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Medical aid schemes battle to survive
by Eamonn Ryan
2001-04-12

Predictions by open medical schemes - schemes whose membership is open to the general public - that aspects of the Medical Schemes Act would threaten their very survival are proving to be alarmingly accurate. The report, published this month, notes that schemes have been involved in frantic maneuvering to avoid the worst effects of the Act's concept of universal healthcare. Merger activity has increased and is expected to continue at a brisk rate as schemes seek to grow and diversify their risk pools. The worsening solvency situation has arisen despite the fact that increases in medical scheme contributions have once again outpaced the consumer price index. Gross premiums received by the major medical schemes increased 21.1% to R17.5-billion in 1999. Despite this, 87% of schemes surveyed posted underwriting losses for the 1999 year. The average value of claims increased during 1998 and 1999 from 91.4% of premiums to 97.3% in 1999. Private hospitalisation, optical services and medicines were some of the main reasons for this inflation. Imported inflation - the Rand depreciated 25% during 1999 - was most evident in chronic medication and the cost of hospital equipment. (Source: Business Times, 8 April 2001)

Predictions by open medical schemes - schemes whose membership is open to the general public - that aspects of the Medical Schemes Act would threaten their very survival are proving to be alarmingly accurate. The report, published this month, notes that schemes have been involved in frantic maneuvering to avoid the worst effects of the Act's concept of universal healthcare. Merger activity has increased and is expected to continue at a brisk rate as schemes seek to grow and diversify their risk pools.

The worsening solvency situation has arisen despite the fact that increases in medical scheme contributions have once again outpaced the consumer price index. Gross premiums received by the major medical schemes increased 21.1% to R17.5-billion in 1999. Despite this, 87% of schemes surveyed posted underwriting losses for the 1999 year.

The weaker underwriting results are due to the unfavourable claims environment of 1999, but also to a degree of underpricing by schemes in an effort to win additional membership, the report says. A deteriorating claims environment was widely anticipated when the Medical Schemes Act introduced open enrolment and community rating. Medical schemes can no longer refuse membership or discriminate against potential members on the grounds of age or health status.

This means that, by virtue of falling into the same income bracket, a low-risk individual pays the same contribution as an individual who is at a higher risk of falling ill. As a result, there is an incentive for healthier individuals to opt out of open medical schemes in favour of alternative means of cover - essentially self-insurance - leaving behind a greater proportion of high-risk members who consequently face a worsening claims experience.

Many schemes recorded surpluses by virtue of their investment income that benefited from strong equity markets during the second half of 1999. This is unlikely to be repeated in 2000. Maneuvering by schemes to avoid the potentially negative aspects of the Act on open medical schemes, particularly the open enrolment period, failed to achieve any impact.

Several applied for closed medical scheme status to avoid open enrolment entirely, while others vigorously supplemented their risk pool with new members in 1999 and thereafter suspended their marketing to wait out the expected open enrolment period, the survey reports. But this ploy proved ineffective as the period in which previously uninsured individuals could join a scheme without any late-joining surcharge on premium - originally six months - was extended to March 2001.

Jason Hall, senior analyst at Global Credit Ratings, says: Since 1992 the medical inflation rate has been far higher than the general inflation rate. Because this has been more than five percentage points higher in some years, the portion of average household expenditure devoted to healthcare has more than doubled in eight years to over 7%.

The average value of claims increased during 1998 and 1999 from 91.4% of premiums to 97.3% in 1999. Private hospitalisation, optical services and medicines were some of the main reasons for this inflation. Imported inflation - the rand depreciated 25% during 1999 - was most evident in chronic medication and the cost of hospital equipment.

But medical schemes have actively tried to curb internal efficiencies. There were an unprecedented number of mergers over the past two years to improve economies of scale. Some examples of this were the Kopano merger with VaalMed to create Protector Health, and the Meddent merger with Finmed and Premier to create OmniHealth.

Efforts by medical schemes to curb costs of service delivery also paid off. After six consecutive years of escalating delivery costs that saw the cost of delivery creep up from 4% of gross premium income to 10.3%, costs increased only slightly to 10.4% in 1999.

Source: Business Times, 8 April 2001

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