10 April 2013

Fewer schemes in SA

As South Africa’s medical scheme industry continues to consolidate, with smaller schemes either being liquidated or absorbed into bigger players.

As South Africa’s medical scheme industry continues to consolidate, with smaller schemes either being liquidated or absorbed into bigger players, consumers could benefit from more competition and downward pressure on the cost of medical cover. 

“We’ve seen the number of registered schemes drop from 120 in 2008 to 95 in 2012,” says principal officer of Resolution Health Medical Scheme, Mark Arnold. 

“This trend is likely to continue over the next few years.”

He says consolidation of small schemes into bigger ones is beneficial to the industry as larger schemes have more negotiating power with service providers such as hospitals and doctors.

“Medical inflation has been running at about 3% higher than general inflation (CPI) with factors such as technology and a shortage of skills driving up costs. However, smaller schemes don’t have much bargaining power in this set-up,” adds Arnold.  “Larger open schemes can use economies of scale to drive down costs across the board.”

Due to the limited number of healthcare practitioners, combined with a lack of competition in the private hospital market, very few solutions exist for schemes to manage down these costs.  Prescribed Minimum Benefits (PMBs) are a particular concern as schemes are legally obliged to cover these costs at whatever tariff the healthcare provider charges. 

“Larger schemes are in a much better position to set up Designated Service Provider (DSP) networks, through which they negotiate better pricing with a group of hospitals by offering them a higher volume of patients,” he adds.

Arnold says the large uptake of benefit plans offering members services at a particular DSP indicate that consumers are ready for innovative products that bring down premiums. 

”Many members choose to be limited to a network of hospitals in a particular area, for example, if their monthly contributions are lower.”

Smaller schemes still has a part to play

However, he says, only when the medical scheme market isn’t dominated by two or three large players, will consumers really benefit from competition amongst medical schemes.

“The trend of consolidation is likely to continue until the market is left with only 10 – 14 large open medical schemes with 100 000 to 1m members each,” he adds.  “This should lead to downward pressure on administration, and ultimately healthcare costs.”

He explains that, in the current environment, schemes of less than about 27 000 members find it difficult to compete. Smaller schemes can get caught in a “death spiral”, where they find it challenging to attract younger, healthier members.  As the membership ages, so claims escalate and the scheme is forced to increase premiums, leading more young people to leave. 

“Smaller schemes simply don’t have the budget to attract new members, which not only requires huge spending on marketing, but also investment in behind-the-scene processes such as developing managed care protocols, R&D and making claims processing more efficient,” says Arnold.

In addition, brokers are concerned about the long-term sustainability of smaller schemes and tend not to promote them to their clients. 

Arnold says smaller schemes of below 27 000 members still have a place in the South African medical scheme landscape, but are likely to serve niche geographical areas – such as Cape Town or Durban.

The consolidation process has also affected thousands of members of closed schemes, which have seen a significant reduction in reserves as their membership numbers fall and age profile worsens. 

However, he says, liquidations of small schemes should be a last resort.

“In a liquidation, the scheme’s reserves are paid out to members, who may not spend the money on healthcare and the funds are then effectively lost,” Arnold explains.  “A merger, on the other hand, ensures that the reserves are taken across to the new scheme, contributing towards the stability of the overall industry.”


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