Impressive turnaround at Spectramed
In the year ending 31 December 2007, Spectramed realised that serious action was needed to ‘fix’ the scheme. The scheme’s 2007 deficit surged to R53.659m as non-medical expenses (including managed care: management services, broker service fees and administration expenditure) crept up to 12% of premium received. Chief executive and principal officer of Spectramed, Quincy Beukes, reflects on the 2007 result. “Even though the scheme was financially sound, and steadily growing with an annual income of R1.5bn and reserves in excess of R242m, we realized that we had to implement a process of financial, business and people re-engineering to meet future challenges in a time of global economic crises,” he said.
The time-tested method to address such a situation is to hike member premiums. After due consideration the Spectramed board decided it could achieve the required turnaround by working on operational aspects rather than turning to hard-pressed members.
A new business model
They unpacked the 2007 Income Statement and realised the quickest fix would be to reduce Spectramed’s non-healthcare expenditure to within the Council for Medical Schemes (CMS) 10% guideline. These expenses were largely incurred due to Spectramed’s inappropriate and outdated business model – the same model relied upon by the majority of South Africa’s medical schemes. Medical schemes incur unacceptably high administration fees because they rely on profit driven entities to manage their essentially non-profit schemes. “We learned that the medical schemes industry as a whole was plagued by an outdated principle of outsourcing, which amounts to the abdication of responsibility rather than the delegation of tasks,” said Beukes.
The solution was to replace the existing business model with a share-sourced model. In the previous Spectramed business model the board would elect a principal officer who would appoint a healthcare administrator. This administrator would appoint third parties to meet all the administrative needs of the scheme regardless of whether the service was “better, faster and more cost effective” than what Spectramed could provide in-house. In the share-sourced model the Spectramed board decides what service providers to contract with. In Spectramed’s case this share-sourced model cut the non-healthcare delivery costs by R51.7m in the 2008 financial year. Management services charges fell from R38m to R21m, broker service fees from R37m to R31m and administration expenditure from R191m to R159m.
Changing membership trends
Excessive administration charges weren’t the scheme’s only problem. Its mainly public sector members were moving to the Government Employee Medical Scheme (GEMS) at an alarming rate. “We faced a substantial business threat from the introduction of GEMS into the medical schemes arena,” said Beukes. At one stage 74% of Spectramed’s members were drawn from the public sector. The board and executive can be commended for maintaining a relatively flat beneficiary curve throughout the 2008 year, and correcting the balance between government and non-government members. “Through our commercial acquisition focus we managed to reduce the percentage of public sector members to less than 42%, which we believe to be a substantial risk management success,” said Beukes.
The scheme also had to deal with no fewer than seven compliance issues. It tackled these matters head on, and only one issue remains halfway through 2009. The group is working with the CMS to ensure this final compliance issue is attended to. Spectramed’s business model is an unmitigated success and Beukes believes it’s only a matter of time before the rest of South Africa’s open medical schemes change their business models too. He says “Spectramed is now in the position to meet future challenges with a stable and financially viable scheme.” The scheme is independent, flexible and able to meet the changing needs of the market and its membership.
Editor’s thoughts:
Spectramed demonstrates what can be achieved when a struggling medical scheme takes charge of its destiny. The scheme worked closely with the Council for Medical Schemes to manage itself back to financial health and address a range of compliance issues. Would you prefer your medical scheme to follow the Spectramed route to an ownership and accountability model? Add your comments below, or send them to [email protected]
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