DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes

 
DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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
DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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.

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DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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

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DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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.
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DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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
DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
ALEXANDER FORBES HEALTH

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DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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
DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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
DIAGNOSIS 2018/2019 - An analysis of key trends in the medical schemes industry from 2000 to 2017 - Alexander Forbes
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

10
DIAGNOSIS 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

                                                                                                                                   11
ALEXANDER 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.

12
DIAGNOSIS 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

                                                                                                                               13
ALEXANDER 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

14
DIAGNOSIS 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

                                                                                                                                                                                                                15
ALEXANDER 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%

16
DIAGNOSIS 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

                                                                                                                                                                          17
ALEXANDER 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:

18
DIAGNOSIS 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

                                                                                                                                                                                                                                 19
ALEXANDER 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

                                                                                                                                       21
ALEXANDER 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.

22
DIAGNOSIS 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

                                                                                                                                                                                               23
ALEXANDER 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

24
DIAGNOSIS 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

                                                                                                                                                                              25
ALEXANDER 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

26
DIAGNOSIS 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.

                                                                                                                                  27
ALEXANDER 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.

28
DIAGNOSIS 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

                                                                                                                                                                              29
ALEXANDER 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.

30
DIAGNOSIS 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.

                                                                                                                                                                                                                         31
ALEXANDER 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)

32
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