HEALTH FINANCING AND EXPENDITURE IN POST-APARTHEID SOUTH AFRICA, 1996/ /99

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1 THE NATIONAL HEALTH ACCOUNTS PROJECT HEALTH FINANCING AND EXPENDITURE IN POST-APARTHEID SOUTH AFRICA, 1996/ /99 Final draft: April 2002 Jane Doherty, Stephen Thomas, Debbie Muirhead The National Health Accounts Project was funded by the European Union and the National Department of Health

2 Acknowledgements This report is based on data, analyses and preliminary reports produced by the National Health Accounts Project Team made up of members of the Health Economics Unit at the University of Cape Town (which led the project), the Centre for Health Policy at the University of the Witwatersrand, the Department of Economics at the University of Durban-Westville, the Directorate of Health Financing and Economics in the national Department of Health, and an independent consultant. Our thanks go to them for their persistent efforts and teamwork over the past three years. Special mention must be made of Prof. Di McIntyre who provided invaluable insights throughout the life of the project, and gave generously of her time and expertise in commenting on successive drafts of this report. Lastly, we thank all those members of national, provincial and local government, as well as private sector institutions, who co-operated with us in providing data. The NHA Project Team (in alphabetical order) Luvuyo Baba Chris Bowa Prem Brijlal Vishal Brijlal Judith Cornell Devina Dawkinum Jane Doherty Jane Goudge Sandi Mbatsha Di McIntyre Difathlo Monnakgotla Charlotte Muheki Debbie Muirhead Pamela Ntutela Khethisa Taole Steve Thomas Andile Tintelo Nicole Valentine Renay Weiner Eyob Zere

3 Health financing and expenditure in post-apartheid South Africa EXECUTIVE SUMMARY Background to this report This report is a product of the National Health Accounts (NHA) Project that was commissioned by the National Department of Health of South Africa and funded by the European Union. It is the natural successor of a 1995 report generally known as The Health Expenditure Review that described patterns of health financing and expenditure in apartheid South Africa. The NHA Project was intended to measure health financing and expenditure changes in the post-apartheid era. The particular objectives identified by the National Department of Health for the Project were to: Monitor the impact of recently introduced resource re-allocation policies; Provide data to assist in the development of three-year rolling budgets for the public sector; Evaluate health sector efficiency; and Inform the development of new policies. This report synthesises information from two earlier - and separate - reports on the public and private health care sectors, providing a comprehensive analysis of the entire health system. Introduction to National Health Accounts NHA exercises are well-recognised internationally as important tools for informing financing policy. Standard methodologies have been developed which ensure that complete and consistent data sets are collected and that these are comparable between countries. The South African NHA Project applied international experience to local conditions to develop a conceptual framework as well as a set of data collection instruments that were implemented across the country. Data were collected for the financial years 1996/97 to 1998/99 (where the financial year begins in April of one year and ends in March of the next). With respect to financial data, information was collected on the sources of funds for health care, the financing intermediaries through which these funds flow, and the uses to which these funds are put (that is, expenditure patterns). Expenditure patterns were expressed in two ways: first, by line item (that is, by type of input such as personnel, drugs and capital expenditure) and, second, by type of provider (that is, by type of facility, programme of health worker on which the money was spent). Data were expressed in real terms, that is, the effect of inflation was removed and prices standardised to one year, 1999/00. The NHA Project also collected data on personnel and other non-financial data such as numbers of facilities and activity data (for example, outpatient visits and hospital inpatient days). Trends in the overall level of funds available for health care There are four main sources of finance for health care. Government, whether at a national, provincial or local level, allocates to the health sector a portion of the funds it The NHA Project i

4 Health financing and expenditure in post-apartheid South Africa raises from taxes, licenses, sales of utilities such as electricity and water, and other sources of income. Employers (which include private firms as well as governmentowned enterprises) fund health care for their employees, either directly through health services provided at the workplace, or indirectly through contributing to different forms of private insurance on behalf of their employees. Households contribute to private insurance or pay out-of-pocket for health care services. Donors and non-governmental organisations, both local and international, also fund health services. Table A presents the sources of finance for the health sector in 1998/99. The overall level of resources was high and grew rapidly during the period under review. In 1998/99, 8.8 percent of Gross Domestic Product was devoted to health care. 1 In this context, enduring problems experienced by large sections of the South African population in accessing health care services and enjoying quality care is particularly unsettling. Equally problematic are indications that tax-based financing of health care, the largest source of funds, began to stagnate in 1997/98 after initial growth. Towards the end of the period under review, households which contributed over a third of funds - began to shoulder the burden of financing their own care to a greater extent. Private employers also found themselves paying out more for the health care of their employees, this in the context of declining employment. Table A: Sources of finance in the South African health care sector, 1998/99 SOURCES OF FINANCE R billion (1999/0 0 prices) % total sources change in %, 1997/ /99 (%) Government Employers Households Donors and non-governmental unknown organisations TOTAL n/a This mix of changes was the result of two major features of the South African health system. First, the majority of resources (59 percent in 1998/99) were controlled by private sector intermediaries (Table B presents the different types of financing intermediary in South Africa). These resources were directed in the interests of those able to pay for their own health care, which was less than a fifth of the population. Thus, while the overall level of resources was high, most resources were destined for the private sector. Increases in funds available to the private sector did not bring extended insurance coverage. On the contrary, the percentage of people covered by insurance, whether partly or in full, declined. 1 In this section, all figures refer to Scenario C as described in Appendix 3. The NHA Project ii

