Discovery's market dominance means little incentive to drop prices, health market inquiry finds

Discovery Health, which administers 18 medical aid schemes, makes profit that is "multiples" of its competitors, according to the health market inquiry.

The 69-month inquiry into what drove up private health prices found that Discovery, Medscheme and Metropolitan dominated the administrator market. Administrators charge for services rendered to not-for-profit medical aids.

Discovery Health is not a medical aid, as is sometimes assumed, but charges medical aids, including Discovery Health Medical Scheme, about a 10% admin fee per month to design benefits and pay hospitals and health workers.

Its market dominance was pointed out by former chief justice and chair of the inquiry, Sandile Ngcobo. He suggested it could set prices it charged to medical aids, and that there was little incentive to drop prices.

Administrators make money by charging medical aids to decide what benefits to pay, and by paying claims.

Ncgobo said the Discovery administrator did not face any real competition and made much higher profits than Medscheme and Metropolitan.

He said: "Discovery leads with a market share of 40%. Medscheme is next with 39% of the market based on gross contribution income. This comes from a profitability analysis of the three largest administrators."

Medscheme, Metropolitan and Discovery administer 80% of medical aids.

Ngcobo said: “They have substantial market share, over a consistently prolonged period. They have a high degree of market power and ability to control processes and maximise fees.”

He said there was a "skills gap" between the board of trustees of medical aids and administrators.

Trustees of medical aids are supposed to look after medical aid members' best interests,  hold administrators to account and ensure they hire the most efficient administrators. But this was not what happened.

In fact, trustees and their bosses, who are known as principal officers, are paid for services every year regardless of performance, said Ngcobo.

Because trustees are paid regardless of their performance, he said "there was little incentive for them to ensure the medical aid grows (which can bring down costs) and that non-healthcare costs (such as administration) are appropriately maintained".

This means administrators can decide what to charge medical aids for services and are not held to account by the trustees, who can be paid millions annually.

The inquiry recommended that medical aids all have one single base option and compete  on providing better benefits to members, such as buying health care based on the quality of doctors and hospitals, rather than just based on cost.