Introduction by hyRLTrT

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									Does the private health care sector display oligopolistic characteristics
                                    in South Africa?




                                   Juanita Germishuizen




                  Mini Research report presented in partial fulfilment of the
                    requirements for the degree of Masters of Business
                        Administration at the Stellenbosch University




                                Supervisor: Prof. A. Roux




Degree of confidentiality: A                                          December 2009
                                                                                               ii


                                       DECLARATION

By submitting this research report electronically, I, Juanita Germishuizen, declare that the
entirety of the work contained therein is my own, original work, that I am the owner of the
copyright thereof (unless to the extent explicitly otherwise stated) and that I have not
previously, either in its entirety or in part, submitted it for obtaining any qualification.




J. Germishuizen                                                          2 October 2009
                                                                                       iii


                               ACKNOWLEDGEMENTS



Thank you to Prof A. Roux in guiding my handling of this difficult topic.

Also, thank you to my family: J.J Germishuizen, S. C Germishuizen, A. Botha, C. Botha and
friends for your encouragement and support.
                                                                                             iv


                                         ABSTRACT

In the field of Economics, the term “competition” refers to the method involved in steering an
increase in supply, which leads to a decrease in equilibrium price and an increase in
equilibrium quantity. However, competition involves more than just an increase in supply. In
any economy, competition can affect factors, such as innovation, efficiency and the
accessibility to goods and services. In some cases, the effect might not be positive, if the
goods and services only benefit certain parties involved, rather than the general population.
Traditionally, there are four basic types of market structure, with each structure displaying
unique market power characteristics, which are initiated by an organisation’s profit motives.
All market structures, other than that of perfect competition, are forms of imperfect
competition. One such imperfect market structure is oligopoly, which has certain unique
characteristics (Doyle, 2005:198). In the private health care sector, cost increases can be
related to the increased market concentration, due to the increase of market power by
hospital groups. Therefore, the prevalence of competition in the private health care sector
should be monitored.

That health care functions in a dynamic environment has been historically proven and can
also be seen in the latest trends. A bundle of factors, rather than a single factor, determines
success. Any overview of the international health care industry should demonstrate the rapid
development of the industry. The industry, compared with the relatively elementary and
experimental health care system of a few decades ago, is currently super specialised. A shift
has taken place in the market from the role of the industry as a government-funded health
care provider to that of a private hospital provider.

In South Africa, the complexity of the health care sector is made even more complex by the
many role-players and the interaction between the different private and public health
providers. The cost of access to hospitals should be prioritised. Research shows that the
private health care sector caters for the health needs of almost seven million people, who
comprise only 15% of the total population. However, the sector has spent more money than
the entire public sector, with the per capita expenditure exceeding that of the public sector
eightfold. The increase in the cost of private hospitals in South Africa has been caused by
changes in the market concentration. Such expenditure has given the private hospitals
greater market power and has influenced their behaviour.
                                                                                            v


                                     OPSOMMING

In ekonomie verwys die term “kompetisie” na die metode betrokke om ’n toename in aanbod
te veroorsaak, wat weer ’n verlaging in die ewewigsprys en ’n verhoging in die
ewewigshoeveelheid tot gevolg het. Kompetisie behels egter meer as net ’n verhoging in
aanbod. In enige ekonomie kan kompetisie faktore soos innovasie, doeltreffendheid en
toegang tot goedere en dienste beïnvloed. In sommige gevalle is die effek egter nie positief
nie, soos wanneer goedere en dienste slegs sekere belanghebbendes bevoordeel in plaas
van die algemene publiek. Daar is, tradisioneel gesproke, vier basiese markstrukture wat
elkeeen unieke mark beherende eienskappe toon wat deur die organisasie se winsmotiewe
geïnisieer word. Alle markstukture, behalwe volmaakte kompetisie, is vorms van
onvolmaakte kompetisie. Een so ’n markstruktuur is oligopolie wat sekere unieke eienskappe
toon. In die privaat–gesondheidsorgsektor, is kosteverhogings gekoppel aan verhoogte
markkonsentrasie as gevolg van die toename in privaat hospitaalgroepe. Kompetisie in die
privaat-gesondheidsorgsektor moet dus gemonitor word.

Dat gesondheidsorg in ’n dinamiese omgewing funksioneer is reeds bewys en kan ook in die
nuutste tendensegesien word. Dit is egter ‘n hele groep faktore, nie slegs een faktor nie, wat
sukses waarborg. ’n Oorsig van die internasionale gesondheidsorgindustrie toon dat
ontwikkelinge in die industrie baie vinnig vorder. Vandag is gesondheidsorg uiters
gespesialiseerd in vergelyking met dekades terug, toe dit relatief elementêr en
eksperimenteel was. Die rol van die industrie het verskuif van ’n staats-gesubsidieerde diens
na waar dit vandag grootliks deur privaat instansies gelewer word.

In Suid-Afrika word ’n reeds komplekse gesondheidsorgsektor meer gekompliseer deurdie
baie rolspelers in die sektor asook die interaksie tussen die verskillende privaat- en
staatsgesondheidsorgvoorsieners. Die koste van toegang tot hospitale behoort ’n prioriteit te
wees. Navorsing toon dat die die privaatgesondheidsorgsektor dienste aan sewe miljoen
mense bied wat slegs 15% van die totale populasie is. Hierdie sektor spandeer egter baie
meer as die met ’n per capita uitgawe byna agt keer meer as staatsgesondheidsorg. Die
oorsaak van koste verhogings in privaatgesondheidsorg in Suid-Afrikaanse hospitale is
veroorsaak deur veranderinge in die konsentrasie van die privaatgesondheidsorgsektor. Dit
gee privaathospitale groter markmag en beïnvloed dus hul optrede.
                                                                                                                                          vi


                                               TABLE OF CONTENTS


DECLARATION ..................................................................................................................... ii
ACKNOWLEDGEMENTS ..................................................................................................... iii
ABSTRACT .......................................................................................................................... iv
OPSOMMING ........................................................................................................................ v
LIST OF TABLES AND FIGURES .......................................................................................viii
CHAPTER 1 INTRODUCTION AND BACKGROUND ........................................................... 1

   1.1         Introduction ............................................................................................................. 1
   1.2         Definitions of terms and concepts ........................................................................... 2
   1.3         Statement of the problem ........................................................................................ 2
   1.4         Research objective ................................................................................................. 3
   1.5         Research methodology ........................................................................................... 3
   1.6         Delimitation ............................................................................................................. 3
   1.7         Overview and layout of the study ............................................................................ 3

CHAPTER 2 A REVIEW OF THE THEORY OF OLIGOPOLY ............................................... 5

   2.1         Introduction ............................................................................................................. 5
   2.2         Definition of oligopoly .............................................................................................. 5
   2.3         Measuring market concentration ............................................................................. 6
   2.4         Oligopoly features ................................................................................................... 6
   2.5         Conjectural variation model ..................................................................................... 7
   2.6         Limit pricing model .................................................................................................. 7
   2.7         Collusive oligopoly .................................................................................................. 7
   2.8         Tight oligopoly ......................................................................................................... 8

       2.8.1      Factors contributing to a tight oligopoly .............................................................................. 8

   2.9         Cartel ...................................................................................................................... 9
   2.10        Conclusion .............................................................................................................. 9

CHAPTER 3 THE INTERNATIONAL EXPERIENCE OF THE HEALTH CARE SECTOR ... 10

   3.1         Introduction ........................................................................................................... 10
   3.2         Tendencies in health care ..................................................................................... 11
   3.3         Health care services in China................................................................................ 11
   3.4         Health care services in Japan ............................................................................... 12
   3.5         Health care services in the United Kingdom .......................................................... 13
   3.6         Health care services in the United States of America ............................................ 14
                                                                                                                                     vii

   3.7        The effect of ownership on competition in the hospital industry ............................. 16
   3.8        Private–public partnerships as a policy option in medical health care ................... 16

      3.8.1      Potential dilemmas in the case of a public–private partnership ....................................... 17

   3.9        What the government can do in the presence of oligopoly .................................... 18

      3.9.1      Regulation of the health care sector ................................................................................. 18

   3.10       Reference price system ........................................................................................ 19
   3.11       Conclusion ............................................................................................................ 20

CHAPTER 4 SOUTH AFRICAN HEALTH CARE SERVICES .............................................. 21

   4.1        Introduction ........................................................................................................... 21
   4.2        Role-players in the health care sector ................................................................... 21
   4.3        National Health Insurance ..................................................................................... 23
   4.4        National Health Reference Price List health services ............................................ 24
   4.5        Characteristics of the health care market .............................................................. 24
   4.6        The cause of increased health care costs ............................................................. 27
   4.7        The profit-maximising behaviour of private hospitals ............................................. 29
   4.8        South Africa’s hospital industry: The investment analysis view ............................. 30
   4.9        Conclusion ............................................................................................................ 32

CHAPTER 5 THE IMPLICATIONS OF AN OLIGOPOLY, OR NOT, FOR SOUTH AFRICA 33

   5.1        Introduction ........................................................................................................... 33
   5.2        Current landscape................................................................................................. 33
   5.3        Price transparency ................................................................................................ 34
   5.4        Managed competition ............................................................................................ 35
   5.5        Public – private partnerships ................................................................................. 35
   5.6        The need to change .............................................................................................. 36
   5.7        Reform of the health services ................................................................................ 36
   5.8        Conclusion ............................................................................................................ 37

