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Cost shock for medical scheme members in 2017

Personal Finance

Medical scheme members should brace themselves for double-digit increases in contributions, as well as benefit cuts, next year, announcements by two large medical schemes this week indicate.

The country’s largest medical scheme, Discovery Health Medical Scheme (DHMS), announced a weighted average increase of 10.2 percent for its members, while Momentum Health members will face a weighted average increase of 11 percent. These are the average increases across the schemes’ options weighted according to the number of people in each option.

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Dr Jonathan Broomberg, the chief executive officer of DHMS’s administrator, Discovery Health, says the scheme has faced a sharp increase in medical inflation this year and expects medical inflation to be 10 to 15 percent next year, while schemes generally could face medical inflation of between 10 and 20 percent next year.

Victor Crouser, the coastal head of health at Alexander Forbes, says the brokerage is of the view that other schemes will announce double-digit increases of about 10 percent for next year.

Crouser says Alexander Forbes expects that members will see their benefits being reduced as schemes try to juggle their options and remain financially stable in the face of the recent sharp increase in claims.

Earlier this year, both DHMS and the country’s second-largest medical scheme, the Government Employees Medical Scheme, disclosed that they had experienced a steep rise in claims this year. They ascribed this to an increase in hospital admissions (apparently a result of new hospitals being opened), an increase in the utilisation of benefits, fraud, wastage and abuse, and members joining schemes only when they are sick in order to access benefits.

Schemes are expected to ensure that each option is self-sustaining.

There are only three ways in which schemes can meet a steep increase in claims: cut benefits, or increase contributions, or run down their reserves, if these exceed the 25 percent of contributions required by law.

Both DHMS and Momentum Health are relatively strong schemes: they are growing their memberships and the average age of their members is lower than that of other schemes. As a result, they have fewer claims and a lower ratio of claims to contributions.

Both schemes also have reserves that meet the legally required solvency ratio of 25 percent.

Both schemes’ increases are in breach of the Council for Medical Schemes’s guideline that schemes should try to contain their increases to inflation (5.9 percent in August, as measured by the Consumer Price Index) plus three percentage points. The council typically only allows schemes to increase their contributions by more than this percentage if they can show good reason for needing to do so.

Schemes with declining membership and/or a greater proportion of older, sicker members, or which need to build up their reserves, can be expected to put through the highest contribution increases for next year.

However, you should not look solely at the percentage increase when assessing whether or not a scheme’s contributions are expensive. A smaller percentage increase on a scheme with high contribution rates can be higher in rand terms than a big percentage increase on a scheme with low contribution rates.

In addition, you need to pay close attention to any benefit cuts, because these affect the value you receive for your contributions.

Broomberg says eight out of 10 DHMS members will face an increase of 9.9 percent or less in their contributions next year.

Contributions on the scheme’s Executive and Comprehensive plans will increase by 11.9 percent. The increases will be 14.9 percent on the Coastal Core Plan, 7.8 percent on the Coastal Saver Plan and 9.9 percent on all other plans.

Coastal Saver Plan members will find that their contributions to their medical savings accounts have changed from 25 percent of their contributions to 20 percent, which means they will have less available in these accounts to pay for day-to-day benefits (visits to doctors, dentists and optometrists, as well as acute medication).

Broomberg says DHMS decided to reduce the savings account contribution to keep the overall contribution affordable. If the savings account contribution had remained at 25 percent, the overall contribution increase would have been 14.9  percent, he says.

Despite the relatively stiff contribution increases, Milton Streak, the principal officer of DHMS, says the scheme’s contributions are 15 percent below the industry average, and the scheme expects to maintain its competitive edge next year.

Damian McHugh, the head of health marketing at Momentum Health, says Momentum’s increases will range from 8.9 to 15 percent, and benefit limits will increase by at least medical inflation.

McHugh says Momentum has kept the scheme’s age profile low – it has an average age of 42 years – which has given it a competitive advantage. The average ages of the top 10 largest open medical schemes range from 42 to 51 years.

McHugh says schemes with an older average membership have typically experienced a decrease in their solvency ratios.

A scheme’s ratio of claims to contributions increases by two to three percentage points for every year by which the average age of its membership increases, he says.

Schemes with older age profiles may be forced to merge over the next seven years, McHugh says.

Liberty and Bonitas recently received approval from the Competition Commission to merge.

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