RANDS AND SENSE:
Medical scheme contribution increases of between 8% and 12% for next year are going to be a bitter pill for members to swallow in this economic environment. It could result in option downgrades and cancellation of medical scheme memberships.
Why are increases in the medical scheme environment so high?
One needs to compare medical scheme contribution inflation and medical care and health-care expense inflation trends to consumer price index (CPI) inflation.
Over the past 18 years, CPI inflation has been 5.7% a year, medical care and health expenses inflation 7.5% a year, while medical scheme contribution inflation has tracked at 7.6% a year.
Over this period, medical scheme increases exceeded CPI inflation by at least 1.9% a year.
The gap between medical scheme contribution inflation and CPI inflation has reduced in recent years, probably as a result of efforts by medical schemes to manage costs charged by providers; buy-downs to lower cost benefits; changes to family size, possibly removing dependants due to affordability constraints; and new entrants joining low-income options.
The general observation in the industry is that medical inflation will be about 2% to 3% higher than CPI over the long term. Increases in a particular year may be significantly higher due to adverse claims experience. The deviation from CPI is mainly due to:
* Tariffs: high increases in health-care service provider fees and an increase in hospital admission rates.
* Utilisation: a rising burden of disease, more use of benefits and new medical technologies.
* The requirement to maintain medical scheme reserves of at least 25% of gross contribution income.
* Benefit enhancements.
Medical schemes’ audited financial results which include size scale, membership growth, membership profile, financial results and solvency levels provide a good indication of the scheme’s performance and an indicator of the increase for the following year.
Schemes need to balance all these factors to grow consistently while achieving a positive operating result.
Medical schemes running at a financial loss and not meeting the required solvency, may need to take corrective measures such as higher increases or reducing benefits.
Schemes that are performing well in most key indicators may give back to the members by way of lower increases. Traditionally, high cover and network options are under the most pressure and schemes are likely to make some corrections on these plans next year.
Schemes are using the following factors to determine their 2020 increases:
1. South African Reserve Bank forecast consumer inflation to project an average of 5.2% to 5.4% in 2019 and 2020, respectively.
2. Cost increase assumptions analysis for 2019 showed that scheme demographic and utilisation factors are projected to add about 1% to 3.9% to the total cost increases for medical schemes.
3. Scheme performance, as detailed above.
Choosing the right medical scheme option is a complex decision, with 20 open medical schemes available in South Africa, each offering several benefit options. It is crucial that a medical scheme broker assists members with individual needs based on health-care requirements and affordability.
Tracy Janssens is branch head at Alexander Forbes Health.
PERSONAL FINANCE