Medical Schemes need to improve cash management

Medical schemes could make a material difference to their bottom lines – and hence their ability to meet members’ funding requirements – simply by improving the way in which they manage their cash reserves.

So says Stephen Rogers, joint MD of Taquanta Asset Managers, who points out that medical schemes are essentially cash businesses that are required to hold a substantial portion of their reserves as readily accessible, liquid assets.

“The result is that most medical schemes have millions of rand languishing in current accounts earning little if any interest. If that return could be increased by just one or two percentage points, the impact over a year could be substantial. For example, if the scheme had R25-million in its current account, and the return on this was increased by only 2%, the net result would be around R500 000 extra on the scheme’s bottom line in just 12 months,” he explains.

According to Rogers, medical schemes need to develop and implement an effective cash management policy and to communicate this to their administrators.

“Cash management is the daily management of the medical fund’s liquid assets – its cash – to ensure the effective operation of the medical scheme by ensuring that excess cash balances of the medical fund are optimally invested on a daily basis, according to the investment strategy and policy of the fund,” he explains.

This will ensure that cash balances in the medical scheme’s lower interest earning operational accounts are kept to a minimum as per the agreed policy. This is achieved by applying Treasury management skills to this process as there is generally a high degree of certainty to the timing of the cash flows of medical schemes.

Rogers points out that as the primary cash flows of most medical schemes are handled though an Electronic Funds Transfer (EFT) process, there is a high degree of predictability to the cash flows. As a result, the scheme’s cash management policy can be optimised fully to facilitate a more efficient investment mandate and enhanced return on surplus funds.

“In most funds, the administrator is responsible for the day to day administration of cash flow management on the current accounts of the scheme. The problem is that few administrators are equipped or skilled to enhance the returns on the surplus short and long term cash positions on behalf of the fund; to enhance the returns on these investments in respect of agreed benchmarks; and to invest or dis-invest funds to meet the cash flow requirements of the scheme.

“Yet there is clearly significant scope for the enhancement of cash management in medical schemes. Taquanta Asset Managers works closely with several medical schemes, and their administrators, to improve the liquidity management of their cash. The benefits realised to date have been significant at absolutely no cost to the schemes’ members,” Rogers concludes.