In a rebuttal to the provisional findings of the long-awaited Health Market Inquiry (HMI), Discovery Health says its growth and profitability is not a result of any market advantage or charging its medical scheme members higher fees.
Instead, its success is a function of innovation and operational efficiency driven by management and ongoing investments in customer service technologies.
“We disagree strongly with the view that Discovery Health’s sustained growth and success is a sign of market failure,” says Discovery Health CEO Jonathan Broomberg. “Discovery Health was started up 25 years ago without any members, at a time when our competitors already had substantial scale and brand recognition.”
The Competition Commission’s HMI provisional report, which was unveiled on Thursday (July 5) by former chief justice Sandile Ngcobo, found that Discovery’s astounding profitability was an indication of “market failure”.
And with the absence of new and emerging players in the medical aid scheme industry to challenge Discovery’s dominance, there are no signs that the market would self-correct, the HMI found.
While Ngcobo, who has chaired the inquiry since its start in 2014, supported Broomberg’s views about how skilled its management is in running the business, he painted a grim picture of Discovery’s dominance relative to competitors Metropolitan and Medscheme.
Of the 22 medical schemes open to the public, just two hold 70% of the market in terms of the number of members they have, according to the HMI. One of these is the Discovery Health Medical Scheme, which holds 55% of the medical schemes market.
“Under normal competitive conditions, Discovery’s profitability would attract new competitors and stimulate competition from incumbents,” says Ngcobo. “There is no sign of this. On the contrary, we see Discovery growing and becoming more successful over time.”
However, Broomberg says Discovery’s growth has been organic given the competitive rates it charges for open schemes (geared for ordinary members) and closed/restricted schemes (driven by employers).
When compared on a like-for-like basis, Discovery’s premiums are on average 16.4% lower than the next eight competitor schemes, he says. “This is due to a combination of effective procurement, claims and fraud risk management by Discovery Health.”
Discovery Health is the administrator of Discovery Health Medical Scheme (it has the same name as its administrator). Medical schemes are not-for-profit and owned by members, and should operate separately from administrators, which operate on a for-profit basis.
Discovery Health manages more than three million lives on an open and closed Discovery Health Medical Scheme and collected R5.5 billion in fees in 2017 for this role.
“Similarly, Discovery Health’s 18 restricted scheme clients benefit materially from the full range of services provided by Discovery Health, including major claims risk savings which result in lower premium increases over time,” says Broomberg.
He adds that publicly available data confirms that the weighted average administration expenses and fees incurred by Discovery Health Medical Scheme and closed schemes administered by Discovery Health are “in line with the overall market.”
He continues: “The fees charged to Discovery Health Medical Scheme are in fact the 14th lowest out of 22 open medical schemes when measured on a rand per beneficiary per month basis, or 10th out of 22 open schemes when measured as proportion of contribution income.”
The HMI’s report also features the market share of Discovery Health (the administrator). There are 16 medical scheme administrators in SA, but Discovery Health and Medscheme accounted for 76% of the market based on gross contribution income in the five-year period assessed (2010 to 2014). The HMI found that the interests of administrators are dominant, and that scheme members are too weak or disempowered to force administrators to align to member interests.
The report stated: “The lack of incentives … to scheme employees, trustees and principal officers … weakens schemes’ resolve to hold administrators to account for delivering value to members. Healthcare costs and administration fees are increasing and benefit packages cover less care.”
Broomberg agrees, saying that trustees of schemes should hold administrators accountable for delivering value to members.