DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes

 
DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
DIAGNOSIS
                         2017/2018

Analysing the key trends in the medical schemes industry from 2000 to 2016

Alexander Forbes Health Technical and Actuarial Consulting Solutions

HEALTH
DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
ALEXANDER FORBES HEALTH

                              INTRODUCTION
                              Alexander Forbes Health’s Technical and Actuarial
                              Consulting Solutions team is proud to present this
                              year’s Diagnosis.

                              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
                              facing the industry.

                              This analysis covers key statistics and trends over the 17-year period from 2000 to
                              2016, based largely on the consolidated financial results for all registered medical
                              schemes, with specific focus on the 10 largest open and the 10 largest restricted
                              medical schemes by principal membership.

                              The final demarcation regulations and the gazetted National Health Insurance White
                              Paper have resulted in much debate in the medical schemes industry in 2017. The
                              expected consolidation process of both schemes and benefit options in 2018 has
                              resulted in some 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 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
DIAGNOSIS 2017/2018

CONTENTS
1. Key industry developments                                              5

2. Performance indicators                                                 9

  2.1 Size and scale                                                      9

  2.2 Market share                                                      12

  2.3 Membership profile                                                13

  2.4 Contributions                                                     20

  2.5 Inflationary trends                                               21

  2.6 Healthcare expenditure                                            23

  2.7 Non-healthcare expenditure                                        25

  2.8 Financial performance                                             28

  2.9 Investments                                                       32

  2.10 Solvency levels                                                  34

3. Alexander Forbes Health Medical Schemes Sustainability Index         37

4. Conclusion                                                           41

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DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
ALEXANDER FORBES HEALTH

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DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
DIAGNOSIS 2017/2018

KEY INDUSTRY DEVELOPMENTS
Industry consolidation
At the Board of Healthcare Funders           A National Health Insurance (NHI)
conference in July 2017 the acting           Implementation Committee on
registrar of the Council for Medical         Consolidation has been established and
Schemes (CMS) indicated in his               tasked with restructuring the current
presentation that the CMS would              healthcare financing arrangements in the
consider the consolidation of risk           lead-up to the creation of a central NHI
pools across smaller medical schemes         fund. This is to be achieved through five
in South Africa. According to the            transitional arrangements covering the
Medical Schemes Act 131 of 1998              following segments of the population:
(as amended), the registration of a new      ■■the unemployed
medical scheme requires a minimum            ■■the informal sector
membership of 6 000 principal                ■■the formal sector comprising large
members per scheme and 2 000                   businesses
principal members per scheme option.         ■■the formal sector comprising small
                                               and medium-sized businesses
The CMS has issued Circular 51               ■■the public sector
of 2017, clarifying its approach to
consolidation and reiterating its            The unemployed and the informal sector
commitment to improving financial            will be covered through the creation of
protection for medical scheme members        new funding arrangements. The formal
through effective risk pooling. This         sectors would see the consolidation
circular sets out the Council’s approach     of existing medical schemes into one
to consolidation as a consultative           fund with mandatory coverage in which
process involving key stakeholders           PMBs will be replaced with a more
and focusing only on the 31 medical          comprehensive benefit package. The
schemes that currently have fewer than       public sector would see similar funding
6 000 members. However, the review           changes to the formal sector along
will also include schemes servicing local    with changes to current government
government and state-owned entities          healthcare subsidies.
as well as civil servants at a national or
provincial level.

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DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
ALEXANDER FORBES HEALTH

                                           INDUSTRY TIMELINE

    1998                                                                             2000
    ■■The Medical Schemes Act is signed into law.                                    ■■The Medical Schemes Act comes into
      It introduces prescribed minimum benefits                                        effect and the Council for Medical
      (PMBs), community-rated contributions and                                        Schemes (CMS) is established.
      open enrolment.

    2004                                                                             2003                                             25%
    ■■A Competition Commission ruling bans the system of collective tariff setting   ■■The National Health Act gives a
      between schemes and healthcare providers.                                        framework for a structured and uniform
    ■■Single exit price (SEP) is implemented for pharmaceutical manufacturers.         health system.
    ■■The National Health Reference Price List (NHRPL) is first published by the     ■■Personal medical savings accounts are
      Department of Health.                                                            limited to 25% of gross contributions.
    ■■Medical schemes must maintain a 25% solvency level.

    2005                                                                             2006
    ■■The Government Employees Medical                                               ■■The Council for Medical Schemes takes
      Scheme (GEMS) is registered.                                                     over publication of the National Health
    ■■The Children’s Act                                                               Reference Price List, a guideline for
      stipulates the age of consent for minors                                         healthcare service tariffs.
      to medical and surgical treatment.

    2009                                                                             2008
    ■■The Competition Amendment Act is signed into law, providing                    ■■The Medical Schemes Amendment Bill is proposed,
      a legal framework and giving formal powers to the Competition                    providing for the risk equalisation fund, low-income
      Commission to conduct market enquiries.                                          benefit options, improved governance, and an
    ■■The Protection of Personal Information Bill is published to                      amendment of the definition of the business of a
      protect personal information processed by public and private                     medical scheme.
      bodies, including medical schemes and industry stakeholders.                   ■■The Health Professions Council of South Africa
                                                                                       scraps ethical tariffs, used by providers as a ceiling
                                                                                       for patient accounts.

    2010                                                                             2011
    ■■Dispensing fee regulation is introduced for pharmacists and                    ■■The Consumer Protection Act comes into
      licensed health professionals.                                                   effect, supporting a culture of consumer
    ■■The High Court rules the National Health Reference Price List                    rights and responsibilities.
      invalid and sets it aside.                                                     ■■The Green Paper on the National Health
    ■■The High Court dismisses the Board of Healthcare Funders’ court                  Insurance Policy is published.
      application to seek clarity on the meaning of Regulation 8(1).
    ■■The Council for Medical Schemes publishes the prescribed
      minimum benefits code of conduct to ensure compliance with
      Regulation 8(1) – ‘pay in full’.

