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South Africa’s National Health Insurance system is set to be debated in Parliament soon, reports Reuters. The news agency describes the NHI as a flagship ANC policy. It is designed to overhaul the crisis-ridden health system and create improved access to medical care for the many poor black people who have to queue at understaffed state facilities, says Reuters. But draft legislation, unveiled earlier this month, has been met with doom and gloom in the private sector. The shares of companies like medical scheme provider Discovery and private hospital operator Netcare took a knock when the NHI Bill was released and financial advisers have warned that the proposals will not work because the execution of the system is too expensive. In this article, market expert Greg Norman explains why NHI cannot work. – Jackie Cameron
Why National Health Insurance can never work in South Africa
By Greg Norman*
There are 162 pharmaceutical companies providing medicines and healthcare products to the South African public. In 2018 IMS research reported R49bn in prescription medicine sales for the 12 month period.
Government legislation pertaining to mandatory generic substitution (Act 90) was passed in 2000 and restricted the profit margin charged by pharmaceutical manufacturers, pharmaceutical wholesalers and pharmacies for prescription drugs. Whilst the government’s intention was to make medicine more accessible and affordable to all South African citizens, the negative commercial impact of this legislation on sales and distribution of prescribed medication has led to many community retail pharmacies closing.
When comparing the impact on cashflows in pharmacy and other retail organisations, a pharmacist will be expected to purchase a single drug for approximately R1,000 but only make R50 profit. This means that in order to buy another dose of the same medicine, the pharmacist would have to sell 21 of these products to make enough to buy another single pack of the same product. That would take working capital of R21,000+ just to afford the purchase of another single pack for the customer that might be taking this on a monthly basis. Should the pharmacist be expected to carry stocks of this medicine for 10 of their customers each month, the pharmacist will be required to have working capital in excess of R210,000 to sustain the stock levels. And this is just one medicine out of approximately 4,000+ the average pharmacy carries in their store. This does not even account for contribution to rent, staff, infrastructure and operating costs.
This is why most pharmacists keep dispensary stocks low and expect pharmaceutical wholesalers to supply on demand. And this is where the picture gets really tricky.
There are approximately 10 main pharmaceutical wholesalers of which +/- 5 are of significant size carrying anywhere from R750m worth of medicines and health related products to R1bn each month. Each wholesaler intends to turn the full inventory within 60 days. Collectively, according to IMS research for 2018, this translates into R49bn in prescription medicine sales alone, but this figure is not broken down into the net income to pharmacists.
It’s estimated that 2,500 independent community retail and corporate pharmacies exist in South Africa. These operations serve the bulk of the private patient sector and part of the public patient sector.
Combined medical aid members in SA hovers in the region of around 9 million insured lives. Medical aid contributions amount to around R140bn with the insurance companies making 10% of total contributions which goes to mammoth administrative structures, significant technologies to ensure all stakeholders throughout the value and supply chain are funded, documented and all payments collected.
In keeping with the government’s principles to keep costs of medicines as low as possible, ALL medical aids and medical insurance companies produce a drug formulary. This is a carefully selected group of the cheapest generic medicines for all common diseases and illnesses. Doing the maths on this gets really interesting but also clearly demonstrates chaos theory in practice. For example, the most commonly prescribed antibiotic used to treat anything from a throat infection to a tooth abscess is commonly referred to as an AmoxyClav antibiotic. (Amoxicillin + Clavluanic Acid) There are more than 270 derivatives of this drug on the market. Pharmaceutically they are all the identical chemical compounds but are made by different companies and sold at different prices (chaos theory in practice). Medical aids and insurance companies stipulate up to 4 or 5 of the same drug within a narrow price band. This means that any and every pharmacy has to carry one or more of these stipulated drugs should a medical aid member present a prescription at a pharmacy in the area.
Again, should the pharmacist not hold stock but need it, they will order this from the pharmaceutical wholesaler.
A logistical nightmare of gigantic proportions
In 2000, when ACT 90 was passed into law, petrol per litre was just R2.85. It’s R15.93 in 2019. Picture this; a pharmaceutical wholesaler based in say Bloemfontein that delivers medicine to say Kimberley will have to travel 164.8km (329kms there and back). It will require 18 litres of fuel to travel to and from Kimberley at a cost of around R286.74 in petrol alone. And the logistic fee stipulated by the government in Act 90 means the wholesaler can only charge R5.91 on a product costing R90.94 (2014 prices ex DoH).