CHAPTER 6 CONCLUSION AND RECOMMENDATIONS .................................................. 38

   6.1        Conclusion ............................................................................................................ 38
   6.2        Recommendations ................................................................................................ 39

LIST OF SOURCES ............................................................................................................. 40
                                                                                                                                       viii


                                     LIST OF TABLES AND FIGURES



Table ‎ .1: Bed need versus supply for the private health sector ...........................................26
      4

Table ‎ .1: Public versus private per capita expenditure .......................................................33
      5



Figure ‎ .2: Hospital cost trend from 1990 to 2006 ................................................................26
       4

Figure ‎ .3: Hospital national concentration trend in acute beds from 1996 to 2006 ..............27
       4

Figure ‎ .4: Hospital concentration trend in acute beds in the four major cities from 1996 to
       4
2006 .....................................................................................................................................27

Figure ‎ .5: Evaluation of nurses’ salaries and age-related cost drivers of private hospital
       4
costs from 2002 to 2005 .......................................................................................................28

Figure ‎ .6: Hospital in-patient admission rate trends, comparison of the United States with
       4
the South African private sector............................................................................................29
                                                                                               1



                                          CHAPTER 1
                       INTRODUCTION AND BACKGROUND


1.1      Introduction

The private health care industry, which is a major industry in its own right, together with the
public sector forms the total health care sector in South Africa (Doctor recruitment initiative,
2008). Health care varies from the most basic primary health care, which is provided free of
charge by the government, to the most expensive technologically advanced medical
interventions offered by the private industry. Public sector health care is undersupplied and
overused, while private sector health care provides mainly for middle- and high-income
earners, who can afford to belong to a medical aid scheme. Such earners constitute only
18% of the population (Health care in South Africa, 2008).

Health care is an integrated process, which involves many role-players. The industry, as is
the case with many other industries, can be divided into a supply side, consisting of the
private hospitals, among others, and a demand side, including the patients, employers and
medical aid schemes. The South African private health care industry is currently dominated
by three large groups: Life Healthcare, Medi-Clinic and Netcare (Mafu, 2007b). A feature of
South Africa’s private health care sector is its constantly rising costs. According to the former
Minister of Health, “the private sector is in fact becoming more and more unaffordable, even
for those who have medical insurance. We have to exercise our stewardship role and stop
this cost spiral.” (DA: Fix public health first, 2007)

At the request of the then minister of health,Tshabalala-Msimang, in 2007 the Council for
Medical Schemes (CMS) investigated the reasons for the rapid increase in the cost of
medical aid scheme premiums, in an attempt to address the issue of rising private health
care costs. Such ever-increasing costs have contributed to increases in medical aid
contributions, making them too expensive for most of the population. The report highlighted
that one of the reasons for the high costs is that there is increasing intensity in the three
private hospital groups:

Life Healthcare, Medi-Clinic and Netcare, with lack of competition being an important factor
contributing to increased costs in the private sector.
                                                                                                 2


1.2      Definitions of terms and concepts

The most important definitions applicable to the current study are as follows.

Health care: Health care has been defined as “[t]he prevention, treatment, and management
of illness and the presentation of mental and physical well being through the services offered
by the medical and allied health professions” (http://medical-dictionary.com).

CMS: The Council for Medical Schemes is a statutory body, established by the Parliament of
South Africa to provide supervision over medical schemes (www.medicalschemes.com)

Hospital Association of South Africa (HASA): HASA represents the interests of more than
90% of private hospitals in South Africa, it is a not-for-profit organisation that exists solely to
further the interests of its member hospitals (www.hasa.co.za)


1.3      Statement of the problem

An oligopoly is a market structure, in terms of which a few companies supply a majority of
small buyers. When a de facto oligopoly market exists, unregulated prices and costs
fluctuate. The CMS investigation found that the three hospital groups, Life Healthcare, Medi-
Clinic and Netcare, supply 87% of all beds in South Africa, which amounts to an increase of
50% since 1996 (Pile, Mzolo & Rose, 2008).

Given the high, and rising, costs of private health care in South Africa, and the significant
increases in medical aid premiums, together with the apparent dominance of the three
above-mentioned hospital groups, the problem statement for the current study, therefore, is
as follows: The supply side of the South African private health care sector displays
oligopolistic characteristics.
                                                                                               3


1.4      Research objective

The objectives of the current research are as follows:

   i.   To establish whether private health care hospital groups do, indeed, display
        oligopolistic characteristics in South Africa.

   ii. To examine both the negative and positive implications of oligopolic characteristics, if
        they should be found to be present in the private health care sector.


1.5      Research methodology

The method chosen for the research was to examine secondary data. The reason for the
topic chosen by the writer was due to personal interest as health care has always been a
passion for the writer. The interest comes from twelve years experience in the public health
care sector as a student in nursing and then exploring the private health care sector in
various disciplines. The reason why the research has been limited to the private health care
sector is because it is the current environment of the writer.


1.6      Delimitation

The current study is limited to research into the private health care sector in South Africa, so
that it excludes consideration of the public health care sector, private doctors, private clinics
and not-for-profit hospitals in South Africa.


1.7      Overview and layout of the study

The research paper is presented in six chapters.

Chapter 1 explores the background to, and current status of, the private health care sector in
South Africa. The chapter also states the problem question.

Chapter 2 consists of a comprehensive literature review of material relating to oligopolies.

Chapter 3 reviews the international literature related to experience of the private health care
sector in China and the USA.
                                                                                            4

Chapter 4 looks at the private health care hospital groups in South Africa, which are
assessed in terms of the concentration ratios.

Chapter 5 explores the positive and negative implications of a private health care sector with
oligopolistic characteristics.

Chapter 6 summarises the literature review and draws appropriate conclusions.
                                                                                             5


                                       CHAPTER 2
                A REVIEW OF THE THEORY OF OLIGOPOLY


2.1     Introduction

In the field of Economics, the term “competition” refers to the method involved in steering an
increase in supply, which leads to a decrease in equilibrium price and an increase in
equilibrium quantity. However, competition involves more than just an increase in supply. In
any economy, competition can affect factors, such as innovation, efficiency and the
accessibility to goods and services. In some cases, the effect might not be positive, if the
goods and services only benefit certain parties involved, rather than the general population.
Traditionally, there are four basic types of market structure, with each structure displaying
unique market power characteristics, which are initiated by an organisation’s profit motives.
All market structures, other than that of perfect competition, are forms of imperfect
competition. One such imperfect market structure is oligopoly, which has certain unique
characteristics (Doyle, 2005:204). In the private health care sector, cost increases can be
related to the increased market concentration, due to the increase of market power by
hospital groups. Therefore, the prevalence of competition in the private health care sector
should be monitored.

Oligopoly theory was first explored by Sir Thomas More in the early 1400s, with such theory
only being later developed by a French economist, Antine Augustin Cournot, during the
1800s. Cournot claimed that organisations set a price and the amount to be produced in
terms of their best estimation that their competitors will not react. Under such circumstances,
the organisations will tend to decrease their prices and to increase their production in order
to gain control of a large portion of their market (Friedman, 1983). The consequence is a
market, in which prices are higher and output is lower. Such would not have been the case in
a market where there were more competitors.


2.2     Definition of oligopoly

An oligopoly is one type of imperfect competition. Unlike in the case of a monopoly, however,
in the case of an oligopoly, the number of organisations is few, but more than one. Normally,
in the latter case, the entry to the specific sector is limited. Organisations can produce the
same or differentiated products or services, and there is some control over the prices
charged. (Morris, Devlin & Parkin, 2007: 109).
                                                                                               6


2.3       Measuring market concentration

Perfect competition occurs when there are many different small organisations, considering
the overall market size. Any other form of market share is seen as imperfect competition
(Doyle, 2005: 205).

According to the Competition Act, market power refers to the power that organisations have
over prices and the manner in which the organisations keep out competitors. Increased
market power exists when the demand for products and services is inelastic (Evaluation of
Medical Schemes cost increases: Findings and Recommendations, 2008).

The concentration ratio is a measurement tool for measuring the market share of the
dominant organisations in a market. A refinement of the tool is the Herfindahl Index, which
measures the total market share of all organisations in an industry by adding the squares of
the individual market share of each organisation concerned. Market share can be measured
in terms of total sales, net output, the number of people employed or the capital asset value.
The output is assessed on the basis of the measurement used.

The advantage of using such a measurement tool is that it is sensitive to the number and
size, such as the percentage of total admissions, of organisations. For instance, when two
large organisations merge, the impact will be much greater than if two small organisations
were to merge. According to Feldstein (2005: 264):

      Estimating whether a merger may be anti-competitive involves calculating the market
      share’s HHI index of each of the competitors (within the relevant product and geographic
      markets) both before and after the proposed merger. If the new HHI exceeds 1800
      under the proposed merger, then the merger is likely to trigger an antitrust investigation.
      The HHI, however, is not sufficient by itself to determine the competitiveness of that
      market, how hospitals compete, and whether competition will be decreased as a result
      of the merger.


