Medscheme explains cost increases

Even though recent increases have been above CPI, Aron points out that the schemes under management by Medscheme have, in contrast to industry trends, have all effected single-digit increases and kept benefits largely unchanged. However, he warns that due to various factors, medical schemes are increasingly under pressure to raise contributions.

"We understand that issues related to healthcare funding are important to the general public. Hard-earned money is spent on monthly contributions to medical schemes. Peace of mind that these contributions will provide cover for acute and chronic medical conditions is as important as investment in education and security," Aron says.

Schemes are strictly governed by law

By law, medical schemes are non-profit entities established for the benefit of members. They are managed by a board of trustees elected by the members and the entire medical scheme strictly governed by law and overseen by the Council for Medical Schemes to ensure members are treated fairly. The real issue is that medical schemes must still be sustainable.

The drivers of high healthcare costs are complex and the fact that healthcare inflation outstrips general inflation is not a purely South African phenomenon but an international trend. Primary among the causes of higher medical inflation are the escalating costs of hospitalisation and private healthcare, the fees of medical specialists as well as administration costs.

In many instances medical schemes are price takers when it comes to hospital costs, as they do not have significant bargaining power when negotiating hospital fees. However, schemes also operate in an environment where the same hospital provider charges different tariffs to different schemes. Unless this issue is addressed, even low tariff increases for a scheme that is currently paying too much relative to the market, would lead to unnecessarily high member contribution rates.

Salary increases in excess of inflation rate

While administration costs are not directly related to medical costs, a majority relate to healthcare administration and risk management staffing. "A significant proportion of these staff consists of highly trained professionals, and they have to be remunerated appropriately in order to retain them. In recent years particularly, salary increases have been well in excess of general inflation, and employers offering their staff less, risk losing them to competitors and becoming unable to offer the services they have been contracted to provide," Aron says.

Aron argues that another important contributing factor is that the overall age profile of medical scheme beneficiaries has not changed dramatically in recent years. Currently the only significant source of new membership in the industry is the Government Employees Medical Scheme (GEMS). When GEMS membership is excluded from the analysis, the remaining medical scheme population is virtually static, and as a result gradual ageing is evident.

Another important consideration by medical aid schemes in increasing fees is the regulatory reserve requirement. These reserves are to ensure that members have the security of solvent medical schemes capable of paying their claims. The legislated 25% solvency ratio - accumulated funds divided by annual contributions - must be maintained and medical schemes have to take this into account in their annual contribution increase calculations.