Tackling Back-Related Claims

Tackling Back-Related Claims

Wynand Neethling

BCom (Hons) FASSA
Actuary: Medscheme Health Risk Management

Wynand has gained extensive experience in both the life insurance and private healthcare industries. He graduated from the University of Stellenbosch in 1998, after which he began his career at Old Mutual actuaries and consultants. In 2004 he moved to the retail risk product development division where he was instrumental in reviewing and rebuilding the underwriting and reinsurance processes. He joined Medscheme in 2009, where he is responsible for providing actuarial support to key medical scheme clients, both in South Africa and Namibia.

Tackling Back-Related Claims:

A Case Study (Sasolmed and DBC)

The traditional model of managing medical scheme benefits through a combination of benefit design and managed care funding rules has reached a stage of maturity where greater cost management is difficult to achieve without sacrificing quality of care. Instead, a different model is required, with medical schemes partnering more closely with the providers of medical services.

In this way, financial incentives are aligned and medical scheme members are more likely to receive appropriate medical care. There are a number of ways in which such an arrangement could operate, and this article illustrates one example where a bold initiative carried out by Sasolmed and DBC (Documentation Based Care) is showing promising early results.

Why back surgery?

For the employer, back pain is a significant source of both absenteeism and “presenteeism” (where employees are at work but not able to fully perform their jobs). Back surgery requires a long recuperation period, which means even higher absenteeism costs for the employer.

Sasolmed saw the cost of back surgery rising year- on-year, mainly as a result of higher average claim

amounts. For example, in 2009 back-related hospital admissions cost Sasolmed approximately R34 million – almost 4% of total claims. The scheme saw in its claims experience a combined back hospital admission rate of approximately 7 per 1 000 lives per annum. Of these more than half were for heavily invasive spinal fusions or laminectomies. Despite the cost, the back problems were often not resolved. Approximately 30% of patients were readmitted within four years of the initial surgery.

With over 400 lives hospitalised each year for back- related surgery, Sasolmed was open to alternative solutions. DBC (Documentation Based Care) approached Sasolmed and offered conservative out-of-hospital back rehabilitation as a possible solution. DBC’s protocols, processes and equipment were imported from Finland,

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where they have been successfully applied in managing chronic back pain conservatively.

The protocols typically consist of a six-week intensive rehabilitation programme delivered by a multi- disciplinary team at a DBC centre. The team includes a general practitioner, physiotherapist and biokineticist and the protocols focus on functional restoration. Health outcomes, based on a variety of measures which include pain experienced and a range of motion and interference with the activities of daily living are continuously monitored.

DBC was so confident in their methodology that the company was willing to enter into a risk sharing arrangement. Since applying financial rewards (and penalties) is one of the best ways to incentivise the correct behaviour, Sasolmed was willing to consider this proposal.

The rest of this article discusses the key aspects of the arrangement and the reasoning behind them. The results achieved to date are also reviewed.


As with any new initiative, there were challenges to overcome. Sasolmed’s membership base is highly concentrated, with approximately 70% of its members based either in Secunda or Sasolburg. The closest DBC facilities were in Johannesburg and Nelspruit – more than 100 km away. This would have been a logistical nightmare, since the majority of affected members

were blue-collar workers and the treatment requires bi- weekly visits to DBC practices.

While setting up practices in these towns would have solved the problem, this solution required a significant capital investment – a solution which raised a number of questions:

As with any new initiative, there were challenges to overcome. Sasolmed’s membership base
is highly concentrated, with approximately 70% of its members based either in Secunda or Sasolburg.


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Ultimately the solution was jointly developed by four parties:


    according to the agreed protocols and processes.


    provider to Sasolmed.


    organisation which is the main party to the risk transfer contract with Sasolmed, sub-contracting DBC practices to provide the relevant services.

