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Plans to use medical scheme reserves to fund premium holidays will not fly

12 May 2020 Gareth Stokes

The hope harboured by some healthcare brokers and financial advisers that medical schemes might dip into reserves to subsidise premiums for their struggling clients has been largely dismissed. And recent interactions with the likes of Discovery Health and Momentum Health suggest that assistance to scheme members will be funded by other means.

Protecting scheme members

The Council for Medical Schemes (CMS) has issued dozens of circulars through the first quarter of 2020 to keep the industry informed of developments around the coronavirus pandemic. In Circular 33 of 2020: Understanding medical scheme reserves, released 7 May 2020, they reminded readers that all established schemes had to maintain reserves totalling 25% of their annualised gross contributions. These reserves are intended as a buffer against unforeseen and adverse developments such as an excessive claims or expense experiences, or adverse market conditions. It is not impossible for schemes to use their reserves to subsidise members’ premiums; but as the ensuing paragraphs will show it is rather impractical. 

Dr Ryan Noach, CEO of Discovery Health, observed that Discovery Health Medical Scheme (DHMS) collects more than R6 billion in medical scheme premiums each month. “Providing support to cover these contributions for all members would deplete the scheme’s entire R19 billion reserve in just three months, rendering the scheme unable to pay members’ claims and sustain itself,” he said. He added that schemes needed to be adequately capitalised and in strong cash positions to meet the anticipated COVID19 claims in addition to existing operational commitments. 

Momentum Health discussed the impact of the pandemic on medical schemes during a webinar, hosted 2 May 2020. Damian McHugh, Head of Sales and Marketing at the insurer, said that schemes operated as close to break-even as possible by balancing members’ premiums against the forecast claims experience each year. The CMS 2018-19 Annual Report showed that only 10 of 24 large (more than 20 000 members) medical schemes had posted both operating and net surpluses for the latest year. Six schemes had both operating and net deficits, and eight achieved small net surpluses despite having operating losses. 

Impact of pandemic on an average scheme

Momentum Health illustrated the impact of using reserves to offset premiums by considering an ‘average’ medical scheme with 50 000 members, each contributing R4 000 in monthly premium. This scheme would collect R200 million each month and be required to hold R600 million in reserves, being 25% of the total premium collected annually. In a normal year, this scheme would expect to pay-out R2,1 billion in claims; incur R300 million in non-healthcare expenses; and earn around R60 million in interest on its reserves, leaving a net result of R60 million. But what happens in a pandemic year? 

To estimate the impact of pandemic on an average scheme we must first consider how the claims experience changes. The CMS has declared COVID19 as a clinical emergency and included it in the list of Prescribed Minimum Benefits (PMBs). This means that the coronavirus infection must be funded by schemes, in full, and irrespective of their various benefit options. “The outbreak may well have a significant impact on claims costs for medical schemes,” said Noach. “The cost of testing [alone] is expected to be material, with multi-billion rand projections for DHMS members over the next 12 months”. DHMS estimated the average cost per admission of a COVID19 patient at R75 000, more than three times a typical average admission cost. 

Momentum also expects the pandemic to have significant cost implications. “We estimate claims costs to increase by between one and three percent as a result of the pandemic,” said McHugh. He added that the total costs incurred by a medical scheme in treating COVID19 patients would depend on the extent and severity of the outbreak as well as scheme-specific factors such as the average age and chronic disease burden of members. This is something that healthcare brokers and financial advisers should consider when advising their clients on medical scheme and scheme benefit changes at the end of the year. 

The elective surgery conundrum

Higher COVID19 claims could be offset by reduced costs due to the deferral of elective procedures and treatments. “Our actuarial teams have done a lot of work on elective costs during lockdown; but we do not know whether those costs are [permanently] off the table, or whether they will filter through later in the year,” said McHugh. The difficulty in forecasting claims during pandemic is confirmed by DHMS. “We have experienced a marked reduction in the expected in-hospital claims patterns for this time of year,” said Noach. “Most elective surgical procedures have been cancelled and a reduction in medical admissions has also been noted”. DHMS expects a marked increase in hospital admissions once hospitals formally re-open and elective surgical lists resume. 

We can tweak Momentum’s example to reflect the impact on an average scheme of various COVID19 scenarios. Imagine, for example, that coronavirus causes a 1% spike in claims, while the economic impact of lockdown halves the scheme’s investment income. This scenario yields an operating deficit of R21 million and a scheme surplus of just R9 million. Finally, we can consider the impact of subsidising members out of the reserves. Paying R200 million to fund all members for just one month would result in a net deficit for the year of R191 million and reduce the scheme’s capital solvency by almost a third, to just 17%. 

Schemes can use some of their reserves for COVID19 relief initiatives, subject to regulatory approvals; but it is more likely they will assist members in other ways. “We are  not encouraging people to pause cover; but will rather find financial solutions for them to continue to afford / pay their premium,” said McHugh. Initiatives include allowing scheme members to pay their premiums out of medical savings and deferment options for employer groups with 10 or more employees. DHMS has applied to the CMS for exemptions to allow for a range of contribution relief. “The individual exemption allows DHMS members with positive carry-over medical savings account balances to use these balances to pay their contributions during this period,” said Noach. DHMS has also created a dedicated fund of up to R2,3 billion of its reserves (approximately 12% of total reserves) to provide contribution relief to qualifying SMEs, subject to conditions. This relief will be in the form of zero interest loans. 

Exemptions must benefit members

“Any consideration to utilise scheme reserves to address the negative financial impacts of coronavirus on the medical schemes industry will only be justified if it benefits medical scheme members,” concluded the CMS. DHMS added that it would provide relief options to members with due consideration for the scheme’s cash and solvency positions. “At a time of a global healthcare crisis, there is nothing more important than ensuring that you have reliable, competent, and solvent medical scheme coverage,” concluded Noach. 

Writer’s thoughts:
South Africa’s medical schemes face a real challenge in protecting their capital solvency while accommodating members’ pandemic-related treatment costs. It is impractical to dip into reserves to assist members because these reserves are there as a shock-absorber for higher than expected costs (such as those caused by pandemic). Are you satisfied with the financial assistance offered by medical schemes to your clients to date? Or is there more they could do? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts

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