DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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DIAGNOSIS
2018/2019
An analysis of key trends in the medical schemes industry from 2000 to 2017
Alexander Forbes Health Technical and Actuarial Consulting Solutions
HEALTH
ALEXANDER FORBES HEALTH
Introduction
Alexander Forbes Health’s Technical and Actuarial Consulting
Solutions team is proud to present this year’s Diagnosis.
We are confident that this publication will give you a comprehensive view of the performance of
the South African medical schemes industry as well as some of the changes and challenges that
the industry is facing.
This analysis covers key statistics and trends over the 18-year period from 2000 to 2017, based
on the consolidated financial results for all registered medical schemes, with specific focus on
the 10 largest open and 10 ten largest restricted medical schemes by principal membership.
The proposed legislative reforms and the findings of the Competition Commission’s Health
Market Inquiry have resulted in much debate in the medical schemes industry during 2018.
The draft framework for consolidation of medical schemes and benefit options was also
published and has created uncertainty for many schemes.
If you would like to discuss any of the issues addressed in more detail, please speak to
your Alexander Forbes Health consultant or contact one of the specialists listed at the end
of this publication.
2
DIAGNOSIS 2018/2019
Contents
1. Key industry developments 4
2. Performance indicators 7
2.1 Size and scale 8
2.2 Market share 11
2.3 Membership profile 12
2.4 Contributions 18
2.5 Inflationary trends 21
2.6 Healthcare expenditure 23
2.7 Non-healthcare expenditure 25
2.8 Financial performance 27
2.9 Investments 31
2.10 Solvency levels 32
3. Alexander Forbes Health Medical Schemes Sustainability Index 35
4. Conclusion 39
3
ALEXANDER FORBES HEALTH
1. Key industry developments
1998
■■The Medical Schemes Act is signed into law. It introduces
prescribed minimum benefits (PMBs), community-rated
contributions and open enrolment.
2009
■■The Competition Amendment Act is signed into law. It provides
2000 a legal framework and gives formal powers to the Competition
Commission to conduct market enquiries.
■■The Medical Schemes Act comes into effect and the ■■The Protection of Personal Information (POPI) Bill is published to
Council for Medical Schemes (CMS) is established. protect personal information processed by public and private bodies,
including medical schemes and industry stakeholders.
2003
■■The National Health Act gives a framework for a
2010
structured and uniform health system for the entire country. ■■Dispensing fee regulation is introduced for pharmacists
■■Personal medical savings accounts are limited to 25% of and licensed health professionals.
gross contributions. ■■The High Court rules the National Health Reference Price List
invalid and sets it aside.
■■The High Court dismisses the Board of Healthcare Funders’ (BHF)
court application to seek clarity on the meaning of Regulation 8(1).
2004 ■■The CMS publishes the prescribed minimum benefits code of
conduct to comply with Regulation 8(1) – ‘pay in full’.
■■A Competition Commission ruling bans the system of collective
tariff setting between schemes and healthcare providers.
■■Single exit price (SEP) is implemented for pharmaceutical
manufacturers.
■■The National Health Reference Price List (NHRPL) is first 2011
published by the Department of Health. ■■The Consumer Protection Act takes effect to support a culture of
■■Medical schemes must maintain a minimum solvency level of 25%. consumer rights and responsibilities.
■■The Green Paper on the National Health Insurance Policy is
published for public comment.
2005
■■The Government Employees Medical Scheme
(GEMS) is registered.
2012
■■The Children’s Act stipulates the age of consent ■■The Taxation Laws Amendment Act provides for a new medical tax
of minors to medical and surgical treatment. credit system to replace medical tax deductions. The definition of a
dependant is widened in the Income Tax Act to be the same as the
definition of a dependant in the Medical Schemes Act.
■■Draft demarcation regulations propose the removal of most gap
2006 cover products and hospital cash plans.
■■The CMS takes over publication of the National Health Reference
Price List, a guideline for healthcare service tariffs.
2013
■■The Financial Services Laws General Amendment Act
amends the Medical Schemes Act by widening the
2008 definition of the ‘business of a medical scheme’.
■■Schemes must hold members’ medical savings account (MSA)
■■The Medical Schemes Amendment Bill is proposed but not contributions separate from scheme reserves and allow interest to
signed into law. It provides for the Risk Equalisation Fund accrue to positive MSA balances.
(REF), low-income benefit options, improved governance, and an ■■The National Health Amendment Act provides for the establishment
amendment of the definition of the business of a medical scheme. of the Office of Health Standards Compliance (OHSC), a key
■■The Health Professions Council of South Africa (HPCSA) scraps building block of the National Health Insurance (NHI).
ethical tariffs, used by providers as a ceiling for patient accounts. ■■The Competition Commission Inquiry into Private Healthcare
is announced.
■■The Protection of Personal Information (POPI) Act) is signed into law.
4
DIAGNOSIS 2018/2019
2017
■■The revised National Health Insurance White Paper is gazetted on
30 June 2017. This version does not provide updated estimates
of the NHI costs, but identifies additional potential sources of
funding, including the removal of medical aid tax credits as well
as the public sector medical aid subsidies.
■■The findings and recommendations of the Competition Commission’s
Health Market Inquiry are delayed to 30 November 2017.
