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23 May 2004 Angelo Coppola

This is the first in a two part series on the main issues raised by the annual report from the Registrar for Medical Schemes.

Andre Meyer, CEO of Medscheme, tackles the first two issues:

* What is included in this figure?

* Is 15% a reasonable figure for “overheads”?

What is Included?

Administration “costs” are not the same as administration “fees” paid to an accredited administrator. Let’s have a look at each of the specific elements of these non-healthcare costs

Administration fees are paid by the scheme to the administrator.

These will range between different schemes, as they will depend on the nature of the services required, e.g. visits to employer paypoints, marketing services, etc. These are negotiated annually.

Factors driving up these fees include increased volumes of administration due to member utilization increases, investment in technology (electronic claims, data warehouses, etc.), complexity of benefit design, and interfaces with external parties (consultants, brokers, audit committees, ratings agencies, marketing and PR companies, unions, BHF, etc.).

There is also increased claims scrutiny to minimize fraud and abuse.

These fees are the largest component of non-healthcare costs, and need to be monitored.

Administration expenses are those external costs incurred in the course of running the scheme.

These expenses include operational costs such as postage of monthly statements to members and doctors, printing of brochures, holding of meetings/elections, etc.

Included under this category are trustee expenses, where trustees fly to attend meetings, and trustees may be paid fees per meeting or per month, and attend other meetings, conferences, etc.

The Registrar for Medical Schemes has already taken action in this area to curtail potential excesses. Also included here are certain costs payable to the Council for Medical Schemes or to auditors for complying with the Medical Schemes Act, such as quarterly returns.

Managed care fees, meanwhile are paid to managed care organizations, and also vary enormously, depending on how many services are contracted for.

In respect of open market schemes only (not in-house schemes), there is the cost of marketing the scheme, which is another significant component of admin costs.

The Registrar’s Report reflects that admin costs in open-market schemes are higher than in closed schemes primarily for this reason. The Act provides for schemes to pay commission to brokers of 3% of premium.

In addition, there are marketing support costs, including advertising, promotions and broker support personnel which are necessary to support marketing activity in a highly competitive market.

While the Council for Medical Schemes has been critical of the value of brokers, it is evident that they are the most preferred channel of acquiring new members, and by members themselves when trying to evaluate which of several schemes meets their needs.

Commissions are paid directly by schemes to intermediaries for their services.

Reinsurance premiums in the industry also form a meaningful part of the non-medical expenses, having increased to R13.3bn in 2002. Legislative measures have been introduced to deal with some abuses, but this cost is offset by R12.2bn in recoveries, which essentially fund healthcare expenditure.

On the second question, is 15% reasonable for overheads? Meyer says this is a value-for-money question which must be answered by the customer who pays.

Administration costs in healthcare are generally less than other financial services e.g. Life Assurance (20-25% of premium) or Short-Term Assurance, banking, etc. where admin costs and margins generally exceed those in healthcare.

In addition, a comparison of the workload required shows how much more is done in healthcare, where medical aid administration covers a whole family (not one policy holder) who submit on average eight claims lines per family per month.

It is also worth benchmarking with providers of healthcare to see whether their “overheads” are also restricted to no more than 15% of the direct costs of providing care. Arguably, the non-healthcare costs of all providers should also be subject to scrutiny and control.

The 2003 Annual Report from the Registrar for Medical Schemes raises concerns relating to the rise in non-healthcare or “administration” costs in healthcare, which comprise approximately 15% of total expenditure, reports Andre Meyer, the CEO of Medscheme.

Tomorrow we deal with the third question.

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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