The real gap in the medical schemes industry
The Council for Medical Schemes (CMS) is obsessed with medical ‘top up’ insurance and what they refer to as excessive healthcare broker remuneration. These ‘concerns’ featured strongly at a media presentation held at the organisation’s Hatfield offices on 19 May 2009. But as government readies the first discussion document on a proposed National Heath Insurance (NHI) system we can think of more serious hurdles the organisation will have to clear over the next few years.
Acting Registrar of Medical Schemes, Patrick Matshidze highlighted the first of these challenges as he provided a brief overview of the industry. He observed that only 16% of the country’s population were members of private medical schemes. The remaining 84% rely on the public sector (64%) or ‘out of pocket’ expenditure (20%) for their healthcare requirements. A quick look at private medical scheme membership going back to 2000 confirms his assessment. Membership of open schemes reached saturation nine years ago and restricted schemes membership only picked up after the 2006 launch of the Government Employee Medical Scheme (GEMS). “For quite some time medical schemes [membership] remained stable – until the introduction of GEMS in 2006,” said Matshidze.
Getting the private-public balance right
The first hurdle (in our view) is for the regulator to create an environment where private medical schemes can expand their reach beyond the nearly eight million individuals covered at 30 June 2008. But it’s the second hurdle that presents the real challenge. The CMS needs to define its role in the event the ruling party’s call for an NHI implementation within five years succeeds. A national health system would require mandatory contributions (as a percentage of gross remuneration) from all South Africans. And it would push a large number of individuals with private medical schemes cover back into the public healthcare fold. In our view, a successful NHI would render the entire medical schemes industry obsolete!
While it waits for clarity in the public healthcare space the CMS has to continue monitoring the impact of the Medical Schemes Act 131 of 1998. And they’re in great shape to do so, as evidenced by the accurate, transparent and up-to-date statistical data published in the CMS Annual Report 2007/2008. Matshidze advised that the 2008/2009 report would be released toward the end of August 2009.
Medical schemes ravaged by inflation
With relatively stable membership numbers we can use the graph of contributions, benefits and claims rations in the medical schemes environment as a proxy for inflation. Each of these categorise has been on the rise since 2000 despite flat membership. According to Matshidze this trend accelerated in the latest year. He attributes the trend to South Africa’s medical schemes age profile and the ongoing challenges in the supply side of the industry. Bringing down costs in the private healthcare sector has been a government priority for years. Previous minister of health, Manto Tshabalala-Msimang, tackled exit prices in the pharmaceutical sector and lambasted private hospitals during her tenure.
“We currently are fairly satisfied that non-healthcare expenditure has stabilised,” said Matshidze. Industry-wide administration, reinsurance, broker commission & distribution and managed care fees have stabilised around the R1.2bn mark in each of the last three years. His only concern is that “broker fees continue to increase.” The graphic provided with the presentation didn’t provide enough detail, so we turned to the Broker Costs section in the latest CMS Annual Report. This shows that “broker costs for all schemes increased by 6.1% to R1.0bn from the previous year’s R982.5m.”
What to do with the healthcare broker?
Broker costs (including all commissions, service fees and other distribution costs) accounted for 11.7% of total non-healthcare expenditure in the latest year. The CMS observes that fees increased 128.1% since 2001 against a net increase of 48.3% in member numbers. We cannot counter the CMS observation that “substantial increases in broker service fees are not being matched by increases in new members,” but we can argue the relevance of this comparison. The annual compound fees increase of around 12.5% is higher than inflation; but part of this increase is due to the growth in broker numbers to deal with higher membership. At 31 March 2008 the CMS lists 8 078 accredited brokers and 1 966 accredited brokerages! It seems strange the CMS would dedicate so much time to ‘tackling’ broker commission when this total as a percentage of gross contribution income sits at only 2.1%. Administration expenditure and managed healthcare fees were at 12% in the same period...
CMS head of accreditation, Danie Kolver, notes there are “systemic concerns with the current way in which brokers operate – particularly their relationships with certain parties…” Ironically – the difficulties in the broker remuneration environment are being solved by targeting the broker rather than the medical schemes themselves. Perhaps the long-term solution would be to adopt an either/or approach. Product ‘sales’ should either be handled by marketers only (through product aligned tied agents), thus allowing consumers to make their own medical scheme choice. Or product referrals should be handled by service professionals only (brokers), who receive a fixed flat fee regardless of which scheme they refer clients to.
Editor’s thoughts:
CMS proposals to redefine broker roles in the medical schemes industry will have serious consequences for the consumer. We’re not sure whether consumers will grasp the CMS distinction between ‘services’ and ‘marketing.’ Would you prefer a ‘service’ or ‘marketing’ model for product distribution in the medical schemes space? Add your comments below, or send them to [email protected]
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