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DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
DIAGNOSIS 2017/2018

                                            2017
                                            ■■The revised National Health Insurance (NHI) 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 required schemes to hold medical
                                              savings account assets separately from the rest of the scheme’s assets. This means that:
                                              ●●medical savings account assets will now form part of the scheme’s assets
                                              ●●assets can be invested in investment classes other than cash
                                              ●●interest on medical savings account assets can accrue to the scheme
                                            ■■An NHI Implementation Committee on Consolidation is established to oversee the restructuring of the
                                              industry before the full implementation of NHI. This process includes:
                                              ●●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

2016
■■The Competition Commission Inquiry into Private Healthcare is delayed, with the draft report not being published
  by August 2016 as proposed in the revised timelines.
■■The Council for Medical Schemes releases a proposed risk-based solvency framework to replace the controversial
  25% statutory minimum that has been in place since the introduction of the Medical Schemes Act.
■■Final demarcation guidelines are published in a joint statement by the Department of Health
  and National Treasury. These guidelines allow hospital cash plans and gap cover to continue, but prohibit primary healthcare
  insurance products which will fall under the CMS and require exemption from the Medical Schemes Act.

2015
■■The Competition Commission Inquiry into Private
                                                                           ‘     2014 – the Financial
                                                                                 Services Board introduces
                                                                                 Treating Customers
                                                                                                           ‘
  Healthcare continues, with medical schemes and                                 Fairly (TCF)
  administrators being requested to provide claims
  and tariff information for the last 17 years.
■■The Minister of Health publishes a draft
                                                                 2014
  amendment to Regulation 8. Medical schemes are                 ■■The 12-member board of the newly established Office
  no longer required to pay for prescribed minimum                 of Health Standards Compliance is named.
  benefits at cost, but rather at either a contracted            ■■The Competition Commission Inquiry into Private
  rate or the 2006 guideline tariff plus inflation.                Healthcare begins.
■■The Council for Medical Schemes approves the                   ■■The Draft Road Accident Fund Benefit Bill provides
  framework for exemption and allows low-cost                      for a no-fault benefit scheme and a new administrator
  benefit options to be introduced from 1 January                  to replace the Road Accident Fund.
  2016. The framework is then withdrawn soon                     ■■The Financial Services Board introduces Treating Customers
  afterwards.                                                      Fairly, a market conduct framework of regulatory reform.
■■The National Health Insurance White Paper is                   ■■The National Department of Health publishes a National Health
  published on 10 December 2015. It proposes a                     Insurance booklet.

                                                                             ‘
  single payer system with no option to opt out
  and medical schemes being limited to offer
  complementary cover.
                                                                                  2013 – the Protection                ‘
                                                                                  of Personal Information
                                                                                  Act came into law

2012                                                             2013
■■The Taxation Laws Amendment Act provides                       ■■The Financial Services Laws General Amendment Act amends the Medical
  for a new medical tax credit system to                           Schemes Act by widening the definition of the business of a medical scheme.
  replace medical tax deductions. The                            ■■Schemes must hold members’ medical savings account (MSA) contributions
  definition of a dependant is widened in the                      separate from scheme reserves and allow interest to accrue to positive
  Income Tax Act to be the same as that in the                     MSA balances.
  Medical Schemes Act.                                           ■■The National Health Amendment Act provides for the establishment of the
■■Draft demarcation regulations propose the                        Office of Health Standards Compliance (OHSC), a key building block of
  removal of most gap cover products and                           National Health Insurance.
  hospital cash plans.                                           ■■The Competition Commission Inquiry into Private Healthcare is announced.
                                                                 ■■The Protection of Personal Information Act is signed into law.

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DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
ALEXANDER FORBES HEALTH

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DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
DIAGNOSIS 2017/2018

PERFORMANCE INDICATORS
This section analyses the key statistics                                    ■■Membership growth: Increasing                          ■■Financial results: The trend in a
influencing the performance of                                                membership reduces the volatility of                     scheme’s financial results illustrates
medical schemes.                                                              a scheme’s claims, and improves the                      the adequacy of their pricing.
                                                                              profile, as new members tend to claim                  ■■Solvency levels: Although the
When evaluating the performance                                               less than the average member in their                    current statutory solvency level of
of medical schemes, key factors to                                            first year of membership.                                25% of gross contribution income
consider are as follows:                                                    ■■Membership profile: Claims                               may be inappropriate, each scheme
■■Size and scale: Larger schemes                                              experience will be more favourable                       should have sufficient reserves after
  tend to have more stable and more                                           for younger populations with lower                       considering each of the previous factors.
  predictable claims experience. They                                         chronic prevalence.
  should also have greater negotiating
  power when setting prices.

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

                                                     Beneficiaries in open medical schemes        Beneficiaries in restricted medical schemes

                                                     Number of open medical schemes               Number of restricted medical schemes

                                                                                                                                                                                                              9
DIAGNOSIS 2017/2018 - Analysing the key trends in the medical schemes industry from 2000 to 2016 - Alexander Forbes
ALEXANDER FORBES HEALTH

       At the end of 2016 there were                                 and particularly for restricted medical         since 2000. The 82 medical schemes
       82 registered medical schemes in                              schemes, by the significant amount of           operating in South Africa at the end
       South Africa, reducing from 83 schemes                        management time needed to manage an             of 2016 served a total of 3.99 million
       at the end of 2015 because LMS                                employer-based restricted scheme.               principal members and 8.88 million
       Medical Fund (previously Liberty Medical                                                                      beneficiaries. The number of principal
       Scheme) amalgamated with Bonitas                              Momentum Health and Metropolitan                members covered on medical schemes
       Medical Fund with effect from 1 October                       Medical Scheme amalgamated                      increased by 1.0% in 2016, while the
       2016. From the end of 2000 to the end                         with effect from 1 July 2017, while             total number of beneficiaries under
       of 2016 the number of medical schemes                         Discovery Health Medical Scheme                 cover increased by 0.8%, with
       in existence reduced from 144 to 82,                          and the University of Witwatersrand             greater growth in beneficiaries being
       which represents a 43% decrease in the                        Staff Medical Aid Fund are expected             observed on restricted medical
       number of registered medical schemes                          to merge on 1 January 2018. The                 schemes. A total of 58.8% of principal
       over 16 years, mainly as a result of                          Community Medical Aid Scheme                    members participated in open medical
       amalgamations among the smaller, less                         (COMMED) was liquidated in 2017,                schemes at the end of 2016 with
       sustainable schemes. The number of                            with Bonitas Medical Fund agreeing to           the balance of 41.2% participating
       open medical schemes has decreased                            take on the existing COMMED members             in restricted medical schemes. This
       by 25 (53%) compared to a decrease                            with no underwriting.                           compares to 58.9% and 41.1%
       of 37 (38%) restricted medical                                                                                respectively at the end of 2015.
                                                                     Despite the observed decrease in
       schemes over the 16-year period. This
                                                                     the number of medical schemes, the              The graph below shows the percentage
       consolidation appears to be driven
                                                                     industry has grown by 1.45 million              change in medical scheme membership
       mainly by the difficulty in maintaining
                                                                     principal members (57.0%) and                   over the last 16 years.
       the financial sustainability of small
                                                                     2.29 million beneficiaries (34.7%)
       schemes in the current environment

