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Medical Inflation: Understanding the Rise of Medical Costs

There’s no doubt that even high-income earners feel the pinch of rising costs in private healthcare. Why do healthcare rates rise more than average inflation—are medical schemes greedy?

Today we are looking at what influences healthcare costs and, ultimately, medical inflation.

South African Healthcare Demographics in Context

Most South Africans rely solely on the public health system, with 8 million outside the traditional medical scheme market (paying cash for private health care from their pockets). Over 8 million more South Africans are insured with private medical schemes and struggle with rapidly rising healthcare costs.

Most people struggle because they use the wrong metrics to budget for increases.

The difference between CPI and Medical Inflation

The standard inflation measurement (consumer price inflation, CPI) does not equate to healthcare inflation. Healthcare costs tend to sit 3% – 4% above inflation each year and is thus a more relevant metric.

There are numerous drivers of healthcare inflation that change every year.  

New diseases and new technology are prevalent medical inflation drivers.

COVID-19 provides a perfect example of this case in point. When the pandemic started, there were no vaccines. Thankfully, they came through quickly, but at a high cost because they had to be developed (already costly) and fast (added expense).

Back in 2019, before COVID-19, our medical expenses looked vastly different. By 2020 we had to pay for general treatment, hospital and pharmaceutical costs we’d never previously experienced.  

Research, procurement and distribution costs for these new treatments are known in the industry as the “new technology tax”, a medical inflation driver.

No one can predict what will drive healthcare inflation, but new technology (such as vaccines or innovative treatments) remains constant. The industry is continually investing in new tech to find life-saving treatments for new and old diseases, like cancer.

Population demographics also affect healthcare inflation.

South Africa has a young population, making our fight against something like COVID-19 different to other countries. Our lower mortality rate, despite higher infections, is attributed to the younger population. However, the professional market and medical scheme market are ageing. The number of older adults will progressively increase and place strain on the healthcare system, leading to higher costs.

WHO’s World Report on Ageing and Health states that the proportion of South Africa’s population aged 60 years or older will double from 7.7% to 15.4% of the country’s total population over the next 35 years.

Increased demand.

Age and growing disease burdens (even among youth) are causing people to use healthcare services more than before. This, too, contributes to rising healthcare inflation. Focusing on preventative measures, like creating a culture of healthy eating, activities, and behaviours, will go a long way to combat these costs. 

Fewer doctors and specialists.

Increased demand coupled with fewer doctors and specialists means long waiting lists and higher remuneration.

There is more demand than supply (not of facilities but of skilled providers in the facilities). We need to create more nurses, doctors, and specialists in our system to increase accessibility and adequately supply services.

The Minister of Health echoed these sentiments when we said that the country currently has a doctor-to-patient ratio of 1 to 3,198. If you compare that to 2019, when the ratio was 1 to 1,266, the need for serious intervention is apparent. Healthcare costs will continue to escalate until we create a broader base of healthcare skills.

Sources:
Based on the CEO of Profmed, Craig Comrie’s thoughts on the cost of healthcare inflation in private healthcare. – article dated 01 June 2022.

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