    Finding the solution

    A critical success factor was Medscheme’s IT platform. Over many years Medscheme has invested heavily in systems and data management and built solid relationships with key providers, including both general practitioners as well as specialists. The combination of general practitioner linking (where a member has selected a GP of choice within a contracted network) and specialist referral management (where a member must be referred by their GP before a specialist visit would be funded) were key factors in ensuring a smooth roll-out of the programme.

    Medscheme has invested heavily
    in systems and data management and built solid relationships with key providers, including both general practitioners as well as specialists.

    The operational managed care environment was robust and flexible enough to handle exception cases correctly. Sasolmed’s Board of Trustees and Principal Officer were innovative, open to new ideas and willing to take a risk on these ideas.

    DBC was willing to invest in new practices to back up their confidence in the processes and protocols. Resilience Health was willing to share in the claims risk associated with the arrangement.

    Key contract terms

    The contract included the following key terms:

allowed sufficient time to recoup any initial capital investment and to address the long-term problem of chronic back pain. This was crucial since the scheme could run the risk of a spike in back-related claims once the programme ends.

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    Resilience Health in exchange for a capitation fee. This includes spinal fusion, laminectomy and back and neck pain admissions.


    defined inflation, but with no allowance for increased utilisation over time. However, this capitation fee is then subject to a reduction factor from year two to six. This relates to the assertion by DBC that their processes and protocols offer a more cost-effective solution to treating chronic back pain appropriately.


    was required to provide a bank guarantee to cover any downside risk.




    the use of DBC.


    A key element to the success of the programme was to proactively identify members with back pain. As noted earlier, members who have had back-related admissions are likely to have further admissions. Medscheme uses predictive models to identify those members likely to suffer from chronic back pain.

    A key element to the success of
    the programme was to proactively identify members with back pain. As noted earlier, members who have had back-related admissions are likely to have further admissions.

    For example, when a member claims for a health event that has a high probability of being due to back pain (such as certain MRI/CAT scans, rhizotomies and facet blocks) at Medscheme would notify Resilience Health. Resilience Health would then contact the member and the member’s doctor to inform them of DBC and the relevant processes.

    A further key element related to working closely with both members and providers to ensure a seamless integrated process. Prior to the launch of the programme, there


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was a comprehensive member education campaign in place to ensure members would undergo conservative treatment as a first resort. Due largely to this member- centric communication effort, virtually no resistance from members to the introduction of this programme was experienced.

This committee also developed the protocols for general practitioners when handling back pain cases. Initially there was some resistance from specialists and physiotherapists.

Sasolmed’s Clinical Coordination committee (a joint forum between the medical scheme and representatives of the general practitioners serving the members) was instrumental in educating the general practitioners. This committee also developed the protocols for general practitioners when handling back pain cases. Initially there was some resistance from specialists (particularly orthopaedic surgeons and neurosurgeons) and physiotherapists. Significant work was required to convince them and DBC and Resilience Health doctors visited the majority of specialists involved in performing back surgery.

Prior to the introduction of the programme, the normal sequence of events was:

  1. Member suffers from back pain.
  2. Member consults with a general practitioner and, if

    required, is referred to a specialist.

  3. Member sees orthopaedic or neurosurgeon.
  4. Should the member require surgery, hospital pre-

    authorisation is obtained via Medscheme.

  5. Member undergoes the procedure in hospital.

As stated earlier, roughly 30% of members were re- admitted within four years, so in many cases the member suffered further back pain and the process repeated itself.

Since the introduction of the DBC programme, the process has been as follows:

  1. Member suffers from back pain.
  2. Member either goes directly to DBC or consults

    a general practitioner who refers them to DBC for assessment.

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  1. If the member’s condition does not allow rehabilitation, authorisation for appropriate hospital admission is provided. Alternatively, if rehabilitation is appropriate given the member’s condition, he/shewillundergoasix-weekcourseoftreatmentata DBC centre.
  2. If the rehabilitation treatment has the desired effect, the member should not require further intervention. Alternatively, if rehabilitation is unsuccessful, authorisation for the appropriate hospital admission is provided.