5 Health financing and expenditure in post-apartheid South Africa Table B: Financing intermediaries in South Africa, 1998/99 FINANCING INTERMEDIARY Public sector % OF SECTOR Central government 9.5 National Department of Health 2.7 Other national departments (Defence, Education, Correctional 6.8 Services, and Safety and Security) Regional government 82.0 Provincial Departments of Health 79.3 Provincial Departments of Works 2.7 Local government 5.6 Statutory Security Schemes 2.8 Workers' Compensation Fund (receives a levy from employers based on their risk profile and wage bill, and contributes to the costs of health care for injuries sustained at the workplace) Road Accident Fund (receives contributions from a levy on fuel sold by oil companies and provides cover for medical expenses incurred by third parties involved in motor vehicle accidents) Government direct expenditures and compensation for health care for employees Private sector Private health insurance 68.3 Medical schemes (non-profit associations operated by professional administrators that are essentially for-profit companies - receive premiums from households and employers) Health insurance (offered by life and short-term insurance companies - most policies provide non-indemnity cover for major surgical and hospitalisation costs i.e. the insurer pays a predetermined amount of money for clearly specified events, rather than reimbursing the actual costs of health care as is the case with medical schemes) Households' out-of-pocket payments made directly to public or 30.1 private health services Private firms direct expenditure on workplace health services A second feature of the South African system was that pressure was placed on government financing of health care by the government s own macro-economic policy, coupled with poorer than expected macro-economic performance and reprioritisation of government spending away from social sectors. This was compounded by inefficiencies in resource use within the public health sector (see later). This made it difficult for The NHA Project iii

6 Health financing and expenditure in post-apartheid South Africa government to expand its health services to provide proper care for the poor, or to absorb the growing ranks of those who were previously able to purchase private care but increasingly found it unaffordable. This meant a decline in government spending per person dependent on the public sector of 2.5 percent between 1997/98 and 1998/99 (to a value of R814), after an increase of 4.3 percent between 1996/97 and 1997/98. Indications are that the need for public sector care increased over the period under review while the ability of government to meet this need was increasingly constrained. Trends in reducing geographic inequities in health care resource allocation Although South Africa is an upper middle-income country, large sections of its population are poverty-stricken and suffer from poor health status. In addition, financial and human resources, in both the public and private sectors, have historically been skewed in favour of the advantaged. These include those with medical scheme cover and, amongst those without cover, people living in urban areas. As it came into power the new government declared its intention to redress inequities rooted in the apartheid regime s policies. The largest equity problem lies in the increasing differential in resources available to service the poor who are dependent on public sector care, and higher-income individuals, especially medical scheme beneficiaries. For example, annual expenditure per medical scheme beneficiary rose from 4.7 times that spent by national and provincial departments of health per public sector dependant in 1996/97, to 5.8 times in 1998/99. 2 In 1998 the proportion of people on medical aid who used a health service in the previous month was 68 percent higher than the proportion of those not on medical aid. Even within the population not on medical aid, there was a differential in health service utilisation that was linked to relative wealth. The Medical Schemes Act of 1998, which was implemented in 2000, is a policy which attempts to increase the size of the population with private sector cover, improve the level of cross-subsidisation within the private sector, and prevent dumping of private patients on public hospitals once benefits have been consumed. In so doing it may improve equity within the private sector, as well as lessen the burden on public services. Resources freed in this sector could be used to improve services for those who are fully dependent on the public sector. This report reviews years prior to the implementation of the Act, and so cannot comment on the extent to which the Act has contributed to reducing inequity. A comprehensive evaluation of the Act is clearly a priority. Policymakers need to know both whether the coverage of the medical schemes industry has broadened and whether expenditure per beneficiary has decreased through the pressures of increased competition. However, the main mechanism to address inequity between the public and private sectors would be some form of social health insurance. Until progress is made on this policy the major cause of inequity in South African health care will not be addressed. A second leading cause of inequity is the differential in public resources available to different geographic areas. Government has made some progress in this regard, at 2 These figures are derived from Scenario C. Other figures in this section are for Scenario A as data were not sufficiently disaggregated (see Appendix 3). The NHA Project iv

