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

Industry Developments Access Solvency Low-income cover Regulatory framework Improved Improved Increased attention Strengthened

Membership

Static

Tipping point
Past
(Pre-2000)

Present
2000 - today

Future

Coverage of SA population
1m Wealthy uncovered 7m current medical scheme population
16% 4%

Over 7 million South Africans uncovered

17% 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

Evolution of private healthcare in SA

Industry Developments Access Solvency Low-income cover Regulatory framework Improved Improved Increased attention Strengthened

Membership

Static

Tipping point
Past
(Pre-2000)

Present
2000 - today

Future

Evolution of private healthcare in SA

Industry Developments Access Solvency Low-income cover Regulatory framework Improved Improved Increased attention Strengthened

Membership

Static

Tipping point
Past
(Pre-2000)

Present
2000 - today

Future

Tipping Point Variables

1. 2. 3. 4. 5. Cost & Affordability Risk Protection Distribution Capital Bold Vision

Sound foundation to build on

1. Cost & Affordability

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

Present

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

Future

The affordability formula

Affordability

= f[(

Breadth of access
Active Network Management

), (

Quality of care

), (

Basket of benefits

)]

Consumer & Manufacturer demand for new technologies

Floor price for PMBs R237* per life excluding:

Administration
Reserve build up Distribution costs

Competition

Co-operation

Regulation

* REF community rate

1. Cost & Affordability

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

Present

Community pricing Price floor based on minimum benefit package Inflation managed by focus on underlying cost drivers Flexibility of PMBs Co-operation between funders, providers & suppliers Compete on networks

Future

2. Risk Protection
Past
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

Present

Future

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 its 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) concession

53
51 49 47 Age 45.4 50.7 49.7

45
43 41 39 37 35

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

Average age of Discovery Health new entrants during the year

2004 2005 2006

Cost impact of high cost conditions

245 10,000 members
160 140 120 100

Monthly member premium

80 60 40

Increase in premium to fund treatment

62

65

195

84

206

60%

56

Monthly Premium per member

111 19 56 11 39 6 3

20

0 Base premium Stents (Original Launch Price) Xigris (Original Launch Price) Herceptin adjuvant Biologics for conditions other than cancer Other new registered drugs for chronic conditions Biologics for Oncology (currently available) Pipeline Biotechnology Drugs

Estimated number of members that would benefit

Technology

Only way to manage today is to avoid coverage Expectation of coverage but co-operate to minimize financial risk

2. Risk Protection
Past
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 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

Present

Future

3. Distribution
Past
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

Present

Future

A new broker focussing on low-income products

Assumptions Writes 21 cases per month Average premium of R600 Legislated commission of R18 per member per month Rands per month 12,000 10,000 8,000 6,000 4,000 2,000 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 Months Income 14,000

2 years to recover upfront losses

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

1 year to reach minimum wage of R1,500 pm

Environment unlikely to attract new entrants

3. Distribution
Past
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

Present

Future

Create incentives to encourage growth of distribution capabilities - especially for individual members and lowincome products

4. Capital
Past
Guideline only Lower levels of capital

Present

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

Future

Industry Reserve Levels

40%
R18.5bn held at end of 2004

Reserve as % of Gross premium

35%

30%

R13.7bn

R5.6bn excess capital held in industry at end of 2004

25% R6.2bn 20% R7.4bn

R9.7bn

R12.9bn needed for 25% level

Potential capital available for improved access

15% 2000
Source: COMS annual reports

2001

2002

2003

2004

4. Capital
Past
Guideline only Lower levels of capital

Present

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

Future

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

5. Bold Vision
Past
Cottage industry little capital Underdeveloped infrastructure Low competitive pressure to meet consumer needs

Present

Period of consolidation leading to world class private healthcare, administration and managed care Sound regulatory framework

Future

Consolidation over time

250

Total number of Medical Schemes in South Africa

203 200 198

189

181 165 154 156 149

150

145

100

50

0 1996
Source: COMS annual reports

1997

1998

1999

2000

2001

2002

2003

2004

SA exceeds world class service standards

Calls
Measure Answer speed Abandon rate First call resolution US Benchmark 80% in 21.93s Average 38s Average 4.58% Best 3.52% Average 75.33% Best 79.32% Measure Turnaround

Claims
US Benchmark HMOs*: Mean 71 Days Medicare**: 95% of claims in 30 days US Managed Care***: 98% - 99.1%

Accuracy

*From interstudy 2000 analysis of 600 HMOs ** From US Managed Care handbook

Source: 2005 Purdue Report on health insurance industry call centres

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

International costs of administration

SGA+EBIT for Companies in most Similar Operating Environments

Having most Similar Operations Monitor Survey of Healthcare systems 2002

Multinacional (Venezuela) Sanitas (Spain) Adeslas (Spain) AXA PPP (UK) BUPA (UK) Masvida (Chile) Brasilsade (Brazil) Colmena Golden Cross (Chile) Sul Amrica (Brazil) Isapre Banmdica (Chile) ING Salud S.A. (Chile) Vida Tres (Chile) Consalud S.A. (Chile) Norwich Union Healthcare (UK) Bradesco (Brazil) VHI (Ireland) Asisa (Spain) Standard Life Healthcare (UK)
0% 5%

43.5%
30.0% 23.1% 23.0% 19.7% 19.4% 18.4% 16.2% 16.1% 15.7% 15.6% 14.7% 14.7% 14.5% 14.2% 13.1% 9.9% 9.8% 10% 15%

World class service at lower cost

Segment Average = 17.0% SA open scheme average (12.7%) as per 2004 COMS report
20% 25% 30% 35% 40% 45% 50%

% of Total Premium Income

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

25

5. Vision
Past
Cottage industry little capital Underdeveloped infrastructure Low competitive pressure to meet consumer needs

Present

Period of consolidation leading to world class private healthcare, administration and managed care Sound regulatory framework

Future

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

Create bold vision

September 12th 1962 July 20th 1969

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

Cost & Affordability
Flexibility of PMBs Co-operation of providers, funders & suppliers for high cost care REF implementation Strengthen underwriting protection

Risk Protection

Distribution

Encourage growth in low-income markets

Capital

Improve capital efficiency Responsible co-operation whilst maintaining competition 10 million lives by 2010

Bold Vision

Tipping point leadership

Neville Koopowitz CEO Discovery Health