■■The Constitutional Court overturns the Supreme Court’s ruling that
2014 requires schemes to hold medical savings account assets separately
from the rest of the scheme’s assets. This means that:
■■The 12-member board of the newly established Office of Health ●●medical savings account assets will now form part of the
Standards Compliance is named. scheme’s assets
■■The Competition Commission Inquiry into Private Healthcare begins. ●●assets can be invested in investment classes other than cash
■■The Draft Road Accident Fund Benefit Bill provides for a no-fault ●●interest on medical savings account assets can accrue to
benefit scheme and a new administrator to replace the Road the scheme
Accident Fund. ■■A National Health Insurance Implementation Committee on
■■The Financial Services Board (FSB) introduces Treating Customers Consolidation is established to oversee the restructuring of the
Fairly (TCF), a market conduct framework of regulatory reform. industry before the full implementation of NHI. This process
■■The National Department of Health publishes a national health includes:
insurance booklet. ●●consolidating those schemes with fewer than 6 000 members
into larger schemes
●●merging public sector schemes
●●reducing the number of benefit options offered by the remaining
schemes
2015
■■The Competition Commission Inquiry into Private Healthcare continues,
with medical schemes and administrators being requested to provide
claims and tariff information for the last 17 years.
■■The Minister of Health publishes a draft amendment to 2018
Regulation 8. Medical schemes are no longer required to pay for ■■The National Health Insurance Bill is published on 21 June 2018.
PMBs at cost, but rather at either a contracted rate or the 2006 It sets out the framework for establishing the National Health
guideline tariff plus inflation. Insurance Fund, which will be a single, mandatory public
■■The Council for Medical Schemes approves the framework for purchaser and financier of health services in South Africa.
exemption and allows low-cost benefit options to be introduced from ■■The Medical Schemes Amendment Bill is published on
1 January 2016. The framework is then withdrawn soon afterwards. 21 June 2018 and proposes wide-ranging reforms to the
■■The National Health Insurance White Paper is published on 10 Medical Schemes Act. The changes include:
December 2015. It proposes a single payer system with no option to ●●redefining the benefits package all schemes are mandated to cover
opt out and medical schemes being limited to offer complementary ●●revising the governance structures of medical schemes
cover. ●●changing the way schemes are allowed to differentiate
contributions across beneficiaries.
■■The Competition Commission’s Health Market Inquiry publishes
its provisional findings on 5 July 2018 after a series of delays.
The findings identify the concentration of market share with select
2016 funders and facilities as one of the market failures in providing
private healthcare and propose remedies to improve transparency
■■The Competition Commission Inquiry into Private Healthcare is and market competitiveness.
delayed, with the draft report not being published by August 2016 ■■The Council for Medical Schemes publishes a draft framework
as proposed in the revised timelines. on the consolidation of medical schemes, setting forth a four-
■■The CMS releases a proposed risk-based solvency framework to pillar approach to consolidation. The framework also proposes
replace the controversial 25% statutory minimum that has been in the consolidation of public sector schemes into the Government
place since the introduction of the Medical Schemes Act. Employees Medical Scheme.
■■Draft demarcation guidelines are published in a joint statement by
the Department of Health and National Treasury, allowing hospital
cash plans and gap cover to continue, but prohibiting primary
healthcare insurance products.
5
ALEXANDER FORBES HEALTH 6
DIAGNOSIS 2018/2019
Performance indicators
This section analyses the key statistics influencing the
performance of medical schemes.
When evaluating the performance of medical schemes, the key factors
to consider are:
Size and scale
Larger schemes tend to have more stable and more predictable
claims experience. They should also have greater negotiating power
when setting prices.
Membership growth
Increasing membership reduces the volatility of a scheme’s claims,
and also improves the profile, as new members tend to claim less
than the average member in their first year of membership.
Membership profile
Claims experience will be more favourable for younger populations
with lower chronic prevalence.
Financial results
The trend in a scheme’s financial results illustrates the adequacy of
their pricing.
Solvency levels
Each scheme should have sufficient reserves after considering each
of the previous factors. The current statutory requirement is for
schemes to hold 25% of gross contribution income.
7
ALEXANDER FORBES HEALTH
2.1 Size and scale
Medical schemes in numbers
6 000 000 100
90
5 000 000
80
70
4 000 000
Number of medical schemes
Number of beneficiaries
60
3 000 000 50
40
2 000 000
30
20
1 000 000
10
0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Beneficiaries in open medical schemes Beneficiaries in restricted medical schemes
Number of open medical schemes Number of restricted medical schemes
At the end of 2017 there were 80 registered medical schemes The University of the Witwatersrand Staff Medical Aid
in South Africa, reducing from 82 schemes at the end of Fund (WitsMed) amalgamated with Discovery Health
2016 because Momentum Health and Metropolitan Medical Medical Scheme on 1 January 2018. Spectramed
Scheme amalgamated on 1 July 2017 and Community and Resolution Health Medical Scheme merged on
Medical Aid Scheme (COMMED) was liquidated on 1 January 2019.
4 August 2017. From the end of 2000 to the end of 2017,
the number of medical schemes reduced from 144 to 80, Despite the observed decrease in the number of medical
which represents a 44% decrease in the number of registered schemes, the industry has grown by 1.47 million principal
medical schemes over 17 years, mainly as a result of members (57.8%) and 2.28 million beneficiaries (34.6%)
amalgamations among the smaller, less sustainable schemes. since 2000. The 80 medical schemes operating in South
Africa at the end of 2017 served a total of 4.01 million
The number of open medical schemes has decreased by principal members and 8.87 million beneficiaries.
26 (55%) compared to a decrease of 38 (39%) restricted
medical schemes over the 17-year period. This consolidation The number of principal members covered on medical
appears to be driven by the: schemes increased by 0.5% during 2017, while the total
number of beneficiaries under cover decreased by 0.1%,
■■difficulty in maintaining the financial sustainability of small mainly driven by a reduction in beneficiaries covered on
schemes in the current environment and particularly for restricted medical schemes. A total of 59.0% of principal
restricted medical schemes members participated in open medical schemes at the end
■■significant amount of management time needed to manage of 2017 with the balance of 41.0% participating in restricted
an employer-based restricted scheme medical schemes. This compares to 58.8% and 41.2%
respectively at the end of 2016.
8
DIAGNOSIS 2018/2019
The graph below shows the percentage change in medical scheme membership over the last 17 years.
