If you're a member of Discovery — like some two million South Africans — prepare yourself for a 9.8 percent increase in your medical aid... even though medical inflation is below CPIX, according to Stats SA.

Bruce Whitfield:
I mentioned last night the announcement from Discovery Health that it was going to be upping the cost of medical aid by 9.8 percent next year across all of its plans and announced some additional benefits as well. But the core of its announcement is that is going to cost its two million members nearly 10 percent more for medical aid cover.

I have taken the liberty of rounding it up. Adrian Gore the chief executive of Discovery joins us now. Adrian that 10 percent increase is a pretty big number, why so high?

Adrian Gore:
Bruce firstly I think you need to conceptualise it. The healthcare costs do go up higher than inflation, so it is not ideal. Ideally we would like to go up at the rate of inflation, but if you actually look at what the underlying drivers are, you look at the cost of hospital costs going up, doctor costs going up, the fact is that they tend to go a bit higher than inflation.

And our expected range is typically CPI or inflation plus two or three percent. When you add that together, you get about 9.5 percent range as a base. So those are the ingredients of what goes into it. It is not ideal, we do know that people battle to afford healthcare now and our role is to try and keep that under control, but the ability to maintain benefits and to offer best quality care does cost that money.

Bruce Whitfield:
I have got a graph in front of me, it comes from Stats SA and it is medical inflation versus CPIX over the past 10 years, since January 1997 when in 1997 we saw medical inflation over 21 percent. It has gradually come down and for the first time in the last 10 years, medical inflation is actually lower than CPIX according to Stats SA. Your research is that medical inflation is higher than CPIX?

Adrian Gore:
I don’t know what is in that index, I will tell you the underlying ingredients, the reality is that hospital costs are going up at 12 percent per year for the last five years and we are bringing that under control, we expect that to be closer to eight percent, 7.5 to eight percent.

Doctor costs have been increasing. In our view not enough, one of the big things we try to do is in fact pay doctors more so that we get them to charge the tariff that the schemes pay and then members are not out of pocket. But the fact is that when you get on the ground and you do these negotiations and you do what we think we should do, when you add it up, you get the figures like 9.5 to 10 percent.

Bruce Whitfield:
Where in the medical supply chain though is inflationary pressure? What is creating it? Is it the medical devices, providers, is it the hospitals, is it the doctors, because somewhere inflation is creeping up. Every part of the supply chain denies that it is there fault, and when you see an increase of 10 percent in medical aid, you have got to say hold on a second, it is the insurers that are putting up the costs.

Adrian Gore:
I think we are the conduit, so you need to look at what is going on inside and I think it is such a hot topic that people tend to jump into this blaming. The fact is that doctor tariffs have been going up in line or slightly higher than inflation and I think they are too low, we are trying to get them up. So that is inflationary, but I think justified.

The hospital cost side of it has been going up too high, there are a lot of issues, there are medical devices, there have been certain perverse incentives in the system, I think we have worked them out of the system. I think over time we will get that under control. The other thing that is important in healthcare that is not evident in other areas is that the cost of technology adds 0.5 percent.

Healthcare does more and more every year, the new medicines that come out that cost more money and then you have demographic changes, medical schemes have an aging population, you have got a flat community rate and that adds 1.5 to two percent. So if you add that together, you do get higher numbers. I think it is very easy to be emotional and to try and assign blame.

Bruce Whitfield:
Well it is emotional Adrian, because suddenly 10 percent in your medical aid costs is a big whack for a lot of people.

Adrian Gore:
Let me rephrase that, I don’t mean emotional that you should not be because members battle to afford it, we know this. I mean emotional in terms of blaming. I don’t think there is any covert process going on that drives up inflation and the fact that if you put it together, you get these numbers.

Bruce Whitfield:
From where you sit though as the person who determines how much money ultimately your users of medical aid will pay, where do you see the biggest pressure on inflation in the medical systems? Is everybody equally to blame? You seem to suggest that it was at the hospital level and I would assume you mean private hospitals?

Adrian Gore:
That fact is that hospitals have gone up by 12 percent per year for five years. Now when you think about inflation at six percent, that is a five to six percent real increase year compound for five years. That is not sustainable, it is not acceptable and that is why over the last couple of months there have been very heated debates, fights about things like rebates that drive our costs.

It is not all about conflict and about blaming, but it is not an acceptable situation and in fact, Discovery Health I think has put a very strong stand by saying we won’t tolerate it and going into 2008, our expectation is that it will come down quite substantially. So a lot of that I think has been worked out of the system, and if you ask me, going backwards, what has driven that inflation, I would say to you that it has been the hospital costs.

I will tell you Bruce that on the other side, I think doctors have had a raw deal. You can see it from anyway you like, but if you see the quantum that they take out of the healthcare system, they have been pressurised out and one of the things we are trying to do is to pay them more an to get them into arrangements with us where they accept what we pay, members don’t have gaps. So there are pressures and some of them are legitimate and justified and others, I think the hospital side in the past have not been and our job is to work that out of the system.

Bruce Whitfield:
Now the 9.8 percent increase CPI plus three percent, I am assuming that will go somewhere to addressing the reserves requirement issues that you have got with the Council for Medical Schemes. You say that you will hit the 25 percent required level by the end of next year, does that mean that after that increases will be less onerous?

Adrian Gore:
I think the rate of increase over time will retard, because of exactly that. But the truth of it is if you look at the contributions, already in the last number of years, there has been a contribution to those reserves.

So those are not inflating, it is not causing any inflation if you follow me, it is already built into the rates over the last number of years and there has been a buffer to create those reserves. So that is not driving up inflation at all, but when we do get there, over time, I think that will help bring down the rate of inflation.

Bruce Whitfield:
Adrian Gore the Chief Executive of Discovery the group, he has joined us on the line from Johannesburg this evening. Medical aid inflation up 9.8 percent for Discovery, the biggest medical aid in the country, two million members, Adrian Gore saying hospitals, that is where the real inflation increase is coming from.