Efficiency Discounted Options: Will they save the industry?

Efficiency Discounted Options (or “EDOs”) offer an appealing value proposition to medical scheme members. In return for undertaking to make use of a network of healthcare providers you can pay less for the same benefits compared to the price on the option that allows you to visit any healthcare provider you choose. The logic underlying this is that the network of healthcare providers is more efficient and that the efficiency savings are passed along to members.

The general consensus is that such an arrangement is desirable. To quote from the Council for Medical Schemes Annual Report 2013/2014:

Benefit options with network arrangements offer advantages to both members and medical schemes. Members receive discounts because the scheme is able to obtain efficiency from a selected provider network. Members’ contributions are fair and non-discriminatory and they retain a measure of choice within the efficiency of the network. Medical schemes also achieve cost savings because network arrangements allow schemes to negotiate better reimbursement and healthcare delivery terms.

According to the same report there were 40 EDOs offered by eight medical schemes by March 2014, up from 31 a year earlier. It also notes that all of these are open medical schemes. EDOs are therefore becoming quite popular. It is worth asking why this is the case.

It is no secret that medical scheme contribution rates have been increasing at above-inflation rates for as long as anyone cares to remember. The affordability of medical scheme cover has therefore been under pressure. As medical scheme contributions increase as a proportion of household income price and affordability becomes one of the most important considerations when a member chooses a medical scheme option. Price is also increasingly becoming a factor in the decision of whether to purchase medical scheme cover at all. Young and healthy individuals who feel that medical scheme membership does not offer value for money are the most likely to opt out.

There are various causes for the affordability challenge facing medical schemes but it is important to note that, as a result of structural problems in the various laws and regulations related to private healthcare funding, open medical schemes are more exposed to the risk factors that drive up costs compared to most restricted medical schemes. These are mostly related to the risk profile of members that medical schemes can attract and retain. Simply put, due to the community rating provisions of the Medical Schemes Act, a scheme that can attract healthier, lower claiming members can offer the same benefits at a lower cost than a competitor with a larger proportion of high claiming members.

This is where EDOs come in. By being able to offer the same benefits at a lower contribution rate a scheme can retain members who would otherwise have left the scheme. For the pioneering medical schemes who have introduced EDOs there is also a competitive advantage in the continuing struggle for members. The ability to offer EDOs quickly becomes an imperative for the other medical schemes who need to remain competitive in order to remain sustainable.

Of course, once you reach a point where the majority of open medical schemes offer EDOs, simply offering such discounts no longer provides any competitive advantage. The magnitude of the efficiencies and the resulting discounts, together with the appeal of the healthcare provider networks then becomes more important.

A discussion of the nature of efficiency in healthcare becomes relevant at this point.

As discussed above the ability to attract lower claiming members onto a medical scheme option has a direct bearing on the cost of benefits. These lower claiming members are also those who are more likely to accept network restrictions. As a result, the risk profile of the members in the EDO version of an option may therefore be better than that of the non-discounted version of the same option. The statistics contained in the Council Annual report shows that this is indeed the case. The social solidarity principles underlying the Act require that the cross subsidy from lower claiming to higher claiming members should be kept intact and that the difference in contribution rates between EDO and non-EDO versions of the same option should only be based on the efficiencies produced by the provider network. If this is not the case then the discount amounts to a form of risk-rating as younger and healthier members pay less than higher claiming members based on their claiming patterns, which is undesirable and contrary to the Act.

Where should the efficiencies come from? Some medical schemes have constructed networks based on analysis of data to identify efficient providers (for example efficient hospitals). Such an exercise is technically challenging – how do you compare a small hospital which only handles routine cases to a major hospital with specialised services? This requires case-mix adjustment, which relies on a software tool called a Diagnosis Related Grouper.

In the case of most medical schemes who have introduced EDOs such complex technical exercises have been avoided and the efficiencies have been generated by means of negotiated provider discounts.

It is fair to ask: why should a provider offer discounts to a medical scheme? Shouldn’t the same procedure have the same cost regardless of which medical scheme benefit option the patient belongs to? The answer has a lot to do with the nature of a provider’s cost base.

Let’s take hospitals as an example. A large proportion of the costs involved in operating a hospital are fixed and only a small proportion is variable. There exists a minimum volume of business (admissions) that is required to cover these costs. If volumes fall below this level the hospital will incur losses. Conversely the profitability of the hospital rises dramatically as volumes increase above this minimum breakeven point. In other words, volumes are key and from the hospital’s perspective the average cost of an admission or procedure varies accordingly. It is therefore in the interests of the providers to offer discounts in order to get on the networks, provided that the network channels sufficient business their way to increase volumes and cover the cost of discounts (at least).

This has created a small shift in power in the relationship between medical schemes and providers. As is the case with traditional network options EDOs create an opportunity for medical schemes to channel patients towards network providers and, possibly more importantly, away from non-network providers. Given the rate at which EDOs are growing providers have little choice but to participate.

Will EDOs allow medical schemes to gain some control over spiralling healthcare costs? Not necessarily.   Given the choice providers would prefer not to see their overall profits reduce. Providers who have been excluded from some EDO networks have responded by approaching competing medical schemes with attractive offers. EDOs have therefore arguably not resulted in sufficient pressure to prompt changes in provider behaviour and may only result in cost shifting.   EDOs also do not solve the industry’s structural problems. Finally, there is a problem with the types of efficiency currently being generated.

Efficiencies derived from provider discounts or selecting efficient providers based on costs mean that we define efficiency as “the ability to offer the same healthcare service at a lower cost.” This ignores a critical component in the healthcare equation: quality. Being able to purchase healthcare services at a lower cost will not result in optimal efficiency if the outcomes of that healthcare is of poor quality, necessitating additional treatment down the line.   In order to achieve true efficiencies total quality measurement is required, not only of short term outcomes such as complication rates or even post-operative mortality rates, but also of the overall health of patients over the long term.

The unfortunate reality is that very little quality measurement is currently taking place in the medical schemes industry. Universal coordination of care is poor.  This may change as the industry matures in its implementation of EDOs. Rather than simply competing based on price medical schemes may then start to compete based on the (quantifiable) quality of healthcare offered by their networks.

Schemes will also have to refine their implementation of EDOs. Different provider networks within options need to be integrated in order to ensure that patients have a good experience of the EDO option. For example if the specialist and hospital networks are not integrated patients may find themselves in a situation where their (network) specialist cannot treat them because he is not associated with any of the network hospitals.

These developments point to a future where medical schemes increasingly move beyond their historic role of simply being administrators of benefits, focused on minimising the cost of those benefits (which clearly hasn’t worked) and becoming more involved in the management of the long-term health of their members.

That is an exciting prospect, provided that such changes are properly implemented and all the stakeholders buy into the vision.