Bleak year for medical schemes

POOR FINANCIAL RESULTS: INDUSTRY EXPERIENCED ITS HIGHEST CLAIMS RATIO SINCE 2009

65% of schemes failed to achieve an operating surplus and had to draw on their investment returns.

For the third consecutive year, SA’s medical schemes industry posted poor financial results in 2016. Alexander Forbes Health’s annual diagnosis looked at the financial and demographic performance of medical schemes between 2000 and 2016. Here’s an overview of findings:

Medical scheme numbers

The top 10 open and restricted medical schemes, by principal membership, remained unchanged.

Growth in dependants for the majority of schemes was 0.6% in 2016. As this was lower than that of principal members, it may indicate financial pressures, resulting in medical cover being purchased for fewer dependants.

Contribution income

In terms of operational performance, only seven of SA’s top 10 open and restricted schemes had enough contribution income to cover all claims and expenses in 2016.

The industry achieved an operational deficit of R2.390 billion in 2016 (2015: R1.219 billion deficit).

Inflationary trends

The gap between medical scheme contribution inflation and consumer inflation (CPI) continues its downward trend, partly due to medical schemes trying to manage provider costs. Over the past 17 years, medical care and health expenses inflation has been on average 7.6% p.a, while CPI inflation averaged 5.8%, resulting in 1.8% gap p.a.

Average medical scheme contribution inflation was 7.5% pa, resulting in actual increases in medical scheme contributions per principal member exceeding CPI inflation by at least 1.7% pa.

However, since this calculation includes buydowns to lower options and reduction in family size, this isn’t the true picture. Thus, headline increases by schemes over this period are CPI plus 2.5% to CPI plus 4.5%.

Healthcare expenditure

The risk claims ratio is the proportion of contribution income used to fund claims, excluding any allowance for medical savings accounts. The ratio for all medical schemes increased to 92.1% in 2016 (2015: 91.4%). The generally-accepted benchmark is 85%.

Investment income

In 2016, 65.9% of medical schemes failed to achieve an operating surplus and had to draw on their investment returns, placing additional pressure on solvency levels.

This strategy isn’t sustainable unless investment returns are able to keep pace with, and preferably exceed, claims inflation.

Financial performance

The noticeable deterioration in the overall operating results of the industry from 2013 to 2015 continued, with further deterioration of financial performance in 2016. The industry ended 2016 with an overall solvency of 31.6% (2015: 32.6%), due to a worsening solvency position of both open and restricted schemes.

Medical schemes sustainability index

With the continued consolidation of medical schemes and rising claims costs, the sustainability of schemes and the assessment thereof have become increasingly important for industry stakeholders.

The Alexander Forbes Health Medical Schemes Sustainability Index analyses the collective impact of key statistics on the sustainability of medical schemes in future years.

The biggest increases in the index for 2016 were seen for Transmed and Profmed, which improved their 2015 scores 20.8% and 17.8% respectively. Polmed is once again the top performer in the index, although it wasn’t 2016’s top performer. The industry profile remains fairly stable. – Alexander Forbes Health