2.4       Oligopoly features

The basic features of an oligopoly are as follows:

      Only a few sellers exist in the industry, with each closely watching its opponents.
      Products and offerings are almost alike, but not identical.
      All the organisations are highly productive, which ensures a powerful presence in the
       marketplace.
                                                                                                7

      Many obstacles exist to market entry.
      Compensation can be in the form of economies of scope, which means that assets, or
      Resources can be split between organisations to ensure relatively low costs.
      Organisations tend to grow, despite the fact that the market might have become
       saturated. One way in which they grow is by acquiring their competitors, which helps
       to ensure that access to the industry is limited. Sometimes organisations also look for
       alternative solutions, such as entering into agreement on the amount produced, so
       that they can enjoy the highest profit from the product made available, while
       experiencing the minimal threat (Doyle, 2005: 216).


2.5      Conjectural variation model

In terms of the conjectural variation model, organisations in any industry take a best guess
regarding how other organisations might respond to their actions. According to the Cournot
model, there is an assumption that the other organisations will not react to such actions. The
model also refers to a certain number of organisations, which match the circumstances of
looking after and caring for one another (www.sjsu.edu).


2.6      Limit pricing model

In terms of the limit pricing model, best guesses take into consideration the fact that other
organisations might either access or exit the industry. The model matches the circumstances
of an industry in which different organisations do not look after one another (www.sjsu.edu).


2.7      Collusive oligopoly

Collusive oligopoly occurs when firms collude to limit the amount of competition existing
between them. The characteristics of such an oligopoly are that a small number of firms
know one another well; no government intervention occurs to stop the collusion; one firm is
the dominant firm, with the others serving as followers; and the organisations concerned are
prepared to share information on costs and production processes with one another (Morris,
et al., 2007: 110).

Two types of collusion exist: explicit collusion, where there are clear agreements about
pricing policy, and tacit collusion, where there are no clear agreements about such policy.
Explicit agreements are marked by agreements made at social assemblies. Adam Smith
characterises such assemblies as consisting of “people of the same trade [who] seldom meet
                                                                                                 8

together, even for merriment and diversion, but the conversation ends in a conspiracy
against the public or in some contrivance to raise prices” (Canoy & Onderstel, 2003). Another
form of explicit collusion occurs when organisations arrange themselves into trade
associations, in response to government action, such as when a joint patent licence is given
to a small number of suppliers.

Tacit collusion means that the organisations concerned can sustain prices close to those
charged in a monopoly. When the asking price of the organisations is high, they can expect
revenge from other organisations when they diverge from the lower asking prices. Such is
the norm for many organisations in the struggle for survival. Problems arising from such
collusion can be that the organisations need to decide on the price on which they can
collude, as well as on how they might maintain that price. Price transparency might result in a
stable collusion. However, it is difficult to collude in an innovation-driven market. Similarity in
available capacity, the number of products/ services and costs might facilitate collusion
(Canoy & Onderstel, 2003: 24).


2.8      Tight oligopoly

Tight oligopolies are another type of oligopoly in which a market is characterised by the
ability to make supernormal profits for a given period. Supernormal profits represent a profit
level above a reasonable rate of return on capital. A profit level that exceeds normal and
reasonable profits is unusual when compared to the rest of the market. The concept of a tight
oligopoly is not new, with it having been mentioned in, for instance, the Gencor/Lonrho
judgement in the court of first instance (Canoy & Onderstel, 2003: 13).

2.8.1 Factors contributing to a tight oligopoly

A tight oligopoly is characterised by the following:

      Horizontal mergers and takeovers, which result in the presence of fewer firms in the
       market.
      Vertical restraints, due to an agreement between the suppliers and distributors
       concerned.
      Predatory pricing and pricing limits, which both limit the number of firms in a market.
      Increased transparency, enabling firms to sustain a coordinated market.
                                                                                              9


2.9      Cartel

A cartel exists when organisations formally agree on production. They might also agree on
the continued high pricing of products and service delivery. Such agreements are illegal, as
they are forbidden under competition law. Therefore, in most countries, organisations might
become involved in a less evident form of collusion (Doyle, 2005: 216). When oligopoly
markets exist, but there is no collusion, organisations can only best guess how their
competitors might react to their actions. A tool that can be used to examine such inter-
reliance is game theory. Game theory, which is a microeconomic approach, allows for the
assessment of the actions of individuals and organisations. In terms of game theory,
organisations normally look for a dominant strategy, which means that an organisation will
have the best outcome, regardless of the strategy that other organisations follow.

Nash equilibrium, which is another form of game theory, occurs when each of the
participants involved decides what the best strategy is for them, even when they know what
strategies the other participants are following. A prisoner’s dilemma occurs when the
equilibrium that results from the playing of a game leads to a situation in which all the
participants involved do not attain the best possible outcome (Doyle, 2005: 219).


2.10     Conclusion

Markets with different characteristics, such as monopolies and oligopolies, are inadequate for
encouraging the best output from available resources and for attaining the same level of
efficiency as is possible in a perfect market (Scott, Solomon & McGowan, 2001: 11).

An oligopoly is a market structure that might exacerbate a decline in social welfare
standards. In the presence of only a few organisations and high-entry barriers, consideration
must be given to which other characteristics also play a role in a market dominated by such
forces. Whether the complaints about a market which is dominated by an oligopoly are
justifiable is a matter of debate. In order to justify such complaints, it is often necessary to
use empirical data that are not publicly accessible (Canoy & Onderstel, 2003: 125).
                                                                                           10


                                      CHAPTER 3
       THE INTERNATIONAL EXPERIENCE OF THE HEALTH CARE
                                        SECTOR


3.1      Introduction

An overview of the international health care industry shows the rapid development that has
taken place in the industry. The health care industry is super specialised, when compared
with the elementary and experimental health care industry of a few decades ago. A shift has
occurred in the market from government-funded health care to being a private hospital
provider.

Studies looking at the future of the health care industry advise that the combination of the
following three forces will ensure that further change and growth occurs in the private health
care industry:

      Consumerism: Patients are spending more of their money, so they will have more
       power to make their own decisions. In future, patients are bound to become more
       demanding consumers. Currently, due to advances in technology and education,
       private hospitals will need to focus on meeting increased demands.


      E-health: Information technology has developed so much that it is expected that, in
       future, patients will be able to reduce their physical interactions with doctors and
       hospitals, as they will communicate via the Internet from home with the relevant
       doctors and nurses.


      Genomics: Patients are more aware of their genetic health makeup than they used to
       be. The health industry needs to adapt to such changes in order to survive. Increased
       health care costs, higher demand and customer dissatisfaction have been forecast to
       become one of the most important characteristics for all stakeholders. (Private
       Hospital Industry, 2005:4)
                                                                                             11


3.2         Tendencies in health care

In keeping with international trends, the following tendencies have been noted in South
Africa:

         The global workplace: Health care professionals are internationally in demand as a
          scarce resource.


         International competition: Europe is known for its patients seeking cost-effective and
          quality health care across borders. Even in the United Kingdom (UK), there are long
          waiting lists for those government patients awaiting surgical procedures.


         The increasing cost of health care is a source of much concern, especially as the
          population ages. Increased costs place even greater pressure on the quality of health
          care (Private Hospital Industry, 2005:31).

In general, a large portion of the European gross domestic product (GDP) is created in
markets by a small number of organisations, which comprise oligopolies. Often the media
reports complaints of oligopolies charging unfair prices or of their inferior products and
services. Consideration must be given to whether such complaints are justifiable, and, if so,
what the government should do about them. Whether the competition law, as a tool, is
sufficient or whether the government can make use of other tools to solve the problem is
debatable (Canoy & Onderstel, 2003). From a welfare point of view, those markets
dominated by oligopoly might not produce the best possible outcomes. Organisations might
more easily form part of an oligopoly in order to increase their selling price, no matter the
quality of their product or service, than it would be for them to survive in a market where
there are numerous organisations. This is the reason why it is worthwhile to examine the
nature of oligopolies, and why policy makers and competitive powers need to be given
special attention.


3.3         Health care services in China

China, with a population of 1.3 billion people, has made significant economic strides forward
in recent years. However, there has been a weakening in the health care services that it
provides to most of the countryside. Therefore, it is necessary to analyse this country’s
health care sector. The sector is run by the Cooperative Medical System (CMS), which is a
system that provides health care for most rural areas. The CMS functions as part of the
communal system, being financed by communal welfare funds. When economic
                                                                                             12

transformation in the agricultural sector caused the CMS to collapse, along with the
communes, it became the responsibility of an estimated 700 million people to pay for all their
medical expenses themselves. The result has been that illnesses have gone untreated, with
health care proving to have become too expensive for most people to afford. The Chinese
government has, therefore, established an insurance system, for which the employers
contribute 6% and the employees 2% of their wages.

With the economic transformation, health care services have remained the responsibility of
the government. However, the per capita provision of health care showed no increase from
1989 until 2003, while the per capita output of all other services and products increased
significantly. One of the reasons might be that the government has had limited funds, with
there being no incentive for them to increase the supply. Public ownership has been blamed
for causing the lack in increase in supply. To prove the point, the privatisation of the public
health care system in Suqian City in Jiangsu has been very successful. Not only did such a
move lead to a reduction in the price of the service, but it also increased the supply and
improved the quality of the health care provided. Chow (2006) concluded that the major
weakness in China’s health care system lay in it not encouraging enough private supply.
Though China does not need to privatise all its public hospitals, the private hospitals are in
demand, in competition with other private hospitals and public hospitals. As a result, the best
hospitals stand to thrive.