Annual percentage growth in membership
30%
25%
20%
Percentage annual growth rate
15%
10%
5%
0%
-5%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
All schemes Open schemes Restricted schemes
There is a significant difference between the trends in the The open schemes with membership below this threshold
annual growth rate of open and restricted medical schemes, are Cape Medical Plan (5 179 principal members), Makoti
with the divergence in the trend beginning in 2006 when the Medical Scheme (3 498 principal members) and Suremed
first members registered on GEMS. Following the significant (1 261 principal members).
increase in restricted scheme membership attributable to
GEMS in 2006 and 2007, the annual growth in restricted A large membership base allows for lower claims volatility
schemes reduced each year, with very little growth being and helps schemes, or their administrators, negotiate more
observed in the restricted schemes from 2013 to 2015. competitive reimbursement rates and fees with the various
healthcare service providers. This ensures that medical
In 2017 principal membership of open medical schemes scheme members have lower shortfalls or copayments when
grew by 0.9% while membership of restricted schemes grew using these designated service providers.
by 1.3%, with net growth of 20 620 members across the
industry during the year. A small membership base generally results in a more
variable claims experience, which increases the risk of
The minimum membership requirement set by the Council contributions not being set at an appropriate level to cover all
for Medical Schemes (CMS) for registering a new medical claims and expenses. This variability is compounded further
scheme is 6 000 principal members. At the end of 2017 by the negative impact of high-cost claims, especially in the
there were three open medical schemes and 27 restricted current environment where schemes are required to pay in
schemes with fewer than 6 000 principal members. full for the cost of prescribed minimum benefits, regardless
of the rates charged.
9
ALEXANDER FORBES HEALTH
Despite these risks as well as amalgamations of many small principal members over the year, while Sasolmed has moved
schemes, a fair number of restricted schemes are still up to ninth place because of a 1.3% growth in membership.
performing well. Of the 30 schemes referred to earlier that
have fewer than 6 000 members, only 10 achieved a surplus Transmed continued to lose membership in 2017, having
before investment income in 2017, up from 9 in 2016, already lost 11.9% of its principal members in 2016.
which indicates the risk profile and claims volatility to which Umvuzo Health Medical Scheme and the Chartered
smaller schemes are exposed. Accountants (SA) Medical Aid Fund (CAMAF) are the 11th
and 12th largest restricted schemes at 31 December 2017
The graph below ranks the top 10 open schemes and top with 27 909 and 24 943 principal members respectively.
10 restricted schemes according to the number of principal
members at 31 December 2017. This represents 87.7% of Four of the open schemes and six of the restricted schemes
all principal members participating on a registered medical considered here experienced positive growth in 2017, with
scheme, or 95.5% and 76.4% of open and restricted the remaining ten experiencing a reduction in membership
medical scheme membership respectively. numbers. The number of beneficiaries with medical scheme
cover reduced by 0.1% during 2017, after the net increase
Momentum amalgamated with Metropolitan Medical Scheme in lives observed in 2016.
in 2017, resulting in growth of 11.6% in the number of
principal members during the year. Topmed Medical Scheme The number of principal lives covered increased by 0.5%,
and CompCare Wellness Medical Scheme are the 11th and which resulted in the average family size in the industry
12th largest open schemes at 31 December 2017 with reducing from 2.22 at 31 December 2016 to 2.21 at
20 650 and 14 422 principal members respectively. 31 December 2017. This may be indicative of financial
pressures resulting in fewer dependants being added to
The top 10 restricted medical schemes by principal cover. Members also tend to add beneficiaries to cover only
membership have also remained unchanged in 2016. when they need medical attention. This anti-selective risk
However, Transmed has moved down to the eighth largest is greatest for those schemes with the fewest underwriting
restricted scheme as a result of the 13.7% decline in controls, as they are most vulnerable to these high claimers.
Membership by medical scheme
1 600 000 30%
1 400 000
20%
1 200 000
Percentage growth from 2016 to 2017
10%
Number of lives covered
1 000 000
800 000 0%
600 000
-10%
400 000
-20%
200 000
0 -30%
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2017 principals 2017 dependants Growth in principal members Growth in dependants
10DIAGNOSIS 2018/2019
2.2 Market share In 2017 total market share of GEMS was 17%, compared
to 2% in 2006 when the first members joined. The rapid
The industry’s net growth of 20 620 principal members over growth in membership includes:
the 2017 financial year was driven by the growth on:
■■eligible government employees transferring from other
■■Discovery Health Medical Scheme (Discovery), which open schemes
experienced net growth of 25 961 principal members ■■the amalgamation with Medcor in 2010
■■LA Health, which grew by 5 755 principal members ■■the transfer of a group of 16 000 pensioners from
Medihelp to GEMS early in 2012
Discovery’s total market share based on the number of
principal members has increased from 16% in 2001 to 33% Continued new member growth, stimulated by an attractive
at the end of 2017, compared to a decrease in market share employer subsidy, has increased the market share of
for the rest of the open schemes from 54% in 2001 to 26% GEMS in the past. However, that employer subsidy was not
in 2017. increased for a number of years from 2011, which may have
contributed to the slowdown in membership growth.
This decline in open medical scheme membership
(excluding Discovery) is due to: It is likely that the increases in the public sector subsidy
announced since 1 January 2016 have contributed towards
■■many members choosing to move from their current the growth in lives covered on GEMS during the year. The
medical scheme to join Discovery Health total market share of the balance of the restricted schemes
■■eligible public sector employees moving from open has decreased from 30% to 24%, driven by a number of
schemes to GEMS since its inception. amalgamations of restricted schemes into the open medical
scheme environment.