7 Health financing and expenditure in post-apartheid South Africa least in the earlier part of the review period. Initially some of the poorer provinces began to receive fairer budget allocations. This trend reversed after 1997/98, however, followed by an improvement in the position of some of the already better-off provinces. Thus, in 1998/99, the richest provincial health department spent twice the amount per public sector dependant than the poorest, even excluding spending on those hospitals classified as central or provincial tertiary hospitals (which are intended to service more than just the inhabitants of a single province). This gap is widened if provincial health care expenditure by other government departments is taken into account (that is, spending by provincial departments of public works, local government and Departments of Defence, Education, Correctional Services and Safety and Security). Indeed, when provincial spending by both the public and private sectors is combined, all provinces other than Western Cape and Gauteng fall below the national per capita average. Clearly, within the sphere of policy on the public sector, current processes for resource re-distribution need to be re-examined. It certainly appears that several policies and mechanisms are failing to achieve the objective of shifting provinces towards equity in public health care spending. These include the formula which determines the global budgets awarded to provinces (known as the equitable shares ), conditional grants awarded to some provinces only, the medium-term expenditure framework which plots allocations over three years, and the processes at a provincial level that determine the share of budgets awarded to health departments. As yet, only the conditional grants system is being seriously reviewed. Other mechanisms may have equally important impacts on equity, however. In addition, the creation of norms and standards for encouraging provinces to spend equitably in relation to one another is a policy option that is worthy of consideration. Trends in shifting resources to more cost-effective levels of care 3 The government has an array of policies to improve access to public primary health care (PHC) services. Some price barriers to services have been removed through the free PHC policy, and this report shows that financial, human and physical resources have indeed been redirected to PHC. For example, expenditure on PHC services (including clinics and health centres, public health programmes and outpatient departments at district hospitals) increased at an annual average rate of 5.3 percent between 1996/97 and 1998/99. Yet, without a thorough evaluation of the combined impact of the array of government policy initiatives on utilisation, it may be difficult to plan adequately for further progress in future. It is clear that a thorough evaluation of the free PHC policy, and its supporting measures, is required urgently. Alongside this evaluation, it would be worthwhile exploring the potential the private sector holds to assist the public sector in achieving its objectives, especially at the PHC level. While achievements in developing public PHC services are considerable, there are signals that the funding of these services may be beginning to dip, in both absolute and per capita terms. Public PHC spending per person dependent on the public sector declined from a high of R205 in 1997/98 to R191 the following year. The funding of 3 The figures in this section are for Scenario A as data were not sufficiently disaggregated to calculate Scenario A (see Appendix 3). The NHA Project v

8 Health financing and expenditure in post-apartheid South Africa district and regional hospitals was also squeezed, partly as a result of the reprioritisation of PHC but more importantly as a result of the expansion of spending on central and tertiary hospitals. Maintaining services at these hospitals is important in order to ensure accessible hospital care and appropriate referral channels. However, this category of hospital experienced the highest average annual growth in spending (8.5 percent) over the period under review. While improvements in efficiency at lower level hospitals could theoretically absorb decreases in funding, this is unlikely at present, given the problems in management capacity at this level. Thus, the end result of present trends may be to undermine the District Health System that the government is keen to implement. The increased spending on central and provincial tertiary hospitals is a result of the conditional grant system. These grants are supposed to meet 75 per cent of the total running costs of the ten central hospitals and allow the development of tertiary services in provinces hitherto lacking in them. The current form of the Central Hospitals Grant is not appropriate because, amongst other reasons, it is not calculated directly on the basis of national specialist services and assets. The Health Professional Training and Research grant may also be centralising activities unduly. Given the government s commitment to PHC, there may need to be a redistribution of teaching and research funds to lower levels of care so that not all teaching is done in hospitals. These criticisms have been noted by the National Department of Health and, as mentioned earlier, the grants are under review. Such a review is indeed an urgent priority if the re-distribution of resources between levels of care is not to become a casualty of this particular aspect of financing policy. Trends in improving the efficiency of resource use by services 3 The annual real growth in expenditure per medical scheme beneficiary was as high as 10 percent between 1996/97 and 1998/99, compared to a figure of one percent for public sector spending on public sector dependants. The main driver of cost escalation in the medical schemes sector was private hospitals which, in 1998/99, consumed 29 percent of funds spent on beneficiaries. The average annual growth in this expenditure has been 19 percent between 1996/97 and 1998/99. Private hospital beds more than doubled in the decade between 1989 and 1998, and the annual rate of growth between 1989 and 1994 was very similar to the rate of growth thereafter (around 9 percent). This happened despite the government moratorium placed in 1994 on the development of new private beds. The contributions of private hospitals and also of medicines - to overall scheme expenditure are critical trends to watch. Further investigation is required to understand better the reasons for cost escalation in the private sector. As mentioned already, government s attempt to limit the supply of private hospital services through a moratorium on new beds has failed to have an impact on the industry, while interventions aimed at controlling the cost of medicines such as generic prescribing and substitution, limiting dispensing by private practitioners, and creating a single exit price for pharmaceuticals as they leave the manufacturer have not yet been implemented. Medical schemes administrators need to address the over-utilisation of services promoted by the fee-for-service, third party payer environment, and demonstrate a commitment to providing low-cost packages. As the largest single employer, government has an important role to play in encouraging the development of The NHA Project vi

