Annual report highlights broker costs up

The Council for Medical Schemes (CMS) released its Annual Report for 2016-2017 providing a comprehensive report on the status of the private medical schemes industry in South Africa. We thought it would be useful to provide a quick summary in a nutshell of these points to give you a better understanding of the medical schemes industry and what has been going on.

Medical scheme industry overview

According to the report the 82 schemes had a total subscription of 8.879 million members as at 31 December 2016. The industry experienced a year-on-year increase of 0.78 % in the total number of medical scheme beneficiaries, up from 8.809 million in December 2015. The total number of beneficiaries of restricted schemes increased by 1.39% compared to a 0.30% increase in the beneficiaries of open schemes.

The average age of medical scheme beneficiaries in 2016 was 32.5 years compared to 32.3 years reported in 2015. Female beneficiaries were generally older than male beneficiaries. The average age of female medical scheme beneficiaries was 33.4 years in 2016 and that of males 31.5 years. The pensioner ratio increased slightly to 7.9%, with a general rise in the ratio for both males and females.

Gross contributions increased by 8.1% to R163.9 billion as at December 2016 from R151.6 billion in December 2015. Risk contributions (excluding medical savings accounts contributions) increased by 8.1% to R147.8 billion from R136.7 billion in 2015. The equivalent increase from 2014 to 2015 was 7.7%. Gross contributions per average beneficiary per month (pabpm) rose by 7.2% to R1 543.2 from R1 439.8 in 2015. After adjusting for inflation, this growth was 0.8%.

Escalating cost and expenditure

A great deal has been written about the impact of escalating private hospital costs on the affordability of medical schemes. The reason for these concerns is once again highlighted when we assess the total benefits paid by medical schemes on behalf of their members.

Expenditure on healthcare benefits increased (in nominal terms) by 8.87% from R138.89 billion in 2015 to R151.21 billion in 2016. Total hospital expenditure by medical schemes comprised R56.61 billion or 37.44% of the R151.21 billion that medical schemes paid to all healthcare providers in 2016. Total medical scheme expenditure on private hospitals increased by 9.80% to R56.32 billion, up from R51.29 billion in 2015.

Payments to medical specialists amounted to R10.24 billion or 6.78% of total healthcare benefits paid in 2016. About 51.33% of the R10.16 billion paid to medical specialists in 2016 was paid to those operating in hospitals. Expenditure on general practitioners (GPs) amounted to R8.96 billion or 5.93% of healthcare benefits paid, representing an increase of 3.25% on the 2015 figure of R8.68 billion.

Consuming the majority of the pie

Healthcare benefits which medical schemes covered from their risk pools amounted to R135.98 billion in 2016 compared to R124.54 billion in 2015, an increase of 9.18%. Hospital expenditure accounted for 41.46% of risk benefits paid in 2016. Expenditure on medicines accounted for 13.52% of total risk pool benefits. Medical specialists consumed 6.86% of the pie, while risk pool expenditure on GPs was R6.81 billion or 5.01% of total risk pool benefits.

The total cost on prescribed minimum benefits (PMBs) for medical schemes amounted to R73.1 billion in 2016. The total risk benefits paid in 2016 was R136 billion. The expenditure on PMB-related healthcare benefits therefore constituted 54% of total risk benefits paid. In 2015 PMBs constituted 51% of total risk benefits paid.

Broker and administration costs

The CMS Annual Report also provides a summary of costs, defined as all commissions, service fees and other distribution costs paid to the broker network. Broker costs, which include all commissions, service fees and other distribution costs, increased by 10.0% from R1.8 billion in 2015 to R2.0 billion in 2016, compared to 5.8% in 2015. Broker costs represented 14.1% of total non-healthcare expenditure in 2016, a slight increase from 13.9% in 2015.

The total gross non-healthcare expenditure for all medical schemes at the end of 2016 was reported at R14.1 billion. This constitutes an increase of 8.5%, up from R13.0 billion in 2015. Non-healthcare expenditure increased marginally by 1.2% to R1 594.7 in 2016 from R1 575.6 in 2015. The non-healthcare ration (as % of RCI), also increased to 9.6% in 2016 from 9.5% in 2015.

Administration expenditure, which is the largest component of non-healthcare expenditure in all medical schemes, grew by 8.1% to R11.9 billion between December 2015 (when it was reported at R11.0 billion) and December 2016.

Open schemes incurred a total deficit of R955.7 million (2015: R539.6 million deficit), and restricted schemes generated a combined deficit of R1 435.1 million (2015: R668.9 million deficit). This deterioration is mainly due to the worsening claims ratios of all schemes from 91.4% in 2015 to 92.1% in 2016.

A total of 78.3% (or 18 of 23) of open schemes and 61.7% (37 of 60) of restricted schemes showed net healthcare deficits during the year under review. The net surplus of all schemes combined, after investment income and consolidation adjustments, was R2.1 billion (2015: R2.5 billion).

The industry average solvency ratio decreased to 31.6% in 2016 from 32.6% in 2015. The solvency ratio of open schemes decreased by 2.1% to 28.6% in 2016 (2015: 29.2%). Restricted schemes experienced a decrease of 4.5% in their solvency ratio, 35.8% from 37.5% in 2015.

The CMS 2016-2017 Annual Report is an impressive record of medical schemes activity in the period.

Editor’s thoughts:

The CMS Annual Report contains a wealth of information on both open and restricted medical schemes. If you are a medical broker we would like to hear your views about what should be expected from the broker and if you believe there could be room for improvement. The hospital costs, for example, are quite excessive. Do you believe this needs to be addressed in some way? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.