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Amalgamation of schemes: What does it mean for your clients?

01 October 2010 Dr Vusi Memela, Sechaba Medical Solutions

Historically, schemes or administrators merged to increase market share, reduce costs or expand an existing product offering. Today, additional legislative pressures and constraints play an important role in mergers as a means of survival.

As the medical aid environment grapples with increased legislative demands, uncertainty around the National Health Insurance, economies of scale and other economic and financial factors, an amalgamation trend has started to emerge.

Trend emerging

The recently released Council for Medical Schemes Annual Report 2009-10 outlines the numbers, which are not yet overtly large, but do signify the start of such a trend under the various pressures faced by the industry.

It states that from January 2009 to 2010, the number of registered medical schemes dropped from 110 to 105. Since then, an additional eight merger requests have passed through the Council.

Understanding the drivers

Analysing some of the reasons behind this trend, Sechaba Medical Solutions’ Company Secretary and Legal Advisory Executive, Dr Vusi Memela, says: “There are several factors that influence a scheme’s decision to merge.

“Firstly, legislative compliance has played a large role, particularly if one considers the increased pressure on schemes with negative or static growth figures, to provide certain legislated services such as PMBs. This has resulted in a significant increase in costs without the balance of increased income. Many of the smaller schemes have thus been unable to maintain the required 25% statutory reserve level.”

Sound economics

“Secondly, sound economic decisions underlie many of these amalgamation decisions. These include creating larger risk pools, which create a more stable and predictable claims profile, and a more established annual contribution pool. The merging of schemes also produces better economies of scale which translate into lower fixed costs per member. This gives the scheme greater bargaining power to negotiate with service providers, administrators and other third party suppliers,” explains Memela.

“In addition, schemes that merge gain access to greater market sectors. For example, if one scheme has a stronghold in the mining sector and another in the retail sector, the merged scheme has greater opportunities in two markets as opposed to one. There are also financial factors driving these mergers including sustainability of schemes in an uncertain environment, an improved balance sheet and pooling of reserves.”

Benefits to members

While it takes some adjustment on behalf of the members to adapt to a new brand and the products of the merged scheme, mergers can have some positive spin-offs for members.

“Often there is a greater choice of benefit options and value-add products, giving the member greater freedom of choice. A wider national footprint gives the members greater accessibility to the scheme. And, being part of a larger risk pool gives the member greater peace of mind, while belonging to an often better known brand provides members with greater feelings of association.”

Into the future

The Medical Schemes Act of 1999 was a means of preparing schemes and administrators for the future direction of healthcare in South Africa. Moving forward, Memela believes smaller schemes and administrators, who are worried about their future in an NHI industry, should revise their strategic focus to ensure their survival and diversify their business strategy to spread the risk, or else look for partners that are strategically aligned to be prominent players in an NHI environment. “A merger is more favourable when it is a part of a focused business strategy rather than a last resort when a scheme has no way out.”

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