Medical schemes not at rock bottom, yet – CMS

A look at the financial sustainability of a medical schemes.

Medical schemes are financially safe and able to cover member claims, says Elsabé Conradie, head of stakeholder relations at the Council of Medical Schemes (CMS). Her comments come after the worse-than-expected release of recent industry results.

Registered medical schemes incurred a net healthcare deficit (before taking investment and other income into account) of R4.3 billion by the end of September 2016, a quarterly report from CMS shows.

When investment and other income are included, the deficit is reduced to R746.0 million, but is still way off the budgeted surplus of R352.3 million. It in fact represents an actual to budget variance of 311.8%. 

It took some time for members to digest these results, which were released in February. For those who are not actively following the highs and lows of the industry, it seems as if medical schemes are on the point of hitting rock bottom.

However, things are not so dire. Marcel du Toit, chief executive of Optivest Health Solutions, says although the deficit was higher than expected, schemes countered this with adjusted benefits and a higher than usual increase in contribution levels for 2017 (for open schemes the average increase was 12.1%).

“Furthermore, the average solvency level was 29.7% at the end of September, which is still above the required level of 25%,” he says.

Seven schemes didn’t meet the required 25%, but Conradie says the CMS meets regularly with those Boards of Trustees for review to ensure they have business plans in place to promote growth and sustainability. “We monitor them very closely.”

The solvency ratio is determined by a scheme’s membership growth, claims and healthcare expenses and investment income. Fast-growing schemes may have difficulty meeting the required level and sitting below the expected ratio doesn’t necessarily mean the scheme is having financial difficulties.

Conradie says members should also keep in mind that solvency levels often fluctuate according to claim cycles. “Schemes are often only periodically below the required level in line with their claims cycle.” 

The most sustainable

Alexander Forbes Health developed a Medical Schemes Sustainability Index to measure the financial sustainability of a medical scheme. The latest index shows Polmed, Samwumed, LA Health, Discovery Health Medical Scheme (DHMS) and Sasolmed as the most sustainable in the industry. 

The index takes into account the scheme’s’ size, membership growth, the change in age of beneficiaries over time, the annual operating result per beneficiary, the change in accumulated funds per beneficiary, the scheme’s actual solvency relative to the statutory requirement, as well as the scheme’s solvency trend.

Using a base year of 2006, these factors are considered for each of the years from 2007 to 2015 with the final index score reflecting the cumulative impact over this period.

Bankmed, Fedhealth, Medihelp, Sizwe and Medshield are the rest of the top ten open and restricted schemes on the Alexander Forbes Health Sustainability Index: 2014 and 2015.

The medical schemes are ranked from highest to lowest to give an indication of their relative sustainability.

Source: Alexander Forbes Health Diagnosis 2016/2017

The financial strength of a scheme can also be measured by its claims paying ability, which is rated by an independent credit rating agency, such as Global Credit Ratings (GCR). 

Not all schemes are rated, but the GCR ratings for some of the larger schemes are:

  • DHMS AA+(ZA) Stable
  • Momentum AA (ZA) Stable
  • Medihelp AA-(ZA) Stable
  • Medshield, AA-(ZA) Stable
  • Fedhealth AA-(ZA) Stable
  • Bankmed AA+(ZA) Stable
  • Transmed BB+(ZA) Stable
  • Siswe A+(ZA) Stable

More mergers expected

Over the past decade there has been a significant increase in the number of amalgamations between schemes, with stronger ones swallowing the small. The number of registered medical schemes decreased from 122 in 2007 to 83 in 2015, according to the CMS Annual Reports.

“The most recent example is Liberty Health which, struggling to build a younger membership profile and maintain reserves, amalgamated with Bonitas,” says Du Toit.

He expects the amalgamation trend to continue, but says that members should not be adverse to becoming part of a larger scheme.

“The critical mass of larger schemes protects them financially. Medical schemes work on the concept of cross subsidisation, older members with higher claim ratios are subsidized by the younger and healthier members. The larger the membership, the larger the risk pool of the fund.”

Du Toit says smaller schemes who struggle to build a younger membership base are not viable over the long term.

“They can only increase premiums and carry the cost of their ageing membership profile up to a point. When their reserves stay under pressure, members should ask for an amalgamation with a stronger and larger scheme,” he says.

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And as soon as they start clamouring for amalgamation with larger schemes, they will fall foul of the competition (anti-trust) law. They are over a barrel whichever way they look!

End of comments.



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