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The state of the medical schemes industry: The Registrar’s Report at the 10th anniversary of the new Act

01 October 2010 Andre Jacobs, Aon

The release of the Registrar of Medical Schemes’ latest annual report coincides with the 10th anniversary of the new Medical Schemes Act - an opportunity to evaluate the efficiency of the Act in terms of membership, financial soundness, access to fair treatment, basic benefits and governance of medical schemes.

In 1999, the registrar’s report was only 48 pages long. The most recent annual report, covering the period up to end December 2009, consists of a comprehensive analysis of the private medical scheme industry covering 344 pages. It is evident that the quality of reporting and depth of analysis has improved remarkably.

It presents an opportunity to assess the efficiency of the new legislation by considering the difference in results before the legislation became effective (1999) to date (2009).

Number of medical schemes

The number of medical schemes declined from 146 to only 110 in the period between 1999 and 2009 - a reduction of 24%. In 1999 there was no dominant medical scheme, but today the private medical scheme market is dominated by Discovery Health Medical Scheme. It has a market share of 42% of the open medical scheme market and 41% of the assets of open medical schemes. This market dominance is matched in the restricted membership medical scheme market by the Government Employees Medical Scheme (GEMS) with nearly 28% share of the restricted membership medical scheme market.

Number of members

The number of principal, or main members, covered by private medical schemes grew by nearly 51% from 2 276 495 at the end of 1999 to 3 434 445 in 2009. This remarkable growth can be attributed to a number of factors such as the involvement of professional healthcare brokers, employer subsidies and support, as well as legislation that provides for an environment of open enrolment.

It is also encouraging to see that exemptions are provided in terms of the Act where medical schemes want to provide more affordable cover. Some of the exemptions will pave the way to cover more employees who currently find it financially prohibitive to join a medical scheme.

Commission

Broker commission has also increased substantially. However, to compare broker commission to member growth is not appropriate as broker commission was completely changed with effect from 2003. The movement of broker commission from the administrator to the medical scheme should have resulted in a decrease in administration costs, but the unintended consequence was that the benefit was not passed on to the healthcare consumer.

Solvency

Solvency of medical schemes is only one indicator of the financial soundness of medical schemes. The industry frequently debates the appropriateness of the solvency level in the regulations promulgated in terms of the Medical Schemes Act.

However, the percentage solvency of private medical schemes increased from 20,2% in 2000, peaking at 39,1% in 2005 and declining to 32,9% at the end of 2009. The most dramatic decline in the percentage solvency was experienced in restricted membership medical schemes. The percentage solvency in open medical schemes declined since 2005 by 7,4% whilst the percentage solvency in restricted membership medical schemes declined by 33%.

Although the percentage solvency declined in the last four years, the total assets in private medical schemes increased by 33% to R27,8 billion. In the open medical scheme market, Discovery Health Medical Scheme still dominates the market with reserves in excess of R6 billion, or 41% of the reserves held by open medical schemes. The total reserves of medical schemes grew in this decade from R4,8 billion to R27,8 billion and now represents nearly 37% of the total claims paid in 2009.

Consumer protection

The protection provided to members in terms of dispute committees, complaints to the Council for Medical Schemes, and protection in terms of waiting periods, late joiner penalties, access to proper treatment, and efficient medicine makes the Medical Schemes Act one of the most progressive pieces of legislation, protecting the rights of members. The low number of complaints is still concerning, but professional brokers are at the forefront of protecting the members of medical schemes.

The Medical Schemes Act has also been successful in providing a minimum set of benefits for members.

Governance

The improved governance of medical schemes is due to the structure of the office of the Council for Medical Schemes, which has increased capacity and created the fulfillment of the Council’s vision to protect the interests of members. The governance guidelines established by the King Commission has also facilitated the improved governance of medical schemes.

Trustees of medical schemes and the regulator should be concerned that in the period December 2008-2009 the contributions increased with 14,5% whilst the healthcare expenditure increased with 17,9%. In the same period the cost medical schemes pay to manage healthcare expenditure increased with 15,5%. The value added by managed care organisations in actually managing the cost of healthcare needs to be assessed.

Trustees of medical schemes may need to consider applying outcomes based agreements with managed care organisations as the current inflationary fee for service managed care remuneration model with medical scheme claims outstripping contribution increases is not sustainable. The containment of healthcare claims are the responsibility of medical scheme trustees and managed care organisations should be held accountable for the outcomes of their labour.

Outlook

The consolidated outlook of the private medical scheme industry indicates a healthy position, but some medical schemes still struggle to remain financially sound as their claims exceed the contributions levied, resulting in medical scheme operating deficits. The inability of some medical schemes to attract and retain the correct risk profile and to manage and price their benefits appropriately to their risk exposure is one of the major drivers of medical scheme amalgamations. The implementation of a Risk Equalisation Fund will ensure the sustainability of smaller medical schemes, and will provide a more competitive environment for medical schemes.

The assets held by medical schemes and the stringent investment guidelines set in Regulation 28 of the regulations promulgated in terms of the Medical Schemes Act now result in a substantial amount of money being taken out of the main stream economic stimulation. It would be encouraging if the Regulator can allow this high level of cash being held, mainly dormant, by medical schemes to stimulate the economy and benefit projects aimed at providing universal coverage to all South African citizens.

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