This is part 3 of a four-part series on you and your medical scheme. Click here for part 1 and here for part 2.

 

Some of South Africa’s biggest medical schemes have announced significant contribution hikes for 2017. Even more worrying is that, on some schemes, the increases were accompanied by a reduction in benefits, which means that members will be paying more for less.

 

Fedhealth’s principal officer, Jeremy Yatt, says this is a symptom of the increasing financial pressure on schemes. “Unlike other types of insurance, medical schemes derive no benefit from higher contributions, because there are no shareholders, dividends or bonuses to be paid out,” he says. “Rather, it’s an indication that the current medical scheme model in South Africa is deeply flawed.”

The annual report published by the Council for Medical Schemes (CMS) provides an overview of how the industry is faring. The latest report, for 2015/16, highlights two trends that show that all is not well.

• Scheme membership is not growing. For the first time since the CMS published its annual report in 1993, the number of beneficiaries fell in 2015. The number of beneficiaries decreased from 8.814 million in 2014 to 8.809 million in 2015, a small decrease of 0.06 percent. If schemes do not grow their membership, they cannot collect more contributions to cover the rising cost of health care.

• The gross claims ratio is deteriorating. The gross claims ratio is a measure of the average amount of money schemes spend on health benefits as a proportion of the contributions they receive. The ideal claims ratio is about 85 percent, or R85 for every R100 received as income. This leaves R15 to pay administration expenses and contribute to reserves. A claims ratio of over 100 indicates that a scheme is operationally insolvent.

According to the CMS’s annual report, the average gross claims ratio was 91.6 percent at the end of 2015. This means that, for every R100 received from contributions, R91.60 was spent on health claims. In 2014, the gross claims ratio was 88.7 percent, and in 2013 it was 86.4 percent. Of the 276 options registered at the end of 2015, over half (54.7 percent) incurred net operational losses, up from 53.3 percent in 2014.

The cost of medical scheme membership is putting a strain on the budgets of most people. Schemes, for their part, are hiking contributions because it is becoming more expensive to provide you with benefits. The cost pressures on schemes are the result of the following factors:

 

Increasing use of healthcare services by members. Many people assume the main reason it costs schemes more to cover the cost of claims each year is because the tariffs charged by doctors, hospitals and other providers keep rising. However, recent research has found that it is, in fact, members making increasing use of medical services. The CMS, in a circular on the contribution increases that schemes implemented at the beginning of this year, stated that, of the average increase of nine percent, 3.1 percentage points was a result of the increased utilisation of medical services. When the cost of claims increases by more than the inflation rate, it typically translates into high contributions for members, unless their scheme finds ways to contain costs or has sufficient reserves to cushion the higher cost.

Recently, some schemes have detected a sharp rise in hospital and hospital-related claims. These schemes believe this is in part a result of several private hospitals being built. Over the past eight years, 25 new hospitals with 2 653 beds have opened. Schemes say new hospitals result in a significant increase in hospital admissions among members, although the prevalence of disease does not increase. However, at least one economist has questioned the robustness of the research behind this claim.

 

• The spiralling cost of providing the prescribed minimum benefits (PMBs). The PMBs cover all medical emergencies, a list of conditions that are life-threatening or that can seriously affect your quality of life if left untreated and 25 common chronic conditions. Medical schemes are obliged to pay PMB claims in full, regardless of what a healthcare provider charges. Data clearly shows that, as a result, some providers are inflating their tariffs for PMB services.

This points to another problem that schemes face: the absence of any regulated ethical or guideline tariffs for healthcare services. Guideline tariffs were in place until 2010, when they were struck down by the North Gauteng High Court on the grounds that the process by which they were drawn up was flawed. Since then, there has been no process whereby the organisations that represent healthcare providers and medical schemes respectively can negotiate set tariffs.

 

• The increase in chronic illnesses. Globally, 60 to 70 percent of deaths are the result of respiratory disease, diabetes, cancer and cardiovascular disease. On average, the cost of claims by members with chronic diseases is much higher than the cost of claims by members without chronic diseases.

Apart from the prevalence of chronic diseases, the age and gender profile of a scheme’s beneficiaries affects its claims experience. For example, elderly beneficiaries with more chronic conditions are expected to have higher claims. The average age of scheme members has increased slightly each year over the past decade, from 31.7 years in 2005 to 32.1 years in 2015, according to the CMS’s 2014/15 annual report. For every one percent increase in the average age of the members of a scheme, its costs increase by 1.5 to two percent.

