Medical Schemes display resiliant financial performance amid tough challanges

Since the deterioration in claims experience evidenced in 2009, most medical schemes have shown a significantly improved financial performance over the last two years. As stated in Global Credit Ratings’ (GCR) latest Medical Schemes Ratings Bulletin – whi

This is according to Sheri Few, Head of Medical Sector Ratings at GCR, who says based on selected financial results thus far for 2012, a number of schemes have reported claim ratios at more elevated levels, largely attributed to hospital-related expenditures.

“Schemes are expected to continue to face a number of challenges in respect of the complex regulatory and operating environment, and will thus need to manage these effectively in order to ensure that their future financial viability remains intact.”

As a result, Few believes further industry consolidation is expected to remain unabated going forward. “This holds particularly true for smaller schemes (as they can benefit from a broader risk base of larger schemes) and/or those experiencing financial difficulties. This again highlights the importance of membership retention and growth, which unpins the crux of cross-subsidisation, and which is crucial for long term sustainability.”

She says additional challenges facing schemes include the implementation of effective risk management practices in order to contain healthcare costs, particularly in light of the National Consumer Commission’s recent opposition on late joiner penalty fees and waiting periods, as well as issues relating to PMB claims.

“In terms of the latter, the Department of Health’s (DoH) resolution to step in and help clarify the interpretation on the PMB definition is positively considered. Moreover, the DoH’s statements of intent to form a bargaining council to determine appropriate tariffs for healthcare services, particularly in light of the recently failed attempt of the HPCSA in providing tariff guidelines, is required sooner rather than later,” says Few.

NHI

A critical development in the future operating landscape for the medical scheme industry is the planned development of the National Health Insurance (NHI) system, added Few. For medical schemes, it would mean that their current operating models would most likely have to be adapted to provide some sort of top-up cover, where this would be an additional expense for members over an above their mandatory contributions to the NHI.

“From the little facts presently known about NHI, consensus suggests that schemes will most likely continue with business as usual for the meantime. Further, as the proposed starting point infers to the rehabilitation of the existing public health infrastructure over the medium to longer term, this holds potentially positive implications for schemes. This being that Designated Service Provider arrangements could be extended with more confidence to the upgraded public health institutions, potentially enhancing member affordability and thus growth. This notwithstanding, the degree to which this will feed through to the medical schemes industry is dependent on both the extent and the timeframe of the proposed course of action, with implementation risk deemed to be high, given the vast scope of the project.”

STATUTORY SOLVENCY

Few says that for the sample of schemes surveyed, the consolidated statutory solvency margin held steady for a third consecutive year at 27% in 2011. Five schemes out of the sample (2010: five; 2009: ten) reported statutory solvency ratios below the regulatory minimum of 25%, with three of these schemes’ solvency ratios being pressurised by growing membership levels in 2011.

“At present, all schemes need to adhere to a minimum statutory solvency ratio of 25%, measured by accumulated funds expressed as a percentage of gross premium contributions. This ratio basically measures a scheme’s ability to absorb unexpected changes in industry variations such as claims experience, demographics and legislation, and thus gives a reasonable proxy of financial strength.”

“While the statutory solvency measure is considered important, it is GCR’s view that it should not be analysed in isolation when determining the financial soundness of a scheme. This, given the fact that this measure has certain shortcomings in its calculation. Consideration should also be given to trends in schemes’ operating and net results, reserve and solvency levels, as well as the size of the scheme and the growth demonstrated. The recent discussions between the Council for Medical Schemes and the industry regarding the possible refinement of the statutory solvency calculation is positively viewed by GCR, as it could lead schemes to hold more optimal reserve levels based on their underlying risk profiles, ultimately enhancing capital efficiency. However, this is likely to depend on the level of change and sophistication of the new models approved”, concludes Few.

Overall, an important part of any rating decision is an assessment of relevant measures and trends over a defined period, with stability being a key objective. GCR’s claims paying ability ratings give an opinion of a medical scheme’s relative ability to honour policyholder and related contract obligations.