Signs point to a medical scheme in trouble
Red flags as Health Squared’s reserves drop
Members of Health Squared Medical Scheme face an uncertain future after it came to light that their scheme’s reserve levels had dropped to just over 2% by the end of July 2022 (well below the minimum statutory requirement of 25%), and the Health Squared Board of Trustees had applied for voluntary liquidation.
But before the high court ruled on the liquidation application, the scheme was placed under provisional curatorship by the Council for Medical Schemes (CMS). While the high court ordered the scheme to continue to provide cover to its members with life-threatening conditions until the end of September, members find themselves having to seek alternative medical cover, which may be subject to various underwriting requirements.
Although the failure of medical schemes is a rare occurrence, the Health Squared scenario highlights the importance of medical scheme financial soundness. It also raises questions as to how scheme members would know if their medical scheme is in financial trouble, and how members can go about selecting a scheme that will be there for them when they need it the most.
By law, a medical scheme must always hold reserves of at least 25% of its annual contributions. These reserves aim to protect members’ interests by ensuring the continued operation of the medical scheme and to ensure it can pay claims in the event of unforeseen circumstances.
As would have been the case for Health Squared, which reportedly suffered from high claims associated with Covid-19, these required reserves also act as a “buffer” when the usual monthly contributions no longer cover the scheme’s liabilities. However, depending on other risk factors, warnings should sound when reserve levels fall below 25% as this could be an indication that the scheme may be in financial trouble.
In the case of Health Squared, the scheme was already running at a deficit in 2019, and its solvency level had dropped to 15.4% (CMS annual report) and so there were red flags even before the increased volatility brought on by Covid-19.
Apart from reserves, there are several other indicators that members can check.
Ideally, schemes should be growing and not shrinking, although this is a challenge in these economic times and so comparative growth or shrinkage across medical schemes may be a valuable measure.
The age profile of the medical scheme is an indicator of risk profile and an important measure as medical schemes are required to manage their risk without being permitted to price according to the age or health status at a member level.
Finally, schemes, as non-profit organisations, price their contributions to be close to break
A medical scheme must hold reserves of 25% of its contributions
even, while allowing for changes in membership, healthcare inflation and solvency requirements. A scheme’s record in this regard indicates good financial management and sound actuarial practices.
The annual general meeting is also a good opportunity for members to ask questions.