                                                                   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

                                                                            All schemes   Open schemes   Restricted schemes

10
DIAGNOSIS 2017/2018

     There is a significant difference                                                 members. The open schemes with                                      the current environment where schemes
     between the trends in the annual                                                  membership below this threshold are                                 are required to pay in full for the cost
     growth rate of open and restricted                                                Cape Medical Plan (5 463 principal                                  of prescribed minimum benefits,
     medical schemes, with the divergence                                              members), Makoti Medical Scheme                                     regardless of the rates charged.
     in the trend beginning in 2006 with                                               (2 427 principal members) and
     the registration of the first members                                             Suremed (1 364 principal members).                                  Despite these risks, a fair number of
     on GEMS. Following the significant                                                                                                                    restricted schemes are still performing
     increase in restricted scheme                                                     A large membership base allows                                      well. Of the 31 schemes referred to
     membership attributable to GEMS in                                                for lower claims volatility and helps                               earlier that have fewer than 6 000
     2006 and 2007, the annual growth in                                               schemes, or their administrators,                                   members, only nine achieved a surplus
     restricted schemes reduced each year,                                             negotiate more competitive                                          before investment income in 2016,
     with very little growth being observed                                            reimbursement rates and fees with the                               down from 16 in 2015, which indicates
     in the restricted schemes from 2013 to                                            various healthcare service providers.                               the severity of claims in 2016 as well as
     2015. In 2016 principal membership                                                This ensures that medical scheme                                    the volatility to which smaller schemes
     of open medical schemes grew by                                                   members have lower shortfalls                                       are exposed.
     0.9% while membership of restricted                                               or copayments when using these
                                                                                       designated service providers.                                       The graph below ranks the top 10 open
     schemes grew by 1.3%, with net growth
                                                                                                                                                           schemes and top 10 restricted schemes
     of 41 175 members across the industry
                                                                                       A small membership base generally                                   according to the number of principal
     during the year.
                                                                                       results in a more variable claims                                   members at 31 December 2016.
     The minimum membership requirement                                                experience which increases the risk                                 This represents 88.2% of all principal
     set by the Council for Medical Schemes                                            of contributions not being set at an                                members participating on a registered
     for registering a new medical scheme                                              appropriate level to cover all claims                               medical scheme, or 95.7% and 77.4%
     is 6 000 principal members. At the end                                            and expenses. This variability is                                   of open and restricted medical scheme
     of 2016 there were three open medical                                             compounded further by the negative                                  membership respectively.
     schemes and 28 restricted schemes                                                 impact of high cost claims, especially in
     with fewer than 6 000 principal

                                                                                                Membership by medical scheme

                          1 600 000                                                                                                                                                                     30%

                          1 400 000
                                                                                                                                                                                                        20%

                          1 200 000
                                                                                                                                                                                                               Percentage growth from 2015 to 2016

                                                                                                                                                                                                        10%
Number of lives covered

                          1 000 000

                           800 000                                                                                                                                                                      0%

                           600 000
                                                                                                                                                                                                        -10%

                           400 000

                                                                                                                                                                                                        -20%
                           200 000

                                  –                                                                                                                                                                     -30%
                                        ry

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                                                               2016 principals            2016 dependants        Growth in principal members           Growth in dependants

                                                                                                                                                                                                                                                     11
ALEXANDER FORBES HEALTH

     Bonitas amalgamated with LMS Medical       Umvuzo Health Medical Scheme and             cover when they need medical attention.
     Fund in 2016, resulting in growth          the Chartered Accountants (SA) Medical       This anti-selective risk is greatest
     of 17.8% in the number of principal        Aid Fund (CAMAF) are the 11th and 12th       for those schemes with the fewest
     members during the year. As a result       largest restricted schemes at                underwriting controls, as they are most
     of that amalgamation, Hosmed Medical       31 December 2016, with 26 319 and 24         vulnerable to these high claimers.
     Aid Scheme is a new entrant to the         957 principal members respectively.
     top 10 open medical schemes in
                                                Five of the open schemes and six of
                                                                                             2.2 Market share
     2016 with 25 528 principal members.
     Topmed Medical Scheme and                  the restricted schemes considered here       The industry’s net growth of 68 558
     Resolution Health Medical Scheme are       experienced positive growth in 2016,         principal members over the 2016
     the 11th and 12th largest open schemes     with the remaining nine experiencing a       financial year was driven by the growth
     at 31 December 2016, with 22 355 and       reduction in membership numbers.             on Discovery Health Medical Scheme
     17 956 principal members respectively.                                                  (Discovery) which experienced net
                                                                                             growth of 29 589 principal members,
     The top 10 restricted medical schemes      The number of beneficiaries with
                                                                                             as well as the Government Employees
     by principal membership have remained      medical scheme cover grew by 0.8% in
                                                                                             Medical Scheme (GEMS) which grew by
     unchanged in 2016. However, LA Health      2016, after the net loss of lives observed
                                                                                             19 589 principal members.
     Medical Scheme is now the fourth           in 2015. The number of principal
     largest restricted scheme as a result of   members covered increased by 1.0%,           Discovery’s total market share based
     the 8.9% growth in principal members       which again resulted in the average          on the number of principal members
     over the year, with Platinum Health        family size in the industry reducing from    has increased from 16% in 2001 to
     down to fifth place because of a loss      2.23 at 31 December 2015 to 2.22 at          33% at the end of 2016, compared to a
     of 5.2% of its membership. Transmed        31 December 2016, which may indicate         decrease in market share for the rest of
     continued to lose membership, with         financial pressures resulting in fewer       the open schemes from 54% in 2001 to
     an 11.9% and 17.7% reduction in            dependants being added to cover. There       26% in 2016.
     the number of principal members and        is also a tendency in the market for
     dependants respectively during the year.   members to only add beneficiaries to

