In the August 2012 Issue of FAnews Magazine I explored whether Discovery Health (a division of JSE-listed Discovery Limited) was underpinned by a medical scheme that was “too big to fail”. My interest was triggered by a number of newspaper articles in whi
CEO of Discovery Health, Dr Jonathan Broomberg, points out that the journalists erred by not making a like-for-like comparison of the DHMS scheme administration costs to those incurred by other open schemes. Its “total administration, managed care and marketing” costs turn out to be only 3.1% dearer than the open scheme average.
At a media briefing held at the group’s Sandton headquarters (12 September 2012) Broomberg addressed various negative perceptions around the medical scheme that today represents more than half of all open medical scheme members. His opening premise was that the sustainability of a medical scheme was a function of growth; cost, quality and access; and financial strength. The 2.438 million DHMS members (including KeyCare) can rest assured their scheme rates highly on each of these measures.
Excellent growth and low lapse rates
DHMS has grown its member base each year going back more than a decade, from 997776 members in 2001 to the current number. And the latest membership trends suggest that members are satisfied with the service they receive. DHMS lapse rates have hovered at around the 4% mark since 2008.
The low lapse rate is singled out as a critical success factor for the scheme. “A low rate of churn enables the scheme to invest in the long-term health needs of its members,” said Broomberg. Average member age is important too. Average member ages in open medical schemes (excluding DHMS) crept up from 31.7 years in 2006 to 34.8 by the end of last year. DHMS, meanwhile, has remained fairly constant, ageing from 31.1 years to just 31.8 over the same period. From an actuarial point of view each year gained (as measured by average member age) has a significant impact on claims.
Solvency is not the only measure of medical scheme wellbeing
At the launch of the Council for Medical Schemes (CMS) 2011/2 Annual Report the registrar warned medical schemes that he would not tolerate the repeated flouting of the legislated 25% solvency ratio for medical schemes. He fired this warning despite recent invitations from the CMS for medical schemes to “discuss” the issue. The rule, which requires that the medical scheme hold 25% of gross member premium in reserve at any point in time, is particularly difficult for growing medical schemes.
We can illustrate the problem by way of a simple example. If Joe Average signs up for a medical scheme membership at a premium of R1000 per month his medical scheme must immediately set aside 25% of the total annual premium in cash. The scheme has to find R3000 immediately despite the new member only having paid a single month’s premium – and regardless of whether the member has claimed or not. DHMS’ solvency stood at 23.5% at 31 December 2011 – or R7.328 billion.
Broomberg says that the solvency ratio should not be relied upon in isolation when drawing conclusions about a schemes’ financial health: “Before you applaud a solvency ratio of 35% you must look at whether the scheme membership is in a growth or decline phase, because a scheme can achieve a good solvency purely based on members leaving it”.
Medical inflation on steroids, worldwide
Each year the CMS lambastes local healthcare providers and medical schemes for contributing to inflation-plus increases in healthcare costs and member premiums. The reality is that medical inflation outstrips ordinary inflation wherever you are in the world. In the US CPI comes in at 1.5% versus medical inflation at 7.5% (measured on a three year average annualised basis). On the same measure South African prices increase at a rate of 5.5% against 10.9% in the healthcare environment.
“There are many different elements driving inflation in the healthcare industry – we have a natural desire to find one culprit – but DHMS data confirms there are several factors at play,” said Broomberg. These include the increasing burden of disease, rising benefit utilisation, adverse selection, new medical technologies and fees for service reimbursement versus utilisation increases. A scheme cannot defer expenditures on new medical technologies and treatments just to bring its overall annual expenditure in line with inflation. Nor can it refuse to pay for treatment and procedures that can give older patients a new lease on life or add decades to younger patients’ lives.
Broomberg took the opportunity to dispel an oft-repeated myth that medical schemes members were being forced onto lower benefit options due to escalating premiums. “There is no evidence of this activity in DHMS, he said. “Over the past four years we have noticed a definite trend wherein 94% of members stick with their existing option, approximately 4% upgrade to a more extensive benefit option and only 2% downgrade each year”.
Definitely too big to fail!
DHMS is a massive medical scheme. Its administrator – Discovery Health – handles some 34000 telephone calls and 67000 emails on its behalf every day! The administrator processes approximately 3.7 million claims per month, of which 88% are submitted electronically. A staggering 1100 new policy applications are received each day, with R2.9 billion in premium collected monthly. Given these statistics nobody will grudge Discovery Health its R103.6 per beneficiary per month in administration fees... But when Discovery Health’s R989 million in after tax profit for FY2011 is considered there will be those who wonder whether members are truly benefiting from economies of scale mentioned.
Editor’s thoughts: In response to our August 2012 magazine article one of our reader’s observed: “Per unit of benefit, Discovery charges significantly less than its competitors and provides a time-tested methodology for changing lifestyle behaviour in order to reduce claims frequency and magnitude”. Would you agree that the group’s size and innovative approach to medical schemes administration are worth a few extra rand in member fees per month? Please add your comment below, or send it to gareth@fanews.co.za
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Added by GregS, 13 Sep 2012