Tipping point leadership

Neville Koopowitz

CEO Discovery Health

Tipping Point Leadership

“To appreciate the power of epidemics… we need to prepare ourselves for the possibility that sometimes big changes follow from small events, and that sometimes these changes can happen very quickly”

“Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – it can be tipped”

• We are looking for the small things that lead to epidemic-like contagion

• If we can find them – then a small concentration of resources in key areas will produce the maximum effect

From: The Tipping Point: How Little Things Can Make a Big Difference, Malcolm Gladwell, 2000

Evolution of private healthcare in SA

Tipping pointStaticMembership

Past

(Pre-2000)

Present2000 - today

Future

Industry Developments

Strengthened

Increased attention

Improved

ImprovedAccess

Regulatory framework

Low-income cover

Solvency

64%

R 0 - R 2,500 R 2,500 - R 5,000 R 5,000+ insured R 5,000+ uninsured

Income bands and insured status

Coverage of SA population

16%

7m current medical scheme population 4%

1m Wealthy uncovered

17%

Over 7 million South

Africans uncovered

Evolution of private healthcare in SA

Past

(Pre-2000)

Present2000 - today

Future

StrengthenedRegulatory framework

Increased attentionLow-income cover

ImprovedSolvency

ImprovedAccess

Tipping pointStaticMembership

Industry Developments

Evolution of private healthcare in SA

Past

(Pre-2000)

Present2000 - today

Future

StrengthenedRegulatory framework

Increased attentionLow-income cover

ImprovedSolvency

ImprovedAccess

Tipping pointStaticMembership

Industry Developments

Tipping Point Variables

1. Cost & Affordability

2. Risk Protection

3. Distribution

4. Capital

5. Bold Vision

Sound foundation to build on

1. Cost & Affordability

Present

Future

• Risk based pricing restricted access for old and sick• Inflation controlled through product design

• Community pricing• Price floor based on minimum benefit package• Inflation managed by focus on underlying cost drivers

Past

The affordability formula

Affordability f= [ ]Breadth of access( ), Quality of

care( ), Basket of benefits( )

* REF community rate

Active Network Management

Consumer & Manufacturer

demand for new technologies

Floor price for PMB’s R237* per life excluding:

•Administration

•Reserve build up

•Distribution costs

Co-operation RegulationCompetition

1. Cost & Affordability

Present

Future

• Risk based pricing restricted access for old and sick• Inflation controlled through product design

• Community pricing• Price floor based on minimum benefit package• Inflation managed by focus on underlying cost drivers

• Flexibility of PMB’s• Co-operation between funders, providers & suppliers• Compete on networks

Past

2. Risk Protection

Present

Future

Poor risks managed through:• Underwriting, declining poor risk members, loading

premiums and exclusions

• Guaranteed access allows sick & elderly affordable access to quality private healthcare

• Freedom of access increases adverse selection risk of groups and individuals with high cost conditions

Past

Adverse Selection

Medical Schemes Act Section 29A.6

A medical scheme may not impose a general or condition specific waiting period on a person in respect of whom application is made for membership or admission as a dependent, and who was previously a beneficiary of a medical scheme, terminating less than 90 days immediately prior to the date of application, where the transfer is required as a result of –

(b) An employer changing or terminating the medical scheme of it’s employees, in which case transfer shall occur at the beginning of the financial year, or reasonable notice must have been furnished to the medical scheme to which an application is made for such transfer to occur at the beginning of the financial year.

Impact of S29A.6(b) concessionA

ge

35

37

39

41

43

45

47

49

51

53

2004 2005 2006

45.4

49.750.7

Average age of members that joined under S29A.6(b) underwriting concession

Average age of Discovery Health new entrants during the year

Cost impact of high cost conditions

56

62 65 84 195 20

6

245

60%

Incr

ease

in

pre

miu

m t

o

fun

d t

reat

men

t

Stents (Original

Launch Price)

56

Xigris (Original

Launch Price)

6

Herceptin

adjuvant

Biologics for

conditions other

than cancer

Other new

registered drugs

for chronic

conditions

Biologics for

Oncology

(currently

available)

Pipeline

Biotechnology

Drugs

3 19 111

11 39

Mo

nth

ly m

em

be

r p

rem

ium

0

20

40

60

80

100

120

140

Base premium

Technology

10,0

00 m

emb

ers160

Monthly Premium per member

Estimated number of members that would benefit

•Only way to manage today is to avoid coverage

•Expectation of coverage but co-operate to minimize financial risk

2. Risk Protection

Present

Future

Poor risks managed through:• Underwriting, declining poor risk members, loading

premiums and exclusions

• Guaranteed access allows sick & elderly affordable access to quality private healthcare

• Freedom of access increases adverse selection risk of groups and individuals with high cost conditions

Past

• REF – responsible solution to adverse selection• Strengthen underwriting protection to restrict opportunistic

member movements• Ensure cover for low frequency, high cost treatments

through industry co-operation

3. Distribution

Present

Future

• Unregulated broker market - no barriers to entry • No qualifications, experience or education necessary

• Extensive accreditation required• Regulations on how advice is given and recorded (FAIS)• Cost to industry capped, controlled and transparent• 9, 426 accredited brokers (www.medicalschemes.com)• Powerful, educated asset for industry growth