3.4      Health care services in Japan

The percentage (80%) of hospitals in Japan that are privately owned outnumbers those in
the USA. In the former country, health care is available for all, all the time. Health insurance
is compulsory for all Japanese citizens. Such health care is provided either privately, within
the communities or, in the case of the indigent, by the government. Making appointments to
see health care professionals is unnecessary, with visits to such professionals being
unlimited and available to all. The Japanese government believes that running their health
care system in this way saves costs, with the Japanese Health Ministry controlling the price
of health down to the last detail. During the negotiations that take place between the health
care industry and the Health Ministry every two years, a price is fixed for every procedure
and drug used. Health care plans that cover basic health care provision for families do not
make a profit (http://www.npr.org).
                                                                                            13


3.5     Health care services in the United Kingdom

In the UK, the Treasury does not allow public money to be spent on new potential private
entrants. Private capital is also not keen on entering a health care sector that is ruled by
public money and political decision making. Between 2003 and 2007, the private health care
sector costs increased by 31,9%. For a competitive market to change, the specific features of
the health care sector must be determined. Studies have indicated that the concentration of
insurance providers might have a harmful impact on price cost margins. Information
inconsistency might influence a competitive system adversely, with such inconsistency
resulting in mergers, which can either cause an increase in the concentration of providers,
which results in price reductions, or in an increased concentration of providers, which can
result in increased prices (McCall, 2008).

The UK health care system is dominated by six organisations, consisting of the National
Health Service (NHS) and five private hospital groups: BUPA; Nuffield; Capio Healthcare;
BMI Healthcare; and HCA International. There are approximately 11 200 private beds in UK
hospitals. In 2001, when Capio Healthcare UK made an acquisition offer to Community
Hospitals Group, BUPA also made an offer, which set off a process with the Competition
Commission. The acquisition was not allowed unless BUPA could differentiate between its
insurance and hospital interest, which it was unwilling to do. CAPIO expressed a belief that
health care is a knowledge-based, rather than property-based, sector. Apart from the major
six groups, 40 smaller independent private hospitals exist (http://www.carehealth.co.uk).

In 2003, 3.5% was spend by private insurers on health care, in contrast to the expenditure in
the USA, was spent on private health care insurers. Private providers have to compete with
the public providers of health care. Only a few mergers and acquisitions have occurred. The
private health care providers negotiate nationally with private insurances. Therefore, when
mergers and acquisitions take place in areas where there is little competition, the private
provider has substantially more bargaining power. When the providers do not compete for
profit maximisation, and there is a need for differentiation, an increase in market
concentration can lead to a decrease in prices. Further research is required into the
relationship between concentration, price and quality, especially in the European markets, in
which the public sector plays a key role (McCall, 2008).

Cooperative health care has returned to the policy agenda of Britain. The stakeholders
involved are a healthy mix of cooperative organisations, partnered with the user/consumer in
a way that allows civic society to control its own health system (Boeninger, 2004).
                                                                                              14


3.6      Health care services in the United States of America

Health care is one of the most important sectors of the economy in the USA, with an annual
expenditure of more than one trillion dollars. Health care, as a sector, is also known for the
problematic nature of its competitive base, which has given rise to several mergers over the
last few years. Of the estimated 6 100 hospitals, 900 merger deals went through from 1994 -
2000. Large cities in the USA tend to be dominated by two or three hospital groups. As a
result, complaints about price hikes, as a result of the mergers, have been numerous
(Gaynor & Vogt, 2003).

The balance of power is essential in the USA. However it is human nature to want still more
power, as an indicator of the level of intelligence and endeavour attained. Increased power,
especially when it is unbalanced, can result in domination, arrogance and suffering.
California, for example, at one stage exercised a satisfying balance of power between its
different hospitals. Since then, however, they have started to experience the impact of
mergers, such as those of WellPoint Health Networks and Health Systems International with
Kaiser, with the majority members remaining the two giants. Monopolies and oligopolies
should not be allowed to prosper, as it is in everyone’s best interests to ensure that there is a
healthy balance of power (Hospitals & Health Networks, Tilt & Barber, 1995: 150).

Health care reform is a key topic of discussion in Washington. Any of the stakeholders
involved agree that the US health insurance system has collapsed, due to the lack of
competition, transparency and accountability, which has resulted in high costs (Harbage &
Davenport, 2009). They believe that the problem will be solved by strong, well-supervised
competition, including by the introduction of a government-managed public health insurance
plan, which will compete with the private insurers.

The private health care sector consists of the following categories:

1) Employers who are self insured;

2) Employers who are contractually bound into health insurance and managed care plans;
and

3) A small group of individuals who make use of the health insurance market. The total
number of Americans who are covered by federal, state and private health care markets
amount to 250 million, meaning that 46 million people have no primary source of coverage.
                                                                                               15

The major role-players in the US health care industry are the hospitals, pharmaceutical
companies, doctors and insurers. Such role-players should maintain the capitalist free
market system. The poor are generally excluded from such a system. For-profit hospitals,
which showed an increase of 19% in profits in 2000, usually show a profit of about 9%, with
the not-for-profit hospitals showing a profit of less than 4%, on average. For-profit hospitals
distribute their profits to their investors, while not-for-profit hospitals generally plough their
profits back into the needs of the hospital. In a capitalist free market system where
privatisation prevails, the movement of assets and functionality from the government to the
private sector is ensured, which serves to increase efficiency. What requires consideration is
for whom the efficiency is intended, and whether it is only intended to create more wealth for
the private health care sector (Boeninger, 2004).

The increase in private health care costs causes employers not to wish to offer medical
insurance to their employees any longer. If such insurance is offered by companies, they
tend to offer lower remuneration packages. The other route chosen by some companies is to
decrease the number of their full-time staff and to increase the number of temporary staff in
order not to contribute to health care insurers.

According to Smith, 40% of patients admitted to US hospitals did not need to be admitted.
For example, psychiatric patients were frequently being admitted to undergo examination,
but were being sent home without much improvement. Doctors are pressured to admit a
certain number of their patients, in order that the hospital management can make sufficient
profits. Rather than the doctors deciding on the treatment of their patients, such treatment is
decided upon by the hospital’s management team, with decision making stemming from
board meetings (Boeninger, 2004).

The conservatives in the USA feel that health care is an economic resource, and not a right
for all people. Thus far, all efforts to ensure that all citizens have access to health care have
been unsuccessful, meaning that the pharmaceutical companies and the American Medical
Association (AMA) have initiated the process of economic colonisation. The government,
therefore, is being colonised by powerful organisations, which have more power than any
existing government (Boeninger, 2004:6).

Alternative health care in the USA has received scant publicity, as it is feared that such
health care might decrease the profits currently being made by the corporate-run hospitals.
As a result, the role of so-called “complementary medicine” is downplayed by the
corporations with a vested interest in the health care business, in their efforts to make the
citizens feel as though it is a secondary option to the mainstream health care system.
                                                                                              16

However, in many other countries alternative and complementary medicine has come to be
regarded as the first choice of treatment (Boeninger, 2004).


3.7      The effect of ownership on competition in the hospital
         industry

In a study undertaken by Gaynor and Vogt (2003), competition among Californian hospitals
was examined in terms of whether they were for-profit, not-for-profit or government-run. The
hospital markets were modelled as a differentiated product oligopoly, as the hospitals sell
services and products based on elements, such as physical location, religious connections,
the technology used, the quality of their services, their resource allocation and their mortality
rates. Another factor was whether the hospitals could create a luxurious experience for their
clients. Consumers value close-to-home facilities that have an extensive product offering.
Modelling the competitiveness of hospitals is justifiable, based on the nature of the
differentiated product oligopoly.

The existence of not-for-profit organisations complicates the situation still further. Such
organisations, rather than focusing on the maximisation of profits, seek to create value for
the community that they service. The outcome of the study conducted by Gaynor and Vogt
(2003) showed that, though not-for-profit hospitals were found to set lower prices, they had
higher mark- ups than had for-profit hospitals. Also, it was found that there was no difference
in merger tolerance between for-profit and not-for-profit hospitals, aimed at exploiting
merger-created market power. The simulation revealed that most merger prices led to an
increase of 53%. In the past, not-for-profit hospitals had defended themselves, stating that
they would not be part of, or take advantage of, the increased market power resulting from
mergers. Since then, the courts in California has been empathic towards not-for-profit
hospitals. However, the results given above contradict the decision not to prevent, or
intervene in cases of, mergers between not-for-profit hospitals. (Gaynor & Vogt, 2003).


3.8      Private–public partnerships as a policy option in medical
         health care

According to Bjorkman (2008:6) a partnership is “a collaborative effort and reciprocal
relationship between two parties with clear terms and conditions, well defined partnership
structures, and specified performance indicators for delivering a set of health services within
a stipulated period of time. They achieve mutually understood and agreed objectives by
following certain mechanisms.”
                                                                                               17

The possibility of an increase of interaction between the public and private services cannot
be ignored. One of the main reasons for such interaction is the ethical demands that are
placed on health professionals to treat those who are ill.

Four aspects are noticeable in the interaction between the private and public sectors:

1) Regulation;

2) Human resources;

3) Patient referrals; and

4) Disease notification. A major reason for inequality in the private health care sector is its
lack of regulation. The existence of a free market for health care can lead to the formation of
monopolies and oligopolies, which can be detrimental to consumers. However, over-
regulation can also lead to an increase in costs. If the government can work together with the
private sector, the monitoring and regulation of any unfairness would be facilitated.

