It is time to check SA Medical Schemes’ vital signs

01 November 2012 John Cranke, PSG Konsult Corporate

How healthy are South Africa’s medical schemes? John Cranke, head of Healthcare at PSG Konsult Corporate discusses the vital signs, the symptoms, the diagnosis and the prognosis for a healthy future.

An important indicator of medical schemes’ health is the risk claims ratio. In 2009 unusually high claims pushed the ratio to dangerously high levels. Schemes were forced to take tough steps to normalise the situation.

Creaking under the strain

They reduced benefits, increased co-payments, introduced stricter protocol management and set up provider network arrangements (such as DSPs and referral management) to curb costs. These measures proved successful and 2010 and 2011 saw a recovery in risk claim ratios across the industry.

The Council for Medical Schemes (CMS) 2011 Annual Report offers a comprehensive snapshot of the industry. It suggests that overall expenditure by the risk pool – or member premiums – increased by less than 10% last year. This increase was in line with hikes in hospitalisation and GP costs.

Expenditure on medical specialists surged by 13.6% (from R17.1 billion to R19.5 billion) over the same period. A likely consequence of this increase is that medical schemes will drive members back to their GPs via, for instance, referral strategies.

Another issue flagged in the latest industry report is the 2.3 million private hospital admissions through 2011. The staggering 197 000 admissions per month is something that must be addressed as a matter of urgency.

Fiscally fit, or not?

It is encouraging that open schemes have improved from loss positions, deficits of R1.7 billion in 2009 and R500 million in 2010, to a R47 million deficit last year. Unfortunately these improvements were largely due to reductions in non-healthcare expenditure and the cost saving measures mentioned earlier.

The bottom line is that schemes are still under significant operating pressure. If you strip out investment income then only 11 of 26 schemes show net healthcare surpluses. Medical schemes’ financial strength can be further assessed by their accumulated reserves. The CMS demands that each scheme hold at least 25% of gross premium income as a buffer against unexpectedly high claims. The appropriate reserve level has been widely debated...

Punishing "good” behaviour

A scheme that is experiencing rapid membership growth, which is good for the scheme, dilutes reserves with the result the surplus falls below the required 25%. Conversely a scheme losing members who have good profiles, something that is bad for the scheme, will experience a release in reserves and an improvement in reserve levels.

Reserve levels should therefore not be interpreted in isolation. Steps are being taken by the CMS to refine the statutory solvency levels based on measures such as underlying risk profiles. The country’s open medical schemes already hold R16 billion in surpluses and it is hoped these funds could be put to better use given more appropriate reserve levels.

Until such time medical schemes with a solvency level below 25% attain the required level, they are monitored against their business plans, which must demonstrate how they intend achieving the statutory minimum.

The elephant in the room

Of greater concern is that medical scheme inflation is consistently above CPI. Last year’s average increase was in excess of 9% and there are concerns that schemes will be unable to meet the CMS guidelines of CPI plus 3% going forward. Members, whose salaries are not keeping pace, are forced to buy down as a result.

Some of the steps schemes might take to rein in costs include:
• An increased focus on provider networks;
• Further medical schemes consolidation;
• Effective management of PMB claims;
• Strengthened governance controls; and
• Taking advantage of the potential positive spin-offs of developments in the public healthcare sector due to NHI.

Tackling systemic problems

In spite of the relative stability in the industry medical schemes are facing serious challenges which will impact on their viability going forward. The Pricing Commission proposed by the Department of Health will help schemes address rising costs.

However, systemic issues such as converting the system from a predominantly curative one to a preventative one will also have to be addressed. The patient might not be on the critical list, but neither is it out of danger.

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