Some small medical schemes deserve to survive the cull

Somebody needs to take up the cause of the smaller, restricted medical schemes under threat of being consolidated — or swallowed up by South Africa’s largest open scheme — but who will take on that role?

That was the gist of a discussion at a recent briefing Alexander Forbes Healthcare gave when it released its latest checkup on the state of the medical scheme industry, Diagnosis.

The report notes that schemes have been consolidating since 2001.

There were 144 schemes then; now there are 82. This isn’t necessarily a bad thing because bigger schemes are generally, but not always, more sustainable and able to negotiate better rates from healthcare providers.

The consolidation of schemes and scheme options is a stated goal of National Health Insurance, and, earlier this year, the January deadline for formulating a plan to consolidate schemes with fewer than 6 000 members was highlighted.

At the Alexander Forbes briefing, actuary Roshan Bhana questioned the rather arbitrary decision to focus on membership size when considering consolidation, as this could see the dissolution of about 29 restricted schemes — 26 in the private sector — that are well funded and provide good benefits to employer groups or industries.

There are legal impediments to forced consolidation, including the need to change the Medical Schemes Act and the rules of schemes that require member consent to merge. NHI policy documents set 2022 as the deadline for legislative changes.

To consolidate, schemes need to merge or liquidate, and are likely to choose liquidation as this way their reserves will be shared among members, Bhana says.

If a scheme merges, its reserves are transferred to the merged entity.

Choose liquidation

Bhana says the 26 viable schemes with fewer than 6 000 members have reserves of R3-billion — on average R35 000 for each of their 85 000 members.

If these schemes choose voluntary liquidation, their reserves will be lost to the medical scheme industry.

Members from the liquidated schemes will be absorbed into other schemes, which will be forced to raise reserves for those new members — the law requires schemes to hold 25% of all contributions in reserve to cushion against periods of high claims.

Reserve-building reduces the amount that can be spent on benefits.

Another concern that Bhana points out is that since 2010, nine out of 15 schemes that have merged have chosen to merge with Discovery Health Medical Scheme. It has 33% of the market share of all principal members, Diagnosis notes. This mega scheme now has reserves of R12-billion.

Need for high reserves

Bhana says there are many arguments why such a large scheme does not need such high reserves and it probably doesn’t need the R3-billion the restricted schemes hold either. The formula to determine how much schemes should hold in reserve is under review, but the deadline for this project is only 2020.

Much hangs on the Competition Commission’s health market inquiry, which needs to consider the reserves issue and if it is really in members’ interests for more members to be merged into the country’s largest scheme.

And the Council for Medical Schemes needs to decide how to act in the interests of all medical scheme beneficiaries, he says.

Aside from the fact that these restricted schemes are well funded and have high solvency ratios, members often enjoy lower contributions and better benefits.

A key reason for this is that membership of restricted schemes is typically compulsory for an employer group, so these schemes don’t have the increased cost that comes with allowing members to join and leave as they wish, often joining only when they are sick and need to claim.

Bhana says restricted schemes usually use higher earners to subsidise the contributions of lower earners to ensure the limited options are affordable for all.

Open schemes typically have more options, with a variety of contribution levels to appeal to different income groups.

Some benefits suit the industry the scheme serves — for example, benefits for lung disease in the mining sector, he says.

We can’t expect open schemes to advance the cause of restricted schemes as there would be a conflict of interests.

Everything on hold

And despite a crying need for sensible policy changes to improve the financial sustainability and governance of all schemes, nothing has happened since 2007. Everything is on hold pending the outcome of the Competition Commission inquiry and more details on NHI policy.

But NHI has a likely-to-be-missed deadline of 2025, and the Davis tax committee says an NHI fund is financially impossible without higher growth.

How much longer can schemes, their members and their employers keep holding their breath?