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Mediclinic News : Discovery's Adrian gore on why medical aid costs are soaring


Discovery's Adrian gore on why medical aid costs are soaring




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FINANCIAL MAIL Discovery founder and group CEO Adrian Gore hadn’t broken a sweat when the Financial Mail entered his office , even though he had just been through the rigours of his first physical examination in years. "I’ve put on a kilogram," he says. "I’ve been 71kg for years, but I’ve just added a kilo." Perhaps you could put it down to more sleepless nights. Last year Gore (52) surprised everyone (including his three children aged 24, 22 and 18) when he and his wife Lauren (51) had another baby. "My wife told me to go and buy a pram. So I walk in there but it’s totally different from when I first had kids. The technology on prams has changed entirely. It was a challenge." Having a baby at an age when most people are having grandchildren hasn’t altered his punishing routine: up at 5am, cycle or gym, e-mails answered by 8am, then into a 14-hour work day crammed with meetings. An actuary by training and smart as a whip, Gore is the best advertisement for his health-care product. It’s folklore at Discovery’s head offices in Sandton that he can do 100 push-ups in a minute. Behind his desk he keeps a set of dumbbells, and whenever he’s stressed he runs up and down the staircase outside his office. In recent months, he has been hitting that stairwell pretty often. His new infant aside, Discovery has a number of balls in the air. First, it is trying to start a bank by squeezing into an overtraded market. Second, it is pushing to expand its UK businesses — VitalityHealth and Life — when Brexit is threatening to push that island’s economy into a recession. Third, Discovery Health, the medical aid administrator which is the rock on which Gore founded the company in 1992, is facing headwinds. First, from medical aid members increasingly resistant to above-inflation increases, and second, from government’s plan to launch National Health Insurance (NHI). Maybe it’s the push-ups, but Gore isn’t fazed. "I still think we have a start-up culture, so we’ll always have pressures. When it comes to NHI, obviously we’re in a contested space, politically. But the real pressure we feel is from our client base. People’s inability to afford increasingly expensive health care is what we’re trying to keep under control. The rest is manageable." Yet to some, Discovery has become too powerful. It controls 52% of the private medical aid market. And it has been accused of throwing its weight around. Dr Jeff King, a specialist physician cardiologist at Sunninghill Hospital, for example, says it used to be that doctors decided how a patient should be treated, and the medical aid covered the bill. But Discovery has become so powerful that it can override the doctor’s judgment on how people are being treated. "I see it with my patients. Discovery ends up denying medication to people which they’re obliged to pay under the law, and only paying for the bare minimum. They should be held accountable by the Council for Medical Schemes (CMS), but that’s not happening," King says. (Discovery says it has its own boards of doctors who give advice on which drugs should be covered. And though doctors may resent Discovery’s influence, the administrator tries to include them in its decisions.) Patients are also bristling at having to dip deeper into their own pockets despite having pricey medical aid cover. And many just don’t understand how the system works. As one person complained on consumer website Hellopeter: "I am highly disappointed that I get bills for co-payments when I am on the Comprehensive cover which is 100% cover for all my dependants." The fact is Discovery does pay for many high-cost drugs like biologicals that other medical aids don’t cover. And while some feel they don’t get value, other people are taking more than their pound of flesh from the scheme. Last year, for example, 89 medical aid members claimed more than R1.22m each just on medicines. Considering Discovery’s medical aid contributions average less than R40,000 per year, this equation is clearly working for some. "When you’ve got this many members, you’re guaranteed not to make everyone happy. "You’re guaranteed to make mistakes," said Michael van der Nest, chair of Discovery Health Medical Scheme, last month. Last year, 738 members officially complained about how they were treated. "This is an issue for us," says Van der Nest — but since Discovery processed 43m claims last year the complaints represent "an infinitesimal number". An entrepreneurial success story Gore’s apologists will argue that this heat is being applied only because the company is so successful. And even his harshest critics will concede that Discovery is