 

• The rising cost of new medicines and technologies. For example, a new medicine for the treatment of lymphoma (cancer of the lymph nodes) costs R2.2 million for an eight-month course, while a new medicine for treating melanoma or lung cancer costs R1.4 million for a six-month course.

 

• The poor quality of state healthcare services. If there were better state hospital facilities, Yatt says members would be able to use public facilities, which would cost schemes less.

 

• The cost of medical malpractice insurance is rising. Yatt says that, as South Africa becomes an increasingly litigious society, the number of malpractice and negligence suits is on the rise. The cost of insurance is sky-high for practitioners, particularly those who practise in disciplines such as gynaecology and neurology. Doctors recover the higher premiums by charging higher tariffs.

 

Increasing fraud, which results in schemes paying unnecessary or excessive claims. The tough economic climate and the record level of unemployment has led to an increase in fraud and abuse among members. However, healthcare practitioners also commit fraud, typically by over-billing.

 

• The healthcare system is fragmented. In countries such as the United States and India, doctors are salaried employees of a medical centre, which charges a single overall cost for a procedure, Yatt says. In South Africa, it is more difficult to estimate what an operation will cost, because the various components, such as use of the ward and theatre, anaesthetist, consulting doctor and surgeon, are charged for separately. As a result, schemes cannot negotiate with one provider for a lower tariff.

 

• Anti-selection, which is when someone joins a medical scheme only when he or she is ill and needs to claim. It is possible to do this, because, by law, open medical schemes have to admit anyone who applies to join and may impose only limited waiting periods, during which new members cannot claim certain benefits. Restricted schemes (those limited to people who work for a certain employer or group of employers) are obliged to admit anyone who is eligible for membership and typically do not apply any waiting periods.

 

• High mandatory reserves. By law, schemes are obliged to hold 25 percent of contributions as reserves to protect schemes against large claims. Many experts say this percentage is unnecessarily high and that schemes’ reserves should be aligned to their exposure to risk. This would free up reserves, which schemes could use to provide you with better benefits.

 

• Absence of regulatory reform. The government’s decision to implement a National Health Insurance (NHI) system has resulted in the regulation of the medical schemes industry being neglected. A number of proposed reforms that could make schemes more sustainable and reduce members’ contributions have apparently been abandoned, because the focus is almost exclusively on NHI (see Regulatory reforms could benefit medical scheme members).

Yatt says an example of how legislation does not support schemes is that it prohibits schemes from rewarding or penalising members based on their claims behaviour. For example, they can’t lower your contributions if you don’t claim for a certain number of years, or raise them if you claim too often, as is the case with car insurance. As a result, Yatt says, there are no real incentives for members to take responsibility for their health.

 

‘WE NEED TO WORK TOGETHER’

Unless the government and all role-players, including members, work together to tackle the legislative environment and cost drivers, medical scheme membership will continue to rise above the headline inflation rate, making it more of a grudge purchase than it is already, Jeremy Yatt, the principal officer of Fedhealth, says.

Yatt says some of the challenges facing medical schemes could be overcome if:

• There was regulation to support schemes. For example, if the government introduced caps on the tariffs charged by healthcare providers, this would alleviate the cost pressure on schemes. The government could also make it compulsory for young people who earn above a certain amount to join a medical scheme. This would provide schemes with the income to subsidise the expenses incurred by older, sicker members, and it would reduce costs for members across the board.

• People made it a priority to be healthy by exercising, eating correctly and not smoking. For example, South Africa is experiencing a steady increase in rates of obesity, which can give rise to a host of medical costs, such as chronic medication, operations to relieve joint problems, and an increased risk of heart attacks and strokes. Schemes will have to pass on these higher costs in the form of contribution increases for members.

• All roleplayers worked together. Doctors, hospital groups, medical schemes and the government should co-operate to encourage people to live a healthy lifestyle and use healthcare services and medical scheme benefits responsibly.

Yatt says all roleplayers want to provide a good-quality service to the community and be properly remunerated. Instead of medical schemes competing against each other by chasing a small pool of members, they should work together to fulfil their obligations to their members, while remaining sustainable.