Medical schemes in uncharted territory

Actuaries at South Africa’s large open medical schemes find themselves in uncharted territory as they set about forecasting members’ benefits utilisation for 2022 and beyond. The data gathered over the decade ending 2019 has been rendered practically obsolete due to the significant shifts in medical schemes’ claims patterns coinciding with lockdown levels and successive waves of Covid-19 infection. To further complicate matters, a detailed assessment of Momentum Medical Scheme (MMS) 2020 and year-to-date 2021 statistics, shows little evidence of the expected rebound of hospital admissions to pre-lockdown levels.

“From a purely financial perspective, the medical schemes industry has experienced 2020 quite positively,” opined Damian McHugh, Marketing Executive at Momentum Health. “The question we are asking today is what the past 18 months mean for our healthcare and medical schemes ‘picture’ in 2022 and beyond”. McHugh, who was presenting during a Momentum Health Solutions financial update webinar, held 21 July 2021, spent an hour unpacking the impact of pandemic on the scheme’s finances before illustrating how difficult it was for schemes to set risk-appropriate contribution levels without reliable trend data. More on the pricing challenges in a moment, first we reflect on MMS’ financial health. 

Four measures of a medical scheme’s health

McHugh unpacked the financial health of the domestic medical schemes environment by comparing four important metrics across eight leading open medical schemes. These metrics include growth in membership; the average age of a scheme’s beneficiaries; claims ratios; and solvency. We will briefly consider the industry’s ‘state of play’ under each heading. 

Growth. The membership of most medical schemes, whether open or closed, contracted between 2019 and 2020. This type of decline is expected during periods of financial crisis, which the pandemic turned into. MMS saw its total membership reduce slightly, from 156723 members to 152228, though the count was negatively impacted due to international students being unable to continue with their studies during lockdown. McHugh said if this effect was stripped out, the scheme actually grew by about 1100 members. Bestmed was the only other ‘top eight’ open scheme to show slight membership growth from 2019 to 2020. An interesting anecdote is that the fear of pandemic caused many members to hold onto their medical insurances despite financial hardship. Analysts had expected a higher rate of scheme membership attrition, given financial constraints. 

Beneficiary age. The average age of an MMS beneficiary has increased by a mere 0.6 years over the past eight years, to 33.7 years. “We have kept our age band very flat over the entire period; but the increase in average age at other open schemes has, in some cases, been quite pronounced,” said McHugh. Medical schemes strive for a lower average age because a younger, healthier scheme delivers a better claims experience in the current year as well as into the future, all else being equal. 

Claims ratio. Open medical schemes have experienced a sharp drop-off in their claims ratios, which is a measure of the total claims paid against all member contributions received by the scheme. By way of example, MMS saw its claims ratio improve from 84% in 2019 to just 72% in 2020. McHugh explained that the pandemic was handled in such a way that the cost of Covid-19 admissions and treatments was more than offset by the change in utilisation of other in- and out-of-hospital benefits. The claims expenses incurred by most medical schemes during 2020 were thus nowhere near their 2019 levels. 

Solvency. “Medical schemes are in a stronger financial position [due to material improvements in solvency] and may be in a position not to put through big contribution increases going into 2022,” said McHugh. The MMS solvency ratio improved from 25.9% to 39.6% while large open schemes saw an average 30% improvement in this measure. (Schemes are required by law to hold reserves totalling 25% of their total annual premium). Short-term improvements in capital reserves, although a welcome development, cannot be viewed in isolation and McHugh warned that some of this solvency may be used up as the full cost of Covid-19 filters through the system over 2021-2023. It is also likely that reserves will be depleted as schemes catch-up with medical procedures that were delayed over the last 18 months. 

Swings and roundabouts

Nothing illustrates the impact of pandemic-linked lockdown on South Africa better than a month-by-month review of medical scheme expenses. McHugh did a great job explaining the difficulties facing medical scheme actuaries in deciding contribution increases… The data available for their 2021 pricing decision, which was made around September 2020, included a January and February at similar levels to 2019 and an April to August that totally broke from established benefit utilisation trends. The hard lockdown saw medical scheme claims costs falling through the floor as both surgical and non-surgical hospital admissions dried up… And although July and August costs were much higher than those seen in April to June, they were still significantly below 2019 levels. 

“There was a lot of talk about catching up on hospital procedures in October and November 2020; but that did not happen,” said McHugh. The result was that many medical schemes based their 2021 contribution increases on higher than actual utilisation estimates for the final quarter of 2020. This decision was exacerbated by lower than forecast utilisation of dentists and GPs for most of 2020 too, with only the cost of medicines staying close to the predicted amount. “This year’s hospital admissions are still not at 2019 levels,” he added. “There [appears to be] a psyche change insofar going to hospital … people are avoiding hospital admissions due to their fear of contracting Covid-19 during the stay”. 

Day-to-day utilisation is back on track

MMS statistics suggest that day-to-day utilisation of dentists, GPs, specialists and medicines for the first half of 2021 is back in line with 2019 numbers, with an early suggestion that the full year utilisation in these categories could exceed 100% of 2019. The question that brokers and medical scheme members will be asking is whether the industry’s premiums are already at an acceptable level to cover 2022 claims… 

“Claims ratios and solvency margins have positively impacted schemes in 2020; but there are costs coming as a result of Covid-19 that are not yet fully factored in,” concluded McHugh. Medical schemes are presently carrying a double cost load of preventative actions via vaccination as well as the additional costs of treating Covid-19 due to South Africa’s longer-than-expected journey to population immunity. Another concern is that 18-months of delays to preventative screenings and deferment of essential medical treatments could have massive future cost implications. So, while there is a case for a lower level of contribution increases in 2022, we cannot ignore the cost implications as the industry catches up with suppressed demand. 

Writer’s thoughts:
If Momentum Medical Scheme’s experience over the 18-months ending June 2021 is similar that of other schemes, and there is no reason it should not be, then it would seem that our medical schemes environment has successfully navigated the pandemic storm. Were you surprised by the low utilisation of medical schemes’ in-hospital benefits given all the media coverage of ‘hospitals bursting at their seams’? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].