one of SA’s greatest entrepreneurial stories. The story began in 1992 when Gore, then a 28-year-old product development actuary at Liberty Life, hit on an idea for a novel "behavioural-based" medical insurance product. He contacted Laurie Dippenaar, then RMB Holdings CEO, to back his idea. The way medical aids worked back then was crazy, contributing to soaring costs, Gore told a Harvard Business School study on Discovery. "You pay a monthly premium, and then you can walk into a supermarket any time you want and take whatever you want off the shelf." Gore and Liberty colleague Barry Swartzberg believed it could be different. Their model split "nondiscretionary" spending (like hospital visits), which would be paid in full, from "discretionary" spending (such as visits to the general practitioner), which would be paid from a new "medical savings account (MSA)". The MSA encouraged people to use only the services they needed. Dippenaar gave Gore R10m as seed capital and the right to use the dormant Magnum insurance licence. Initially called Momentum Health, it had 3,300 members in 1995 and eked out revenues of just R1m. But the concept caught fire, driven in no small part by the Vitality programme, which offered discounts on things like movie tickets and flights in exchange for members keeping healthy — quitting smoking, eating healthier and going to gym. Soon every medical aid was offering an MSA. Rebranded as "Discovery", Gore’s company listed on the JSE four years later, valued at R3bn. Today, 17 years later, it’s worth R81bn. Those 3,300 medical aid members have grown to 3.3m (of which 2.69m are from the Discovery Health Medical Scheme). It now has 700,000 life insurance policies, a nascent investment business with R61bn invested by 66,000 customers, and 7m customers on four continents. Discovery soon left rivals in the dust. When Gore first pitched his idea to Dippenaar, his employer Liberty was the fifth-largest company on the JSE. Today, Discovery’s value of R81.8bn is more than double Liberty’s R37bn. Its "shared value" model, pioneered by its behavioural economics tool Vitality, is a case study at Harvard Business School, which lauds Discovery as a beacon of entrepreneurship. For investors, Discovery has been a rare find: a blue-chip stock with acres of growth potential. If you had put R10,000 into Discovery when it listed in 1999, it would now be worth R150,000 – excluding dividends. And this growth shows no sign of slowing. Last year, it produced a 68% jump in after-tax profit to R5.5bn. Discovery got to this position by turning the medical schemes market upside down. Today, its 52% share of the private medical aid market for "open schemes" has given it tremendous clout. But is Discovery abusing its power? Medical aid ‘rip-off’ claims With medical costs soaring, Discovery is facing a growing chorus of allegations that it is fleecing medical aid members to make profits for the JSE-listed company. In theory, there are safeguards to ensure this doesn’t happen. Medical aids are meant to be independent, not-for-profit medical schemes run by an independent board of trustees. The medical aid then hires a third-party administrator to run the scheme (and to provide "managed care" services). In theory this means the Discovery Health medical scheme should be separate from Gore’s company, which only provides "administration" for a fee and which can be "fired" with just 90 days’ notice. But in practice, say critics (like commodities trader Jonathan Egdes), the medical aid isn’t truly independent of its administrator, and this cozy relationship has allowed the medical aid fees to rocket. To put it in today’s parlance, the medical aid has been "captured" by the administrator. It doesn’t help that both entities share the Discovery name, which adds to the confusion. To Discovery, this is off the mark. Gore says contributions "have increased by less than the industry average or any other open medical scheme over the past five years". He adds that the administration fee is in the "lowest quartile" of medical schemes — 17th lowest out of 23 schemes. Still, rumblings of discontent were evident at the Discovery Health Medical Scheme AGM last month, where 870 people packed the Sandton Hilton hotel boardroom. It was a lively three-hour affair, with medical aid members having come from as far afield as Kuruman in the Northern Cape to ask questions, find out what their fees were buying, and elect a new board of trustees to look after their interests. "Medical aid is becoming less and less affordable," said one woman, adding this was clearly why many people were downgrading their health-care plans. Egdes added to this sentiment, saying that Gore’s administration company is sucking up huge fees from the medical aid members. "We bear all the risk, yet they manage to double the amount set aside for fees in a few years. Are we going