Market share by principal membership
GEMS Discovery
2010: Medcor 2004: AngloGold
2017
2012: Pre-92 Medihelp pensioners 2010: Afrisam, Umed
2012: Edcon
2013: Nampak, IBM
2011 33% 2014: Altron, Afrox, PG Bison
17%
2006 29%
2%
16%
27%
2001
16%
28% 30%
54%
43%
25% 30%
24%
26%
All restricted medical schemes All open medical schemes
(excluding GEMS) (excluding Discovery)
2001 to 2017 2001 to 2017
Net reduction of 38 schemes Net reduction of 28 schemes
11ALEXANDER FORBES HEALTH
2.3 Membership profile
One of the most important contributing factors to a scheme’s performance is the risk profile of its members, with some of the
key statistics being:
■■average age of beneficiaries
■■pensioner ratio (defined as the percentage of beneficiaries over the age of 65 years)
■■average family size
Let us consider the trends in each of the above factors.
Average age of beneficiaries
35
34
Average age of beneficiaries
33
32
31
30
29
28
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
All schemes Open schemes Restricted schemes
Note: Average age was recorded in the CMS Annual Reports from 2005 only.
12DIAGNOSIS 2018/2019
The average age of beneficiaries in the medical schemes significant numbers of younger members joining the scheme
industry has remained fairly constant since 2005, with a in the early years. From 2011 the growth driven by GEMS
marginal increase from 32.3 years in 2015 to 32.5 years in slowed down, and this has resulted in the average age of
2016. However, the average age of both open and restricted restricted scheme beneficiaries increasing from that point.
schemes has risen from 2016 to 2017, with a bigger
increase experienced by open schemes. The average age As a scheme ages, we expect the average claims per member
of beneficiaries on open schemes increased by 0.9 years to increase, with a generally accepted benchmark of a 2%
to 34.9 years, while the average age on restricted schemes increase in average claims per year increase in average age.
increased from 30.6 to 31.0 years at the end of 2017. A typical claims curve is shown on the next page.
From 2006 to 2010 the average age of beneficiaries in
the restricted scheme environment reduced consistently
each year. This was due to the rapid growth of GEMS, with
Average age of beneficiaries
2016
Restricted
All schemes Open schemes
schemes
32.5 34.0 30.6
2017
Restricted
All schemes Open schemes
schemes
33.2 34.9 31.0
13ALEXANDER FORBES HEALTH
A typical claims curve over a member’s lifetime
Young and single Family with children Middle-aged Retired or retiring
■■ Hospital cover ■■ Hospital cover ■■ Hospital cover ■■ Hospital cover
■■ Limited or no ■■ Day-to-day cover ■■ Higher day-to-day cover ■■ Comprehensive
day-to-day cover ■■ Maternity benefits ■■ Chronic benefits day-to-day cover
■■ Limited chronic benefits ■■ Higher chronic benefits
■■ Cover for joint
Average claim per member
replacements and other
age-related conditions
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70+
Age
Individual claims Family claims
14DIAGNOSIS 2018/2019
The following graph considers the average age of beneficiaries for each scheme included in this year’s analysis. It also includes
the change in the average age of each scheme from 31 December 2014 to 31 December 2017.
Average age of beneficiaries
55 7
50 6
45 5
40 4
35 3
Change in age
Average age
30 2
25 1
20 0
15 -1
10 -2
5 -3
0 -4
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Average age in 2017 Three-year change
While the absolute age of a scheme’s membership is also increased significantly over the last three years as
important and indicative of the likely claims profile, the a result of the loss of a significant number of younger,
change in this figure signals a change in the profile that healthier beneficiaries.
would result in the medical scheme needing to take
corrective action in its pricing of benefits, especially if the LA Health’s average age has reduced significantly over the
age were to increase. last three years as a result of the high rate of growth from
younger and healthier members. Momentum and Sizwe also
Of the 20 schemes included in this year’s Diagnosis, experienced decreases in the average age of beneficiaries
KeyHealth and Transmed have the highest average age over the three-year period. As in previous years, Polmed has
of beneficiaries in open and restricted medical schemes the lowest average age of all the schemes considered.
respectively. In addition to a high average age, Transmed
also has an extremely high pensioner ratio, in part because
membership is voluntary. Transmed’s average age has
15ALEXANDER FORBES HEALTH
Pensioner ratio
10%
9%
8%
Pensioner ratio
7%
6%
5%
4%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
All schemes Open schemes Restricted schemes
Note: Pensioner ratio was recorded in the CMS Annual Reports from 2005 only.
The average pensioner ratio across the industry increased from 7.9% to 8.4% in 2017. Open schemes have experienced a
greater increase in the pensioner ratio than restricted schemes, with an increase from 9.2% to 10.0% from 2016 to 2017
compared to the increase from 6.3% to 6.5% on restricted schemes.
Pensioner ratio
2016
Restricted
All schemes Open schemes
schemes
7.9% 9.2% 6.3%
2017
Restricted
All schemes Open schemes
schemes
8.4% 10.0% 6.5%
16DIAGNOSIS 2018/2019
Average family size
2.8
2.7
2.6
Average family size
2.5
2.4
2.3
2.2
2.1
2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
All schemes Open schemes Restricted schemes
The average family size for restricted medical schemes decreased slightly from 2.39 to 2.38 in 2017. This was largely driven by
the decline in dependants covered on GEMS over the year.