12
DIAGNOSIS 2017/2018

This decline in open medical scheme       the past was assisted by continued           2.3 Membership profile
membership (excluding Discovery)          new member growth, stimulated by an
is due to many members choosing           attractive employer subsidy. However,        One of the most important contributing
to move from their current medical        that employer subsidy was not increased      factors to a scheme’s performance is the
scheme to join Discovery Health and       for a number of years from 2011, which       risk profile of its members, with some of
the movement of eligible public sector    may have contributed to the slowdown         the key statistics being:
employees from the open scheme            in membership growth. The increase           ■■average age of beneficiaries
market to GEMS since its inception.       in the public sector subsidy with effect     ■■pensioner ratio (defined as the
                                          from 1 January 2016 is likely to have          percentage of beneficiaries over the
In 2016 GEMS’s total market share was     contributed towards the growth in lives        age of 65 years)
17%, compared to 2% in 2006 when          covered on GEMS during the year. The         ■■average family size
the first members joined. The rapid       total market share of the balance
growth in membership includes eligible    of the restricted schemes has                This section considers the trends in each
government employees transferring from    decreased from 30% to 24%, driven            of the above factors.
other open schemes, the amalgamation      by a number of amalgamations of
with Medcor in 2010 and the transfer      restricted schemes into the open
of a group of 16 000 pensioners from      medical schemes environment.
Medihelp to GEMS early in 2012. The
increase in GEMS’s market share in

Market share by principal membership

 GEMS                                                                                            Discovery
 2010: Medcor                                                                                    2004: AngloGold
                                                            2016
 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 2016                                                                                    2001 to 2016
 Net reduction of 37 schemes                                                                     Net reduction of 27 schemes

                                                                                                                                   13
ALEXANDER FORBES HEALTH

                                                                    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

                                                                   All schemes   Open schemes      Restricted schemes

      Note: Average age was recorded in the CMS Annual Reports from 2005 only.

      The average age of beneficiaries in                     From 2006 to 2010 the average age of                 As a scheme ages, we expect the
      the medical schemes industry has                        beneficiaries in the restricted scheme               average claims per member to increase,
      remained fairly constant since 2005,                    environment reduced consistently each                with a generally accepted benchmark
      with a marginal increase from                           year. This was due to the rapid growth               of a 2% increase in average claims per
      32.3 years in 2015 to 32.5 years in                     of GEMS, with significant numbers of                 year increase in average age. A typical
      2016. The average age of both open                      younger members joining the scheme                   claims curve is shown on page 16.
      and restricted schemes increased                        during the early years. From 2011 the
      slightly in 2016, with a slightly bigger                growth driven by GEMS slowed down,
      increase experienced by open schemes.                   and this has resulted in the average
      The average age of beneficiaries on                     age of restricted scheme beneficiaries
      open schemes increased by 0.2 years                     increasing from that point.
      to 34.0 years, while the average age on
      restricted schemes increased from 30.5
      to 30.6 years at the end of 2016.

                                              AVERAGE AGE OF
                                2015           BENEFICIARIES                          2016

                                32.3          All schemes                                32.5

                                33.8          Open schemes                               34.0

                                30.5          Restricted schemes                         30.6

14
DIAGNOSIS 2017/2018

                      15
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

16
DIAGNOSIS 2017/2018

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 2013 to 31 December 2016.

                                                                                    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 2016             Three-year change

While the absolute age of a scheme’s                                      an extremely high pensioner ratio, in
membership is important and indicative                                    part because membership is voluntary.
of the likely claims profile, the change                                  Transmed’s average age has also
in this figure serves as an indicator of                                  increased significantly over the last
a change in the profile that would result                                 three years as a result of the loss of a
in the medical scheme needing to                                          significant number of younger, healthier
take corrective action in its pricing                                     beneficiaries. LA Health’s average age
of benefits, especially if the age were                                   has reduced significantly over the last
to increase.                                                              three years as a result of the high rate
                                                                          of growth from younger and healthier
Of the 20 schemes included in this                                        members. Momentum and Bankmed
year’s Diagnosis, KeyHealth has the                                       also experienced decreases in the
highest average age of beneficiaries in                                   average age of beneficiaries over the
the open schemes, whereas Transmed                                        three-year period. As in previous years,
has the highest average age in the                                        Polmed has the lowest average age of
restricted schemes. In addition to a                                      all the schemes considered.
high average age, Transmed also has

                                                                                                                                                                                                                   17
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

                                                       All schemes   Open schemes     Restricted schemes

        Note: Pensioner ratios were recorded in the CMS Annual Reports from 2005 only.

     The average pensioner ratio across the industry increased from 7.7% to 7.9% in 2016. Open schemes have experienced
     a greater increase in the pensioner ratio than restricted schemes, with an increase from 8.8% to 9.2% from 2015 to 2016
     compared to the increase from 6.1% to 6.3% on restricted schemes.

                   2015          PENSIONER RATIO                          2016

                   7.7%          All schemes                               7.9%

                   8.8%          Open schemes                              9.2%

                   6.1%          Restricted schemes                        6.3%

18
DIAGNOSIS 2017/2018

                                                                             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

                                                                    All schemes   Open schemes    Restricted schemes

   In 2016 the average family size for                          absence of employer subsidies. Those              In addition, as members’ dependent
   restricted medical schemes increased                         beneficiaries who have been removed               children become self-supporting, they
   slightly from 2.38 to 2.39. This was                         from cover may be added back on                   become ineligible for membership as
   driven by the growth in dependants                           to the membership when they need                  dependants on their parents’ medical
   covered on GEMS over the year.                               medical cover, for example during a               scheme and in turn become principal
                                                                pregnancy, and medical schemes may                members themselves. This has a direct
   However, the average family size for                         use waiting periods to try to control this        impact on the average family size in
   the entire medical schemes industry                          anti-selective behaviour.                         two ways:
   has declined over the last 16 years,                                                                           ■■Dependants being removed from
   and this trend continued in 2016.                            Those beneficiaries who have been                   a medical scheme will reduce the
   This indicates that fewer dependants                         removed from cover may be added back                average family size.
   per principal member are being                               on to the membership when they need               ■■Individuals joining a medical scheme
   registered with medical schemes each                         medical cover, for example during a                 as single members will also reduce the
   year. This may be due to affordability                       pregnancy, and medical schemes will                 average family size.
   constraints of members who can no                            use waiting periods to try to control this
   longer afford to provide medical cover                       anti-selective behaviour.
   for their entire family, particularly in the

