Medical inflation to remain high

Medical inflation has, on average, been 1.8% a year higher than the Consumer Price Index over the past 17 years, and this trend is set to continue. reports

THE PAST few years have been difficult for the South African healthcare industry, with medical schemes facing escalating healthcare costs, which they have passed on to consumers, making a significant dent in disposable incomes.

A study released this week by Alexander Forbes found that medical inflation (medical care and health expenses inflation) will be about 2% to 3% higher than Consumer Price Index (CPI) inflation over the long term.

CPI inflation has averaged 5.8% a year over the past 17 years, while medical inflation has averaged 7.6%, resulting in an average gap of 1.8% a year.

In the same period, average medical scheme contribution inflation was 7.5% a year, meaning increases in contributions exceeding CPI inflation by 1.7% a year.

Roshan Bhana, the head actuary of technical and actuarial consulting solutions at Alexander Forbes Health, says the average contribution increases for the top nine open medical schemes have been well above CPI since 2007.

“Increases announced for 2017 were higher than in prior years because of a significant increase in the use of in-hospital benefits reported by many schemes.

“However, the contribution increases for 2018 are lower, in part because of lower CPI inflation in 2017,” Bhana says.

Alexander Forbes says medical inflation has been higher than CPI for the following reasons:

• High increases in the fees charged by healthcare service providers.

• The rising burden of disease. (A disease burden is the impact of a health problem as measured by financial cost, mortality, morbidity, or other indicators.)

• The increase in hospital admission rates.

• Medical scheme members making greater use of benefits.

• The development of new medical technologies.

• The statutory requirement that schemes maintain reserves of at least 25% of their gross contribution income.

• Medical schemes enhancing their benefits.

BLEAK PICTURE

The Alexander Forbes report says many schemes are struggling to stay afloat.

It says that, at the end of 2016, there were three open medical schemes and 28 restricted schemes with fewer than 6 000 principal members. The open medical schemes whose membership was below this threshold were Cape Medical Plan (5 463 principal members), Makoti Medical Scheme (2 427) and Suremed (1 364).

The study found that 13 of the 20 schemes considered did not have sufficient contribution income to cover both their claims and their non-healthcare expenses in full.

The 13 schemes were found to have used investment income and, in some cases, their reserves to subsidise their costs.

The industry experienced higher claims in 2016 than in 2015, and the highest claims ratio since 2009.

Bhana says the industry had an operational deficit of R2.39 billion in 2016, almost twice the R1.219bn deficit in 2015.

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

The industry’s net growth of 68 558 principal members over the 2016 financial year was largely driven by Discovery Health Medical Scheme, which experienced net growth of 29 589 principal members, and the Government Employees Medical Scheme (Gems), which grew by 19 589 principal members.

SUSTAINABILITY INDEX

Alexander Forbes also looked at the sustainability of the top 10 open and the top 10 restricted medical schemes in 2015 and 2016, using 2006 as the base year.

The biggest increases in the Sustainability Index for 2016 were for Transmed and Profmed, which improved their 2015 scores by 20.8% and 17.8% respectively.

Gems experienced a decline in its index value in 2016. The scheme incurred deficits at operating and net levels during the year.

Polmed was the top performer in the Sustainability Index. The scheme achieved a fair operating deficit in 2016, increased its reserves and maintained a solvency ratio of more than above 50%, which was significantly above the minimum of 25%.

Bhana says the medical schemes industry overall was fairly stable, and its financial position was sound.

“The year 2018 may hold some challenges, as the industry is faced with consolidation measures in the build-up to the full implementation of National Health Insurance.

“We look forward to the recommendations of the Competition Commission’s Health Market Inquiry to assist with controlling costs and contributions in the industry.”

kabelo.khumalo@inl.co.za