Since the 1990s, even the World Health Organisation (WHO) has shown interest in the
development of public–private partnerships (Andreazzi, Andreazzi & Carvalho, 2006). Both
the private and public sectors can complement each other, as both have their own
weaknesses and strengths, so that, on their own, they cannot provide accessible and
affordable health care (Bjorkman, 2008). The private and public sectors can only learn from
each other by, for instance, sharing resources, transferring relevant knowledge and skills,
and minimising the effect of rising health care costs.

3.8.1 Potential dilemmas in the case of a public–private partnership

Relatively underdeveloped countries dispute the motivation of the private sector to be
involved in such partnerships. It is felt that the private sector is overly concerned about profit
and too little concerned about striving to meet the objectives of public health. Some problems
that might occur with a public–private partnership are those of profit maximisation, ignorance
of the basics of health education and prevention, the non-integration of information systems,
the difference in remuneration, which, in the past, has caused the private sector to attract
many of the public resources, such as labour, and a lack of control regarding the quality of
services rendered. Of still greater concern is that the private supply of health care is
determined by a willingness to pay, the ability to pay, over-demand, a lack of judgement
about the quality of products and services, and the demand for rare resources. What cannot
be ignored is the innovation and efficiency demonstrated by the private sector and the role
that it can play in the transfer of management skills and best practice advice. The private
                                                                                           18

sector provides the ideal circumstances for research, development and the recognition of
new techniques of treatment (Bjorkman, 2008: 4).

A critical success factor in a public–private partnership is leadership. A weakness in
governance should not be solved by means of forming a public–private partnership. Rather,
such a partnership should flourish through the identification, empowerment and utilisation of
champions. Partnerships like this are emerging in developing countries, where they are set to
appreciate in value, rather than merely to debate how a subsidy can be implemented. A
subsidy might be made available by the direct purchasing, in the form of vouchers, of private
sector services or by means of a social insurance scheme.

A weakness in a public–private partnership is often the excess documentation, including the
distribution of comprehensive paperwork. Such documentation often entails the rediscovery
of past practices, as the result of previous partnerships providing insufficient information.
Therefore, it is very important that there should be political consensus and that the legal
systems define the roles in such partnerships.


3.9     What the government can do in the presence of oligopoly

When only a few organisations exist and the entry barriers are high, the government can
make use of certain tools to control the situation. The government can also prevent markets
from developing oligopolistic characteristics by eliminating or reducing the occurrence of
mergers and acquisitions.

One means of preventing such an occurrence might be through the promulgation and
enforcement of competition law, which is designed to prevent a reduction in welfare being
caused by the actions of any organisation. A government can treat oligopolistic
characteristics by penalising behaviour that might otherwise lead to such a reduction. A
government can also avoid the development of oligopolistic characteristics by issuing new
licences and lowering entry barriers (Canoy & Onderstel, 2003: 55).

3.9.1 Regulation of the health care sector

Regulation of the health care sector might significantly distort the economy in many different
ways. If there are elements in an economy that might impact negatively on welfare, policy
makers do not, necessarily, have to become involved. Regulation is costly, as it requires a
government to use highly specialised staff who can create, implement and monitor the
necessary regulations. In order for a government to devise such regulations, it needs
                                                                                              19

accurate data about all relevant variables, such as the demand and cost configuration, which
is not always readily available.

Organisations might respond to the enforcement of regulations by making use of
extraordinary incentives. For example, if prices are regulated, organisations might not invest
in new technology, meaning that they either fail to replace the existing technology or to
create new products from it. In terms of the Averch–Johnson effect, when regulations rely on
a rate of return on capital, organisations might over-invest in capital and under-invest in other
resources, such as labour.

According to Canoy and Onderstel (2003: 65), price discrimination, which entails different
people paying different prices for the same products or services, can be regarded as
politically incorrect.

A study by Thomas P. Weil (1996:272) investigated whether either a competitive or a
regulatory strategy might successfully control costs. The outcome of the study showed that
there was almost no difference in the increase of hospital expenditures between markets that
were either highly regulated or mainly driven by market forces. The same trends were
noticed in regards to savings. Therefore, in a market that is characterised by little antitrust
caution, consumers may experience a market that is dominated by alliances, which operate
as an oligopoly.

No matter what controls or policies are created, each additional control or policy makes it
more difficult to understand the dynamics of the health care market. The past has proven that
all controls and policies can have unintended effects (Fielding & Rice, [n.d.]: 226).


3.10      Reference price system

A reference price system means that one price is set by an insurer, which can be the
government or any other institution, for a group of products that are alike. Any price higher
than the set price must be paid by the consumer. Such a system allows organisations to set
prices higher than the reference price, with the motivation for the adoption of such a system
being the promotion of competition (Barros & Martinez-Giralt, 2000: 122).

An oligopolistic organisation can contribute to the general welfare by producing a surplus for
consumers and producers. The production of a surplus means that the needs of consumers
are met, while a producer sees surplus in terms of profits. Welfare can be described as static
and dynamic efficiency. Static efficiency contributes to the total welfare, not taking into
account the investments made in product or process innovation. Such static efficiency could
                                                                                               20

be attained by, for example, fixing organisations in the market, technology, market, or
production capacity. When the allocation of resources is efficient, static efficiency is optimal.

In contrast, dynamic efficiency entails the taking into account of measurements that are
intended to improve the general welfare by means of enhanced products and services. A
market with only a few firms, high entry levels, heterogeneous products and the existence of
Cournot interaction might contribute to low static efficiency (Canoy & Onderstel, 2003: 22)
The Cournot interaction refers to the strategy adopted by an organisation, in terms of which it
handles the price level and quantity, or output, of a product.


3.11     Conclusion

It is not always possible to establish the difference between public and private health care
providers, because the health sector consists of three large markets - those relating to
medical services, hospital services and drugs, with each being affected by the other. Two
other markets that cannot be ignored are those relating to biomedical equipment and private
health insurance (Andreazzi, et al., 2006: 46). Such markets cannot operate in isolation, as
they are dependent on each other for survival. Accordingly, control of behaviour in the health
care sector is necessary.
                                                                                             21


                                       CHAPTER 4
                SOUTH AFRICAN HEALTH CARE SERVICES


4.1      Introduction

The complex nature of the health care sector in South Africa is exacerbated by the many
different role-players, as well as the interaction between private and public health providers.
Though the Constitution of South Africa allows all citizens of the country to exercise their
rights, economic realities impact on the practising of such rights. Patients have the right to
choose between being served by private or public providers, even in the case of poor
patients who are dependent on government welfare. Health care is an economic good, with
unique characteristics. Health care is provided by people and it influences on human welfare.
People want such care, and are willing to pay for it.

Economics is concerned with what is produced, as well as with how, and for whom, it is
produced. Market forces normally determine who gets what. The government interferes in
the health care sector more than it does in the production of any other economic goods.
Such interference can take the form of the regulation of health care provision, the
determination of what prices can be charged and what profits can be made.

The health care sector is distinguished by the lack of planning of when people will fall ill and
the uncertainty of expenditure, whereas, with most goods, the demand is more or less
predictable and to be expected (Morris, et al., 2007: 7). This chapter considers the current
landscape of the South African health care sector.


4.2      Role-players in the health care sector

The role played by various role-players in the South African health care sector is as follows:

Department of Health (DoH): The DoH is responsible for the determination of government
policy governing all health plans. By prescribing the minimum benefits to be awarded in
terms of such plans, it ensures the diagnosis and treatment of some life-threatening diseases
without those consumers with the diseases having to pay any additional fees, providing that
they make use of the designated service providers.

Government hospitals: while government hospitals, in the past, were regarded as the
backbone of a system of comprehensive and quality care, currently this is no longer the
case, due to the financial restrictions imposed on the government. Government hospitals use
                                                                                                22

a Uniform Patient Fee Schedule, which is a billing system for those patients who fall outside
the government provision. Such a system enables public hospitals to provide services to
private patients and to bill them accordingly. Public–private partnerships are not new in
South Africa, as, for example, in the case of the Inkosi Albert Luthuli Hospital. The
partnership, in this case, relates to the management of information and medical technology.
Government hospitals are also competitive in that they provide services in terms of the
prescribed minimum benefits.

Private hospitals: Private hospitals appeal to both local and foreign consumers, due to their
maintenance of high levels of service excellence. Foreign consumers are used to having to
wait a long time for medical treatment in their own countries, so that the availability and
affordability of medical care services in South Africa is comparatively attractive.

CMS: The CMS regulates the medical schemes environment in South Africa. In 2003, the
total principle membership of medical schemes amounted to 2 802 815. Private health
insurance, of which the first medical scheme was De Beers Consolidated Mines Ltd Mined
Benefit Society, was established in 1889. Seven more schemes were in existence by 1910.
By the end of the Second World War, in 1939, a total of forty-eight schemes was in
operation. Insurers were first given recognition in the Medical Schemes Act promulgated in
1967. From 1969 to 1980, the government became increasingly involved with medical
schemes, in terms of the Act. However, since the 1994 amendments to the Act, the
government has allowed insurers and health care providers greater flexibility regarding
contracting and vertical integration. In the light of such developments, the ANC-led
government has proposed reregulation of certain aspects of the industry. The government
influences the private health care financing sector in several ways, such as by means of
regulation, taxation and the administration of the Workmen’s Compensation Fund and the
Road Accident Fund (Soderlund, et al., 1993).

