Medical Funds Look to Strategic Mergers to Manage Risk
Value of strategic mergers in the medical aid industry, Gerhard Van Emmenis
As the recession continues to bite, and medical aid funds find themselves under pressure from increasing costs, stagnant membership numbers, and the ageing demographic of the insured population, many are beginning to consider the possibility of mergers as a strategic measure. Mergers enable medical funds with similar membership and benefit profiles to take advantage of economies of scale, leaner administration and increased bargaining power in order to continue to provide reliable cover for their members in times of economic stress.
Bonitas, South Africa’s top medical aid brand - Markinor 2008 and the country’s second largest provider, is keenly aware of the issues facing both medical funds and their members at this time, and is currently considering the possibility of a strategic merger or acquisition.
In its recent annual report, the Council for Medical Schemes identified a trend towards consolidation of this nature in the industry, especially amongst restricted schemes. This, says the council, has not lead to a net loss in membership, but to an important improvement in the risk profiles of the funds concerned.
As growth in the number of claims continues to outstrip the increase in contributions, and as the overall membership pool remains steady at around 7 million, the management of risk is a very real and immediate issue. Many schemes are currently subsidising contributions from cash reserves in order to minimise the impact of increases on members, but this is not sustainable in the long term. While this may be an appropriate short-term measure, it can eventually compromise the integrity of the cash reserves medical funds must, by law, retain in order to cover claims for a period of at least three months.
While the statutory solvency ratio is 25%, Bonitas has always managed to retain a ratio much higher than that. This cannot be said for all schemes, 18 of which have been unable to maintain the minimum ratio during the past year. Smaller open schemes facing this challenge would do well to consider consolidation with larger, more stable schemes in the interests of providing secure cover for their members. Bonitas, on the other hand, is considering consolidation as a means of reducing costs, minimising contributions increases, maintaining a solvency ratio above 40%, and managing the erosion of benefits.
The latter is an issue that has hit the headlines this year, with many medical aid members running out of day-to-day benefits or reaching their self-payment gap well before the end of the year. As Bonitas covers in excess of 650000 lives, and is strongly committed to providing medical cover across all demographic profiles, it would be irresponsible not to consider consolidation with one or more smaller schemes in order to manage this risk for its members.
Bonitas has a successful history of initiating and implementing strategic mergers. In 2006 it entered into a merger agreement with Protector Health, and the following year with BHP Billiton’s health unit, and it is able to draw on these experiences when considering any possible future mergers.
Now, as corporate clients and brokers enter the year-end review period, it is important that they be assured of both the stability of their fund of choice, and the best value for money in terms of benefits for their staff.
Not only this, but it is vital to manage the impact of external factors such as the introduction of health insurance products, the worsening demographic profile of open schemes, and the prospect of the introduction of a national health insurance scheme.
In short, Bonitas wishes to remain true to its mission of providing affordable medical cover for all South Africans, and merging with one or more smaller medical schemes will benefit everyone involved. The challenge now is to identify the right potential partner or partners, and to initiate appropriate discussions with them. With consolidation as an objective, everyone wins.