to allow this to persist, that the administrator benefits from my funds?" he asked. Egdes is right that the fees are monstrous. Last year, the Discovery Scheme paid R5.1bn to Gore’s Discovery Holdings in fees — R3.8bn in "administration fees" and another R1.3bn for "managed care services". This was 8.2% more than it was paid the previous year. Van der Nest replied: "It is a lot, of course it’s a lot, but we are satisfied that we’re getting value for our members." Given that Discovery has far more members than everyone else, surely it should be able to push fees lower than its rivals, through economies of scale? After all, for every R1 a Discovery member pays in medical aid contributions, 14c doesn’t go to paying for health care at all, but to "non-health care expenses". This includes administration costs, managed care costs and brokers’ fees. Dr Jonathan Broomberg, Discovery Health CEO, said the administrator was doing its best to keep a lid on costs in a world where medical costs are spiralling out of control. "Discovery’s administration fees, once inflation is stripped out, actually fell 8% (between) 2010 and 2016, while (those of rival schemes) are up 9%," he said. Still, this fee has been a bone of contention for years, with sceptics saying the notionally "independent scheme" is a piggy bank for Gore’s expansion plans. Gore’s company is clearly making plenty of profit from the scheme. Discovery’s most recent full-year financials, to June last year, show the SA health business made R1.47bn in profit. That works out to a handy margin of 30.1%. Van der Nest said the independent trustees had had many robust meetings with Gore’s company and managed to wrestle down the fees. "(The fees) have had an effective decrease of CPI minus 1% over the past three years," he said. It’s true the administration fee has dropped. But it might not have were it not for the intense pressure put on Discovery by the public. Noel Graves, a trustee of the scheme, spoke up at the AGM, saying all the negotiations over fees with Discovery Holdings are "tough". "I’m no-one’s puppet. I do not bow to Johnny Broomberg and neither would he expect it," he said. Some don’t buy that. Stan Eiser, an independent medical consultant, says "a not-for-profit medical scheme has been turned upside down and is being milked for every last drop Discovery can get its hands on, including direct formal interference in quality of care." Eiser says many people don’t take issue with this because they think Discovery owns the medical aid. In fact, the members own it. Gore says he has no problem with people questioning the fees. "We have many fierce critics and we’ve always listened. I don’t take it personally, even when some of it is absolute nonsense. If it’s about the interests of policy members, then it’s valid and fair." Some companies don’t like scrutiny but Gore says it’s needed. "Look at what happened to some of the institutions that went unchecked. It’s a dangerous slope when you don’t engage with criticism." Nasty habits It’s a noble sentiment, but undercut by a recent case in which Discovery employed some nasty tactics to muzzle one such critic. It hauled in the legal hotshots to bully Mario Compagnoni in a bid to keep a damning Council for Medical Schemes (CMS) report secret. The story dates back to 2013 when Compagnoni, a retired Italian-born South African businessman, was one of a group of medical aid members who asked the CMS to investigate whether Discovery had "rigged" the election of trustees of the medical scheme. The allegation which the regulator was probing was whether Discovery Holdings had coerced any of its 3,800 staff or associates to vote for specific trustees at the medical scheme’s AGM — people who, presumably, would be more amenable to the demands of the administrator. It’s a big deal because if Discovery’s medical scheme were to have a less than "independent" board of trustees made up of the administrator’s chosen nominees, they’d feel more comfortable that their fee might not be scrutinised as vigorously as otherwise. (Discovery is adamant that while it encourages its staff to vote at the AGM, "we do not force employees to attend nor to vote in any particular way"). The council provided a draft report with directives, which Discovery challenged, miring it in red tape. After more than a year of waiting, Compagnoni lodged an access to information request with the CMS for the report in 2015 — and was given it. Fearing the findings would leak out, Discovery sprang into action, threatening Compagnoni with fines and up to five years in jail. Discovery’s lawyers, Knowles Husain Lindsay, sent a letter to Compagnoni saying the report is "under appeal at the CMS". "Possession of documents connected to an inquiry or investigation under the Medical Schemes Act constitutes being party to a criminal offence," the lawyers wrote. All Compagnoni