9 Health financing and expenditure in post-apartheid South Africa such packages. For example, the amount that government spent annually per public sector dependant during the period under review was roughly the same as the monthly subsidy it offered to civil servants purchasing medical aid. This does not seem an equitable use of tax funding. In the public sector, the large proportion of expenditure absorbed by personnel (71 percent in 1998/99) presents a major challenge to improving the efficiency and quality of care. Civil service agreements make the scaling-down of personnel complements difficult, and it is more realistic to expect shifts to happen slowly through attrition than through dramatic changes in staff establishments. Budgeting policy now formally encourages provincial administrations to decrease the overall percentage of total expenditure accounted for by personnel. Another personnel-related challenge in the public sector is shifting the balance of highly skilled to lesser skilled staff, especially in the nursing profession. Of course, lesser skilled staff should only replace more highly skilled staff when there is no implication for the quality of care received by the patient. However, the South African public health service currently relies on a mix of staff that is unnecessarily highly skilled and unaffordable in the long-term (for example, half of all nurses are professional nurses). Redressing the balance is no easy task, as it entails reviewing the competencies of lesser skilled staff as well as present constraints on the types of care they are allowed to render. It also entails developing career paths that satisfy the aspirations of staff, without increasing the costs of care unnecessarily. The public sector also needs to watch its level of expenditure on administration, lest it become too high, especially as decentralisation proceeds. This is more of a problem in some provinces than others, particularly when decentralisation is occurring within the context of extensive bureaucracies inherited from the apartheid state. Last but not least, the improved management of hospital resources remains a high priority, as does the closure of redundant beds. Hospitals consume the bulk of public health resources and may be becoming more expensive in terms of unit costs. This limits opportunities for expanding primary health care services. Appropriate capital investment - and spending on maintaining existing stock - is required to enable improvements in management to take full effect. The sustainability of current patterns of resource mobilisation and use 1 The overall resource envelope of the health sector is likely to continue expanding in the short- to medium-term. Most of the expansion will benefit the private sector, however. The public sector will find itself increasingly constrained in its ability to meet existing needs, let alone new burdens generated by the HIV/AIDS epidemic. Whether private sector coverage will expand alongside increased funding depends on the impact of the Medical Schemes Act of If the medical schemes environment is unable or unwilling to expand into the upper-lower and lower-middle income markets through offering low-cost packages, the implications could be dire. The state would have to increasingly accommodate those falling out of the medical schemes environment due to spiralling costs in the private sector. The NHA Project vii