So if a Bloemfontein pharmaceutical wholesaler was to undertake to urgently deliver a single pack of medicine to a particular pharmacy in Kimberley, the wholesaler would spend R286.74 in fuel alone in order to make R5.91. Commercial insanity at its worst.
Every pharmaceutical wholesaler would like to be able to compete for trade but it is against the law for anyone to offer discounts or enticements in order to drum up sales and move the volume of prescription stock they hold in good faith. Every pharmacist would like to offer their customers immediate or rapid service, but because of the cost and margin ratio, they are forced to trade on confirmation of need (have a customer present the prescription so that they can order and purchase the required medication). This then means the pharmacist will expect the most service-oriented wholesaler to deliver pronto, irrespective of whether he or she does so at a loss.
Most will argue that the intention must then surely be to fill each delivery vehicle with as much stock as possible and it goes without saying that those wholesalers servicing distant pharmacies will focus on trying to achieve the highest level of efficiency by attempting to optimise volume delivery. Yet again, as per the example of the ratio of earning between purchase and sale of medicines with minuscule profits, it’s even worse for pharmaceutical wholesalers.
Bear in mind that the South African population is spread across virtually the entire country, with some community settlements several hundred kilometres from metropolitan areas where pharmaceutical wholesalers are based, for obvious reasons.
Introducing NHI – the commercial joke of the century
National Health Insurance (NHI) is a concept designed around the principal of providing free healthcare for ALL South African citizens which is a noble but incredibly naïve consideration.
NHI has been stated by government not to be confused with medical aid. It is simply insurance to cover medical expenses incurred by all healthcare stakeholders within the value and supply chain. In another breath government also states that they intend to procure medicines directly for NHI. Now that is not the function of an “insurance management” operation.
The SA government intends to take hold of ALL private medical insurance and medical aid contributions in order to add this to the state’s allocated funds purposed for universal healthcare. The amount of money harnessed by government will be in excess of R500bn. This is bigger than the total debt the government has incurred to save Eskom.
Now, with clarity, the government intends to raise taxes of the employed citizens in order to swell the income to NHI. Depending on who one talks to about the current rate of unemployment, the number can be anything from 30% but is more likely around 45% of active, viable and employable individuals, whether skilled or unskilled.
This means that +/- 55% of the population paying tax will carry the entire nation. Remember, currently, all taxpayers make up the government’s existing healthcare budget of +/- R247bn. A large proportion of employed citizens also contribute to their own medical aid scheme’s and medical insurance, whether full medical cover including hospital cover, or just medical cover with additional insurance for hospital cover or just hospital cover.
Combined, the two aspects: taxed income (that goes to government anyway) and after-tax expense which goes to medical aid. Technically speaking, the average employed individual is already supporting state healthcare and their own medical aid costs.
You are reminded that at the outset, government stated that they are not a medical aid scheme. However, they have since gone on record to say that ALL SA citizens will be given medical cover through NHI, HOWEVER, medical aids will NOT BE ALLOWED TO offer medical cost cover for the same facilities offered by NHI. Is this an insurance fund or a medical scheme then?
The assumption by government of shared resource
With the need to now proliferate the delivery of medicine to every chronic medicine user in South Africa, there is the very clear and obvious need to have physical medicine delivered to catchments or collection points for people under NHI. FREE MEDICINES. Bear in mind the miniscule income to pharmaceutical couriers and wholesalers. Now consider that pharmaceutical wholesalers will need to distribute on a grand scale to (NHI and Private patients), medicines to every corner of the country. FREE OF CHARGE.
So where will the courier and wholesaling income be earned? Consider the impact of two commercial strata, one being NHI funded services and standard everyday pharmaceutical trade. Right now, people visiting pharmacies and clinics will buy healthcare products and non-prescription medicines daily. In the interim between the government starting to raise taxes to fund NHI while usurping the power of the existing medical schemes, how will the present commercial healthcare stakeholder and service provider-base be compensated? For example, if Mrs Jones visits a doctor for a throat infection next week, will she still pay the doctor for the consultation? Will NHI cover the expense or will Discovery or Momentum, or FedHealth etc. have to claim that money back from government? And when Mrs Jones gets to her pharmacy with her non-compliant antibiotic that falls outside of the formulary of medicines stipulated by government because she is allergic to penicillin, how will the transaction at the dispensary be resolved? Will the medical aid cover this or will Mrs Jones have to cough in the rest? And when full-blown NHI is in force, will NHI reject the cost completely because it falls outside of the National Pharmacy Benefits Protocols? And how will the pharmacist be compensated.