had wanted was that the medical scheme present a brief summary of the findings at the AGM. Determined to ensure that didn’t happen, Discovery rolled out the big guns. Knowles Husain Lindsay threatened Compagnoni, saying it appears he "fails to understand the gravity of your position". "Having been notified of the criminal sanctions, you are legally obliged not to disseminate these documents on pain of criminal sanctions against you personally," it said. Not only does this appear to be bullying, but Discovery is relying on a minor clause in the Medical Schemes Act which says that no member of CMS may "disclose any information relating to the affairs of the council". The act says: "No person shall, except in the performance of his or her functions or duties under the act ... disclose any information relating to the affairs of any medical scheme, and furnished to, or obtained by him or her in connection with any inquiry or investigation under the act". But Compagnoni is not a staff member of the CMS. More importantly, he was given that report as part of an access to information request, governed by the Access to Information Act of 2000. This law expressly trumps any "other legislation that prohibits or restricts the disclosure of a record of a public body or private body, and that is materially inconsistent with an object or specific provision of this act". Experts say Discovery is off the mark. Dario Milo, a partner at Webber Wentzel, says that section of the Medical Schemes Act "cannot be read to criminalise the possession of the report by the person who requested it. At most, it criminalises disclosure by staff of the council, but not the recipient of the report. "One assumes the CMS has taken Discovery’s submissions as to the report’s disclosure into account and has nevertheless decided to make it available. Discovery would have had the right to object and, if necessary, litigate before the report was released." It’s an unfortunate tactic from Discovery, which ends up looking like the schoolyard bruiser, employing dubious legal tactics to keep a report into its activities secret. But Gore rejects that view. "Bullying is not our style," he says. "The issue is that the report isn’t final. I think you’re right that everything should be public, but the report should be final. Our concern is about putting out something that’s half-baked." In a later e-mail, Discovery added that "the process has not been finalised and as such it is not appropriate for the report to be published". Whatever the merits of the report, it’s Discovery’s strong-arm approach that seems beyond the pale. While Gore might say the right things about accountability, behind the scenes Discovery may be doing the opposite. So what is in the report that Discovery is so determined to hush up? The Financial Mail has learnt that the report, provisional though it may be, concluded that Discovery may have tried to influence the outcome of the elections of the medical scheme. It seems managers at Discovery may have tried to solicit votes from staff for trustees of the administrator’s choice. In that election, four trustees had a suspiciously similar number of votes. Within the year of launching its probe, the CMS sent out a letter to the industry signalling its intention to declare these sorts of things an "undesirable" practice. Legislation, gazetted two months ago, would ban administrators from campaigning or manipulating the election of trustees. Predictably, Broomberg said there was no link between this law and Discovery. Perhaps equally coincidentally, this year’s Discovery Health Medical Scheme AGM results, put out by PwC, named only the trustees elected — without revealing the number of votes they got. Discovery says this is standard practice from PwC. Medical costs rising This example shows just how rattled Discovery is by the debate over its fees, and medical costs in general. Clearly, Discovery is doing its best to keep medical inflation in check — but there’s only so much it can do. So what’s driving these cost increases? According to Broomberg: "The real story that we’re working on every day is (higher) utilisation." In short, more people are using medical services. In 2008, Broomberg says, 60% of Discovery’s medical aid members didn’t claim; today, only 49% don’t claim. Add in the fact that medicines and treatments have become exponentially more expensive, and it’s a dangerous mix, he argues. For example, in 2006, an average course of chemotherapy to treat cancer would have cost R65,000. Today it’s R1.4m. Medical costs have, on average, gone up by 4% above inflation every year for the past decade. Allied to that, the average age of members in an open scheme like Discovery has risen from about 32 in 2005 to 33.6. So does this mean medical aid will just keep rocketing, sucking up a greater chunk of people’s paychecks every month? Gore says