The Board of Healthcare Funders: The Board of Healthcare Funders represents the medical
schemes, and negotiates tariffs with the suppliers of health care services. Alternative
Reimbursement Tariffs were developed, when the Competition Commission ruled that the
Board of Healthcare Funders could not negotiate collectively on behalf of its members. Since
then, the hospitals and funders have played a more active role in negotiating alternative fees.
The Medi-Clinic hospital group has introduced a nett acquisition cost billing for all surgical
products, which has resulted in the elimination of any opportunities for perverse incentives.

Medical practitioners: The majority of health care providers work in the private sector. The
global markets attract South African doctors by offering them high salaries. Although medical
                                                                                                   23

practitioners are in business for themselves, and are not dependant for their income on the
private hospitals, they can, nevertheless, influence the patient’s choice of hospital. Therefore,
the success of a hospital is dependent on the medical practitioners referring patients to it. It
is, therefore, vital for private hospitals to ensure that they sustain the desired number of
referrals, by investing in the best and latest technology.

Patients: Consumers have become more empowered, demanding quality and value for their
money. They have learned to ask questions about their treatment and to be critical of the
advice that they receive from doctors. Before deciding where to go for their treatment, they
have come to compare the available services.


4.3        National Health Insurance

The South African constitution declare that everyone has “the right to have access to social
security, including, if they are unable to support themselves and their dependants, to
appropriate social assistance” [(s 27(1)(c) of the Constitution 108 of 1996).] and therefore the
state must take reasonable legislative and other measures, within its available resources, to
achieve the progressive realisation of each of these rights” [(s 27(2) of the Constitution 108
of 1996).] (In brief: the extension of social security in South Africa) It is only since 1994, the
democratic elections, that the restructuring of the health system got priority.


Social Health Insurance (SHI): the only people that can claim any benefits are those who has
contributed. Contributors can be employed, a defined group in certain sectors or everyone
that is paying tax


National Health Insurance (NHI): the people that pay tax would be the contributor, but even
non tax payers can be entitled to benefits


In the mid-1990s South Africa called it the NHI, from 2002 it was the same system but was
called the SHI. From 2007, after the Polokwane conference it was changed in the ANC
documentation back to the NHI (Introduction to NHI in South Africa). The current perception
is that the SHI should be the first step to a universal NHI. It is felt that if a NHI system will rise
above the inefficiencies of the private health care sector this system will be a winning
formula.
                                                                                             24


4.4      National Health Reference Price List health services

The Competition Commission issued a statement on July 2003, stating that the South African
Medical Association (SAMA), HASA and the Board of Healthcare Funders had contravened
Section 4(1)(b)(i) of the Competition Act, No. 89 of 1998, by recommending and publishing
benchmark tariffs. The Commission stated that it would use the imposition of penalties by the
Competition Tribunal to prevent certain behaviours. The Commission ensured, in this way,
that such actions would lead to more competitive pricing in the health care sector, with the
consumers being empowered to exercise a greater choice in regards to the available
services. The National Health Reference Price List was, thereby, set to form the basis on
which to determine the price of medical services. Private hospitals would, in future, need to
motivate any price increase, with such motivation being required on a one-to-one basis in the
case of each medical scheme (Private hospital industry summary, 2005).

The University of Cape Town’s Health Economics Unit stated in 2008 that medical aid
members were having to pay 53% more for specialist services and 74% more for the
services provided by private hospitals than in the previous year (Pile, et al., 2008). The
transparency of the private health care industry was also questioned following such
unexpectedly high price hikes. In 1998, private health care providers increased their tariffs in
order to offset their being forced to remove mark-ups from medicines. As a result, the
hospital admission rate rose by 25% in 1999. According to the CMS, the mark-ups were
never, in fact, removed, but simply replaced with rebates, resulting in the mistrust of
consumers (Pile, et al., 2008).

With HASA urging hospitals to be more transparent, the private health care sector has stated
that it would be problematic if private hospital groups were to appeal against the enforcement
of regulations aimed at promoting transparency. According to HASA, the 13% increase in
hospital admission rates between 2002 and 2006 has contributed to the rising costs. HASA
also found that the average age of members belonging to the medical aid scheme has
increased from 36 to 42 (Pile, et al., 2008).


4.5      Characteristics of the health care market

Decisions often have to be taken, as well as policies formulated, in the heath care market
without much access to relevant data. Outcomes are not usually linked to inputs, and there is
ignorance about the relationship between variables. Managers and clinical decision makers
might have perverse incentives to ignore that knowledge which is available in an input–
outcome relationship from being translated into practice. Neither patients nor suppliers in the
                                                                                           25

public and private health care sector are incentivised to economise and to use resources
efficiently (Maynard, 1991).

For 2009, Netcare has shown a 62% increase in staff costs up until September (Pile, et al.,
May 2008). Such an increase is due not to a growing workforce, but to an unexpectedly high
increase in the remuneration of nursing personnel, which has contributed to an overall
increase of 72% in the hospital’s total costs. Qualified medical personnel are leaving South
Africa to such an extent that, currently, 42 000 positions are available, resulting in the
remaining professionals being able to demand higher salaries. Notwithstanding arguements
that private hospitals make supernormal profits, the Financial Mail has reported that JSE-
listed hospitals have a return on their cash of 12%, which is less than the 25% earned by the
pharmaceutical industry. Medi-Clinic reported a margin of 18,8% for the year to September,
which is the highest on record for the last seven years. Netcare reported an earnings margin
of 19% for their group in South Africa for the same period. Comparing margin figures
globally, however, these margins do not seem significant.

Another argument against the making of supernormal profits has been voiced by Kurt
Worrall-Clare, chief executive of HASA, who has stated that, if all profits were to be
eliminated, the monthly savings on medical aid contributions would be only R139 per month.
Though the profit margins on such contributions might be low, the hospitals might still be
making supernormal profits, due to inefficiency. Patrick Masobe, Medical Schemes registrar,
has been known to disagree with the latter. Asserting that the private health care industry is
overcapitalised, he has stated that, in a normal market, those companies that are
unproductive would be exposed by their competitors. The high level of attentiveness paid by
hospitals to certain areas has dulled the competition (Pile, et al., May 2008).

According to the CMS report, the bed occupancy rate in South Africa stands at 53%.
Oversupply is not sustainable in a competitive environment. In contrast, HASA claims that
private health care is experiencing capacity problems, with the three largest hospital groups
having an occupancy rate of 65% in 2006 (See table 4.1).
                                                                                              26

                 Table 4.1: Bed need versus supply for the private health sector




 Source: Evaluation of medical schemes’ cost increases: findings and recommendations, March 2008

An examination of the state of South African private hospitals clearly shows that there has
been a significant increase in market concentration over the last ten years. Such a change in
concentration has resulted in inelasticity in the demand curve, which has resulted in
increased prices and costs.

From 2000 to 2006 private hospital expenditure has increased by R6,9 billion. If these
increases continue, the private hospital expenditure by insurers will total R25 billion. There
was an increase of 8.3% in the average beneficiary per month (See Figure 4.1)




                        Figure 4.1: Hospital cost trend from 1990 to 2006
 Source: Evaluation of medical schemes’ cost increases: findings and recommendations, March 2008

In terms of the Herfindahl-Hirschman Index, since 2002 market concentration has occurred in
all the major cities. (See Figure 4.2.)
                                                                                              27




       Figure 4.2: Hospital national concentration trend in acute beds from 1996 to 2006
Source: Evaluation of medical schemes’ cost increases: findings and recommendations, March 2008.

The market share owned by hospitals, other than those in the Netcare, Medi-Clinic and Life
Healthcare hospital groups, is 16,2%. The national hospital market share is concentrated at
2,31%, which is much higher than the level of 1,8%, which is regarded as a concentrated
market (Evaluation of Medical Schemes cost increases: Findings and Recommendations).




Figure 4.3: Hospital concentration trend in acute beds in the four major cities from 1996 to 2006
Source: Evaluation of medical schemes’ cost increases: Findings and recommendations, March 2008.


4.6     The cause of increased health care costs

Utilisation changes in the medical health care system, which is significant, is not in the
control of hospital management, but is more likely to have been caused by changes in
morbidity, due to the ageing of medical scheme beneficiaries, the prevalence of HIV/AIDS
                                                                                                28

and technological change. HASA blames such a change on the increased health care costs,
rather than on the price increases. The latter are seen to be reasonable, due to the current
economic pressures exerted on hospitals. However, the costs associated with nursing staff
have increased. (See Figure 4.4)




 Figure 4.4: Evaluation of nurses’ salaries and age-related cost drivers of private hospital costs
                                       from 2002 to 2005
Source: Evaluation of medical schemes’ cost Increases: Findings and recommendations, March 2008.

Though such explanations are insufficient to explain the exceptionally high price rises, the
following trends have been noted:

      The per capita cost increased 65% from 2000 to 2006. (Only 1% of people with HIV,
       who are on a medical scheme, undergo treatment for the disease.)