10 Health financing and expenditure in post-apartheid South Africa As discussed earlier, evaluations of the impact of the Act are therefore imperative. But the full potential of the Act cannot be achieved without additional policy actions. Most urgent amongst these is improving the cost-recovery potential of the public sector. This, together with efficiency and quality improvements, would allow it to compete with the private sector in attracting patients with low-cost hospital cover. If designed properly, social health insurance could also be a crucial mechanism for raising resources to crosssubsidise the less well-off and improve equity within the health system. Together these measures would reduce the vulnerability of the public health sector to dwindling per capita levels of taxation-based financing. However, user fee policy in the public sector needs to be applied cautiously. During the period under review, an increasing proportion of public health care expenditure was funded by out-of-pocket payments. At the same time, the collection of user fees declined over the three years of this study, partly as a result of patients with medical scheme coverage shifting to private hospitals. If a new uniform patient fee schedule is widely implemented in public hospitals, and incentives are put in place to encourage the collection of fee revenue, there may be a marked increase in out-of-pocket expenditure by non-scheme members. Whilst revenue generation is important for the public sector, the effect on poorer users of the health services needs to be carefully monitored. Conclusions The National Health Accounts data reveal two eras of public health sector financing. The first ran from 1992/93 to 1997/98. It was characterised by substantial growth in government financing of health care, the re-distribution of health sector funds across provinces, and the shift of resources to primary health care. In contrast, data available for 1998/99 indicate falling per capita financing of health care by government, a reversal of re-distribution trends between provinces and limited growth in PHC expenditure. It is unlikely that these latter phenomena were temporary, as they were associated with major policy changes that affect the long-term climate for public health financing. Indeed, the implementation of GEAR and fiscal federalism, and the elevation of other sectors such as defence in the budgeting process, marked a transition between these two eras of financing. These policies, together with limited economic growth and public sector inefficiencies, have curtailed the potential for increasing access and equity in the public health sector. The NHA data also highlight several key features of private health sector development in the first term of office of the post-apartheid government. These include growth in private sector provision (most markedly in bed numbers), rapid growth in expenditure, and contraction of the number of people with regular access to private care. Together, these trends suggest an overall decline in value-for-money in the private sector. Some of those previously able to afford private care undoubtedly became dependent on public services, particularly hospitals. This would have represented an additional burden on a public sector that was already over-stretched. Government needs to re-consider both the level of funding it devotes to health care and the mechanisms by which it seeks to distribute health care funds to priority services in poor areas. Unless this is undertaken seriously, the earlier gains in health care provision made by the new government will be squandered, and patterns of service delivery on the ground will contradict stated government policy. A summary of the main The NHA Project viii

11 Health financing and expenditure in post-apartheid South Africa recommendations with regard to reforming public sector financing and expenditure appears in Box 1. Box 1: Priority interventions for addressing equity, efficiency and sustainability problems in public health sector financing and expenditure To promote equity: Review national resource allocation and budgeting processes, in particular: the current Treasury formula that calculates the equitable shares component of the budget for provinces; the calculations determining conditional grants to provinces; and the equity-oriented mechansims of the Medium Term Expenditure Framework. Provide support in their provincial budgeting processes to health departments of provinces which do not prioritise health care spending. Consider alternative mechanisms of resource allocation, such as norms and standards, that could protect allocations to priority health care services. Remove cross-subsidies to private patients at public hospitals through appropriate pricing of services and collection of fees. To promote the appropriate distribution of expenditure between levels of care: Conduct a thorough evaluation of the package of PHC-promoting policies and their impact on utilisation. As indicated above, review the calculations determining conditional grants to provinces. To promote technical efficiency: Accelerate management transformation in the public health sector, especially in key hospitals. To promote sustainability: Investigate alternative forms of financing, including user fees within public hospitals, revenue retention and social health insurance. Review human resource policy with respect to appropriate staffing levels, skill mix, distribution across services and packages. Government also needs to enhance the functioning of the private sector and its interface with the public sector. The implementation of the Medical Schemes Act of 1998 was an achievement but its impact needs to be better understood. Medical schemes and their administrators also need to demonstrate a more convincing commitment to cost containment, and apply collective pressure on providers to reduce the costs of provision. The NHA Project ix

12 Health financing and expenditure in post-apartheid South Africa Employers also have a role to play in negotiating down the cost of private health care. One of the biggest employers is government which, as the custodian of tax funds, has an interest in ensuring more cost-effective care for the civil servants it subsidises. A second area of regulation has clearly been unsuccessful. Private hospital expansion continued unabated after the moratorium placed on new beds in This has impacted on the cost of hospital care in the private sector, but has also threatened the viability of public hospitals in small towns as skilled personnel seek better remuneration in private settings. Government clearly needs to find mechanisms for preventing uncontrolled expansion of the private sector in areas where new services would duplicate and threaten existing services, whilst encouraging personnel in both the public and private sectors to move into under-served areas. These mechanisms could include regulation of negative behaviour, as well as the creation of incentives to encourage positive behaviour. Indeed, it is the creation of positive incentives, and new mechanisms for engaging the private sector, that represents one of the biggest challenges to government policy makers. Many of the resources abundant in the private sector such as highly trained personnel, sophisticated technology, managerial skills and money are in scarce supply in the public sector. Government may benefit from harnessing these resources in a cooperative manner in the service of society at large. Indeed, there is a growing interest in public-private partnerships within government as a whole, although the understanding of what such partnerships might be are still evolving. However, this report has highlighted trends within the private sector that sound a note of caution. First, inequity between the public and private sectors grew over the period under review. Second, cost escalation continued unabated. If government enters into partnerships that rely on private sector modes of provision, it needs to ensure that the interests of equity and efficiency will be served. Whether this is in fact possible is difficult to answer as there is very little publicly available data on the performance of the private sector, while the capacity of government to control profit-driven behaviour by private partners is unproven. Thus, in investigating public-private partnerships, government needs to ensure that these are evaluated within the context of an over-arching policy on the private sector. This policy should spell out both the advantages and disadvantages to government of closer engagement, as well as the principles such as equity and sustainability - against which new partnerships should be judged. The recent adoption by the Department of Health of a policy document in this regard is a positive move in this direction. The role of regulation, as opposed to partnerships, also needs to be clearly understood. Lastly, the importance of comprehensive intervention at all levels needs to be made explicit. The experience of the past has shown that piece-meal interventions have had only a diluted effect. Indeed, the absence of an intervention at the level of the source of financing for health care namely some form of new pre-payment mechanism such as social health insurance has meant that the main cause of inequity in health care provision has remained untouched. Lastly, a concerted effort needs to be made to improve data that are relevant to future NHA exercises, as well as the formulation of policy on health financing reform in both the public and private sectors. Many of the analyses in this report were hampered by inaccurate, incomplete or insufficiently disaggregated data from both the public and The NHA Project x

