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12 August 2013

Government employee members posing significant risk to open medical schemes

A significant challenge for a number of open medical schemes in South Africa is their exposure to Persal membership.

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A significant challenge for a number of open medical schemes in South Africa is their exposure to Persal membership, potential members of the Government Employees Medical Scheme (GEMS). Schemes that do not take an active approach towards reducing their exposure could face major ramifications on their long term sustainability.

This is according to Mark Arnold, Principal Officer at Resolution Health Medical Scheme (Resolution Health). “While the financial benefit of government employees is that they tend to be low claiming members as they often have less access to doctors and medical specialists, they also pose a substantial risk to medical schemes. Currently, the majority of new government employees will choose to join GEMS, which is a closed scheme, as they are given a tax subsidy that is unavailable to them if they join another scheme.”

“However, many existing government employees already belong to a range of other open schemes. A key concern is that Government may institute a requirement for all of its employees to transfer to GEMS, resulting in certain schemes not only losing a large percentage of their membership, but also face losing a large portion of their lowest-claiming members. This movement  could have a hugely detrimental effect on the financial health of the scheme.”

As a result, he says it is critical for medical schemes to actively pursue ways to reduce their exposure to GEMS either by attracting new members or by consolidating with other schemes to increase their membership of non-Government employee members. “In fact, we would expect to see further consolidation in the industry over the next 12 months with the number of open schemes reducing from 27 to 23.”

He notes that even some of South Africa’s top 10 largest open medical schemes have not managed to successfully reduce their exposure, and subsequent risk, to Persal membership.

Arnold says Resolution Health has placed a strong focus on reducing its exposure to Government employee members and has successfully reduced its Persal membership from 29% in 2010 to 12% as of April 2013, with a further reduction being a key part of its strategy going forward.

“Ideally, a medical scheme should aim to have Persal membership of below 10%, which is certainly the long term strategy at Resolution Health. However, it is important to view this in context of the scheme’s own demographics. If a scheme has predominantly older members who are likely to claim more, then the GEMS-exposure should be 5% or less, while a scheme with healthier and younger members could have as high as a 15% exposure.

Arnold notes that the average claims ratio for South African open medical schemes tends to be around 84%, with a further 15% often paid out in non-healthcare costs, leaving schemes with a tight margin. The claims ratio among government employees or GEMS members, however, tends to be far lower at around 60%.

“One of the challenges that smaller medical schemes with a high GEMS exposure face is the fact that they struggle to grow organically, particularly with regards to increasing their non-GEMS membership base, so they need to identify an appropriate amalgamation with a scheme that can absorb their GEMS members, highlighting the advantage of the low claims ratio,” says Arnold.

He also notes that many medical schemes with a big exposure to GEMS have a distribution network that operates predominantly within the Government employee market. “For healthcare consultants, it is important to consider a medical scheme’s exposure to GEMS prior to signing up new members, as this could serve as a key indicator of the scheme’s long-term viability.”

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