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Medical schemes with older member profiles could cost you more

09 November 2021 GTC Holdings

Ageing membership profiles and a greater proportion of over 65s could herald future medical scheme contribution increases well in excess of medical inflation. The ability of schemes to attract younger members will directly affect their ability to manage future increases.

Many medical schemes have launched their benefit and premium increases for 2022. According to Jill Larkan, Head: Healthcare Consulting at leading financial and wealth advisory business, GTC, “Some medical schemes released constant increases for the year, whilst others released delayed increases starting from March, April or even September 2022.” She adds that the benefit to members of these delayed increases is especially welcome as many families continue to experience financial strain as a result of the economy’s slow recovery following the easing of COVID 19 restrictions.

Whether delayed or not, Larkan says that we will continue to experience regular annual increases in medical aid contributions invariably ahead of headline inflation. But what drives these increases? What should we be budgeting for into the future, and how should financial advisers be using this information to better plan wealth-management scenarios for their clients?

“If one looks at long-term trends that influence the price of medical scheme contributions, few are as important as the age profile of a scheme’s membership base,” says Larkan.

“The age profile of a medical scheme’s membership base is directly linked to its benefit payment expenses and therefore to the price of its contributions. Statistically, older members use more benefits than younger members, however they both pay the same contribution level. Young members effectively cross-subsidise older members. The long-term sustainability of medical schemes is dependent on being able to continually entice younger entrants to balance an otherwise ageing membership.”

Without the continued flow of younger members, the scheme will be forced to increase contributions by more than the medical-inflation rate year-on-year (unless they reduce benefits) and the scheme will eventually become unaffordable. It is indeed possible that this “unaffordable” point is close for some of the smaller medical aid schemes at the moment, especially when it is considered that most pensioners live on fixed or nominally increasing pensions. Contributions, in excess of inflation, quickly become unaffordable, resulting in withdrawal from the medical scheme and resultant reliance on public healthcare benefits, or family support.

Larkan emphasises that it is vital for all members (and their financial advisers) to be aware of the following three metrics in relation to their scheme: 1) The average age of all members; 2) the trend of the average age over several years; and 3) the pensioner ratio of the scheme.

In the recent Council for Medical Schemes (CMS) Annual Industry Report for the year ended 31 December 2020, Larkan draws attention to the Report’s specific reference to age profiles, pensioner ratios and usage patterns within medical schemes.

The CMS notes that the average age of all members of medical schemes has increased from 32.5 in 2016 to 33.4 years in 2020.

The Report also notes an increase in the pensioner ratio (the percentage of members over the age of 65) from 7.9% in 2016 to 8.9% in 2020.

“These continued aging trends could herald future contribution price increases if not balanced by the introduction of new young members. Those medical schemes with the product and marketing capacity to successfully entice younger South Africans to join will be better positioned to resist these inflationary pressures in the long term, than those schemes which can’t, or which are too small to absorb this impact” concludes Larkan.

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