Category Healthcare
SUB CATEGORIES General  |  HIV |  Medical Schemes | 

Medical schemes financial performance improves, but rising claims may impact future performance

14 November 2013 Marc Joffe, GCR

Since the deterioration in claims experience evidenced in 2009, most medical schemes have shown a significantly improved financial performance over the last three years. As stated in Global Credit Ratings’ (GCR) latest Medical Schemes Ratings Bulletin – which collated information from data of 15 of the largest open schemes in 2012, this follows the implementation of subsequent corrective risk management measures, whilst increased efforts have also been placed on containing relative non-healthcare expenditures. However, a gradual increase in claims trends so far this year could see the industry exhibit slightly weaker operating trends going forward.

This is according to Marc Joffe, Director of GCR, who says based on selected financial results thus far for 2013, certain schemes have reported claim ratios at more elevated levels. However, Joffe notes that this could be ascribed to seasonality, with schemes generally exhibiting comparatively lower claims patterns in the latter months of the year.

"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.”

He says additional challenges facing schemes include the implementation of effective risk management practices in order to contain healthcare costs, particularly 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 Joffe.


"Industry consolidation, particularly amongst the smaller schemes, is expected to continue going forward, as schemes are finding it increasingly difficult to expand their membership bases, amidst persistent healthcare cost pressure.” 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.”

In this regard, Joffe says it is noted that the five largest open schemes represented around half of total industry membership a decade ago, whilst the top five open schemes now represent around 80%. "The on-going consolidation witnessed in recent years is positively viewed, as schemes have generally become financially more stable (in part due to the fact that they can leverage off the benefits associated with scale), which is in members’ best interests.”


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 Joffe. 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 and 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

Joffe says several schemes continued to report net healthcare surpluses during 2012 (particularly some of the larger schemes), driven primarily by a comparatively well contained relative claims experience and stable investment income.

"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.”

Joffe says 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 to schemes holding more optimal reserve levels based on their underlying risk profiles, ultimately enhancing capital efficiency. However, Joffe says this is likely to depend on the level of change and sophistication of the new models approved.

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. Positively, the bulk of rated medical schemes by GCR continue to exhibit very strong financial capacity to pay claims, and a stable outlook. Furthermore, around 48% of total medical scheme industry beneficiaries belong to a scheme with the coveted AA band.

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