29 October 2012

How your scheme spends your money

Your medical scheme costs you a fortune. If you've wondered where all the money goes to, here's the answer. Here's how medical schemes spend your contributions.


While most medical scheme members are very aware of annual increases in their contributions as it directly affects their pocket, more often than not they are ignorant about the ‘inner workings’ of their medical scheme and how/on what their contributions are spent.

“As custodians of our members’ contributions, it is first and foremost our duty to facilitate the best quality healthcare possible, taking their financial means into account. Members also need to remember that all profits go to themselves in the form of reserves or to keep future contribution increases as low as possible,” notes Liberty Medical Scheme Executive Principal Officer Andrew Edwards.

With regard to annual premium increases, he points out that in an environment where the main focus tends to be on spiralling healthcare costs, it is often overlooked that over the last five years, the quality and standard of healthcare in private facilities have also vastly improved. This can be ascribed to major technological improvements.

In total, medical schemes collected R107,4bn in contribution income in 2011, 87,2% of which was spent on claims.

Restricted schemes (company schemes for employees) spent a significantly lower proportion of contribution income on expenses (7.7% compared to 13.7% in open schemes). This is not unexpected as these schemes do not incur significant marketing and distribution costs and are generally simpler to administer (and hence attract lower administration fees), a healthcare consultant point out.

Schemes also derive income from investment activities, and are required by law to maintain a minimum reserve level (solvency ratio) of 25% of its premium income.

Claims, expenses
While increases in expenses, have, on average, been lower than CPI inflation, the average increase in claims costs per beneficiary continued to exceed average CPI inflation (5.0%) by more than 2.6%, according to the 2011 annual report of the Council for Medical Schemes (CMS). 

Several of medical scheme options offer a savings facility for scheme members to pay a fixed sum up to a maximum of 20% of their gross contributions into a savings account, so as to help pay the members’ portion of healthcare costs. Unexpended savings amounts are accumulated for the long-term benefit of members and interest is paid on the balances at the rate decided by the Trustees from time to time. Interest is charged on savings advanced to members, as per the rules of the Scheme and the Medical Schemes Act. 

In terms of claims expenditure, the annual report shows that hospitals, at 36,6% of claims costs, continue to account for the biggest share of gross claims paid by medical schemes. Per member per month amounts paid to mostly private hospitals increased by 7,1% from 2010 to 2011.

Medical specialists accounted for 22,8% of claims expenditure, followed by medicines at 16,3% which was relatively low due to the fact that the Single Exit Price (SEP) which mandates that medicine manufacturers may only sell their products at one price to all their customers, regardless of the nature of the customer’s order size and consumption levels, did not increase in 2011.

General practitioners accounted for 7,3% of claims paid, and dentists for 3,5%.

The prevalence of, and therefore expenditure on, chronic conditions (included on the list to which Prescribed Minimum Benefits apply) increased significantly from 2010 to 2011 with prevalence increasing for most major chronic conditions and hypertension topping the list.

Regulation 8 of the Medical Schemes Act stipulates that medical schemes must pay for the diagnosis, treatment and care of all PMB conditions in full, without any co-payment from the member. Despite a number of court applications to mitigate the open-ended liability created by PMBs the status quo is still applicable.

Non-healthcare costs
Fees paid to administrators constitute the biggest share of schemes’ non-health expenditure, with open schemes paying on average R52 per principal member per month in broker fees in 2011 as opposed to R49 in 2011. This equates to R2.11 of every R100 of contribution income.

Other non-healthcare costs are incurred by marketing activities (mostly for open schemes), administration, managed care fees, trustee remuneration.

In instances where medical schemes do manage to make a profit, this goes straight back to the scheme, contributing to the solvency ratio/scheme reserves and assisting to keep premium increases to a minimum.

“Unfortunately, mainly due to high claims costs,  on an annual basis many industry schemes do not show a profit, and as a result they have to rely on their reserves to compensate for the operating deficit,” Edwards concludes.

(Press release by Liberty Medical Scheme, October 2012) 

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