this is an inevitable consequence of the way in which the medical industry is structured internationally. "Health-care costs across the world, like private education, have been growing at inflation plus 3%-5%. In other industries, technology drives costs down. But with health care, it’s the opposite — biological drugs, personalised medicine and new machines are unbelievably expensive. Add in the fact that doctors are a rare skill and you can see why it’s growing like this." But how much higher can this go? What’s the endgame? Gore cites a study which says that in the long term, health-care costs don’t drop — they just end up taking a greater share of your wallet at the expense of other things. "You see this in the US, where 20% of people’s costs are health care. I’m not saying it’s acceptable but it is what’s happening." But part of Discovery’s success has also been because it represents an alternative to the public medical sector, which is characterised by too few doctors, medicine shortages, long queues and tumbling-down infrastructure. In no other industry (except perhaps education) is it clearer that SA is a country of opposites. More than half SA’s health spending goes to the private sector, yet only 25% of households went to private hospitals, doctors or clinics, says a recent Stats SA survey. And while 71% of whites have private medical aid, only 6% of blacks do. Even in this context, can Discovery afford to keep raising medical aid costs when the pool of those who can afford it is shrinking? "No, no, we don’t want to keep hiking fees," Gore says. "We’ve just got to figure out how to be more efficient, and it’s not simple given how few doctors we have. But as long as we keep medical aid increases to between inflation plus 3% to 4%, I think we’ll be OK." At the AGM, Broomberg attested to just how difficult that will be, given that new hospitals are popping up all over the place. Between 2008 and 2015, 27 new hospitals were built in SA. Hospitals, it turns out, are sucking out most of the money spent by medical schemes. In SA in 2014, medical schemes paid out R124bn, of which 37% (R46.6bn) was to private hospitals, like those run by Mediclinic and Netcare, for ward and theatre fees and other costs. Refering to two specific hospitals built in KwaZulu Natal, Broomberg says: "we believe that if those hospitals hadn’t opened, we don’t believe any member would have been (worse off)". It’s a frightening scenario: cost increases that threaten to make medical aid unaffordable for younger, healthier people, combined with a situation of those remaining using more just because it’s there. Discovery’s main ammunition in this battle is its ability to shape people’s behaviour using its Vitality incentive programme. Gore believes in this "shared value" concept. It’s clear that Vitality, initially derided as a marketing gimmick, is working. The Harvard case study points out that the life expectancy of an average South African with an insurance policy is 67; but for Vitality members it is 82, and for "highly engaged" Vitality members it is 88. If you’re an active Vitality member, you have a 25% lower chance of being admitted to hospital. "Vitality members who engaged in the programme had achieved higher life expectancy, and their health-care costs were 7%-14% lower than those of individuals covered by a Discovery (policy) who were not Vitality members," the study found. Broomberg says: "Vitality saves Discovery more than R1bn in claims, mainly due to the change in behaviour." So while Discovery has rubbed a number of people up the wrong way — specifically, medical aid members and doctors — it’s a model of SA innovation that has been copied by many. Fortune magazine last year placed Discovery 17th on its list of 51 global companies that have had a big impact on major global, social or environmental problems. More than a decade ago, a Financial Mail cover story described a youthful Gore as the "accidental CEO". Even today, he’s not the guy keen to keep the comfortable corporate job. He says he remains motivated by the fact that his company is essentially still a "start-up". "We’re in that phase. We’re trying to build a bank, we’re expanding our model overseas. I get excited by that. But if you’re just working as CEO of a big corporate which aims to grow at 7% a year and sit in board meetings all day, that’s not for me. I’m not a boardroom kind of guy." Instead, he remains motivated by the fact that, unlike most other JSE-listed companies, Discovery has a "mission". "If you think of most financial services companies in our ecosystem and globally, they don’t stand for anything. We do. Our model is to make people healthier, our [raison d’être] is then fundamentally different from most companies that simply want to make a profit."
Created at 2016/08/02 08:26 AM by Mediclinic
Last modified at 2016/08/02 08:26 AM by Mediclinic