                      2015                   FAMILY SIZE                                 2016

                      2.23                All schemes                                    2.22

                      2.12                Open schemes                                   2.11

                      2.38                Restricted schemes                             2.39

                                                                                                                                                             19
ALEXANDER FORBES HEALTH

         2.4 Contributions                                                                                     investment income is then added to the                          excess of the statutory requirements.
                                                                                                               reserves of the scheme and serves to                            However, this would not be sustainable
         Medical schemes work on the concept of                                                                increase its solvency levels. However,                          in the long term, as over time the
         risk pooling, where the risk contribution                                                             where investment income is not sufficient                       scheme would become underpriced
         charged to members depends on a                                                                       to cover this shortfall, the scheme is                          and would ultimately need to adjust
         combination of these factors:                                                                         forced to use its existing reserves, which                      its pricing with larger contribution
         ■■Claims: the expected medical expenses                                                               results in decreasing solvency levels. A                        increases in future years.
           of the entire membership group                                                                      scheme may decide to use investment
                                                                                                               income to cover claims or expenses for a                        The graph below considers the
         ■■Non-healthcare expenses: the costs
                                                                                                               number of reasons, including increasing                         allocation of contribution income for
           associated with any administration of
                                                                                                               claims costs, short-term adverse claims                         the top 10 open schemes and top 10
           claims and day-to-day operations
                                                                                                               experience and cross-subsidisation                              restricted schemes, together with the
         ■■Investment income: the interest
                                                                                                               between benefit options.                                        totals for open and restricted schemes
           or returns expected from the
                                                                                                                                                                               and the industry as a whole. Where the
           scheme’s assets
                                                                                                               Some schemes may intentionally set                              contribution to reserves sits below the
         Where the scheme’s claims and                                                                         contributions to use part or all of the                         0% line, schemes have used part or all
         expenses exceed the contributions,                                                                    investment income to subsidise claims                           of their investment income to fund for
         investment income is required to                                                                      and expenses, particularly schemes                              claims and expenses.
         subsidise this shortfall. Any remaining                                                               which have significant reserves in

                                           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:

                                                                                                           Allocation of contribution income in 2016

                                            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

20
DIAGNOSIS 2017/2018

In some cases, where investment income          2.5 Inflationary trends                            the average contribution per principal
has not been sufficient, schemes have                                                              member per month, and allow for
had to use their existing reserves, placing     The graph below compares medical                   normal medical scheme contribution
pressure on solvency levels.                    scheme contribution inflation, along               increases, as well as buy-ups and
                                                with medical care and healthcare                   buy-downs to other benefit options.
In 2016, 13 of the 20 schemes                   expense inflation trends, to consumer              Changes in contributions as a result of
considered did not have sufficient              price index (CPI) inflation over the last          family size or family composition are
contribution income to cover both their         17 years, where:                                   also taken into account.
claims and non-healthcare expenses in           ■■CPI inflation is the weighted average          ■■Medical care and health expense
full and so used investment income and            price inflation in different sectors             inflation is measured by Statistics
in some cases their existing reserves to          and indicates the general level of               South Africa and is based on that
subsidise the cost incurred. Two open             price increases. Viewed in isolation, it         component of CPI which relates to
schemes, Discovery and Bestmed, and               doesn’t necessarily give an accurate             doctors’ fees, nurses’ fees, hospital
five restricted schemes, LA Health,               reflection of cost pressures in a                fees, nursing home fees, medical
Platinum Health, SAMWUMED,                        particular sector. Individual sectors            and pharmaceutical products and
Transmed and Sasolmed, had sufficient             may experience cost increases that               therapeutic appliances.
contribution income to add to their               differ from CPI inflation, as is the case
reserves during the year.                         in the healthcare sector.
                                                ■■Medical scheme contribution inflation
In the following sections we consider
                                                  is calculated for all medical schemes
each component of the medical
                                                  who submit annual financial returns
scheme pricing equation in more detail.
                                                  to the Registrar of Medical Schemes.
However, we will first look at some of the
                                                  Percentage increases are based on
inflationary trends that we have seen in
the industry over the past 17 years.

   AVERAGE INFLATION OVER 17 YEARS
                                                                                                                Medical care and health
                                                                                                                expenses inflation
                                                                     Registered medical scheme
                                                                     contribution inflation                     7.6% per year
                                                                     7.5% per year

                        Rebased CPI inflation

                        5.8% per year

                                                                                                                                             21
ALEXANDER FORBES HEALTH

     Average annualised                     The general observation in the industry     buy-downs to lower cost benefit options,
                                            is that medical inflation (medical care     new entrants joining low-income options,
     contribution increases                 and health expenses inflation) will         and changes to family size, possibly
     2007 to 2018                           be approximately 2% to 3% higher            through the removal of dependants as a
                                            than CPI inflation over the long term.      result of affordability constraints.
                                            However, increases in a particular year
                                            may be significantly higher because         The graph on the left provides a
                                            of adverse claims experience. The           high-level summary of the average
                                            deviation from CPI is mainly due to:        headline contribution increases
            12%
                                            ■■high increases in healthcare service      announced by medical schemes since
                        Bestmed     11.0%     provider fees                             2007 and compares this to average CPI.
                                            ■■a rising burden of disease                Note that we have taken an arithmetic
                                            ■■increasing hospital admission rates       average for illustrative purposes and have
                        Fedhealth   10.1%   ■■more use of benefits                      only included the medical schemes where
                                            ■■new medical technologies                  this information is available. Also note that
Medshield    9.5%                                                                       these increases are based on the headline
                                            ■■the requirement to maintain
                                              reserves of at least 25% of gross         increases announced by individual
                        Bonitas      9.3%                                               schemes and the method of calculation
 Medihelp    9.3%                             contribution income
                        Momentum     9.3%   ■■certain benefit enhancements              may vary. It does, however, provide some
 Discovery   9.2%                                                                       useful information on real contribution
                                            CPI inflation has averaged 5.8% over        increases faced by members.
                                            the last 17 years, while medical care
                                            and health expenses inflation has been      The average contribution increases for
                                            on average 7.6% per year, resulting         the top nine open medical schemes
                         Sizwe 7.8%                                                     since 2007 have far exceeded average
                                            in a gap of 1.8% per year. Over the
                                            same period, average medical scheme         CPI. The margin between the level of
                                            contribution inflation was 7.5% per         CPI and the industry’s contribution
                         CPI 6.2%           year, resulting in actual increases in      rate was highest from 2008 to
                                            medical scheme contributions per            2011. Since 2012 the contribution
                                            principal member exceeding CPI              increases have tended to be closer
                                            inflation by at least 1.7% per year.        to CPI as schemes have aimed to
                                                                                        limit increases in contributions to
                                            The gap between medical scheme              increase competitiveness and minimise
                                            contribution inflation and CPI inflation    membership losses as a result of
                                            has reduced in recent years, most           affordability constraints. Increases
                                            likely as a result of efforts by medical    announced for 2017 were higher than
                                            schemes in managing the costs               in prior years because of a significant
                                            charged by providers. While this would      increase in the use of in-hospital
                                            have a direct impact on medical             benefits reported by many schemes.
                                            scheme contribution increases, the          However, the contribution increases for
                                            further reduction in the gap between        2018 are lower again, in part because of
                                            average medical scheme contribution         the lower level of CPI inflation in 2017.
             0%                             inflation and CPI inflation indicates the
                                            extent of member

