial number of public health doctors are interns, or freshly qualified and doing community service, rather than experienced doctors. Because private health pays more and is more likely to have patients who will sue if something goes wrong, it is more discerning of who it employs. That is why in private hospitals there are more experienced doctors and nurses with better skills on average who know that they are likely to be dismissed if they don’t perform.

Private medical care staff tend to have a better professional attitude than those in public health. Private hospitals have better equipment and are better able to maintain stocks of basic necessities like rubber gloves, syringes, swabs, etc. Patients at private hospitals are not subjected to common public hospital problems such as a lack of bedding or decent food.

The effect on outcome of quality differences is substantial. In “A Comparison of health outcomes in public versus private settings in low- and middle-income countries” Montagu et al report that risk of mortality in private health settings is 60 per cent of that in public health settings.

Private medical care is accused of ‘over-servicing’ for profit. But, even if this is so, it isn’t really making private hospital care any costlier than public hospital care. The main factor which leads many astray in their reasoning, including the Minister, is the huge state subsidisation of public hospitals.

Economist Mike Schüssler compiled statistics from independent sources such as Statistics South Africa, the National Treasury and the Council of Medical Schemes reports. He says that on average 100 per cent of the cost in private hospital care is borne by the client whereas only 2 per cent of the cost of public hospital care is charged to the client. If we fail to take all the relevant factors into account and only consider costs passed on to the client at private and public hospitals then average private hospital charges are 60 times public hospital charges.

Just because a public hospital client doesn’t pay 98 per cent of the cost of their care, it doesn’t mean this cost does not exist. But what it does mean is that someone else (a taxpayer) has to do the paying. The money still comes out of the economy. Channelling this payment via government, instead of it being paid directly to the hospital, no doubt involves a significant portion of those funds being diverted into government itself to cover administration and the like. In other words, the government funding figures will underestimate the actual cost of public hospitals to taxpayers, and therefore the true cost to the country. The IMSA relative cost equation above does not take into account this inefficient channelling of funds through government when estimating the relative cost to the economy of private and public hospitals.

Let’s apply the 60 fold ratio of private to public hospital client charges to the Minister’s anecdotal examples. If clients paid full costs in public hospitals, his ‘a few rand’ for circumcision could become ‘more than a hundred rand, if not several hundred’, and the costs of a spinal decompression operation could be as high as R1.8 million in public hospitals. Alternatively, if private care was subsidised to the same extent and didn’t pay VAT, a client could be charged as little as R250 for a private circumcision and R2,500 for a spinal decompression. This makes the Minister’s case look quite bad.

Schüssler goes on to show that between 2000 and 2008 private hospital charges rose by 74 per cent and, while public hospital charges rose by only 12.8 per cent, the government funding cost per admission rose by an astounding 111.7 per cent. I estimate therefore that full public hospital costs rose by 108 per cent. That is 46 per cent faster than private hospital costs. The difference was especially marked between 2001 and 2006. For that period, the Council for Medical Schemes reports say that private costs per admission rose 22.1 per cent and public (full) costs per admission rose 57.7 per cent. Public hospital costs therefore rose 161 per cent faster than private hospital costs in that period. All of this is in spite of there being only a 0.5 per cent growth in public hospital admissions in the context of an 8.5 per cent growth in population between 2000 and 2008, and a 42 per cent mortality increase between 2000 and 2005. So, in the face of greater urgency, the ability of public health care to reach the poor actually declined by 7.4 per cent in this period.

In sum, reliable statistics show that private hospital care is at worst 5.3 per cent more expensive than public hospital care, but is likely to be significantly cheaper when quality of care and other services, as well as the inefficiency of the government funding channel, are taken into account. For example, if the 60 per cent private versus public health setting mortality rate applies to SA, the cost of saving a life is 36.8 per cent cheaper in private hospitals than in public hospitals. Furthermore, in terms of the cost to the economy at large, public hospital care has been, and is likely to continue, getting more expensive than private hospital care, at a rapid rate. Finally, public hospitals are getting worse, not better, at providing affordable health care to the poor.

A superficial glance at the costs to clients suggests that public health care is cheaper to provide than private care but when you look at the cost to the economy at large and the effectiveness of actually providing care, the opposite is clearly true.

In order to provide more health care at a lower price to the poor, government is undermining the myriad private efforts of South Africans to look after their own health. Less obviously, it is shifting a great proportion of the country’s productive efforts away from other important purposes in order to provide a far from satisfactory form of health care.

The declining public admission rates per capita, in the context of high mortality, shows clearly that government’s current healthcare policy actually leads to less care for the poor. Even if we were to accept that the health of the poor justifies a drop in overall utility, the anti-private pro-public path chosen by government is a failure. If government is serious about saving the lives of the poor, and improving welfare generally, it needs to take a different path.

AUTHOR Garth Zietsman is a statistician. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article / 10 April 2012

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