Family size
2016
Restricted
All schemes Open schemes
schemes
2.22 2.11 2.39
2017
Restricted
All schemes Open schemes
schemes
2.21 2.10 2.38
17ALEXANDER FORBES HEALTH
However, the average family size for the entire medical 2.4 Contributions
schemes industry has declined over the last 17 years and
this trend continued in 2017. This indicates that fewer Medical schemes work on the concept of risk pooling, where
dependants per principal member are being registered with the risk contribution charged to members depends on a
medical schemes each year. combination of these factors:
This may be due to affordability constraints of members who ■■Claims: the expected medical expenses of the entire
can no longer afford to provide medical cover for their entire membership group
family, which may become more of an issue once children ■■Non-healthcare expenses: the costs associated with any
qualify for subsidies of medical scheme contributions. administration of claims and day-to-day operations
Those beneficiaries who have been removed from cover ■■Investment income: the interest or returns expected from
may be added back on to the membership when they the scheme’s assets
need medical cover, for example during a pregnancy, and
medical schemes may use waiting periods to try to control Where the scheme’s claims and expenses exceed the
this anti-selective behaviour. contributions, investment income is required to subsidise
this shortfall. Any remaining investment income is then
In addition, as members’ dependent children become added to the reserves of the scheme and serves to increase
self-supporting, they no longer qualify for membership as its solvency levels.
dependants on their parents’ medical scheme and in turn
become principal members themselves. This has a direct However, where investment income is not sufficient to
impact on the average family size in two ways: cover this shortfall, the scheme is forced to use its existing
reserves, which results in decreasing solvency levels. A
■■Dependants being removed from a medical scheme will scheme may decide to use investment income to cover
reduce the average family size. claims or expenses for a number of reasons, including
■■Individuals joining a medical scheme as single members increasing claims costs, adverse short-term claims
will also reduce the average family size. experience and cross-subsidisation between benefit options.
In simple terms, the financial
operations of a medical scheme can be
described by four main factors, shown contributions + investment income ≥ claims + expenses
in the equation:
18DIAGNOSIS 2018/2019
Allocation of contribution income in 2017
110%
100%
90%
80%
Percentage of gross contribution income
70%
60%
50%
40%
30%
20%
10%
0%
-10%
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Medical savings account Healthcare expenditure Non-healthcare expenditure Contribution to reserves
Some schemes may intentionally set contributions to use part sufficient contribution income to cover both their claims and
of the investment income to subsidise claims and expenses, non-healthcare expenses in full and so used investment
particularly schemes which have significant reserves in excess income and in some cases their existing reserves to
of the statutory requirements. However, this would not be subsidise the cost incurred. Three open schemes,
sustainable in the long term, as over time the scheme would Momentum, Medshield and Sizwe, and five restricted
become underpriced and would ultimately need to adjust its schemes, Polmed, Bankmed, Profmed, Transmed and
pricing with larger contribution increases in future years. Nedgroup, did not have sufficient contribution income to add
to their reserves during the year.
The graph above considers the top 10 open schemes and
top 10 restricted schemes, together with the totals for open We next consider each of the components of the medical
and restricted schemes and the industry as a whole. Where scheme pricing equation in more detail. However, we will first
the contribution to reserves sits below the 0% line, schemes look at some of the inflationary trends that we have seen in the
have used part or all of their investment income to fund for industry over the past 18 years.
claims and expenses. In some cases, where investment
income has not been sufficient, schemes have had to use
their existing reserves, placing pressure on solvency levels.
In 2017, 8 of the 20 schemes considered did not have
19ALEXANDER FORBES HEALTH DIAGNOSIS 2018/2019 20
DIAGNOSIS 2018/2019
2.5 Inflationary trends
The illustration below compares medical scheme contribution ■■Medical scheme contribution inflation is calculated for all
inflation, along with medical care and healthcare expense medical schemes who submit annual financial returns to
inflation trends, to consumer price index (CPI) inflation in the the Registrar of Medical Schemes. Percentage increases
past decade, where: are based on the average contribution per principal
member per month and allow for normal medical scheme
■■CPI inflation is the weighted average price inflation in contribution increases, as well as buy-ups and buy-downs
different sectors and indicates the general level of price to other benefit options. Changes in contributions as a
increases. Viewed in isolation, it does not necessarily give result of family size or family composition are also taken
a true reflection of cost pressures in a particular sector. into account.
Individual sectors may experience cost increases that differ
from CPI inflation, as is the case in the healthcare sector.
■■Medical care and health expense inflation is measured
by Statistics South Africa and is based on that component
of CPI which relates to doctors’ fees, nurses’ fees, hospital
fees, nursing home fees, medical and pharmaceutical
products and therapeutic appliances.
Average inflation over 18 years
Medical medical scheme
contribution inflation
Medical care and health
expenses inflation 7.6% per year
7.5% per year
Rebased CPI inflation
5.7% per year
21ALEXANDER FORBES HEALTH
Average annualised contribution The general observation in the industry is that
medical inflation (medical care and health expenses
increases from 2007 to 2019 inflation) will be approximately 2% to 3% higher than
CPI inflation over the long term. However, increases
in a particular year may be significantly higher
because of adverse claims experience. The deviation
from CPI is mainly due to:
■■high increases in healthcare service provider fees
■■a rising burden of disease
■■increasing hospital admission rates
■■more use of benefits
■■new medical technologies
■■the requirement to maintain reserves of at least
25% of gross contribution income
■■certain benefit enhancements
CPI inflation has averaged 5.7% over the last 18 years,
while medical care and health expenses inflation has
been on average 7.5% per year, resulting in a gap of
1.8% per year. Over the same period, average medical
scheme contribution inflation for the industry overall
was 7.6% per year, resulting in actual increases in
medical scheme contributions per principal member
exceeding CPI inflation by at least 1.9% per year.
The gap between medical scheme contribution
inflation and CPI inflation has reduced in recent years,
most likely as a result of efforts by medical schemes
in managing the costs charged by providers. While
this would have a direct impact on medical scheme
12% contribution increases, the further reduction in the gap
between average medical scheme contribution inflation
10.9% Bestmed and CPI inflation indicates the extent of member
Medshield 9.9% 10.0% Fedhealth buy-downs to lower cost benefit options, new entrants
Bonitas | Medihelp 9.3% 9.4% Momentum joining low-income options, and changes to family
Discovery 9.2% 8.8% Hosmed size, possibly by removing dependants because of
KeyHealth 8.7% affordability constraints.
