Smaller medical schemes ‘will have to merge’
With universal health coverage on the cards and schemes under increasing pressure, the Council for Medical Schemes (CMS) is driving a consolidation process to ensure sustainability.
After the publication of the National Health Insurance (NHI) policy document in 2017, which noted that amendments to the Medical Schemes Act “will be initiated as part of the broad, phased implementation”, the council conducted its own research into the process.
In a circular this year, the council noted: “Medical schemes will evolve and consolidate during this phase to provide complementary cover (to NHI). Other activities will involve the creation of a uniform information system and standardisation of health-care services across the medical schemes to be aligned to comprehensive health-care services for NHI.”
This consolidation framework is aimed at reducing the excessive fragmentation of risk pools, addressing risk rating, strengthening cross-subsidies and standardising and simplifying benefit options. The council also suggested that schemes with under 6000 members be consolidated.
Niche medical schemes
There are 29 medical schemes in the country with fewer than 6000 members, and 26 of those are closed schemes, restricted to certain companies or industry sectors.
Such schemes typically have lower levels of non-health care expenditure because there are usually no broker commissions and marketing costs involved. They also have a simpler contribution collection, which is often linked directly to payroll, which makes them less costly to run.
However, they often offer only a single plan and have limited bargaining power. Consolidation makes sense because it supports risk pooling and economies of scale. CMS data indicates that some of these schemes are in a good financial, clinical and demographic position, while others are worse off.
The council will be guided by the publication of the final report of the Health Market Inquiry, which has seen numerous delays. The most recent deadline it has set is September. Its final recommendations are likely to drive policy but the delay is affecting the adoption of the Medical Schemes Amendment Bill, which will be submitted to Parliament only once that final report has been published.
Jill Larkan, head of health-care consulting at GTC, says the CMS’s refocused approach towards small medical schemes “demonstrates a pragmatism that bodes well for the future of the sector”.
The Medical Schemes Act requires that all schemes should be a minimum size of 6000 main members in order to remain viable. But Larkan says the CMS has acknowledged that certain schemes below this threshold are doing well, on many fronts. “Quite a number can demonstrate positive outcomes in several areas, namely advantageous average age profiles, lower non-health-care expenditure and positive, acceptable surplus levels and solvency.”
But, she says, of the 29 small schemes in the country, 26 are closed, essentially constrained in recruiting new members, affecting both their claims experience and the number of benefit options available.
And most of the smaller schemes offer little choice, with just hospital plans. “Generally, they only have one plan, which is very limiting. They don’t get the benefit of cross-subsidising that the bigger schemes have from young to old. There’s no balancing act.”
Keeping it together
Larkan says the council has proposed that smaller schemes below the threshold be consolidated. It’s considering several options: amalgamating industry-sector schemes (for example, BMW, Golden Arrow, Engen and other companies in the transport sector), grouping schemes that are vulnerable or distressed with better-off schemes, and an "umbrella" arrangement, which GTC believes is the most beneficial option for members.
“These (umbrella) arrangements have successfully been implemented in the pension fund industry over the past 15 to 20 years. This would allow for risk pooling, benefit consolidation and cost reduction.
“These factors, along with claims experience and the uniqueness of membership, should all be used to inform the consolidation basis going forward," Larkan says.
“If, over the next year, the council gathers sufficient data to gauge how they contribute to the financial sustainability of schemes and the health-care industry, I firmly believe it will be in a good position to define a new criteria that would encourage amalgamation in the most favourable and cost-effective method and would benefit scheme members first."