13 Health financing and expenditure in post-apartheid South Africa private sectors. While the competitive value of data in the private sector is understood, from the perspective of increasing interest in public-private partnerships, comparative studies of the relative efficiency of the two sectors are urgently required to inform government policy. Some of the main areas of concern, at least with respect to data for future National Health Accounts exercises, are presented in Box 2. Box 2: Priority interventions for improving data for future National Health Accounts exercises 1. Out-of-pocket expenditure by households: Re-evaluate health-related questions in Income and Expenditure Survey and the new Labour Force Survey that has superseded the October Household Survey Investigate other sources of data, especially those that allow triangulation with data from providers or financing intermediaries 2. Local government financial and human resource data: Investigate mechanisms for obtaining regular information from a centralised source 3. Basic activity data, such as utilisation: Improve the quality of this data (recently developed information systems will help in this regard) 4. Improve the accuracy of personnel data and introduce routine analysis: Investigate reasons for data inaccuracies in the government personnel information system, PERSAL Explore the capacity of PERSAL to produce data in a more useful format 5. Improve basic information on private providers (including their number and location): Explore alternative sources such as statutory returns for private hospitals Revise professional councils registration system Conduct a baseline study on traditional medical practitioners 6. Improve the format of medical schemes data provided to the Medical Schemes Council (e.g. with respect to expenditure by line item and by provider, and by geographic area) 7. Improve data on expenditure by firms on workplace health services 8. Improve estimates of expenditure by government on medical scheme contributions for civil servants The NHA Project xi

14 Health financing and expenditure in post-apartheid South Africa LIST OF ABBREVIATIONS AIDS ANC ANIE CBO GDP GEAR HIV/AIDS MTEF NGO NHA PFI PHC PPP TB Acquired Immune Deficiency Syndrome African National Congress Available non-interest expenditure Community-based organisation Gross Domestic Product Growth, Employment and Redistribution Strategy Human Immunodeficiency Virus Medium-term Expenditure Framework Non-governmental organisation National Health Accounts Private finance initiative Primary Health Care Public-private partnership Tuberculosis The NHA Project xii

15 Health financing and expenditure in post-apartheid South Africa Preface This report is a product of the National Health Accounts (NHA) Project that was commissioned by the National Department of Health and funded by the European Union. It is the natural successor of a similar report generally known as The Health Expenditure Review (McIntyre et al. 1995) which described patterns of health financing and expenditure in apartheid South Africa. The NHA Project was intended to measure health financing and expenditure changes in the post-apartheid era. The particular objectives identified by the National Department of Health for the Project were to: 1. Monitor the impact of recently introduced health financing policies, specifically: policies to shift resources to district level care, in particular to primary health care services; policies to shift resources from higher level to lower level hospitals; and the Medical Schemes Act of 1999 (as this Act was only implemented in 2000, the NHA Project was required to provide baseline data that could assist in future monitoring); 2. Provide data that would assist in the development of three-year rolling budgets for the public sector (that is, to contribute to the medium-term expenditure framework or MTEF); 3. Evaluate health sector efficiency; and 4. Inform the development of new policies. National Health Accounts exercises have become well-recognised internationally as important tools for informing financing policy. Standard methodologies have been developed which ensure that complete and consistent data sets are collected and that these are comparable between countries. The South African NHA Project applied international experience to local conditions to develop a conceptual framework as well as a set of data collection instruments that were implemented in a standard manner across the country (Health Economics Unit, Centre for Health Policy and Department of Economics, University of Durban-Westville 1999). The National Department of Health asked the NHA Project to collect data standardised for the financial years 1996/97 to 1998/99 (where the financial year begins in April of one year and ends in March of the next). With respect to financial data, information was collected on the sources of funds for health care, the financing intermediaries through whom these funds flow, and the uses to which these funds are put (that is, expenditure patterns). Expenditure patterns were expressed in two ways: first, by line item (that is, by type of input such as personnel, drugs and capital expenditure) and, second, by type of provider (that is, by type of facility or programme that the money was spent on). Data were collected from both the public and private health care sectors. Importantly, data were expressed in real terms, that is, the effect of inflation was removed and prices standardised to one year, 1999/00. Through the experience of the 1995 Health Expenditure Review, South Africa has built up a tradition of linking financial data to non-financial data, a custom which is not practised in all NHA exercises. Linking data in this way allows analysis of the extent to which financial resources have been translated into physical and human resources on the ground, and in turn have resulted in better access to health services. In addition it The NHA Project xiii