7.6% Sizwe
The illustration on the left summarises the average
CPI 6.0% headline contribution increases announced by
medical schemes since 2007 and compares them to
average CPI. Note that we have taken an arithmetic
average for illustrative purposes and have only
included the medical schemes where this information
is available. Also note that these increases are based
on the headline increases announced by individual
0% schemes and the method of calculation may vary. It
does, however, provide some useful information on
real contribution increases faced by members.
The average contribution increases for the top
eight open medical schemes since 2007 have far
exceeded average CPI. The margin between the
level of CPI and the industry’s contribution rate was
highest from 2008 to 2011.
22DIAGNOSIS 2018/2019
Since 2012 the contribution increases have tended to be The risk claims ratio for all medical schemes decreased from
closer to CPI as schemes have aimed to limit increases in 92.1% in 2016 to 88.7% in 2017. For the 2017 benefit year,
contributions in order to: open medical schemes had an overall risk claims ratio of
■■increase competitiveness 87.2% compared to the 90.6% experienced by restricted
medical schemes.
■■reduce membership losses as a result of affordability
constraints The industry as a whole experienced a lower claims year in
2017 than in 2016, with the average claims ratio decreasing
Increases announced for 2018 were lower than in prior years
for the first time in four years. The noticeable increase in the
in part because of the lower claims ratio in 2017. However,
claims ratio from 2014 to 2015 was in part due to the inclusion
many schemes reported an increase in benefit use during
of managed care fees in healthcare expenditure from 2015.
2018, in particular as a result of high cost benefits such as
oncology. This meant that the contribution increases for 2019 Many restricted schemes do not incur certain non-healthcare
were again higher despite a lower level of CPI inflation in 2018. expenditure items such as distribution costs, marketing
expenses and broker fees. As a result, they can often afford
2.6 Healthcare expenditure to use a higher percentage of risk contributions towards risk
claims than open medical schemes. This trend is illustrated
One of the main components influencing the performance in the graph below.
of a medical scheme is its healthcare expenditure, or claims
experience. In this section we consider the claims ratio as well This graph also shows a cyclical trend. This is most likely
as the actual level of claims that are paid by medical schemes. caused by the lag effect of medical schemes’ annual pricing
exercises. Where a scheme has experienced adverse claims
Healthcare expenditure includes all payments made for during the year, it would usually only correct that experience
claims incurred by members. The risk claims ratio is defined through higher contributions or benefit reductions (and
as the ratio of risk claims to risk contributions (the proportion therefore lower relative claims) in the next financial year and
of contributions that are used to fund claims, excluding any this corrective action often needs to take place over at least
allowance for medical savings accounts). two years.
Trend in claims ratios
120%
110%
Managed care fees were included with
healthcare expenditure from 2015.
Risk claims as a percentage of risk contributions
100%
90%
80%
70%
60%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
All medical schemes Open medical schemes Restricted medical schemes
23ALEXANDER FORBES HEALTH
Claims and contributions by scheme
R2 200 100%
R2 000 95%
Average contribution or claim per beneficiary per month (PBPM)
90%
R1 800
85%
R1 600
80%
R1 400
Risk claims ratio
75%
R1 200
70%
R1 000
65%
R800
60%
R600
55%
R400
50%
R200 45%
R0 40%
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Average contributions PBPM Average claims PBPM 2017 claims ratio
Medical schemes usually finalise their benefits and Although 85% is the generally accepted benchmark for the
contributions reviews in September each year, without the claims ratio, the ideal ratio for a particular scheme depends
full membership and claims experience of that year. Where on its current circumstances, such as:
experience has been worse than expected in the first part
of the year and is therefore included in the data used for ■■the current adequacy of contributions
the purposes of pricing, allowances can be made for this ■■the level of non-healthcare expenses
experience in the next financial year. ■■the need for reserve-building
■■the scheme’s long-term strategy
However, where the adverse experience occurs in the
second half of the year, it cannot be allowed for in the pricing The graph on the previous page indicates the average claims
of benefits into the next year, and so this adverse experience paid per beneficiary per month (PBPM), as well as the
must be made up in the following year. In addition, the risk claims ratio in 2017, for the 20 schemes included in
adverse experience in the second half of the year has a the Diagnosis this year. These claims ratios all include any
direct impact on the reserves and solvency levels of the managed care fees incurred by the schemes.
scheme going into the next year.
While the claims ratios show the adequacy of contribution
In general, medical schemes with a risk claims ratio of above levels, the actual average claims paid per beneficiary indicate
85% face the challenge of achieving an operating surplus the level of benefits provided by a scheme. The graph on
(contributions less claims and expenses) while: the previous page shows that KeyHealth paid the highest
amount in claims per beneficiary in 2017 and had the highest
■■containing non-healthcare expenses below the Council of
contribution income per beneficiary during the year.
Medical Schemes’ generally accepted guideline of 10% of
contributions
■■building reserves to a sustainable level
24DIAGNOSIS 2018/2019
Polmed experienced the highest claims ratio of these schemes, The relationship between contributions and claims for a
with a claims ratio of 99.9% for the 2017 year. Transmed had particular medical scheme depends on the pricing philosophy
a low claims ratio of 85.2% in 2016, which increased to 97.2% followed by that scheme. A scheme with a significant level
in 2017. LA Health had a claims ratio of 81.3% for 2017, the of reserves might intentionally price for an operating deficit
lowest claims ratio of the 20 schemes considered. to use some of those reserves, while a scheme that does not
meet the statutory solvency requirements may have higher
The actual healthcare costs funded by medical schemes are contributions than their demographic and claims profile would
driven largely by the use of services as well as the actual cost require to build reserves.
of claims. The use of services is influenced by:
■■demographic factors (age profile and pensioner ratio) 2.7 Non-healthcare expenditure
■■the incidence and distribution of disease (often called
Non-healthcare expenditure (NHE) includes administration
disease burden) fees, broker commission, distribution costs, bad debts, and
■■advances in diagnostic technology and biological drugs reinsurance costs. Up to 2014, managed care fees were
reported as part of non-healthcare expenditure. However,
The actual cost of claims can be influenced by the negotiating
since 2015 managed care fees have been recognised as part
power of a particular medical scheme or its administrator.
of healthcare expenditure, which means there is a marked
The level of the average claims and contributions per reduction in the proportion of gross contribution income
beneficiary for a particular scheme depends on the: spent on NHE from 2014 to 2015.
