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SUB CATEGORIESGeneral |  HIV |  Medical Schemes | 

Is consolidation treating customers fairly?

06 August 2018Jonathan Faurie

Over the past two years, the South African medical schemes sector has experienced a lot of change through the implementation of Demarcation Regulations – and will likely expect further changes in the future as government moves closer to the implementation of the National Health Insurance (NHI).

But perhaps some of the immediate biggest changes will come in the form of industry consolidation, something that government is seemingly hell bent on implementing.  

The road to here

An NHI Implementation Committee on consolidation was established earlier in the year to oversee the restructuring of the industry before the full implementation of NHI. 

This process includes consolidating schemes with fewer than 6 000 members into larger schemes. According to the recently released Alexander Forbes Health Diagnoses, the merging with public sector schemes reduces the number of benefit options offered by the remaining schemes. 

Two schools of thought

There seems to be two schools of thought regarding the consolidation issue. 

Speaking at the launch of the 2017 Health Diagnoses, Alison Counihan – an actuary with the Technical and Actuarial Consulting Solutions (TACS) Team at Alexander Forbes Health – said that there are very specific reasons why government feels that consolidation may be beneficial. 

It is important for the industry that medical schemes remain profitable. When evaluating the performance of medical schemes, factors to consider include a few key aspects. 

The first is size and scale. According to Counihan, larger schemes tend to have a more stable and more predictable claims experience. They should also have greater negotiating power when setting prices.

 “Government feels that the major advantage of consolidation – bearing the above aspects in mind – is membership growth. Increasing membership reduces the volatility of a scheme’s claims. Further, it improves the schemes profile as new members tend to claim less than the average member in their first year of membership,” said Counihan. 

She added that the third aspect involves the scheme’s membership profile. Claims experience will be more favourable for younger members with lower chronic prevalence. 

“The final two aspects are related to the scheme’s financial performance. When consolidation is taken into account, the trend in a scheme’s financial results illustrates the adequacy of their pricing. The other benefit of consolidation relates to solvency levels. Although the current statutory solvency level of 25% of gross contribution income may be inappropriate, each scheme should have sufficient reserves after considering each of the previous factors,” said Counihan. 

The other side of the coin

Also speaking at the launch of the Health Diagnoses, Roshan Bhana, Branch Head TACS, was a lot more cautious when it comes to the consolidation issue. 

One of the factors of the industry at the moment, where there is very little consolidation, is that there is a significant amount of capital sitting in reserve. This would change if consolidation is sought. 

“In future, schemes will likely seek liquidations rather than amalgamations. If this is the case, these reserves will be lost from the system,” said Bhana. 

Added to this is the fact that restricted schemes usually offer income rating of contributions to compensate for lack of choice; Bhana pointed out that these members will now face high costs or lower benefits following consolidation. 

The game changer

Perhaps we are looking at this debate without addressing the game changing issue. The cost of healthcare in South Africa is high and puts medical schemes under immense pressure in terms of profitability. This quandary is often passed on to clients in the form of premium increases. 

Bhana added that the gap between medical scheme contributions and consumer inflation (CPI) continued its downward trend in 2017. 

“Over the past 17-year period, medical care and health expenses inflation has been on average 7.6% per year while CPI inflation averaged 5.8% per year. This results in a shortfall of 1.8% per year. During the same period, average medical scheme contribution inflation was 7.5% per year, resulting in actual increases in medical scheme contributions per principal member exceeding CPI by at least 1.7% per year. Headline increases announced by schemes over this period are between CPI plus 2.5% and CPI plus 4.5%,” said Bhana. 

Editor’s Thoughts:
The medical schemes industry is experiencing a lot of change. Government promises that this will be resolved with the NHI, and industry consolidation is possibly the first steps towards achieving this. However, will this be a simple process? . Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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