Healthy diagnosis for SA medical schemes despite tough year

If you’re a member of one of South Africa’s largest medical schemes, whether open or restricted, you can be confident that it has sufficient reserves to pay your claims.

This is according to the Alexander Forbes Health Medical Schemes Sustainability Index which tracks the performance of medical schemes and providing a comparative assessment of future sustainability of schemes.

The reason schemes keep reserves is to cushion them in bad years, when members’ claims are high. 

The index is published as part of Alexander Forbes Health’s Diagnosis, an annual publication that analyses key trends in the medical schemes industry from 2000 to 2018. It is calculated from a base year of 2006 and considers a scheme’s membership size, membership growth, average beneficiary age, operating results, accumulated funds per beneficiary, and trends in the scheme’s solvency levels. 

“In the open schemes industry, the sustainability index for the top 10 schemes has improved from 2017 to 2018, mainly due to stability in the membership profile and growth in the level of reserves per beneficiary,” Roshan Bhana, the head actuary at Alexander Forbes Health, says.

The 79 medical schemes operating in South Africa at the end of 2018 served a total of 4.04 million principal members and 8.92 million beneficiaries.

According to Diagnosis a total of 26 of 79 schemes (32.9%) achieved an operating surplus in 2018. By comparison, 43.8% (35 of 80) of schemes achieved an operating surplus in 2017. 

The biggest increases in the sustainability index for 2018 were observed for the Government Employees Medical Scheme (Gems) and Hosmed, which improved their 2017 scores by 27.4% and 15.3% respectively. 

Gems generated a significant surplus (its revenues exceeded its claims and expenses) during both 2017 and 2018, the index shows.  

Gems also grew its market share to 17%, with just over 13,000 principal members joining in 2018. Discovery, which experienced net growth of 27,427 principal members, remains the biggest player with 33% of the market.

Only three of the top 10 open medical schemes achieved an operating surplus, while the rest had to rely on investment income and in some cases reserves to cover claims and expenses, Bhana says. The open schemes industry overall incurred a deficit of R1.33bn in 2018, down from the operating surplus of R1.09bn generated in the prior year.

Medical schemes in South Africa are not-for-profit entities. Administrators and other entities that provide services to a scheme are for-profit. 

Restricted schemes fared better, with six of the top 10 schemes achieving an operating surplus in 2018. The restricted scheme industry experienced a stable claims ratio from 2017 to 2018, on the back of which an operating surplus of R2.55bn was realised.

However, the industry as a whole experienced a high claims ratio in 2018, with some of the largest schemes failing to break-even at an operational level, Bhana says.

A “claims ratio” is the percentage of money the scheme collects that is used to pay your claims. 

The risk claims ratio for all schemes increased from 88.7% in 2017 to 90.2% in 2018. 

Bhana says operating results in the industry seem to follow a cyclical pattern. “Medical schemes rely on the surplus generated in prior years to subsidise adverse claims experience, which creates some variation in financial results from year to year.”

The increase in claims ratio is one reason open scheme contributions increased well in excess of CPI inflation for 2019, as it required schemes to budget for a worsening claims profile in their pricing. Another factor that directly impacts the cost members have to bear through additional contribution increases is the impact of fraud, waste and abuse.

Medical schemes have announced increases for next year averaging about 9.1% but depending on your option your increase could be as high as 12%.

One of the most important contributing factors to a scheme’s performance is the risk profile of its members, including average age of beneficiaries, pensioner ratio (defined as the percentage of beneficiaries over the age of 65 years) and average family size.

Diagnosis found that the average age of beneficiaries decreased to 33.1 years at the end of 2018 (2017: 33.2 years), with the pensioner ratio increasing to 8.5% (2017: 8.4%). Family size has remained unchanged at 2.21 from 2017 to 2018.

Bhana says overall, the profile of the industry “remained stable and the financial position is sound despite another year of operating losses for many schemes”.