Members may choose whether or not to consult DBC as part of the process, but should they choose not to consult DBC a R5 000 co-payment is levied for any admissions for spinal fusion or laminectomy. There have been relatively few co-payments levied, as members acknowledge the advantages of conservative treatment.

Approximately 60% of members who have used DBC consulted with them directly, while 20% were referred to DBC by general practitioners. The remaining 20% were referred by specialists.

Calculation of initial capitation fee

The initial capitation fees were based on the average of in-hospital back-related claims costs over the four-year period from 2006 to 2009. This long period was used to reduce volatility by using a longer-term average. Claims in each year were adjusted for inflation in order to obtain comparable numbers in real terms.

The purpose of the incentives was to transfer only the back-related risk. The current cost of back-related hospital admissions was therefore determined which would form the “income” for the risk-taker (Resilience Health).

Back-related claims included the full hospital cost plus any associated in-hospital provider costs and prosthesis costs, using the Medscheme Hospital Account Summary (HAS) database referred to above.

Allowance was made for the impact of a large group of young, low-income employees who joined Sasolmed during this period, as this group was expected to generate lower back-related costs than existing members, on average.

The capitation fee was adjusted to allow for the actual start date of the contract (August 2010). As there is a fairly regular seasonal variation in back-related claims, a full-year average would not have been appropriate for the first five months (August to December 2010).

A decision was also made to limit the maximum amount per claim, with Sasolmed retaining the excess to avoid distortions in the capitation fee and profit calculations. It was also assumed that claims exceeding this limit were due to complications that would not be reasonably controllable. These often included motor vehicle accidents and were not directly relevant to the programme.

Calculating annual increases in capitation fees

At the beginning of each calendar year, the capitation fees are increased to allow for inflation. This inflationary adjustment is carried out according to a formula defined in the contract which is based on:


respect of prostheses)

No allowance for increased utilisation is made in the calculation of this adjustment. From year two to six, a constant reduction factor is applied to the capitation fee after the inflationary adjustment is added.

The large claim limit is also indexed for inflation each year.

Aligning financial incentives

The purpose of the incentives was to transfer only the back-related risk. The current cost of back-related hospital admissions was therefore determined which would form the “income” for the risk-taker (Resilience Health). This “income” would be used to fund all back-related costs, including in-hospital costs and rehabilitation costs.

The initiative faced a significant challenge in that Resilience Health did not have significant capital at their disposal. The total in-hospital back claims for Sasolmed amounted to approximately R34 million per year. Transferring these funds to Resilience Health would have created a significant financial risk to Sasolmed had Resilience Health become unable to meet their obligations under the contract.

To avoid this risk, it was decided to use a virtual capitation fee arrangement, in place of the traditional approach. Under this arrangement Sasolmed initially funded all in-hospital back-related claims as well as the out-of-hospital rehabilitation costs. At the end of every quarter, a profit/loss calculation is performed and the net result paid by the relevant party.

If a profit was generated, this would be paid to Resilience Health, while a loss would be paid to Sasolmed.


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The calculation included an allowance for outstanding claims (both in– and out-of-hospital), based on methodology as agreed between the parties. The profit calculation is always carried out on a cumulative basis, to allow any over- or under-estimation from previous periods to be corrected.

The profit/loss for the period to date was calculated as: the notional capitation fees
less in-hospital claims
less out-of-hospital rehabilitation claims

= profit or loss

From this profit or loss, any payments already made under the contract was deducted, and only the balance is payable to the relevant party.

Advantages to Sasolmed

The annual increase in capitation fees makes no allowance for increased utilisation. This is normally a significant additional source of claims cost increases and should be seen as a cost saving to the scheme.

From the second year, a constant reduction factor is applied to the capitation fee after the increase has been calculated, so that the scheme sees a real reduction in their back-related claims costs over time.

If the programme achieves its promise of better health outcomes, members should also be more satisfied with the services received, and be less likely to complain about related matters. This therefore assists Sasolmed in meeting its goal of providing valued employee benefits to its members and their dependants on behalf of the employer.

