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Are we headed for a few big medical schemes?

01 November 2011 Damian McHugh, Momentum Health

The Council for Medical Schemes 2010 Annual Report confirms a trend of consolidation in the medical schemes space. It seems certain that the medical schemes landscape will be dominated by a few large players a decade from today...

Over the past two decades the number of medical schemes conducting business locally has more than halved. Ongoing acquisitions, consolidations and mergers in the sector have resulted in the 244 schemes registered in 1990 dwindling to just 100 by the end of 2010. The trend, which exhibits among both open and closed schemes, is expected to continue…

Changes driving consolidation

What is behind this industry-wide consolidation? “Changes in medical scheme legislation over the past 15 years have introduced a number of challenges for the medical schemes market,” observes Damian McHugh, Head of Sales and Marketing at Momentum Health. “The provisions for open enrolment and community rating have, for example, required schemes to accept all members applying for membership, without the ability to charge contributions according to the risk these individuals might pose in terms of the scheme’s reserves.”

This development – viewed in conjunction with the absence of a Risk Equalisation Fund (REF) – results in medical schemes having no defence against potential high-claiming members. Medical schemes have also had to shoulder much larger healthcare expenditures due to government’s Prescribed Minimum Benefits (PMB) regulation. In terms of the PMB definitions, medical schemes must cover a range of emergency procedure and chronic illness benefits that weren’t necessarily covered in the past.

Squeeze on smaller schemes

Each of these interventions brings the long-term sustainability of smaller medical schemes – especially those with older membership profiles – into question. According to McHugh the path to continued sustainability is therefore dependent on a scheme’s ability to attract younger and healthier members in order to cross-subsidise the claims of those members who claim more, without jeopardising the financial position of the scheme as a whole.

A scheme’s average age is by and large indicative of its anticipated claims exposure, as older members generally claim more than younger members and vice versa. Momentum Health was recorded at end 2010 as one of the open schemes with the lowest principal member average age in the industry.

Fewer administrators

Consolidation is not unique to medical schemes. The medical scheme administrator market has also seen significant change over the past two decades. Self-administration proved the most popular model in the early 1990s, with 36% of schemes opting for this method. Nowadays only 10% of schemes self-administer. The bulk of schemes have outsourced their administration to the healthcare administration platforms offered by the combined Momentum and Metropolitan (servicing 33% of all registered schemes) and Discovery Health (29%).

The decline in the number of sustainable medical schemes has created an environment where consumers enjoy greater flexibility and variety when it comes to choosing an appropriate medical aid. The same benefits also hold true for the financial adviser. And it is also easier for the regulators to police medical schemes and ensure that they comply with legislated minimums – such as the 25% solvency requirement.

Benefit of fewer schemes

McHugh concludes: “Having fewer medical schemes is beneficial from a financial adviser’s point of view, as fewer competitors allow for easier evaluation and comparison between schemes. Members of medical schemes will also enjoy more security knowing that those schemes that are left are larger, more sustainable and better able to deal with the changes the industry faces.”

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