16 Health financing and expenditure in post-apartheid South Africa allows the calculation of better equity and efficiency indicators. Consequently, the NHA Project also collected data on personnel and other non-financial data such as numbers of facilities and activity data (for example, outpatient visits and hospital inpatient days). All the data quoted in this report, and many of the analyses, are derived from previous NHA reports. Readers are referred to these reports for detailed descriptions of the methods and definitions used, and for disaggregated information (full bibliographic details of these reports appear in the box at the end of this preface). In some cases, data in this report differ from those presented in earlier reports. This may be because data have been converted into standard financial years and real terms, or because the combination of public and private sector data into standardised matrices (see Chapter 1) required some re-ordering of the data. This report attempts to consolidate the NHA Project s prior reports into a full description of the entire health care system, including both the public and private sectors. The structure of the report is as follows: Chapter 1: Chapter 2: Chapter 3: Chapter 4: Chapter 5: This chapter presents a framework for understanding the structure of the health sector, and the flow of resources through it. It highlights the key policies that impacted on health services between 1996/97 and 1998/99 (the period under review in this report), and emphasises the interconnections between the public and private sectors in the financing, purchasing and provision of health services. The chapter provides an overview of issues that are quantified and debated more extensively in subsequent chapters. This chapter attempts to identify, in broad terms, the level and distribution of the need for health care in the South African community. This is in order to complete the introductory information necessary to judge the appropriateness of the distribution of health care resources described in the following chapters. This chapter first presents the total resources financial, human and physical that were devoted to health care in South Africa during the period under review. Next it describes the share of financial resources that flowed to different purchasing agents (or financing intermediaries). This information lays the foundation for subsequent chapters that review how well health care resources have been distributed to achieve improved equity and efficiency since the apartheid era, and gauge the sustainability of the health sector in future. This chapter assess changes in expenditure on health care. The allocation of financial resources allows some comment on the differential availability of services on the ground. The chapter also makes some comment on the differential burden on households of financing health care through out-of-pocket payments. The influence of the macroeconomic environment on these trends is discussed. This chapter examines the extent to which financial and other resources were re-allocated in practice towards primary health care and district services between 1996/97 and 1998/99 in support of government s policy The NHA Project xiv

17 Health financing and expenditure in post-apartheid South Africa ideals. It also looks at trends within the public hospital sector to see whether resources were re-prioritised towards lower levels of hospital care. Chapter 6: Chapter 7: Chapter 8: This chapter examines the underlying causes of persistent inefficiencies in the health sector. The efficient use of resources is especially pertinent when services need to be expanded within the context of constrained resources. The information presented in this chapter is therefore integral to the discussion on the future sustainability of the health system which is the subject matter of the next chapter. Previous chapters painted a picture of a rapidly growing private sector providing services for the few with a stagnating public sector struggling to meet the needs of the many. This chapter assesses the sustainability of this situation with respect to the sufficiency, regularity, distribution and use of resources (the main focus being on financial resources). The intent is not to generate precise predictions of future financing and expenditure levels, but to illustrate the implications of a continuation of recent trends in the absence of remedial action. This chapter provides a brief synopsis of the main achievements and limitations of the new government with respect to implementation of resource mobilisation and allocation policies in its first term of office, based on the results of the NHA exercise. It also lists the recommendations that appear earlier in the report with respect to improving the equity, efficiency and sustainability of the public sector. It concentrates then on government s approach to the private sector. Lastly, it raises the main data improvements that are required to assist the policy-relevance of future National Health Accounts exercises. Reports on which this consolidated report is based Cornell J, Goudge J, McIntyre D, Mbatsha S National Health Accounts: The Private Sector Report. Pretoria: Department of Health. Doherty J The National Health Accounts Project: Personnel in national and provincial departments of health, 1996/ /99. Pretoria: Department of Health. Muheki C, McIntyre D, Doherty J South African National Health Accounts: Framework and definitions. Pretoria: Department of Health. Thomas S, Muirhead D National Health Accounts Project: The Public Sector Report. Pretoria: Department of Health. The NHA Project xv

