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In spite of the operating loss, a total net surplus of R907,8 million was recorded, thanks to revenue from investments and other sources.

This year is the third year in which the industry has reported an underwriting loss.

Mr Rod Leerkamp, head of actuarial and technical consultancy services at Alexander Forbes Health, says a number of factors contributed to the losses. One of these is the guideline of the Registrar of Medical Schemes (RMS), which stipulates that the increase in member contributions may not exceed CPIX by more than 3%, while the increase in claims expenditure exceeds this.

According to Leerkamp it is a worldwide phenomenon that medical inflation exceeds CPIX. He explains that tariff and cost increases as well as utilisation and demographic changes are the major drivers of the cost increases.

"The increases of service providers, excluding hospitals, are usually in line with CPIX. Hospitals' increases are usually higher and are in the region of 8% to 9% this year. As hospital claims account for the majority of claims, it means that these tariff increases already exceed CPIX.

"Another cost factor is the ageing members of many schemes. One year of ageing adds approximately 2% to 3% to claims expenditure. Technology advances also result in more expensive care and procedures, as well as an increase in the utilisation therefore, for example scans. This adds about half a per cent to claims expenditure annually."

Building reserves
One other factor is the requirement that schemes must build up reserves. "Schemes must maintain a solvency margin of 25% of contributions. Schemes the solvency margin of which is lower, must provide for an additional levy in their contributions in order to build up their reserves to the required level.

"Owing to competitive pressure the contributions of many schemes are not sufficient for the settlement of claims and they therefore use their reserves to make up shortfalls. This cannot continue, as these schemes will gradually have to revise their contributions upwards in order to survive."

Increases and reductions in benefits obviously also result in increases and reductions in members' contributions. Ms Heidi Kruger, head of communication at the Board of Health Funders (BHF), believes the problem is basically that claims are substantially higher than the contributions received. Medical schemes then have to use their own reserves to cover the shortfalls.

The total gross income from contributions for all medical schemes amounted to R38,3 billion in the first nine months of 2007, according to the RMS. The gross contribution per average member was R739. The gross claims per average member per month amounted to R667,4. This is without additional expenditure for which schemes must make provision.

Too many benefeiciaries not good for reserves
Mr Louis Botha, head of Absa Healthcare Consultants, says the increase in the number of benefiaries of medical schemes to 7,4 million could also put pressure on reserves. Reserves usually come under pressure when membership increases, as new members' contributions to reserves only become noticeable in time, whereas they start claiming straightaway.

"The major reason for the increase in membership and beneficiaries is probably the growth of GEMS, the state's medical fund. It is strongly driven by the government's favourable subsidy policy, which offers public servants not previously covered the opportunity to become members and include their dependants as well."

According to Botha the growth of GEMS has had a negative impact on some open schemes, as they not only lose members to GEMS but also often end up with a less favourable risk profile as apparently it is the younger members who prefer to join GEMS.

"In general, medical funds are also exposed, as they have to comply with prescribed minimum benefits (PMBs), which virtually amounts to the principle of an open cheque book. No protection has yet been implemented for medical schemes, as was initially intended with a risk-equalisation fund or a policy of compulsory contributions."

Botha says it seems as if medical schemes in general are not succeeding in concluding meaningful agreements with private hospital groups. 'As there as so few hospital groups and so many schemes, the schemes' bargaining power is less, especially in the context of the existing competition rules.'

Reasons for high private healthcare costs
At an information sessions during the past week, Dr Manto Tshabalala-Msimang, the minister of health, told the portfolio committee for health that the major cost driver in the private healthcare sector was the costs of private hospitals, specialist and administration.

"One of the reasons for the high costs is the inability of medical schemes, and the smaller ones in particular, to negotiate reasonable tariffs with large providers such as private hospitals. We are currently investigating legislation that will result in fair negotiation between medical schemes and providers.

"An amended medical schemes act will be tabled this year. It will strengthen the governance structures of medical schemes and make trustees as well as the heads of schemes more accountable for the administrative expenses of schemes," she said.

However, Leerkamp says that increases in non-claims expenditure such as administrative fees are generally in line with CPIX or lower, and do not contribute to increases that exceed CPIX.

Letitia Watson, Sake Rapport

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