Results to date

As at the date of writing there have been seven quarterly profit calculations. Of these six were positive and one negative.

Figure 1 below shows the real hospital claims per life for each month (adjusted for inflation to be comparable).

Figure 1: Real hospital claims plpm



Real Cost plpm (Smoothed)

Real Cost plpm (Unsmoothed)

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Smoothed claims in Figure 1 are taken as the average per life per month for each year from August to July (to correspond with the start date of the contract).

Table 1 below shows the reduction (adjusted for membership) in claim frequency observed in the year following the introduction of the programme.

Table 1: Reduction in claim frequency

Projected profit/savings

Looking ahead and based on the experience to date, we can estimate the ultimate profit Resilience Health is expected to earn from the arrangement, as well as the cost savings Sasolmed is expected to realise. To calculate these figures, some assumptions are required:

programme had not been introduced, assumed at

2% p.a. from 2010 onwards.

in the claims frequency of 5% p.a. is assumed from 2012 onward.

Figure 2 below illustrates the results of this projection graphically.

The blue area in Figure 2 represents the savings to Sasolmed resulting from the introduction of the programme.

The red area in Figure 2 represents the profit made by Resilience Health in exchange for accepting the risk under the programme.

The purple area in Figure 2 represents the cost of rehabilitation claims.

Figure 2: Projected profit/savings

Based on the assumptions, over the course of the six-year contract (ignoring discounting), Sasolmed is expected to save approximately R48 million while Resilience Health is expected to show a profit of approximately R20 million. These results are sensitive to the assumptions made above, and a range of outcomes are possible depending on how actual experience differs from the assumptions made.

Resilience Health’s profit is particularly sensitive to the hospital admission rate assumption, from 2012 onwards. Table 2 below illustrates how their profit varies based on different values for this variable.

Table 2: Resilience Health profit sensitivity

Spinal fusion


Back and neck pain





Change in claim frequency pa

Profit (Rm)















A reduction of approximately 1% p.a. from 2011 levels is required going forward for Resilience Health to break even over the remainder of the contract.

Sasolmed’s savings are relatively protected, since the capitation fee increases are predefined. The key variable here is the assumed level of utilisation from 2010 onward, had there been no programme. Table 3 below illustrates how the scheme’s savings would vary based on different values for this variable.


-5 -4 -3 -2 -1 1 2 3 4 5 6

Claims w/o intervention

Capitation Fees

Hosp Claims & Rehab

Hospital Claims

Year (1 = 1st year of intervention)

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Rand Millions


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Table 3: Sensitivity of scheme savings

Utilisation p.a.

Profit (Rm)











In this context, even if there were no future utilisation increases, Sasolmed would realise a saving of more than R31 million, due to the reduction factors applied to the capitation fees.

Further benefits

To date, more than 170 Sasolmed members have avoided intensive back surgery (spinal fusion and laminectomy) and over 1 000 members have undergone conservative back rehabilitation through DBC. Assuming a two-month recovery period, the employer has saved approximately 28 working years in terms of employee productivity.

Sasolmed is likely to see other back-related costs reduce over time, including, for example, the medication required for ongoing treatment, radiology costs and physiotherapy costs. These benefits have not been quantified as part of this exercise. It is also noted that the incidence of hip replacements has reduced by 40%. However, it is unclear whether this is related to the programme or not.

Risks to the scheme

The key risk of the arrangement is the entire deal unravelling and that the savings will not be realised. If the back admission rate does not reduce, Resilience Health is unlikely to be able to fund the downside risk. The maximum protection Sasolmed has is the bank guarantee of R3,5 million.

These risks are however mitigated by monitoring the programme monthly, including monthly draft profit statements – even though these are only settled quarterly.


In summary, collaboration by the various parties has resulted in what appears to be a win-win situation:

admissions (at least 170 fewer)

Conservative back treatment appears to reduce the incidence of members requiring back surgery, and significantly reduces the overall cost of treating chronic back pain.