How responsible are medical schemes’ funding models for next year?

‘Once in a century’ event is not over yet, analyst warns health funders

Tuesday, 5 October 2021, All bets are off when it comes to predicting health costs in unprecedented times. Overly optimistic projections for the future of the pandemic and pricing models that medical scheme members will ultimately pay for, one way or another, could place the health funding industry in jeopardy, expert panellists warned at the Agility Quarterly Health Review discussion on Monday.


“There is not a health system in the world that is not taking strain with medical costs increasing above inflation,” Stephan Strydom, healthcare analytics specialist and co-founder of Mast Analytics, said at the Agility Quarterly Health Review on Monday.


Buti Sigasa, managing director of financial advisory consultancy SIGC, points out that, by law, medical schemes operate as non-profit mutual assurance associations, and have a responsibility to remain sustainable to protect the interests of their members.


“Some schemes are deferring increases to next year, and what will be the cost? For low- to middle-income earners, co-payments are a frustration that this key segment will not tolerate. In the years ahead, this will require a larger subsidy increase from employers to keep pace when it catches up.”


The Agility Health Quarterly Reviews are a series of quarterly events that aim to stimulate conversations amongst key industry stakeholders to enhance and promote relevant health objectives while encouraging active participation in the South African healthcare sector’s narrative.


“It’s not business as normal, and it would be naïve to presume that the factors influencing health behaviour and costs will neatly balance the books with no increase at this stage – no matter how much we all hope this will be the case,” says Bianca Viljoen director of product development at Agility Health, medical scheme administrator and managed care provider.


“In the majority of countries, the state funded the cost of the pandemic, but in South Africa a large proportion was funded by the medical schemes, and this speaks to the value embedded in the industry for our country, and the importance of ensuring it remains sustainable and competitive.”


The health funding industry Regulator warned in the Council for Medical Schemes’ Circular 52 of 2021 last week against the continuous underpricing of benefits. The acting general manager of the Regulator’s financial supervision unit also reiterated to medical schemes that all benefit options must be self-supporting in terms of their financial performance.


“It is concerning to see an industry trend where schemes are disregarding this word of caution, as there is a danger that some schemes have underestimated next year’s health needs only to radically increase contributions for their members the following year. Of even greater concern is that in a stagnant market, competition between schemes to attract members based on contribution increase freezes is likely to be at the expense of member value,” comments Viljoen.


“In the uncertainty of a pandemic, health cover can only be considered worthwhile where the combination of benefits more than answers to members’ health and wellbeing needs to deliver better outcomes, while maintaining secure sustainability,” Viljoen adds. 


“What the market values in terms of benefits has changed considerably over the past few years. Benefit design is multifaceted and, as well as ensuring solid COVID-19 related benefits, the pandemic has brought other health needs to the fore, including the importance of supporting members’ mental health.”


“Every medical scheme has had to formulate some view of what will happen with Covid-19 next year, including the timing of it and the rate of vaccination, to determine benefit design and pricing for the year ahead. Healthcare utilisation is increasing, including for a backlog of non-Covid-19 related procedures, and who knows what the next wave is going to look like,” Strydom says.


“The regulations set solvency requirements at a 25% reserve ratio to ensure medical schemes would be ready for a possible outbreak and the Covid-19 pandemic is the event schemes were preparing for. A revision to 15% would unlock benefits for members and improve growth,” Sigasa observed.


“This is a once in a century event, and there is too much money held up in reserves. A risk-based capital approach could be helpful in setting reserves based on assessments of the inherent risk of each individual scheme,” Strydom said.


“When the Delta variant entered the equation, the third wave was more devastating than expected even though healthcare expenditure outstripped the first two waves by almost double, with considerable variance in provincial risk exposure for schemes,” Viljoen says.


“In South Africa, we are nowhere near the vaccination rate required for reaching population immunity, and other health issues have not gone away – even if the claims aren’t being seen yet. Long awaited elective procedures, such as hip and knee replacements, and health costs associated with the complications of poorly controlled chronic health conditions, will pick up again and could exceed pre-pandemic levels.


“With the heavy regulatory cost drivers in place currently, the industry needs to be responsible in how it attracts members. Solid value and benefits where they are most relevant should be the focus, rather than short-sighted under-pricing that will ultimately be at members’ expense even if – and it is a big IF – Covid-19 is brought under control next year. Let’s not forget that many hoped the same for 2021, and we are not out of the woods yet,” Viljoen concludes.