Smaller medical schemes should merge

Londiwe Buthelezi: Business Report, 11 September 2012

Rising medical costs have prompted the Council for Medical Schemes (CMS) to ask some medical schemes with deteriorating finances to consider an amalgamation.

One of the schemes that has been advised to take this route is the National Independent Medical Aid Society, which is in advanced negotiations to merge with Resolution Health.

The health economist at Econex, Mariné Erasmus, said now that the regulator was driving the agenda, the amalgamation and takeover of smaller schemes might accelerate.

"But the trend would have continued in any case because it is the only option for schemes with smaller risk pools in the absence of mandatory cover for formally employed people," Erasmus said.

She said the deteriorating financial position of medical schemes had more to do with their risk profile as a result of regulatory changes, which instituted the open enrolment concept, preventing schemes from cherry-picking some members and rejecting others. With schemes unable to discriminate when applications are made, the increase in higher risk members has had a detrimental effect on the costs of medical schemes.

Sheri Few, the head of medical sector ratings at Global Credit Ratings, said the medical scheme industry was likely to show weaker operating trends going forward.

She said the higher claims ratio reported by medical schemes so far this year motivated for consolidation to continue.

The number of registered schemes already dropped from 99 in March last year to 95 this March.

Already the high claims ratio has left a number of small schemes unable to meet the 25 percent minimum reserves cover as required by the Medical Schemes Act.

The CMS said 60 percent of open scheme beneficiaries were in schemes that did not meet the 25 percent minimum solvency requirement. In restricted schemes, the number had risen from 47.9 percent in 2010 to 49.5 percent last year.

While failure to reach minimum solvency levels did not necessarily mean reserves were insufficient for larger schemes, this was a very real danger for smaller schemes with smaller risk pools.

But Ashleigh Theophanides, the health-care and life sciences assurance leader at Deloitte, said even if a small scheme had a very high solvency ratio, it was almost irrelevant in terms of the rand amount because the scheme might battle to absorb the shock of a high cost event like serious vehicle accidents.

The average actual spend per member was also on average over 15 percent higher at small schemes than at larger schemes.

She said this might be due to factors such as a worse profile of lives, as small schemes had an older average age (34.1 years versus 33.7 years) and a higher pensioner ratio (9.7 percent versus 8.5 percent) than larger schemes.

Theophanides said although restricted schemes had eligibility rules for new members, in the past restricted schemes had chosen to join larger schemes as opposed to merging with smaller schemes.

Of the 39 smallest schemes that were operating at the end of 2011, 36 were restricted schemes.

"Trustees have to look at what is best for members. The stability of a scheme and their purchasing power is a factor to consider," she said. Schemes might still find appropriate smaller peers to merge with.

Meanwhile, the CMS has proposed that a regulator be established to oversee the process of price determination in the private health-care sector in order to control spiralling costs.