      Technology cannot be blamed for the increase in admission rates in South Africa.
       The admission rate, internationally, has not reflected similar trends to those
       experienced in South Africa. In the USA, the admission rates have been seen to
       decrease, while in South Africa such rates, which are already high, are increasing.
       (See Figure 4.5)

      The unusual trend in the use of health care facilities has been openly noted by the
       hospital industry in South Africa. Private hospitals believe that the increase in their
       use is due to the increased number of patients and the length of their stay. The length
       of stay in South Africa private hospitals cannot be compared internationally (see
       Figure 4.5). Patients with low equity, who are not very ill, might be being admitted to
       such hospitals. Internationally, the private health care sector has shown an
       improvement in the efficient use of hospital services. Therefore, it is felt that, given all
       the factors, market power is also playing an important role.
                                                                                                  29




 Figure 4.5: Hospital in-patient admission rate trends, comparison of the United States with the
                                   South African private sector
 Source: American Hospital Association for the US trend. The South African trend for 1998 to 2002 is
    based on a survey done by Herc Hoffman. The figure for 2006 is based on HASA (2008: 13).

          Hospitals make various products and service offerings available, resulting in profit-
           maximising models, which are subject to price discrimination. In terms of such price
           discrimination, less is charged for the more elastic products and services, with more
           being charged for those services and products that are not so elastic (Evaluation of
           Medical Schemes’ Cost Increases: findings and recommendations, March 2008).


4.7         The profit-maximising behaviour of private hospitals

Demand is always inelastic when purchases are made through a third party, such as a
medical scheme, especially when such goods and services are critical to the maintenance of
life. Hospitals offer differentiated products, with different elasticities. Therefore, those
hospitals that seek to maximise their profits practise price discriminate. Price discrimination
entails charging less (in relation to cost) for more elastic services and products, while
charging more for less elastic services and products. Some essential services, such as the
provision of medical consumables and pathology services, are relatively elastic. When a
hospital shares in the profits made by such services and products, the price charged is less
elastic.

According to Feldstein (2005: 274),

      “[h]ospitals are assumed to have a downward sloping demand curve; each hospital has
      a somewhat differentiated product in that not all of its physicians have staff
      appointments at other hospitals, its mix of services may differ, as does its location and
                                                                                               30

      reputation. To maximise profits, the hospital would select that price on the demand
      curve where its marginal cost curve intersects the marginal revenue curve. Further,
      since the hospital is a multiproduct organisation with different payers, it can increase
      profits by price discriminating according to the price elasticity of demand for each class
      of patient and type of service (for hospitals to price discriminate, they need market
      power). The hospital’s room rate is more price elastic than is the demand for ancillary
      services because, once in the hospital, the patient cannot substitute other providers
      ancillary services. Thus, the demand for ancillary services is believed to be less price
      elastic. To maximise its profits, the hospital will charge higher prices (relative to costs)
      for those services and that class of patients whose demands are less price elastic. The
      Profit-Maximising model of hospital behaviour predicts that hospitals will increase their
      prices if demand either increases or becomes less price elastic, or if the prices of their
      inputs increases.”


4.8       South Africa’s hospital industry: The investment analysis
          view

According to the UBS (2005: 28), “The (private hospital) industry remains highly cash
generative, with the only risk we can identify being regulation. Aside from regulation, or
acquisitions, Medi-Clinic’s cash generating ability remains fairly predictable.” The UBS (2005:
25) also states that “[p]rivate hospitals have pricing power owing to their dominant market
position.”

UBS (2005: 19) also finds that “Netcare effectively owns 50% of Ampath, Medi-Clinic owns
an effective 38% in Pathcare and Afrox (Life) owns a stake in Lancet. Private hospital groups
have been able to extend their dominance into the related fields of pathologists and
radiologists through the extraction management fees. Although a direct holding is against the
law, as the HPCSA (Health Professions Council of South Africa) has restricted in terms of
sharing fees, hospitals have by-passed legislation through the extraction of management
fees. Through its association with the hospitals, the pathologist practise (associated with the
hospital) has also consolidated, as private hospitals have been able to restrict new entrants,
and competition. Pricing power has shifted from the medical aid to the pathologist, owing to
the private hospitals’ dominant market position.”

As the health care sector is dynamic, its success, rather than being dependent on only one
factor, should be determined by how proactive and efficient the service providers are, by how
                                                                                             31

well they react to environmental changes, and by their ability to preserve their valuable
resources.

In the past, locality and the degree of specialisation were seen as conferring competitor
advantage. Currently, competition is regarded as being of much more importance, as can be
seen by the following:

     Competing with public hospitals: Government-owned hospitals are experiencing a
      decline in the quality of their services offered to patients, largely due to the lack, or
      inefficient spending, of financial resources. Due to such factors, the number of private
      health care hospitals has increased. However, there is a concern about fair
      competition, with one of the many factors of concern being the licencing requirements
      to which state-owned hospitals are not subjected.


     The international health care sector: Worldwide, patients seek out the most cost-
      effective services. As a result, private hospitals compete against other international
      and local private hospitals for the patients of other nations.


     Retention of medical professionals: Internationally, nursing staff are in short supply. in
      South Africa, the lack of such staff is of great concern, because the salaries offered by
      overseas hospitals tend to be far higher than those that are offered locally. South
      African hospitals, therefore, have to struggle to retain their skilled and knowledgeable
      staff.


     Delivery of a cost-effective quality service: For hospitals to provide a cost-effective
      service, they need to be so innovative that they do not compromise the quality of their
      care.


     The role of health care funders: In order for the private sector to be able to negotiate
      tariffs with the funders, market intelligence is needed in an extremely competitive
      market.


     The successful implementation of alternative pricing structures. In order to attain
      innovative pricing structures, companies need the intellectual capital, which entails the
      employment of a high-salaried workforce, to do so.
                                                                                               32



     Location: Location determines attraction. If a hospital is in the wrong geographical
      area, it will attract neither patients nor doctors.


     Doctor combination: A one-stop service, staffed by doctors who specialise in a range
      of disciplines, is ideal. Referrals between the doctors are then possible, making such a
      service more convenient for the patient.


     Technology and the best available equipment: When the latest medical equipment is
      offered by hospitals, it attracts the leaders in the area. Even more so, when it is the
      objective of a hospital to strive for excellence, it not only attracts the leaders, but also
      the staff and patients. Hospitals that are equipped with the latest equipment are likely
      to be run in an efficient and effective way (Private Hospital Industry, 2005).


4.9     Conclusion

The increase in the costs for private hospitals in South Africa was caused by changes in the
market concentration. The quantity of private hospitals has increased in order to meet the
increased costs; private hospitals have gained greater market power and have altered their
behaviour. The Competition Tribunal’s decisions have indicated that, in future, private
hospital groups will take over all independent hospitals. If the sector is not regulated, the
market in which hospitals operate will experience the contortion of costs and prices. The
more market power that such hospitals have, the more influence they can exercise over the
supply chain. By avoiding normal market pressures, costs will increase, due to the existence
of supernormal profits and endemic efficiency (Evaluation of medical schemes cost
increases: findings and recommendations, 2008).
                                                                                               33


                                        CHAPTER 5
   THE IMPLICATIONS OF AN OLIGOPOLY, OR NOT, FOR SOUTH
                                           AFRICA


5.1      Introduction

The cost of access to hospitals should be addressed as a matter of high priority. Research
shows that the private health care sector supplies the needs of almost seven million people,
who comprise only 15% of the total population. However, more money has been spent on
that sector than on the entire public sector, with the per capita expenditure being eight times
more in the private sector than the public sector. Many citizens wonder why the government
is so concerned with a sector that only provides a service to 15% of the population (See table
5.1). The answer is uncomplicated, there is not only one answer to this question as whatever
happens in the private health care sector influences the whole health sector (www.iol.co.za).
As the private health care sector plans future increases in costs, the situation might worsen,
so that private health care will be even more out of the reach of the majority of the population
in future (Private health care costs unjustifiable, 2008).

                     Table 5.1: Public versus private per capita expenditure




              Source: National Health Insurance on the horizon for South Africa, 2008


5.2      Current landscape

Potential investors in the private health care sector are being discouraged, which can be
seen in the decrease in the value of shares in the three dominant hospital groups. Netcare
shares, for example, have decreased by 24% and Medi-Clinic shares have decreased by
16%, while the JSE all-share index has increased by 8%. These hospital groups are also
facing challenges, such as electricity outages; in South Africa the estimated costs of
operating a hospital on a generator are four to six times more than operating from the grid.

The fear is that, because of the above-mentioned factors, investors will no longer be
interested in investing in the sector. The government appears to be concerned only with the
                                                                                             34

costs of private health care services, because most people cannot afford to pay them. In fact,
the statistics show that, in 1992, only 20% of South Africa’s population belonged to a medical
aid, with the number having dropped to 14% since then (Pile, et al., 2008).

Val Beaumont, Director of Innovative Medicines SA, has expressed a fear that qualified
doctors will leave the country, forcing hospitals to close down. A report by South Africa’s
High Commissioner in Canada stated that South Africa needs to retrieve their doctors in
order to deal with a shortage in skills. The immigration of doctors makes it difficult for South
Africa to deliver a “good quality, easily accessible and equitable services” (Johnstone, M.
2009). The only way to retrieve doctors is by offering them good salaries and securing a safe
living environment. The total number of doctors in Canada currently stands at 1832.

Private hospitals are now investing globally, in order to avoid domestic over-regulation. The
Medi-Clinic group, for example, has invested R17 billion in the health care service in
Switzerland and Netcare has bought control of the General Healthcare Group, which is
based in the UK.