I have no doubt that by now, government members reading this will arguing that if the concept of a national health scheme works all over the world, why can it not work here? Here is your answer.
In the first instance, our tax base is too small for the volume of people required to be served. Secondly, the government, with all due respect, has the most appalling record of budget management second only to Zimbabwe’s government. Eskom, SAA, SABC, Transnet and RDP housing now 25 years after the fact and all of these institutions are collapsing for two reasons. 1. Mismanagement and 2. Mismanagement.
When we consider that currently, the many medical aid companies have very sophisticated technologies that ensure that medical practitioners get paid what they are due, that pharmacists are paid and the member’s savings and contributions are monitored in real time, how on earth will government manage this on their own?
And to make a bad situation even worse, if you read the government’s “manifesto” for NHI, in it is included FULL MEDICAL COVER for ALL foreign nationals, refugees and the like into the total of the population estimated at 56 million people, the estimated 4 million foreigners living in South Africa swells the number to 60 million lives. That’s only R8,333.33 per person per year and a measly R694 per month per person. What is the government smoking when considering this aspect, even if only 30% of the population require care each year? Are they looking for additive excuses to justify their need to swell the coffers they deem to be their lawful right in managing? WHY?
Ulterior motives and impacts
This country is in a shocking economic state. Many municipalities are bankrupt due in no small part to corruption, mismanagement and fraud. Eskom is nowhere nearly out of the woods in terms of having a robust and stable power supply to industry. Because the country’s economy is failing, the retail and commercial structures in private enterprise is contracting which is exacerbating the unemployment ratios, making NHI even less plausible than ever. And yet they confidently refer to a decline in inflation. OMG! A decline in inflation is also caused by a massive decline in consumer borrowing and consumer spending, meaning the average consumer is struggling to make ends meet.
The ANC led South African government has had a quarter of a century to destroy the infrastructure of the country, collecting fees for service and not spending a cent on maintenance or enhanced facilities.
Fact vs opinion
Before you are inclined to accuse me of being a doomsayer, consider this horrible but very true reality. A newly qualified gynaecology student serving her internship at two government hospitals, the Jo’burg General and Helen Joseph Hospital works on an average 18 to 20 hour shift. This individual, yes, only one for both hospitals, runs at their own cost, a private vehicle to get from one hospital to another, delivering babies and serving the greater needs of pregnant women. She also has dwindling supplies of medical equipment and consumables required to professionally conduct proper medical procedures. She carries in her hand bag at all times, drip sets and cannulas for emergency intravenous procedures and even syringes because the demands at both hospitals for these items runs so appalling low, that unless they take what they can when it is available, standing next to a pregnant mother in crisis that desperately needs treatment, but not having ready access to equipment would simply threaten the life of baby and mother.
Sterile environments in both hospitals (and I know this to be the same in virtually EVERY state hospital) have been broken down and remain unmaintained. Drip stands have disappeared so the Heath Robinson solution of “’n boer maak ‘n plan” mentality has the inept maintenance crews in these hospitals smash a nail through the sterile barrier in the wards to hang a drip bag. Inviting into the recovery spaces opportunity for the proliferation of “super-bugs”. Basic but fundamental sterility and sanitary protocols have failed in virtually every state institution.
Beds and bedding have disappeared out of hospitals. General maintenance and professional healthcare protocols are virtually non-existent. Nurses required to be on duty at night sleep through the night in certain hospitals making death declarations after 7am in the mornings on their rounds after being replaced by the day-shift. This is not rumour, but fact. State records will show a remarkable coincidence of recorded deaths in the early morning (around 7am) because these poor, ill individuals weren’t properly treated or monitored at night by the nursing staff charged with the responsibility of caring for their fellow South Africans in need. More money will not make a better nurse.
NHI is not the silver bullet to better healthcare in this country. NHI is the government’s humanitarian excuse to gather much needed funds to prop up other failed institutions. And when the critical levels of fiscal flows fail, what will this country and its people have to endure when there are no more beds in the hospitals, no more medicines and no more professional medical personnel? Will we, like we did under Jacob Zuma’s rolling blackout solution to “no coal”, simply be expected to allow our loved ones to die, because the “well meaning” government failed to manage their responsibilities as civil servants in the service of the people that elected them to government?
- Greg Norman is CEO of Market Guru.
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