22
DIAGNOSIS 2017/2018

        2.6 Healthcare expenditure
        One of the main components                                                  benefit year, open medical schemes                     towards risk claims than open medical
        influencing the performance of a                                            had an overall risk claims ratio of 89.3%              schemes. This trend is illustrated in the
        medical scheme is its healthcare                                            compared to the 95.6% experienced                      graph below.
        expenditure, or claims experience. In                                       by restricted medical schemes. The
        this section we consider the claims ratio                                   industry as a whole experienced a                      The graph below also shows a cyclical
        as well as the actual level of claims that                                  higher claims year in 2016 than in                     trend. This is most likely caused by the
        are paid by medical schemes.                                                2015, with the average claims ratio                    lag effect of medical schemes’ annual
                                                                                    increasing for the third successive year.              pricing exercises. Where a scheme has
        Healthcare expenditure includes all                                         The noticeable increase in the claims                  experienced adverse claims during the
        payments made for claims incurred                                           ratio from 2014 to 2015 was in part due                year, it would usually only correct that
        by members. The risk claims ratio is                                        to the inclusion of managed care fees in               experience through higher contributions
        defined as the ratio of risk claims to                                      healthcare expenditure from 2015.                      or benefit reductions (and therefore
        risk contributions (the proportion of                                                                                              lower relative claims) in the next
        contributions that are used to fund                                         Many restricted schemes do not incur                   financial year, and this corrective action
        claims, excluding any allowance for                                         certain non-healthcare expenditure                     often needs to take place over at least
        medical savings accounts).                                                  items such as distribution costs,                      two years.
                                                                                    marketing expenses and broker fees.
        The risk claims ratio for all medical                                       As a result, they can often afford to use
        schemes increased from 91.4% in                                             a higher percentage of risk contributions
        2015 to 92.1% in 2016. For the 2016

                                                                                                       Trend in claims ratios

                                           120%

                                           110%

                                                                                                                                           Managed care fees were included with
                                                                                                                                           healthcare expenditure from 2015
Risk claims as a % 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

                                                                          All medical schemes      Open medical schemes     Restricted medical schemes

                                                                                                                                                                                        23
ALEXANDER FORBES HEALTH

                                                                                                                             Medical schemes usually finalise their                                 surplus (contributions less claims
                                                                                                                             benefits and contributions reviews in                                  and expenses) while containing non-
                                                                                                                             September each year, without the full                                  healthcare expenses below the Council
                                                                                                                             membership and claims experience                                       of Medical Schemes’ generally accepted
                                                                                                                             data of that year. Where experience                                    guideline of 10% of contributions and
                                                                                                                             has been worse than expected in the                                    building reserves to a sustainable level.
                                                                                                                             first part of the year and is therefore
                                                                                                                             included in the data used for pricing,                                 Although 85% is the generally accepted
                                                                                                                             allowances can be made for this                                        benchmark for the claims ratio, the ideal
                                                                                                                             experience in the next financial year.                                 ratio for a particular scheme will depend
                                                                                                                                                                                                    on its current circumstances, such as:
                                                                                                                             However, where the adverse experience                                  ■■the current adequacy of contributions
                                                                                                                             occurs in the second half of the year,                                 ■■the level of non-healthcare expenses
                                                                                                                             it cannot be allowed for in the pricing                                ■■the need for reserve building
                                                                                                                             of benefits into the next year, and so                                 ■■the scheme’s long-term strategy
                                                                                                                             this adverse experience must be made
                                                                                                                             up in the following year. In addition,                                 The graph below illustrates the average
                                                                                                                             the adverse experience in the second                                   claims paid per beneficiary per month
                                                                                                                             half of the year has a direct impact on                                (PBPM), as well as the risk claims ratio
                                                                                                                             the reserves and solvency levels of the                                in 2016, for the 20 schemes included
                                                                                                                             scheme going into the next year.                                       in the Diagnosis this year. These claims
                                                                                                                                                                                                    ratios all include any managed care fees
                                                                                                                             In general, medical schemes with a                                     incurred by the schemes.
                                                                                                                             risk claims ratio of above 85% face the
                                                                                                                             challenge of achieving an operating

                                                                                                                             Claims and contributions by scheme

                                                                     R2 200                                                                                                                                                                       100%

                                                                     R2 000                                                                                                                                                                       95%
       Average contribution/claim per beneficiary per month (PBPM)

                                                                     R1 800                                                                                                                                                                       90%

                                                                     R1 600                                                                                                                                                                       85%

                                                                     R1 400                                                                                                                                                                       80%
                                                                                                                                                                                                                                                         Risk claims ratio

                                                                     R1 200                                                                                                                                                                       75%

                                                                     R1 000                                                                                                                                                                       70%

                                                                      R800                                                                                                                                                                        65%

                                                                      R600                                                                                                                                                                        60%

                                                                      R400                                                                                                                                                                        55%

                                                                      R200                                                                                                                                                                        50%

                                                                        R0                                                                                                                                                                        45%
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                                                                                                     Average contributions PBPM                  Average claims PBPM             2016 claims ratio

24
DIAGNOSIS 2017/2018

While the claims ratios show the             (age profile and pensioner ratio), the         to use some of those reserves, while
adequacy of contribution levels,             incidence and distribution of disease          a scheme which does not meet the
the actual average claims paid per           (often called disease burden) and              statutory solvency requirements may
beneficiary indicate the level of benefits   advances in diagnostic technology              have higher contributions than their
provided by a scheme. The graph on           and biological drugs. The actual               demographic and claims profile would
the previous page shows that KeyHealth       cost of claims can be influenced by            require to build reserves.
paid the highest amount in claims            the negotiating power of a particular
per beneficiary in 2016, and also had        medical scheme or its administrator.           2.7 Non-healthcare
the highest contribution income per
beneficiary during the year. Nedgroup        The level of the average claims and            expenditure
experienced the highest claims ratio of      contributions per beneficiary for a
                                                                                            Non-healthcare expenditure (NHE)
these schemes, with a claims ratio of        particular scheme will depend on a
                                                                                            includes administration fees, broker
99.4% for the 2016 year. Transmed had        number of factors, including the richness
                                                                                            commission, distribution costs, bad
a high claims ratio of 105.3% in 2015,       of benefits offered, the split of members
                                                                                            debts, and reinsurance costs. Up to
but managed to reduce this to 85.2%          between high-cover and low-cover
                                                                                            2014 managed care fees were reported
for 2016. LA Health had a claims ratio       options as well as the demographic
                                                                                            as part of non-healthcare expenditure.
of 82.9% for 2016, the lowest claims         profile of the scheme in terms of average
                                                                                            However, since 2015 managed care
ratio of the 20 schemes considered.          age and chronic prevalence. The
                                                                                            fees have been recognised as part of
                                             relationship between contributions and
                                                                                            healthcare expenditure, which means
The actual healthcare costs funded by        claims for a particular medical scheme
                                                                                            that there is a marked reduction in the
medical schemes are driven largely by        will depend on the pricing philosophy
                                                                                            proportion of gross contribution income
the use of services as well as the actual    followed by that scheme. A scheme
                                                                                            spent on NHE from 2014 to 2015.
cost of claims. The use of services is       with a significant level of reserves might
influenced by demographic factors            intentionally price for an operating deficit

