So where does the lower-income worker, who can’t afford expensive medical scheme cover but shudders at the thought of being treated in a public hospital, turn for assistance?
Private health care is growing increasingly out of reach of anyone outside the top income brackets: medical specialists are charging what they like and getting away with it because they are in high demand and becoming scarcer as more of them leave the country; liability cover for certain specialisations such as obstetrics has become prohibitive; and new-generation, hi-tech treatments and drugs for cancer and other life-threatening conditions are costing in the hundreds of thousands, even millions of rands.
Medical schemes are battling to keep pace with these rocketing costs, resorting to tightening limits on what they cover, reducing benefits and increasing contribution rates at percentages well above CPI inflation. They also face a grave problem in the form of claim fraud, where members, often in cahoots with corrupt doctors, over claim or claim for procedures not carried out.
Schemes also face serious declines in membership, especially among younger generations, who are looking at cheaper ways, such as short-term insurance offerings, to cover basic medical needs. Younger members, who are healthier, are necessary to subsidise older members, who are less healthy and account for the bulk of the costs.
On top of these trends, the Covid-19 pandemic sent the industry into a tailspin, severely depleting built-up reserves and paving the way for at least one scheme to fail (see below).
Unfortunately, in finding ways to reduce costs, medical schemes often skirt the regulations in providing what, by law, they are required to provide, especially when it comes to the prescribed minimum benefits (PMBs), treatments for a list of life-threatening conditions drawn up by the Council for Medical Schemes (CMS). Another ploy is to increase the administrative burden and red tape for members claiming for PMBs.
In a recent report, Fazlin Swanepoel, managing director of employee benefits at ASI Financial Services, noted that, with young people opting for health-care solutions other than medical scheme membership, the pensioner ratio for open medical schemes increased from 7% in 2013 to almost 9% in 2020. According to the latest CMS annual report, open medical scheme membership reached a high point in 2018, before declining in 2019 and 2020, increasing slightly in 2021.
“South Africa’s very high youth unemployment rate also means that medical scheme coverage is out of reach for most young people. This directly impacts medical schemes’ pricing, as the growing group of older members use more benefits than what they contribute,” Swanepoel said.
Health Squared Medical Scheme, a small scheme with about 48 000 members, was placed under provisional curatorship by the CMS in September. The scheme applied for voluntary liquidation after its reserve levels dropped to just over 2% by the end of July 2022, but before the High Court ruled on the application, the CMS stepped in.
While this is the only recent failure of a medical scheme, it may signify the rumblings of an avalanche of failures, especially among smaller schemes.
Lerato Mosiah, chief executive of the Health Funders Association, says that by law, a medical scheme must, at all times, hold reserves of at least 25% of its annual contributions.
As would have been the case for Health Squared, which reportedly suffered from high claims associated with Covid-19, these reserves act as a buffer when contributions no longer cover the scheme’s liabilities.
Health Squared was already running at a deficit in 2019 and its solvency level had dropped to 15.4% (according to the CMS annual report) and so there were red flags even before the increased volatility brought on by the pandemic.
At the end of 2019, Health Squared already had the highest average age across all registered open medical schemes, with almost 26% of beneficiaries older than 65, further exacerbating the risk.
“The failure of any medical scheme has a knock-on effect on other schemes, since higher-risk members then require cover without any transfer of reserves, which ultimately increases the burden on other scheme members,” Mosiah says.
So where does the lower-income worker, who can’t afford expensive medical scheme cover but shudders at the thought of being treated in a public hospital, turn for funding assistance?
Paul Cox, managing director at the Essential Group of Companies including health insurance provider EssentialMED, says a significant portion of South Africans will readily purchase affordable private health cover if such cover is available. Surveys from StatsSA show that nearly 30% of the population pays out-of-pocket for private primary healthcare, yet only 13% of people are covered by medical schemes, meaning there is a mismatch between the demand for private healthcare and the affordability of private cover.
Healthcare policy that would enable more affordable private cover has been in the doldrums for years now, Cox says. The insurance industry stepped into this unregulated space nearly two decades ago, but government passed the so-called “demarcation regulations” in 2017, limiting the health-related products short-term insurers could provide, with the view that medical scheme legislation would be amended to allow for low-cost offerings.
“However, such low-cost cover would require a major overhaul of the Medical Schemes Act, allowing medical schemes to offer low-cost benefit options that are exempt from the PMBs,” Cox says.
In May 2022, chief executive of Insight Actuaries & Consultants, Christoff Raath, questioned the tardiness of the CMS on this matter, and more recently the Board of Healthcare Funders, which represents medical schemes, joined the fray by taking the CMS to court to compel them to enable the regulatory provisions for low-cost products within medical schemes.
Cox says the elephant in the room is that it is not in the financial interests of medical schemes to offer low-cost benefit options, which will, in effect, trigger a buy down by members.
“One also has to wonder what the wisdom is in forcing a complex regulatory overhaul of the Medical Schemes Act when there is still no clarity on the future of NHI and what the role of private healthcare funders will be.”
Cox and Swanepoel believe that there is a place for the short-term insurance industry in the future of low-cost healthcare funding in South Africa, and Swanepoel points to the employee benefit space in particular. She says employers wanting to manage productivity are increasingly considering subsidising low-cost options, such as primary care, health insurance and even pre-paid healthcare, for lower-income staff.
“It’s time for South Africans to consider – if not demand – hybrid healthcare solutions,” says Swanepoel. “There’s no doubt that medical schemes are already unaffordable – but the need for quality primary, chronic, and emergency healthcare will not go away any time soon – not even if or when NHI rolls out. Everyone in the industry needs to be more creative in finding solutions that more people can afford,” she says.
The full version of this article first appeared in the Personal Finance Quarterly Magazine
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