Why schemes are so expensive

Sound financial governance, not profit, is behind increases in medical aid contributions as schemes strive to maintain solvency ratios, contends Kevin Aron, MD of Medscheme South Africa. 

Medscheme is South Africa’s largestmanaged care and medical scheme administration services provider, looking after the healthcare needs of more than three million people. 

Aron’s comments come as 2012 increases in medical aid contributions have generated public debate, with many people arguing that benefits have shrunk while costs have risen above general inflation. 

Recent increases above CPI

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.

“It is therefore important to understand that annual increases are based on sound financial governance and not on profit motives,” he says.

Medical schemes not for profit

“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 scheme must still be sustainable.”

He says the drivers of high healthcare costs are complex and points out that the fact that healthcare inflation outstrips general inflation is not a purely South African phenomenon but an international trend.

He notes that 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.

Many different cost drivers

“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.”

He says that 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,” he says.

Specialists and PMBs 'expensive'

Also, given South Africa’s shortage of specialists, it is only natural that costs will be high, he says.

Another driver of healthcare inflation relates to prescribed minimum benefits(PMBs), which account for a significant portion of most schemes’ healthcare expenditure.

“As these must be covered in full, schemes have very little control over these costs.  Providers are not currently limited in terms of what they may charge for these services, so fees are facing upward pressure well in excess of general inflation.”

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, he says. 

Ageing members cost more

“It has been exhaustively proven that as medical scheme membership ages, increased utilisation is expected.  Most schemes therefore must make allowance for increased utilisation due to an ageing membership.  For every year that the membership of a medical scheme is expected to age, average claims costs per beneficiary is expected to increase by an additional 1% to 2% above medical inflation.”

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, says Aron.

Maintaining reserves costly

“In the current low inflation environment, investment returns cannot be relied upon to maintain the required solvency ratio, particularly as medical schemes are required to invest their assets in more conservative instruments (mainly cash and cash equivalents), where returns are expected to be stable, but toward the lower end of the spectrum.

“This means that a medical scheme must generate a surplus in order to maintain (or build, in many cases) its solvency ratio, in addition to funding its claims and expenses.  As an example, a scheme with a current solvency ratio of 30% that requires an increase of 6% in order to achieve a break even position in the following year, would require an additional 2.6% in order to also maintain its solvency ratio at 30%. 

“Smaller schemes ideally require solvency ratios significantly above the 25% minimum in order to minimise the risk of claims volatility leading them to breach this minimum level.  As the target solvency ratio increases, so does the additional contribution increase required to maintain it.  This undoubtedly contributes to annual contribution increases being above the general inflation rate.”

While many people may be considering stopping their medical aid cover because of the costs, Aron maintains that it is still worthwhile for people to have a health insurance to cover themselves against the unexpected. 

(Based on a press release from Medscheme, February 2011)