Past

Upfront Expenses

FAIS licensing application fee- R1,150

Education (FAIS credits) - R1,000

Council broker accreditation - R1,000

Council brokerage accreditation - R1,000

Petrol, telephone, fax

Assume R3,000 per month

Assumptions

•Writes 21 cases per month

•Average premium of R600

Legislated commission of R18 per member per month

A new broker focussing on low-income products

Environment unlikely to attract new entrants

Ra

nd

s p

er

mo

nth

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33

Months

Income

1 year to reach minimum wage of

R1,500 pm

2 years to recover upfront losses

3. Distribution

Present

Future

• Unregulated broker market - no barriers to entry • No qualifications, experience or education necessary

• Extensive accreditation required• Regulations on how advice is given and recorded (FAIS)• Cost to industry capped, controlled and transparent• 9, 426 accredited brokers (www.medicalschemes.com)• Powerful, educated asset for industry growth

Past

• Create incentives to encourage growth of distribution capabilities - especially for individual members and low-income products

4. Capital

Present

Future

• Guideline only• Lower levels of capital

• Stringent requirement• Rapid build up of internal capital• Inefficient use of excess capital

Past

Industry Reserve Levels

15%

20%

25%

30%

35%

40%

2000 2001 2002 2003 2004

Re

se

rve

as

% o

f G

ros

s p

rem

ium

Source: COMS annual reports

R7.4bn

R18.5bn held at end of 2004

R13.7bn

R9.7bn

R6.2bn

R12.9bn needed for 25% level

R5.6bn excess capital held in industry at end

of 2004

Potential capital available for

improved access

4. Capital

Present

Future

• Guideline only• Lower levels of capital

• Stringent requirement• Rapid build up of internal capital• Inefficient use of excess capital

Past

• Utilise capital efficiently to create optimal balance between member security and future contributions

5. Bold Vision

Present

Future

• Cottage industry – little capital• Underdeveloped infrastructure• Low competitive pressure to meet consumer needs

• Period of consolidation leading to world class private healthcare, administration and managed care

• Sound regulatory framework

Past

Consolidation over time

Total number of Medical Schemes in South Africa203 198

189181

165154 156

149 145

0

50

100

150

200

250

1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: COMS annual reports

More than 1 in 4 have been consolidated

SA exceeds world class service standards

Measure US Benchmark

Answer speed 80% in 21.93s

Average 38s

Abandon rate Average 4.58%

Best 3.52%

First call resolution Average 75.33%

Best 79.32%

Measure US Benchmark

Turnaround HMO’s*: Mean 71 Days

Medicare**: 95% of claims in 30 days

Accuracy US Managed Care***: 98% - 99.1%

Source: 2005 Purdue Report on health insurance industry call centres

*From interstudy 2000 analysis of 600 HMO’s

** From US Managed Care handbook

*** Cap Gemini, Ernst & Young US Managed Care Benchmark Study 2002

Calls Claims

25

SGA+EBIT for Companies in most Similar Operating Environments

Having most Similar Operations – Monitor Survey of Healthcare systems 2002

International costs of administration

World class service at lower cost

Note: The admin cost comparison is inclusive of broker commissions; the average is calculated excluding the 4 outliers at the top and the bottom of the range; Source: Company financial statements; Monitor analysis

% of Total Premium Income

Sanitas (Spain)

AXA PPP (UK)BUPA (UK)

Masvida (Chile)Brasilsaúde (Brazil)

Adeslas (Spain)

Colmena Golden Cross (Chile)Sul América (Brazil)

Isapre Banmédica (Chile)ING Salud S.A. (Chile)

Consalud S.A. (Chile)Norwich Union Healthcare (UK)

Bradesco (Brazil)VHI (Ireland)

Standard Life Healthcare (UK)Asisa (Spain)

Vida Tres (Chile)

Multinacional (Venezuela)

9.8%

9.9%

13.1%

14.2%

16.1%

16.2%

18.4%

19.4%

19.7%

23.0%

23.1%

30.0%

43.5%

15.7%

15.6%

14.7%

14.7%

14.5%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

SA open scheme average (12.7%) as per 2004 COMS report

Segment Average = 17.0%

5. Vision

Present

Future

• Cottage industry – little capital• Underdeveloped infrastructure• Low competitive pressure to meet consumer needs

• Period of consolidation leading to world class private healthcare, administration and managed care

• Sound regulatory framework

Past

• Bold vision to build on solid foundation• A sound balance between Competition & Co-operation

Create bold vision

July 20th 1969September 12th 1962

“We choose to go to the moon in this decade and do other things, not because they are easy, but because the are hard…”

10 million lives by 2010…

Tipping Point Variables

•Responsible co-operation whilst maintaining competition

•10 million lives by 2010

•Improve capital efficiency

•Encourage growth in low-income markets

•REF implementation

•Strengthen underwriting protection

• Flexibility of PMB’s• Co-operation of providers, funders & suppliers for high cost care

Capital

Bold Vision

Distribution

Risk Protection

Cost & Affordability

Tipping point leadership

Neville Koopowitz

CEO Discovery Health