■■richness of benefits offered Total non-healthcare expenditure, as a proportion of gross
■■split of members between high-cover and low-cover options contribution income (GCI), decreased marginally in 2017
■■demographic profile of the scheme in terms of average age for the medical schemes industry as a whole. This
reduction was driven by a decrease from 6.3% to 6.0%
and chronic prevalence
in the proportion of gross contribution income spent on
non-healthcare expenditure by restricted medical schemes.
Trend in non-healthcare expenditure
20%
18%
Managed care fees were
excluded from non-healthcare
expenditure from 2015.
16%
14%
NHE as a percentage of GCI
12%
10%
8%
6%
4%
2%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
All medical schemes Open medical schemes Restricted medical schemes 10% line
25ALEXANDER FORBES HEALTH
For open schemes, the NHE proportional spend reduced As we assume that NHE increases with CPI while contributions
from 10.2% to 10.0%. The lower level of non-healthcare increase with medical inflation, which is usually 2 to 3%
expenditure within restricted schemes is driven to a large more than CPI on average each year, we would expect the
extent by GEMS whose non-healthcare expenditure was proportion paid to NHE to decrease over time, irrespective of
5.6% of gross contribution income in 2017. whether additional cost control measures are introduced. In
addition, broker fees paid each year may not increase at the
Restricted schemes are expected to have lower non-healthcare same rate as contributions. This is due to the commission cap
costs primarily because they have lower or no distribution in place, which does not increase at CPI and contributes to
expenses or broker fees and certain operating expenses may the decreased NHE percentage. As a result, a more suitable
be subsidised by their participating employers. However, measure of NHE is the absolute cost per member.
some restricted schemes, for example Profmed and GEMS,
do compete with the open market to a certain extent, and as a The graph below illustrates the components of NHE for the
result will budget for marketing expenses and broker fees. top 10 open and top 10 restricted schemes for 2017 as
well as for open and restricted schemes and the medical
schemes industry as a whole.
Non-healthcare expenditure by scheme
R550 22%
R500 20%
R450 18%
NHE as a percentage of gross contribution income (GCI)
R400 16%
R350 14%
NHE per member per month
R300 12%
R250 10%
R200 8%
R150 6%
R100 4%
R50 2%
R0 0%
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Administration expenses Broker and marketing fees Bad debts or other operating expenses NHE as a percentage of GCI
26DIAGNOSIS 2018/2019
Breakdown of
non-healthcare expenditure 1.8%
Bad debts
14.5%
R
Administration fees Broker fees
(and marketing)
83.7%
The marked difference between non-healthcare expenses 2.8 Financial performance
of open and restricted medical schemes is evident from the
graph on the previous page. One of the key factors used to measure the performance
of a medical scheme is the scheme’s operating result. A
Even after excluding broker fees, the pure administration scheme’s operating result is an indication of its financial
costs of open and restricted medical schemes are soundness after claims and non-healthcare expenditure are
significantly different. This may be due to the sponsoring deducted from contribution income. It shows the surplus or
employers of the restricted schemes taking on some of the deficit before investment income. Drivers of strong financial
expenses incurred in the running of the medical scheme performance by medical schemes include:
through the corporate entity, and so reducing the costs borne
by the medical scheme itself. ■■appropriate benefit pricing
■■adequate risk management and claims control
There is no fixed definition for which expenses can be ■■favourable age and risk profile of the membership base
included as administration fees, and this contributes to ■■low non-healthcare expenditure
comission the varied level of administration fees across the
market. Some administrators may include services other than The trend of deteriorating financial results that we have
pure administration, for example actuarial services, which will observed in the industry since 2014 improved in 2017, with
affect the overall profile of administration expenses. the industry as a whole generating an operating surplus of
R3.369 billion in 2017. Restricted schemes achieved an
The diagram above shows the breakdown of non-healthcare operating surplus of R2.234 billion while open schemes
expenditure into its different components across the industry achieved an operating surplus of R1.135 billion.
in 2017.
27ALEXANDER FORBES HEALTH
Trend in operating results
R4 000
R3 000
R2 000
Operating result (R million)
R1 000
R0
-R1 000
-R2 000
-R3 000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Open medical schemes Restricted medical schemes All medical schemes
In 2014 the industry ended the year with an operating deficit During the years following 2004 many schemes had met
of R464.51 million, with restricted schemes attaining an overall the solvency requirements and so no longer had to price
operating deficit of R504.58 million and open medical schemes for larger surpluses. They were, however, then faced with
achieving a small operating surplus of R40.07 million. significant increases in claims in the following years as a
result of a change in service provider charging habits with
The industry ended 2015 with a significant operating deficit the requirement to pay PMBs at costs.
of R1.219 billion (R565.63 million for open schemes and
R653.78 million for restricted schemes). The experience In 2016, 5 of 22 open schemes and 23 of 60 restricted
further deteriorated in 2016, as the industry ended the year schemes achieved an operating surplus. In comparison,
with an operational deficit of R2.391 billion. 11 of 21 open schemes and 24 of 59 restricted schemes
achieved an operating surplus at the end of 2017.
The longer-term trend in operating results since 2000 has
been driven in large part by the prevailing regulations.
Medical schemes were priced to target significant surpluses
in the years prior to 2004 in order to meet the regulatory
solvency requirements by 2004.