18 Health financing and expenditure in post-apartheid South Africa CHAPTER 1: THE STRUCTURE AND POLICY CONTEXT OF THE HEALTH CARE SYSTEM This chapter presents a framework for understanding the structure of the health sector, and the flow of resources through it. It highlights the key policies that impacted on health services between 1996/97 and 1998/99 (the period under review in this report), and emphasises the inter-connections between the public and private sectors in the financing, purchasing and provision of health services. The chapter provides an overview of issues that are quantified and debated more extensively in subsequent chapters. 1.1 THE TRANSFORMATION OF THE HEALTH CARE SYSTEM By 1994, when the first democratic elections were held in South Africa, the key failings of the health care system were well-understood (African National Congress 1994, McIntyre et al. 1995). There were vast inequities in health status and access to services that were largely based on race, geographic location and socio-economic status. The public health sector was notoriously fragmented and inefficient, and concentrated inappropriately on providing sophisticated hospital care in urban settings. The private sector consumed the bulk of health care resources but provided for only a fraction of the country s population. It was clear that an overhaul of the entire system was necessary. During the new government s first term of office, which stretched from 1994 to 1999 and included the period under review in this report, this overhaul focused mainly on the public health sector. However, regulations that are now beginning to impact in a substantial way on the private health sector were also developed during this period (see later discussion). Transformation of the public health sector began with streamlining the national Department of Health, restructuring Provincial Departments of Health, and devolving considerable powers to provincial administrations for operational decision-making in health care delivery. This decentralisation of responsibility was in line with constitutional provisions that strengthened the role of provinces in relation to the other two spheres of government, national and local. Provinces are now mandated to provide hospital services, comprehensive primary level services in the former homelands, and curative primary level care in other areas of the country (in these latter areas they also determine subsidies for local governments that provide mainly preventive primary level care). The national Department of Health retains the overall responsibility for national policy-making and the development of norms and standards to ensure equitable and affordable health care provision. Decentralisation of powers to the provinces was followed by a second wave of decentralisation, the development of the District Health System charged with implementing the primary health care approach. Devolution of powers to this level has been slow because of lack of clarity on the overall role of local government vis-à-vis other spheres of government, uncertainty over what health services local government should ideally provide, and capacity problems (Gilson et al. 1999). In the meantime, the The NHA Project 1

19 Health financing and expenditure in post-apartheid South Africa provision of primary health care services remains fragmented between provincial and local governments, with different patterns of provision occurring in different parts of the country. In parallel to organisational restructuring with its strong emphasis on decentralisation, the new government developed a national health policy statement that was published in 1997 as The White Paper for the Transformation of the Health System in South Africa (Republic of South Africa 1997). The White Paper put forward a comprehensive vision and strategic plan for the health system, placing an over-riding emphasis on coordinating all aspects of the system in the pursuit of equity, but in reality paying scant attention to private sector issues. A diverse set of reforms was implemented to translate the strategy into practice. These included (Ntsaluba 1998): 1. programmatic changes that focused on immunisation, nutrition, reproductive health care, HIV/AIDS and tuberculosis; 2. legislative actions that introduced a National Drug Policy and an Essential Drugs List, legalised termination of pregnancy, imposed restrictions on the use and advertising of tobacco, and revised the nature of several Statutory Councils; and 3. policies that attempted to improve resource accessibility, such as the Clinic Upgrading and Building Programme, the improvement of drug procurement and distribution systems, the recruitment of foreign doctors and the introduction of community service for medical graduates. With respect to health financing policy, the period 1994 to 1999 saw the removal of fees for pregnant women and children under six (in May 1994), and then for all primary health care services (in April 1996). Free services were intended to be available only to those not covered by health insurance, but in practice are rendered to anyone presenting at public facilities. The other major reform in health financing was the development of a resource allocation formula to distribute the national health budget between provinces on an equitable basis. This formula was only applied in the 1995/96 and 1996/97 financial years, however. Thereafter, the nationally controlled process of allocating provincial health budgets was overtaken by constitutional changes that gave effect to the quasifederal nature of post-apartheid political organisation. These changes, which came to impact dramatically on health financing in South Africa, are described in the following section. Although not implemented during the government s first term of office, amendments to the old Medical Schemes Act were drafted and approved by Parliament during this period. The implications of the new Act are also discussed later in this chapter. 1.2 THE STRUCTURE OF THE HEALTH CARE SECTOR While transformation has affected the responsibilities of components of the health sector, as well as the size of resource flows through these components, the fundamental structure of the health sector remained fairly constant during the 1990s. This structure is described below, using a framework consistent with National Health Accounts exercises around the globe. The NHA Project 2