                                                                                                                                      25
ALEXANDER FORBES HEALTH

                                                                      Trend in non-healthcare expenditure

                     20%

                     18%
                                                                                                                               Managed care fees were
                                                                                                                               excluded from non-healthcare
                                                                                                                               expenditure from 2015.
                     16%

                     14%

                     12%
 NHE as a % of GCI

                     10%

                     8%

                     6%

                     4%

                     2%

                     0%
                       2000   2001   2002   2003     2004      2005      2006   2007     2008    2009     2010     2011       2012    2013   2014   2015   2016

                                                   All medical schemes    Open medical schemes   Restricted medical schemes    10% line

     Total non-healthcare expenditure, as a                   Restricted schemes are expected                     paid to NHE to decrease over time,
     proportion of gross contribution income,                 to have lower non-healthcare costs                  irrespective of whether additional cost
     increased marginally in 2016 for the                     primarily because they have lower or                control measures are introduced. In
     medical schemes industry as a whole.                     no distribution expenses or broker fees             addition, broker fees paid each year
     This increase was driven by an increase                  and certain operating expenses may                  may not increase at the same rate as
     from 6.0% to 6.3% in the proportion                      be subsidised by their participating                contributions because of the cap in place
     of gross contribution income spent on                    employers. Some restricted schemes,                 that does not increase at healthcare cost
     non-healthcare expenditure by restricted                 for example Profmed and GEMS, do                    inflation, which also contributes to the
     medical schemes. For open schemes,                       compete with the open market to a                   decreased NHE percentage. As a result,
     the NHE proportional spend reduced                       certain extent, and as a result will                a more suitable measure of NHE is the
     from 10.4% to 10.2%. The lower level                     budget for marketing expenses and                   absolute cost per member.
     of non-healthcare expenditure within                     possibly broker fees.
     restricted schemes is driven to a                                                                            The graph on the next page illustrates
     large extent by GEMS whose                               As we assume that NHE increases with                the components of NHE for the top 10
     non-healthcare expenditure was 5.6%                      CPI while contributions increase with               open and top 10 restricted schemes for
     of gross contribution income in 2016,                    medical inflation, which is usually 2%              2016, as well as for open and restricted
     up from 5.0% in 2015.                                    to 3% more than CPI on average each                 schemes, and the medical schemes
                                                              year, we would expect the proportion                industry as a whole.

26
DIAGNOSIS 2017/2018

                                                                                     Non-healthcare expenditure by scheme

                           R500                                                                                                                                                                              20%

                           R450                                                                                                                                                                              18%

                           R400                                                                                                                                                                              16%

                           R350                                                                                                                                                                              14%
NHE per member per month

                                                                                                                                                                                                                   NHE as a % of GCI
                           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 % of GCI

     The marked difference between                                                       There is no fixed definition for
     non-healthcare expenses of open                                                     which expenses can be included as
     and restricted medical schemes is                                                   administration fees, and this contributes
     evident from the graph above. Even                                                  to the varied level of administration fees
     after excluding broker fees, the                                                    across the market. Some administrators
     pure administration costs of open                                                   may include services other than pure
     and restricted medical schemes are                                                  administration, for example actuarial
     significantly different. This may be due                                            services, which will affect the overall
     to the sponsoring employers of the                                                  profile of administration expenses.
     restricted schemes taking on some of the
     expenses incurred in the running of the
     medical scheme through the corporate
     entity, and so reducing the costs borne
     by the medical scheme itself.

                                                                                                                                                                                                                                       27
ALEXANDER FORBES HEALTH

     The figure below shows the breakdown of non-healthcare expenditure into its different components across the industry in 2016.

                                            84.2%
                                             administration fees
                                                                                                            R

      Breakdown of
      non-healthcare                        1.7%                                                14.1%
      expenditure                            bad debts                                   broker fees (and marketing)

                                                 2.8         Financial performance
                                                 One of the key factors used to measure        2016, with the industry as a whole
                                                 the performance of a medical scheme           experiencing an operating deficit of
                                                 is the scheme’s operating result.             R2.390 billion in 2016. Restricted
                                                 A scheme’s operating result is an             schemes incurred an operating deficit
                                                 indication of its financial soundness after   of R1.435 billion while open schemes
                                                 claims and non-healthcare expenditure         incurred an operating deficit of R0.956
                                                 are deducted from contribution income.        billion. In 2014 the industry ended
                                                 It shows the surplus or deficit before        the year with an operating deficit
                                                 investment income.                            of R464.51 million, with restricted
                                                                                               schemes attaining an overall operating
                                                 Drivers of strong financial performance       deficit of R504.58 million and open
                                                 by medical schemes include:                   medical schemes achieving a small
                                                 ■■appropriate benefit pricing                 operating surplus of R40.07 million. The
                                                 ■■adequate risk management and                industry ended 2015 with a significant
                                                   claims control                              operating deficit of R1.219 billion, with
                                                 ■■favourable age and risk profile of the      open schemes recording a deficit of
                                                   membership base                             R565.63 million at an operational level
                                                 ■■low non-healthcare expenditure              and restricted schemes showing a
                                                                                               deficit of R653.78 million.
                                                 The trend of deteriorating financial
                                                 results that we have observed in the
                                                 industry since 2014 continued in

28
DIAGNOSIS 2017/2018

                                                                                         Trend in operating results

                               R3 000

                               R2 000

                               R1 000
Operating result (R million)