28DIAGNOSIS 2018/2019
Schemes incurring operating deficits have to rely on investment income to achieve a breakeven result on a net level. In 2017,
with the addition of investment and other income, the industry achieved a net surplus of R8.933 billion, compared to the
overall net surplus of R2.142 billion achieved in 2016. Open schemes achieved an overall net surplus of R4.053 billion
(2016: R1.391 billion) and restricted schemes achieved an overall net surplus of R4.879 billion (2016: R0.751 billion).
In 2016, 12 of 22 open schemes and 45 of 60 restricted schemes achieved a net surplus, compared to 16 of 21 open
schemes and 51 of 60 restricted schemes in 2017.
Trend in net surplus
R9 000
R8 500
R8 000
R7 500
R7 000
R6 500
R6 000
R5 500
Net surplus (R million)
R5 000
R4 500
R4 000
R3 500
R3 000
R2 500
R2 000
R1 500
R1 000
R500
R0
-R500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Open medical schemes Restricted medical schemes All medical schemes
29ALEXANDER FORBES HEALTH
Schemes' financial performance for 2017
R3 500
R3 000
R2 500
Operating or net result (R million)
R2 000
R1 500
R1 000
R500
R0
-R500
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Operating result Net result
The graph above shows the financial performance of the top 10 open schemes and top 10 restricted schemes in 2017.
Of the 20 schemes considered in this year’s Diagnosis, eight did not attain an operating surplus in 2017 and therefore had to
rely on investment income to subsidise claims and non-healthcare expenditure. One of the ten open schemes and one of the
ten restricted schemes also did not attain a net surplus, and so were net disinvestors for the 2017 benefit year.
30DIAGNOSIS 2018/2019
Asset allocation at 31 December 2017
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
Asset allocation
Solvency
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
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Cash and money market Bonds Equities Property Collective investment vehicles Foreign assets Other Solvency
2.9 Investments Asset class limits are placed on medical schemes in
Annexure B of the Regulations to the Medical Schemes Act,
Where medical schemes do not achieve operating surpluses, but most schemes are operating well inside the limits for
they become reliant on the investment returns earned over riskier asset classes. The limit on equities is 40%, while the
the year to fund part of their claims and non-healthcare limit on property is 10%.
expenditure. In 2017, 45 of 80 medical schemes failed to
achieve an operating surplus and therefore had to draw This implies that schemes could have up to 50% of their
on their investment returns, placing additional pressure on investments in these higher-risk asset classes, whose returns
solvency levels. are generally expected to exceed CPI inflation. The allowable
exposure to conservative asset classes, such as cash, money
This strategy is not sustainable unless investment returns market instruments and bonds, is unlimited. The only
are able to keep pace with, and preferably exceed, claims restrictions on these asset classes are on the exposure to
inflation. At present, however, most medical schemes follow specific issuers, to ensure some level of diversification.
very conservative investment strategies as shown in the
graph above. The graph shows the asset allocation for the 20 Medical schemes’ preference for cash in particular appears
schemes under consideration in this publication. to be driven by a preference for liquid assets, given that
medical scheme liabilities are short term, as well as concerns
In 2017 open schemes held 19.7% of assets in equities, about risks related directly to the investments (the possibility
with 29.6% being held in bonds and 41.7% of assets being of making negative returns or losing scheme assets).
held in cash. In contrast, restricted schemes held 18.8% of However, for the long-term sustainability of the scheme,
assets in equities, 20.1% in bonds and 55.6% in cash or average returns below medical inflation may pose a greater
cash equivalents. The balance is held in in property mainly, risk, especially for schemes that rely on investment returns
with some exposure to debentures and insurance policies. when they fail to achieve an operating surplus.
31ALEXANDER FORBES HEALTH
In particular, claims expenditure tends to grow faster than CPI. 2.10 Solvency levels
To maintain solvency year on year, the accumulated funds
need to increase in line with the increase in contributions. The solvency ratio is the level of reserves (accumulated
If investment returns cannot keep pace with the increase in funds) that a medical scheme needs to hold as a percentage
claims inflation and accumulated funds increase at a rate of gross annualised contributions. Regulation 29 promulgated
less than contributions, then solvency levels will decrease, in terms of the Medical Schemes Act prescribes that medical
resulting in a need to either increase contributions further – schemes maintain a minimum solvency ratio of 25%.
which would exacerbate this issue – or reduce benefits.
The graph below shows the solvency levels of open and
As a result, for schemes failing to meet the solvency restricted schemes against the statutory level over the past
requirement, low investment returns as a result of 18 years. The increase in industry solvency levels from 2000
conservative asset allocations may in fact be increasing to 2004 is primarily attributable to the calculated efforts of
risk for the scheme. For schemes meeting the solvency medical schemes to build reserves to the prescribed minimum
threshold, this can be eroded over time if returns are below solvency level that was required by 31 December 2004.
claims inflation and they may be missing an opportunity to
maintain affordable contribution increases in the future. On average, restricted schemes have maintained higher
solvency compared to open schemes. From 2006 the
Where a scheme already has sufficient reserves, there is a solvency level for all restricted schemes has declined because
strong argument to invest at least some of the reserves in of rapid membership growth in GEMS. The average solvency
riskier asset classes allowed by Regulation B. Conversely, of open schemes has remained relatively stable since 2006.
schemes that are not adequately funded can increase their
expected return by investing in riskier assets, which will then In 2017 the average solvency for all schemes increased
increase the reserves held and thereby the solvency ratio. to 33.2% (2016: 31.6%). The solvency ratio of open
This also depends on the absolute value of the asset base. schemes increased from 28.6% in 2016 to 29.7% in 2017.
Trend in solvency levels
70%
60%
50%
40%
Solvency
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Prescribed minimum solvency All medical schemes All open medical schemes
All restricted medical schemes Restricted medical schemes (excluding GEMS)
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