Category Healthcare
SUB CATEGORIES General  |  HIV |  Medical Schemes | 

So what?

11 November 2004 Angelo Coppola

The current debate concerning consolidation in the medical schemes industry is being driven by the scheme administrators and perhaps the issue is not as clear-cut as is being presented, says Jeremy Yatt, CEO of Fedhealth.

In fact, consolidation doesn’t suit everybody. For medical schemes there are major issues surrounding consolidation or merging and this focusses on risk pools. Simply because you have a bigger risk pool doesn’t necessarily translate into a safer pool.

There are no real economies of scale when it comes to risk pools, as there are no better merged risk pools – only bigger pools.

The fact is that consolidation would suit the administrators, as they would have more volume and possibly less client information complexity.

And in some cases it is the underlying insurance businesses that really stand to benefit by opening cross selling opportunities to the scheme database.

The bottom line is that the smaller pools or schemes are more exposed to one-off events than their bigger counterparts, in relative terms, although this problem is neutralized as the schemes’ reserves take care of this exposure.

Ideally, schemes look to cross-subsidise the sick by attracting and keeping healthy members.

By taking on an entire risk pool, the benefits of cross-subsidisation are severely diluted.

Members may be lured into believing that being part of a bigger amalgamated fund is to their benefit.

In fact the current argument that the bigger merged schemes offer economies of scale is a fallacy. The bigger schemes are not really in a position to negotiate discounts at local or regional level, simply because there are no national service suppliers.

As it currently stands there are no service providers that have representation across the country with whom to negotiate, although it does hinge on the ruling by the Competition Tribunal on the potential merger between two hospital groupings.

The benefit of belonging to a smaller scheme - and a fact that is not commonly explained - is that these schemes are often regionally focused, and are thus better placed to negotiate discounts with service providers, who are also locally or regionally based.

A prime example of this working was the previous government’s establishment of economic hubs, such as Richards Bay, which meant that localized medical schemes were in a position to negotiate discounts with local suppliers.

State scheme

The government’s view on the establishment of a single state medical scheme, and that consolidation into that single super scheme may offer them economies of scale, isn’t valid as only the state hospitals would benefit from bulk discounts for the purchase of medicine. Members of such a scheme would generally go to private hospitals and would not benefit from this discount.

All in all consolidation is seen as only beneficial to administrators, because they can simplify their administration processes, based on a numbers game.

On the question of member profiles and the marketing speak around the fact that member profiles are so similar, you need to take a close look at the claims history and the age profile of members.

Age is an issue, and small percentage differences between two schemes can mask a myriad of issues.

The administrative nightmare around a consolidation is also huge, and this focuses on the communication to all members about how their new scheme will look, what benefits it will offer, whether there will be any benefit erosion, and the increased chances of getting the member details wrong, regardless of whether the schemes are administered by the same administrator or not.

The fact is only a few schemes have paid their school fees when it comes to merging or absorbing other schemes into theirs. Fedsure Health was one example of a scheme that was 150 000 strong, and decided to merge with Northern (70 000 members) and Tafelberg (30 000 members).

At the end of this particular merger process the scheme was 250 000 strong. Just one month later the scheme member number had dropped to 150 000 – 100 000 members didn’t like the drop in service levels resulting from the merger and voted with their feet.

Majority rule?

If members feel especially strongly, then letters and emails to the regulator, registrar and any consumer affairs body would not be a bad idea. However the problem is that they can’t really do anything, once the ballot has been held and the majority of members have decided.

They would be well-advised to check the small print of the deal and whether they are directly affected. Whether they will have the same benefits, whether the annual premium increases will be of the same order and how they will actually benefit.

Members on a smaller scheme may like the closer working relationship they felt they enjoyed with the trustees and administrators of that scheme and may now find themselves no more than a number in a larger scheme.

A case in point is the recent announcement that two schemes would merge, when in fact it is a take-over as one of the schemes’ benefits will disappear, leaving those members on the disappeared benefit with the choice of having to accept the new benefit structure, whether they like it or not.

It may be acceptable, but then again, it may not.

Members should also check what the situation will be in terms of their savings scheme, what can be claimed, and where a claim will be paid from.

And if the member is unhappy with the proposed merger, make your position clear to the scheme you belong to.

The consolidation conundrum is further complicated with the announcement by the regulator that it is generally in favour of consolidation.

If this were the case why is the process so complicated and why are there so many hurdles to the consolidation process?

In a nutshell consolidation is many faceted and the benefits, advantages and disadvantages will vary with each action. Ultimately members’ interests need to be protected and benefits must be applicable and appropriately priced.

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