A bleak year for SA medical schemes

Alexander Forbes Health highlights challenges facing the industry.

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Diagnosis

For the third consecutive year, the South African medical schemes industry posted poor financial results in 2016, with 65% of schemes failing to achieve an operating surplus and having to draw on their investment returns – a strategy that is unsustainable in the long run.

The industry, as a whole, also experienced its highest claims ratio since 2009.
These figures are contained in Alexander Forbes Health’s Diagnosis, an annual publication prepared by the Technical and Actuarial Consulting Solutions (TACS) team, which analyses key trends in the medical schemes industry.

This year’s Diagnosis provides an overview of the financial and demographic performance of medical schemes between 2000 and 2016, and considers the key issues shaping the industry.

Read more: What you should know when changing medical schemes

Head actuary of TACS at Alexander Forbes Health, Roshan Bhana, said the research team anticipated that the 2017 financial results of schemes would reflect a material improvement from the 2015 and 2016 experience. “This is in part due to the interventions that schemes have put in place to manage two years of unusually high claims.”

An overview of this year’s publication appears below.

Medical scheme numbers
The top 10 open medical schemes by principal membership have remained unchanged since December 2015, although Hosmed is now the 10th largest open medical scheme following the amalgamation of Liberty with Bonitas. The top 10 restricted medical schemes by principal membership also remained unchanged during 2016, but LA Health is now the fourth largest restricted scheme due to an 8.9% growth in membership while Platinum Health is down to fifth place.

Growth in dependants for the majority of schemes was lower than the growth in principal members, with the number of dependants registered on medical schemes increasing by 0.6% in 2016 and resulting in the average family size in the industry reducing from 2.23 in December 2015 to 2.22 in December 2016. This may indicate financial pressures, resulting in medical cover being purchased for fewer dependants.

Contribution income
In terms of operational performance, only seven of the country’s top 10 open and top 10 restricted schemes had sufficient contribution income to cover all claims and expenses in 2016. The industry, as a whole, achieved an operational deficit of R2.390 billion in 2016, almost twice the R1.219 billion deficit reported in 2015.

Inflationary trends
The gap between medical scheme contribution inflation and consumer inflation (CPI) continues its downward trend, partly as a result of efforts by medical schemes to manage the costs charged by providers. Over the last 17-year period, medical care and health expenses inflation has been on average 7.6% per year, while CPI inflation averaged 5.8%, resulting in a gap of 1.8% per year. During the same period, average medical scheme contribution inflation was 7.5% per year, resulting in actual increases in medical scheme contributions per principal member exceeding CPI inflation by at least 1.7% per year.

However, since this calculation includes buydowns to lower options and reduction in family size, this is not indicative of the true picture. Thus, headline increases announced by schemes over this period are between CPI plus 2.5% and CPI plus 4.5%.

Healthcare expenditure
The industry as a whole experienced a worse claims year in 2016 than in 2015, with the highest claims ratio since 2009. The risk claims ratio is the proportion of contribution income used to fund claims, excluding any allowance for medical savings accounts.

The risk claims ratio for all medical schemes increased from 91.4% in 2015 to 92.1% in 2016. The generally accepted risk claims ratio benchmark is 85%, although this will depend on each scheme’s financial position and pricing strategy.

Non-healthcare expenditure
Total non-healthcare expenditure as a proportion of gross contribution income increased marginally for the medical scheme industry as a whole, driven by an increase in the proportion of contribution income spent on non-healthcare expenditure by restricted medical schemes.

Investment income
In 2016, 54 out of 82 medical schemes (65.9%) failed to achieve an operating surplus and had to draw on their investment returns – placing additional pressure on solvency levels. Alexander Forbes Health is of the opinion that this strategy is not sustainable unless investment returns are able to keep pace with, and preferably exceed, claims inflation.

Financial performance
The noticeable deterioration in the overall operating results of the industry from 2013 to 2015 continued, with further deterioration of financial performance in 2016. The industry ended 2016 with an overall solvency of 31.6%, down from the 32.6% solvency reported in 2015.

This trend was driven by a worsening solvency position of both open and restricted medical schemes.

Industry consolidation
A National Health Insurance (NHI) Implementation Committee on Consolidation has been established and tasked with restructuring the current healthcare financing arrangements in the lead-up to the creation of a central NHI fund.

This is to be achieved through five transitional arrangements covering the unemployed, the informal sector, the formal sector comprising small- to medium-sized businesses, the formal sector comprising large businesses, and the public sector.

Medical Schemes Sustainability Index
With the continued consolidation of medical schemes in the industry, as well as rising claims costs, the sustainability of medical schemes and the assessment thereof have become increasingly important for all industry stakeholders. The Alexander Forbes Health Medical Schemes Sustainability Index analyses the collective impact of key statistics on the sustainability of medical schemes in future years.

The biggest increases in the index for 2016 were seen for Transmed and Profmed, which improved their 2015 scores 20.8% and 17.8% respectively. Polmed is once again the top performer in the index, although it was not the top performer for 2016. The profile of the industry remains fairly stable.