                                   R0

                               -R1 000

                               -R2 000

                               -R3 000
                                         2000   2001   2002   2003   2004    2005       2006   2007    2008     2009        2010   2011   2012     2013   2014   2015   2016

                                                                 Open medical schemes          Restricted medical schemes          All medical schemes

                                                                                                                                                                               29
ALEXANDER FORBES HEALTH

     The longer-term trend in operating                                In 2015, 8 of 23 open schemes and                 overall net surplus of R1.391 billion
     results since 2000 has been driven in                             26 of 60 restricted schemes achieved              (2015: R1.353 billion) and restricted
     large part by the prevailing regulations.                         an operating surplus. In 2016, 5 of 22            schemes achieved an overall net
     Medical schemes were priced to target                             open schemes and 23 of 60 restricted              surplus of R 0.751 billion (2015:
     significant surpluses in the years prior                          schemes achieved an operating surplus.            R1.164 billion).
     to 2004 in order to meet the regulatory
     solvency requirements by 2004. During                             Schemes incurring operating deficits              In 2015, 17 of 23 open schemes and
     the years following 2004 many schemes                             have to rely on investment income                 50 of 60 restricted schemes achieved
     had met the solvency requirements                                 to achieve a breakeven result on a                a net surplus, compared to 12 of 22
     and so no longer had to price for larger                          net level. In 2016, with the addition             open schemes and 45 of 60 restricted
     surpluses. They were, however, then                               of investment and other income, the               schemes in 2016.
     faced with significant increases in                               industry achieved a net surplus of
     claims over the following years as a                              R2.142 billion, compared to the overall
     result of a change in service provider                            net surplus of R 2.517 billion achieved
     charging habits with the requirement to                           in 2015. Open schemes achieved an
     pay PMBs at costs.

                                                                                       Trend in net surplus

                           R6 000

                           R5 500

                           R5 000

                           R4 500

                           R4 000

                           R3 500
 Net surplus (R million)

                           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

                                                                  Open medical schemes      Restricted medical schemes    All medical schemes

30
DIAGNOSIS 2017/2018

       The graph below shows the financial performance of the top 10 open schemes and top 10 restricted schemes in 2016.

       Of the 20 schemes considered in this year’s Diagnosis, 13 did not attain a surplus at an operating level in 2016 and therefore had
       to rely on investment income to subsidise claims and non-healthcare expenditure. Four of the 10 open schemes and one of the
       10 restricted schemes also did not attain a surplus at a net result level, and so were net disinvestors for the 2016 benefit year.

                                                                                                          Schemes' financial performance for 2016

                                      R1 500

                                      R1 000
Operating or net result (R million)

                                        R500

                                          R0

                                       -R500

                                      -R1 000
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                                                                                                                          Operating result            Net result

                                                                                                                                                                                                                                     31
ALEXANDER FORBES HEALTH

                                                           2.9 Investments
                                                           Where medical schemes do not achieve                                  This strategy is not sustainable unless
                                                           operating surpluses, they become                                      investment returns are able to keep
                                                           reliant on the investment returns earned                              pace with, and preferably exceed,
                                                           over the year to fund part of their claims                            claims inflation. At present, however,
                                                           and non-healthcare expenditure. In                                    most medical schemes follow very
                                                           2016, 54 of 82 medical schemes                                        conservative investment strategies
                                                           failed to achieve an operating surplus                                as shown in the following graph.
                                                           and therefore had to draw on their                                    The graph shows the asset allocation
                                                           investment returns, placing additional                                for the 20 schemes under consideration
                                                           pressure on solvency levels.                                          in this publication.

                                                              Asset allocation at 31 December 2016

                    100%                                                                                                                                                         60%

                    90%
                                                                                                                                                                                 50%
                    80%

                    70%                                                                                                                                                          40%

                    60%
 Asset allocation

                                                                                                                                                                                 30%

                                                                                                                                                                                        Solvency
                    50%

                                                                                                                                                                                 20%
                    40%

                    30%                                                                                                                                                          10%

                    20%
                                                                                                                                                                                 0%
                    10%

                     0%                                                                                                                                                          -10%
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                           Cash and money market   Bonds   Equities          Property      Collective investment vehicles         Foreign assets      Other           Solvency

32
DIAGNOSIS 2017/2018

In 2016 open schemes held 18.7% of           In particular, claims expenditure tends
assets in equites, with 33.7% being held     to grow faster than CPI. To maintain
in bonds and 40.1% of assets being           solvency year on year, the accumulated
held in cash. In the restricted scheme       funds need to increase in line with the
environment, schemes held 22.1% of           increase in contributions. If investment
assets in equities, 20.6% in bonds and       returns cannot keep pace with the
50.7% in cash or cash equivalents.           increase in claims inflation and
The balance is held in property mainly,      accumulated funds increase at a rate
with some exposure to debentures and         less than contributions, then solvency
insurance policies.                          levels will decrease, resulting in a need
                                             to either increase contributions further –
There are asset class limits placed on       which would exacerbate this issue – or
medical schemes in Annexure B of the         reduce benefits.
Regulations to the Medical Schemes
Act, but most schemes are operating          As a result, for schemes failing to
well inside the limits for riskier asset     meet the solvency requirement, low
classes. The limit on equities is 40%,       investment returns as a result of
while the limit on property is 10%. This     conservative asset allocations may in
implies that schemes could have up           fact be increasing risk for the scheme.
to 50% of their investments in these         For schemes meeting the solvency
higher-risk asset classes, whose returns     threshold, this can be eroded over time
are generally expected to exceed CPI         if returns are below claims inflation, and
inflation. The allowable exposure to         they may be missing an opportunity
conservative asset classes, such as          to maintain affordable contribution
cash, money market instruments and           increases in the future.
bonds, is unlimited. The only restrictions
on these asset classes are on the            Where a scheme already has sufficient
exposure to specific issuers, to ensure      reserves, there is a strong argument to
some level of diversification.               invest at least some of the reserves in
                                             more risky asset classes as allowed by
Medical schemes’ preference for cash         Regulation B. Conversely, schemes that
in particular appears to be driven by a      are not adequately funded can increase
preference for liquid assets, given the      their expected return by investing
short-term nature of medical scheme          in more risky assets, which will then
liabilities, as well as concerns about       increase the reserves held and thereby
risks related directly to the investments    the solvency ratio. This also depends on
(the possibility of making negative          the absolute value of the asset base.
returns or losing scheme assets).
However, for the long-term sustainability
of the scheme, average returns below
medical inflation may pose a greater
risk, especially for schemes that rely
on investment returns when they fail to
achieve an operating surplus.

                                                                                                                33
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