Discovery bosses defend profits on administration

The heads of both Discovery Health Medical Scheme (DHMS) and its administrator were again questioned about the fees the scheme pays for administration and the value it gets for these fees at the scheme’s annual general meeting on June 23.

The questions asked at this year’s AGM and trustee elections, which resulted in four new trustees being announced this week, have been asked before and are likely to be asked again.

That’s because although the scheme’s board feels “comfortable” about the results of a study it commissioned that determined that you, as a scheme member, do get value for money, many members do not feel quite as satisfied with the information presented and other information they receive or their experience when it comes to claiming benefits.

This year, Jonathan Egdes, a member of the scheme who was also up for election as a trustee, raised the issue of the fees paid to the scheme’s administrator, Discovery Health. Egdes, and more than 100 other members who stood for election, did not get enough votes to make it onto the board.

Egdes pointed out at the AGM that while the medical scheme is a not-forprofit entity, the net surplus or deficit made by the scheme is akin to a profit in a for-profit entity.

He said the profits made by the forprofit administrator, Discovery Health, had consistently out-performed the surplus made by the scheme – by almost 100 percent.

It is a huge concern that the scheme and its members bear all this risk while Discovery Health and their administration and managed healthcare businesses double their money, and this had been going on for a number of years, he said.

This week, healthcare business adviser and entrepreneur Stan Eiser elaborated on the point Egdes made, saying that in 2015 the scheme collected R40 billion in contribution income (excluding contributions to medical savings accounts), and made a surplus of 1.27 percent, or R507 million. The administrator, on the other hand, made a profit of R2.07 billion in administration fees, which is 5.17 percent of the contribution income.

Eiser has similar figures for previous years. In 2014, for example, the scheme made a surplus of R753 million, while the administrator made R1.9 billion profit on administration and managed care fees.

CAREFUL BUDGETING

Discovery’s principle officer, Milton Streak, was quick to dismiss Egdes’s comments. Streak said it is completely incorrect to compare the surplus of a medical scheme to the profits its administrator makes, because the scheme budgets “very carefully” for a slim surplus – just a one-percent margin – so a R500-million surplus on almost R50 billion in contribution income, if medical savings accounts are included.

He said members should not pay more in contributions than is required to cover the healthcare and non-healthcare costs and to maintain the scheme’s reserves at the required level (at least 25 percent of its contribution income).

Both Streak and Discovery Health’s chief executive, Jonathan Broomberg, pointed out that the scheme’s administration fees, on average per beneficiary per month, are below the open medical scheme average: R118 for DHMS versus R121 for open schemes (albeit excluding self-administered schemes, which typically have lower fees).

Streak said the scheme’s non-healthcare expenses continued to decline, and last year, annual administration fee increases were 0.5 percentage points below consumer price index (CPI) inflation and declined to 7.79 percent of gross annual contribution income from 7.98 percent in 2014.

The chairman of the board of trustees, Michael van der Nest, reminded members at the AGM that the board had engaged Deloitte in 2013 to determine scientifically the answer to the question of whether members get value for the administration fees they pay.

Streak said a formula used in the Deloitte study had found that, in 2014, for every R1 the scheme spends on administration and managed care per beneficiary per month, it derives R1.69 in added value for beneficiaries.

He says an analysis of contributions paid by option type among the top 10 open medical schemes has again shown that DHMS remains the most affordable across the entire spectrum of healthcare plans available in the open medical scheme market on a like-for-like basis.

Van der Nest told the AGM the board of trustees was satisfied that members were getting value and this was the reason DHMS was growing when others were not and why the scheme was ahead of the rest of the open market.

Streak said the scheme and its administrator shared a common objective, resulting in what he described as a “vested outsourcing arrangement” that an international expert on the subject, University of Tennessee professor Kate Vitasek, believed it was a “win-win” for both the party doing the outsourcing and the service provider.

In determining whether members got value for money, the Deloitte study considered how DHMS performed relative to its open scheme peers in terms of financial strength, growth in membership and sustainability, quality and value for money.

DMHS’s strong membership growth and financials make it hard to doubt the study’s conclusions on these aspects.

On the harder-to-measure quality and value-for-money aspects, the study considered factors such as the out-of-pocket expenses members faced and the number of complaints per 1 000 beneficiaries against the scheme.

It also took into account the fixed cost of administration and the costs that could decrease as the number of members increased and concluded that the administrator is passing on a significant proportion of the economies of scale, but possibly not all.

MEASURE OF DIFFICULTY

The cynical will view the Deloitte study and this year’s vested outsourcing model comments as attempts to justify the fees paid to Discovery Health, while scheme supporters will view it as a responsible move by the board.

The two will probably never agree until there is an independent measure of what schemes deliver and at what cost.

The difficulty with measuring this is in how one measures the quality of healthcare we get for our money.

A comparison of contributions across different schemes, or the ratio of money spent on claims relative to administration and other healthcare costs, gives no insight into the benefits or quality of healthcare you get from a scheme.

All of this is complicated by the fact that many schemes now contain costs by insisting you use hospital, doctor and pharmacy networks.

Another problem in the value-formoney equation is that medical schemes are not required to put their administration contracts out for tender; they are only encouraged to do so by the Council for Medical Schemes.

As the Competition Commission’s heathcare inquiry has acknowledged, “consumers are unable to make informed choices in the selection of health products (insurance, services and products) due to lack of transparency in the healthcare sector”.

The inquiry intends to explore the extent to which, if any, information weaknesses reduce the ability of consumers to make informed decisions, and whether this has any implications for competitive behaviour within the sector.

Many years ago, there was a suggestion that schemes should be compelled to offer the same common package of benefits and provide add-on benefits in comparable packages, so that consumers could compare them easily. DHMS has argued against this in a submission to the Competition Commission, saying schemes’ memberships are too diverse for standard packages.

We can only hope the commission will give some thought to this proposal or an alternative that solves the problem we have in deciding whom to believe when it comes to value and what is a reasonable profit margin on administration fees.