5.3      Price transparency

Price transparency is absent in health care, with the absence thereof being characterised by
1) the buyer of a medical service not knowing what the price is before treatment, and

2) the buyers knowing the price of the service or product, but not being sure whether other
buyers are being charged the same price (Kyle & Ridley, 2007).

Price transparency would expose those hospitals that charge higher prices to some
population groups. In oligopoly markets, price transparency can make collusion easier,
because organisations then have to charge consistently for their services and products.
Decrease of profits might also be the result of price transparency, which might force hospitals
either to close down or to terminate unprofitable services. Hospitals should provide quotes to
their patients prior to providing them with their services and products, so that they know what
the price is. According to Kyle and Ridley (2007: 1390), supplementary research is
necessary to determine the net result of price transparency. The writer concludes that price
transparency could have a positive and/or a negative impact on the private health care
sector. Nevertheless, when price transparency is practiced by private healthcare hospitals,
consumers will benefit.
                                                                                                35


5.4      Managed competition

To increase efficiency in any sector, several conditions need to be present, such as ample
providers and consumers, free entry into the market, homogeneous products and services,
quality of service and product, and accessibility to information on products, services and
prices. Currently, the health care market does not meet these conditions.

The two main problems with the health care service in South Africa are lack of homogeneity
and accessibility of information. Increased competition is likely to increase efficiency, though
such is not always the case. On the contrary, in economics the theory of the second best
infers that increased competition does not have necessarily increase efficiency, but can,
instead, have the opposite effect. In fact, when there are few companies, the greater level of
transparency might encourage the organisations to form cartels in relation to prices. By
knowing what the other organisations might be doing, and sustaining cartel prices, higher
profits are ensured. Private hospital providers mainly compete in terms of the technology and
services offered. Fielding and Rice (n.d.) have argued that managed competition will not
decrease the interest in new technologies. Therefore, the conclusion is that it might increase
efficiency throughout the whole system, allowing for the most output to be obtained from the
least input. Whether it can slow down the rate of health care-related inflation is debatable.


5.5      Public – private partnerships
The private hospital sector has been willing to enter into public-private partnerships with the
health department. But, in certain provinces in South Africa there was unwillingness from the
health department side according to Ramesh Bhoola, chairman of HASA. Furthermore, 70%
of specialists practise in the private sector and the other 30% service the public sector.
These results to 85% of the population are being serviced by 30% specialists, interpreting a
huge inequity. In Durban alone, 50 radiologists practice in the private health care sector while
the public sector has 200 radiologists nationally. According to HASA a public-private
partnership is the future for SA but that government has been reluctant to embrace the idea.
Progress has been made but that there is still a lot of obstacles to overcome before
implementation (Moodley, N. 2005).


The private health care has been under pressure from government. Government wants to
increase the affordability and availability of health services by introducing new laws, for
example, the National Health Amendment Bill. This Bill introduce new processes on the
negotiations of annual tariffs between medical schemes and health care providers, but
private hospitals and doctors are resistant to the new Bill as it will only implement price
                                                                                             36

control. Private hospitals are disturbed, government refused that the private health care
sector will sell their services to the state although it has been done successfully in other
countries. Netcare and Lifehealthcare have got contracts with the UKs National Health
Services, Netcare also supply services to the Lesotho government (Kahn, T. 2008).


5.6      The need to change
The World Health Organisation (WHO) rated South Africa to be number 175 of 191 countries
surveyed in 2001 for expenditure versus outcomes in health. Since 2001, there has been
little change. If South Africa is compared to countries with a similar expenditure, South Africa
is not doing well when comparing life expectancy. In South Africa the life expectancy for
males is 50, Brazil is 68, Chili’s is 75 and Mexico is 72. The inefficiencies in health spending
are not just in the public sector. Contributing to the inefficiencies are human resources that
are imbalanced. In the private health care sector there is one pharmacist for every 1000
beneficiaries; in the public health sector it is a question of 17 000 beneficiaries for every
pharmacist. The same holds true for the general practitioners (GP) - in the private health
care sector there are 540 beneficiaries for one GP and in the public health care sector, 4000
beneficiaries for each GP.

The medical schemes regulatory framework currently also contributes to the inefficiencies in
the private health care sector, such as:

     The Competition Commission Act prevents the medical schemes to operate together
      while allowing the private hospitals oligopoly to exist.
     The high costs of private health care services compared to the increase in salaries
      and wages.

These are only some of the factors that also influence the need for a change in the
healthcare system (http://www.bhfglobal.com).




5.7      Reform of the health services
Within the next five years the government will strive to implement a government-administered
universal health care. Many believe that it would be successful in South Africa, unlike the
ongoing battle in the United States. The gulf between the poor majority and the rich minority
must be closed. Even an insurance executive has admitted that the situation must be
resolved. According to Joe Sealoane of Pro Sano, it is not morally acceptable to continue
with the status quo and that other executives, doctors and hospital administrators should
                                                                                              37

view the Sicko, a document that states that the U.S. health sector is greedy and they are
ignoring the needs of patients. The African National Congress (ANC) would like to implement
a universal health insurance in the next five years before Jacob Zuma’s first term ends. But
having a government that sees the deterioration of hospitals and allowing doctors to leave
the   country    cannot   be   trusted   with   administering   a    new    system    efficiently
(www.sagoodnews.co.za).


5.8        Conclusion

The private hospital health care market only delivers services to 15% of the population, but
the per capita expenditure has been eight times more than for public health care services.
This is a situation that is unjust and needs to be changed.

Government wants to over regulate the health care sector; therefore private hospitals are
investing globally.

Public-private partnerships have not yet been implemented successfully in South Africa.

The increase in market concentration plays a role in the demand for, and pricing of, goods
and services. Although hospitals do their best to control costs, supernormal profits are often
found in the health care market. Inefficiencies which can be seen in the oversupply of
services, overcapitalisation and the use of very expensive medicines, are also common.

In order for private hospitals to survive, it is vital that the management focus on their staff,
promote their acquisition of knowledge and strive to retain their skilled staff. If private
hospitals cannot create wealth for all the stakeholders involved, they will be unable to
survive.
                                                                                            38


                                        CHAPTER 6
                      CONCLUSION AND RECOMMENDATIONS


6.1       Conclusion

There is an increase in the market concentration of private hospitals. Furthermore, with a bed
occupancy rate of 53% there is a clear oversupply of the of private hospital health care
services. The three private hospital groups: Netcare, Medi-Clinic and Lifehealthcare have
80% of the total market power and it is suggested that it will only increase in future through
the takeover     of   existing independent private hospitals. This situation will lead to more
market power and control of the supply chain.

In South Africa the private health care sector has displayed the characteristics of an
oligopoly. A market structure that is inadequate to encourage the best output from available
resources and for attaining the same level of efficiency as is possible in a perfect market.
Organisations that show oligopolistic characteristics have often invested a great deal in
infrastructure, innovation and assets. Therefore, prior to any government intervention, it is
necessary to be aware of any potential outcomes that such an intervention might have that
might be harmful to society. Though access to health care should be guaranteed by the
government, such care should, perhaps, not be managed by the government. As with any
other company, the government is likely first to look at the benefits, rather than at the needs
of humans.

Private health care in South Africa consist of many role players, each concerned with its own
outcomes. Therefore, any decision taken will influence all the role players.

It is evident that the increase in market concentration plays a role in the demand and pricing
of goods and services. Although hospitals do their best to control costs, supernormal profits
seem to be commonplace in the health care market. Inefficiency, which also seems to be
commonplace, is displayed by the oversupply of services, overcapitalisation and the use of
very expensive medicines. If an oligopoly is in place as the prevailing market structure, the
system of social welfare might be in decline.

There should be zero tolerance in society towards markets that present the characteristics of
oligopolies and/or monopolies. To ensure such zero tolerance requires that the leaders of
such a society be moral. Zero tolerance is about maintaining the quality of people’s lives, as
well as about enabling society to ensure the maintenance of the physical, mental and
spiritual health of its citizens.
                                                                                                  39

All market structures, except for that of perfect competition, amount to imperfect competition.
In any society, the ideal is that every person should have access to health care, which would
mean the perfect health care system.


6.2      Recommendations

Market power should be balanced. All the parties involved, including both medical schemes
and private health care providers should have bargaining power. Therefore any conflicts of
interest should be removed.

The policy recommendations, based on the current study, are that hospitals should quote
patients prior to services, so that the clients know what the charges will be.

The government needs to take another look at the licensing system to ensure that market
concentration does not increase. Another requirement that should be taken into
consideration is the diversity level present in organisations. Such diversity levels enable non-
profit organisations to hold a minimum of hospital licences.

In the existence of public–private partnerships, information should be efficient; if it isn’t, it can
influence the decision making process and prolong the implementation of public-private
partnerships. In such partnerships it is vital that there is political consensus and that the legal
systems define the roles of the parties involved.

Regulation of the private health care sector can be costly; therefore data integrity is
absolutely necessary. Regulation should not imply the over regulation of the sector as it
might distort the economy in many different ways.

If the above recommendations on the supply side are ignored, access to health care might
be at the cost of health care to all. If health care is not regulate as prescribed it might
become a private health care only for the richest of the rich.

Much research has been done into both the pharmaceutical industry and into private
insurers, but comparatively little into private hospital providers, either locally or
internationally. Therefore, the current writer suggests that more research should be
undertaken into the private health care sector.
                                                                                            40


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