Three restricted medical schemes scored the highest on the Alexander Forbes Health Medical Schemes Sustainability Index, which was released this week. The index measures key factors that contribute to the sustainability of the 10 largest (based on membership) open and the 10 largest closed medical schemes (see link at the end of this article).
Restricted schemes admit only the employees of companies or employer groups as members, while open schemes admit anyone.
For the second consecutive year, Polmed, which is open to members of the South African Police Service and their dependants, was rated the most sustainable medical scheme. It was followed by LA Health, which is restricted to local government employees and their dependants.
In third place was Samwumed, a scheme for members of the South African Municipal Workers’ Union, which was established by the Cape Town Municipal Workers’ Association in 1952. Discovery Health Medical Scheme was fourth overall and the highest-rated open scheme.
The details of the index are contained in the report “Diagnosis 2015/16” by Alexander Forbes healthcare actuaries Roshan Bhana and Alison Counihan and senior actuarial consultant Casper de Vries.
The report includes an overview of the medical scheme industry, which, the authors say, remains stable and financially sound.
The average solvency (scheme reserves as a percentage of contributions) at the end of 2014 was 33 percent, which was above the 25 percent required by law. This was despite a noticeable deterioration in the industry’s operating results, from a surplus of R1 551.78 million in 2013 to a deficit of R464.51 million in 2014.
A surplus arises when contributions exceed claims and non-healthcare expenses. Operating results are cyclical, with schemes experiencing good years and bad years, Alexander Forbes Health says.
The results of the Medical Schemes Sustainability Index should be interpreted with caution, because only the top 10 open medical schemes (out of a total of 23) and the top 10 restricted schemes (out of 60) are rated.
Furthermore, the index ranks medical schemes according to cumulative scores on a range of quantitative factors and does not take qualitative factors, such as service levels or benefits, into account.
The index attempts to analyse the collective impact of these key statistics on schemes and their ability to sustain themselves in the face of mergers.
The factors that are taken into account include the size of a scheme relative to that of the average open and closed scheme, membership growth, the change in the average age of beneficiaries over time, the scheme’s operating results relative to the industry, and the change in operating results per beneficiary each year.
Additional factors include an analysis of the change in the scheme’s reserves and the trends in the solvency levels of funds.
The biggest increases in the index for 2014 were observed for Sizwe, LA Health and Samwumed, which improved their 2013 scores by 21.9 percent, 18.1 percent and 23.3 percent respectively.
Alexander Forbes Health says although Polmed had a small operating deficit in 2014, it increased its reserves and solvency level (reserves as a percentage of contributions).
LA Health had a slight increase in its positive operating results and an increase in membership and the age profile of the scheme, the report says.
Samwumed’s score improved significantly. This was because the size of the scheme increased, there was a “noteworthy improvement” in its operating results during a generally tough year, its reserves increased substantially and its solvency improved.
The report notes that Liberty Medical Scheme had the biggest decline in its index value. This was because it had a significant operating deficit last year, and its reserves and solvency ratio decreased.
Transmed was ranked at the bottom of the index. It continued to lose beneficiaries and had an operating and a net (after investment income) loss.
The “Diagnosis” report notes that the investment strategies adopted by most medical schemes are too conservative. By law, schemes are allowed to invest up to 40 percent in equities, whereas the average equity exposure is only about 18 percent.
Schemes could earn higher returns by investing in riskier investments. These returns could be passed on to members in the form of lower contribution increases or enhanced benefits, the report says.
The authors note that the consolidation of schemes seems to be slowing, because no amalgamations were announced in 2015.
The report says the average ratio of claims paid to contributions collected increased to 88.2 percent, up from 85.4 percent in 2013. A risk claims ratio of 85 percent is considered sustainable, the authors say.
Contributions that are not spent on claims are used to pay non-healthcare expenses and fund reserves.
However, the authors say the increase to 88.2 percent is not cause for alarm, because generally claims ratios have a two- or three-year cycle, with good years and bad years.
Data released in the 2014/15 Council for Medical Schemes’s annual report shows there has been a slight increase in the average age of medical scheme members (from 31.9 years in 2013 to 32.1 years) and a slight increase in the ratio of pensioner members (those over 65) to total membership. However, family size has continued to decrease. The average family size was 2.25 in 2014, compared with 2.26 in 2013.
The authors say the difference between the rate at which medical scheme contributions are increasing and inflation, as measured by the Consumer Price Index, has decreased in recent years. This partly because medical schemes have succeeded in managing the fees charged by healthcare providers.