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How healthy are SA medical schemes?

Rising costs, higher claims, aging profiles of membership and the prospect of the introduction of NHI lurking around every corner... Are medical schemes in trouble? Here's a look at the vital signs of medical schemes, the symptoms, the diagnosis and the prognosis for a healthy future.
One of the most important vital signs in a medical scheme is the claims ratio and 2009 saw unusually high claims pushing up the ratio. However, many schemes introduced measures like benefit reduction, co-payments, stricter protocol management, provider network arrangements like DSP's and referral management in order to curb costs. These measures have been proving successful and 2010 and 2011 saw a recovery in risk claim ratios.

Size counts

The larger the scheme the better the chance of long term sustainability because:
  • There is a more diverse and usually favourable risk pool
  • Greater stability in claims experience results in predictable costs which in turn translates into competitive increases year on year
  • Economies of scale should drive down administration costs
  • Greater bargaining and negotiating power with service providers

The membership profile of new members is also critical - increasing membership with pensioners is not going to create a healthy scheme.

Age profiles

Open medical schemes show a slight increase in age profile, which is also somewhat higher than closed schemes. It's as a consequence of mandatory membership in closed schemes, which emphasises the importance of attracting young and healthy members for open schemes to improve their profile. If a scheme ages by a year every year long term sustainability is an issue, which could ultimately put pressure on schemes to seek merger opportunities.

Rising claims

Overall expenditure from the risk pool increased by just under 10%, and expenditure on hospitalisation and GP's increased in line with this. However, expenditure on specialists increased by 13.6% from R17.1 billion to R19.5 billion. This will increasingly result in medical schemes driving patients back to their GP's via, for instance, a referral strategy.

Another issue that needs to be addressed is the mind boggling number of 2.3 million private hospital admissions in 2011 - that's 197 000 per month!

So are the schemes fiscally fit?

It is encouraging that open schemes have improved from a loss in 2009 of R1.7 billion and half a billion in 2010 to a R47 million deficit in 2011. However, this was driven largely by the reduction in the non-healthcare expenditure and introduction of measures mentioned at the outset. That the schemes are still under pressure is evidenced by the fact that only 11 of 26 schemes showed net healthcare surpluses before taking into account the investment income. After factoring account investment income, open schemes posted a healthy R1.9 billion surplus and only three schemes failed to post net surpluses on this basis.

The low down on surplus

Regulations require schemes to hold accumulated funds of exactly 25% of gross premium income. This acts as a buffer against unexpectedly high claims due to factors like membership profile changes, large individual claims or a catastrophic event. Accumulated reserves are a good indication of the security available within a scheme and their ability to meet claims from individuals.

And the apparent paradox

We must remember this is only a guide. If the scheme is experiencing rapid membership growth with a good profile, which is good for the scheme, ironically it will dilute the reserves which can drive it to under 25%. Conversely a scheme losing members who have a good profile, which is bad for the scheme, will experience a release in reserves and reserve levels will increase". The Council for Medical Schemes (CMS) is currently engaging the industry to refine the statutory solvency levels based on things likely underlying risk profiles. This will lead to more appropriate reserve levels and therefore enhance capital efficiency. There is over R16 billion across the open medical schemes in surplus and more appropriate reserve levels would allow excess funds to be put to better use.

What happens if the solvency rate is below 25%

Medical schemes with a below 25% solvency are monitored against their business plans - submitted to the CMS - which demonstrate the plan to get back to 25%.

Reducing non health care costs

The Council continues to pay particular attention to non-health care expenditure. They want to move schemes towards a non-healthcare cost of 10%. Based on the 2012 Global Credit Rating Bulletin - there is a steady decline in non-healthcare costs in real and nominal terms. This is encouraging news for members as there will be more money for claims and reserves which will result in lower increases.

Consolidation is the new trend in open schemes

There is definitely further concentration of members into fewer medical schemes, and this trend is likely to continue as particularly the smaller schemes seek opportunities to gain scale.

The elephant in the room - rising costs

Medical scheme inflation is consistently above CPI and last year's average was in excess of 9% across all medical schemes and this has been the case again this year. The problem with increases that are consistently higher than inflation, is that members are more inclined to buy down, especially if their salary increases don't keep pace with medical scheme increases. The problem is that if increases are higher than inflation members are more inclined to buy down. The Council targets CPI plus 3% but schemes will be under pressure to meet this.

The Treatment for high contribution costs

  • There will be ongoing / increased focus on provider networks
  • Expect to see more consolidation - strong schemes will continue to gain strength
  • Ten years ago the 5 largest schemes made up 50% of members now they make up almost 80% of the market
  • PMB claims will need to be effectively managed
  • Governance controls must be strengthened
  • Look to capitalise on the potential positive spin-offs on developments in Public Healthcare sector

In spite of the relative stability in the industry medical schemes are facing serious challenges which will impact on their viability going forward. The Pricing Commission proposed by the Department of Health will help schemes address rising costs, but there are systemic issues which need to be addressed in the healthcare system as a whole like, for instance, converting the system from a predominantly curative one to a preventative one.

We are sometimes prone to silo thinking, but need to remember the private health care system is part of a bigger macro picture, and positive developments in the public sector will have a positive knock on effect in the private sector. We therefore keenly anticipate feedback on the 10 NHI pilot sites across the country and also to hear about the progress of the re-engineered primary health care system.

The patient might not be on the critical list, but neither is it out of danger...

About the author

John Cranke is the head of Healthcare at PSG Konsult Corporate.