BUSINESS DAY TV: Challenging year ahead for healthcare industry
Roshan Bhana is with Alexander Forbes Health.
BUSINESS DAY TV: As South Africans brace themselves for medical aid tariff increases well above inflation, the healthcare industry itself faces a fair amount of change in the year ahead. The Competition Commission is expected to wind up its inquiry into the industry while schemes also face proposed new risk-based solvency measures.
Is this likely to change the face of medical schemes and will consumers ultimately pay even more for health insurance? Alexander Forbes Health recently published its Health Diagnosis for 2016 and 2017 and Roshan Bhana joins us with some of the reports insights.
Roshan ... so a year of change ahead perhaps for the medical schemes industry, a year of challenges though as well, it looks like.
ROSHAN BHANA: Yes, certainly the challenges have been well documented in the past two years. It’s just the nature of the industry and there’s very little appetite in terms of reforms that need to happen from the minister of health ... the focus from the Department of Health is mainly around National Health Insurance (NHI) more so than fixing up what’s wrong with the medical schemes industry.
Having said that, the medical schemes industry is still doing quite well given the circumstances under which it needs to operate and the Competition Commission inquiry together with some of the changes that are expected in the coming year can disrupt the industry, but that is probably still going to take a while before those changes take effect.
BDTV: Before we get to those disruptive forces, let’s take a look at what’s wrong with the industry because when it comes to the top 10 open schemes and top 10 restricted schemes during 2015, 16 of the 20 schemes did not maintain a surplus on an operating level in 2015 and therefore had to rely on investment income to subsidise claims and that (has put) the industry on very treacherous territory.
RB: Yes, there are a range of factors that have contributed to that. Firstly, the ageing profile of medical schemes, so like typical insurance products, medical schemes also operate on the basis where the young and healthy need to subsidise the old and sick. So if I explain it by means of a simple example, if the three of us are in a plan, then we contribute R3,000 for a year ... then that pot is only R3,000 so if one of us claims R3,000 or if we claim R1,000 back, that’s the bit that doesn’t get understood by the average consumer because the consumer thinks they’re contributing R2,000 or R3,000 a month and they’re getting nothing back in return.
That ageing profile is actually making medical schemes unaffordable so as the average age increases there are fewer people at the younger age at the healthy end of the spectrum to subsidise those older people. So that’s one where the industry is ageing and ageing at quite a quick rate.
The second component is the utilisation of healthcare benefits where, for example, you’ve got new technologies, new drugs that come onto the market and people wanting to access those and medical schemes having to fund those treatments whereas previously they didn’t need to. So it’s that component and it’s the component of people becoming unhealthier. Where people over the years have become unhealthy mainly through lifestyle diseases, lifestyle choices such as alcohol, tobacco, lack of exercise, poor diet.
The third component is one of the financial management of the schemes themselves ... on an annual basis medical schemes need to cost their products for the next year. In order for them to remain sustainable some of them do from time to time choose not to fully price their offerings, just to remain competitive. So that would be the case for some of those 16 schemes. Some of them may have actually deliberately chosen that path.
BDTV: The report tracks medical inflation over the 16 years to the end of 2015 and while CPI has averaged 5.7% over that period, medical aid inflation has averaged 7.6% and this year members are facing increases of between 10% and 15%, depending on which scheme they belong to. Are we going to have to continue paying more for less?
RB: Going back to my initial example of the R3,000, if there are three of us and next year claims are R3,500, then the three of us need to pick that up unless a fourth person enters our pot and that’s the challenge. So medical schemes contributions continue to be CPI plus 3%-4%, the consumer, on the other hand, what they tend to do is they tend to buy down to lower options or they remove dependents and that’s how they manage the annual increase from one year to the next.
That’s also a trend that we’ve observed over the last five years or so and it is just indicative of the affordability constraints of the individual, on the one hand, and the constraints faced by medical schemes, on the other hand. Medical schemes also need to remain solvent and they also need to price on an annual basis where they’re sustainable for the long term. And some of the high increases may also have been corrections from previous years where they didn’t price adequately in previous years and they corrected in the current year.
BDTV: When it comes to the regulatory ground that these schemes operate in, the current regulation requires all medical schemes to hold reserves amounting to 25% of annual gross contribution income, with many missing the target on that front. The Council for Medical Schemes has proposed a move to risk-based solvency framework. How do you see this shifting the landscape?
RB: I believe that the industry would welcome a risk-based approach. The current 25% doesn’t have any basis on which it has been determined. So someone just decided that 25% was the number and that’s the requirement for all schemes irrespective of size and the risks they face and all of that. The industry would welcome the Council for Medical Schemes embarking on this risk-based solvency measure.
My views are that it’s still three to five years away. So in order for that to happen there needs to be a change to the Medical Schemes Act because the act basically specifies a 25% level and that obviously depends on the minister’s appetite for regulatory reform for medical schemes.
BDTV: Do you see that reform happening, do you see it starting to happen this year, particularly as we move further into that NHI era?
RB: Yes ... it’s anybody’s guess whether that would happen or not but I believe the Council for Medical Schemes may relax their monitoring of schemes if they have an alternative measure which they themselves have developed. So they could run a parallel process where they have a 25% solvency for statutory purposes, but in terms of their monitoring of financial soundness of schemes, they use a risk-based measure.
For example, a government employee’s medical scheme might not be at a 25% level but a risk-based measure might say they need 15% or some other number and in that instance they wouldn’t worry too much if they’re not at 25%. But, on the other hand, it might be a scheme that is 40% that might need 50%, so the risk-based measure might make it easier for them to monitor financial soundness and sustainability.
But I also do believe that might destabilise the whole industry because you could have a scheme sitting at 100% solvency and requiring 50% and all of a sudden they have these access funds and the only way they could use these access funds is through giving members higher benefits or to use the investment income or the reserves to subsidise contributions.