Medical scheme mysteries – your benefit is my loss

Day 154/365
Creative Commons License photo credit: pheaber

The separation of medical schemes and administrators is poorly understood. This confusion leads to any number of misguided arguments about the miserliness of the industry. There are plenty of other, better reasons to complain, but that’s a different post!

Medical schemes

Medical schemes are non-profit entities established to provide medical cover pooling and administration to members.

If you want to get legal about it, they are independent legal entities regulated by The Medical Schemes Act no.131 of 1998.

The schemes needs to show solvency by having a surplus (assets greater than liabilities) of more than 25% of gross written premium. (“Gross” is really unneeded since it means before allowing for reinsurance which is effectively non-existent in the industry any more.) The solvency margin provides security to members that their claims can be paid even if more claims need to be paid than planned for in the pricing of the medical scheme contributions.

Medical schemes administrators

Medical scheme administrators are typically for-profit companies provided a service to medical schemes and charging a fee for this service in the hope of making a profit.

The administrators negotiate fees with the medical scheme. Since pretty much the start of this millennium, administrators have not made profit out of not paying claims.

So who is ripping me off then?

When a medical scheme declines to pay your claim, it is not the big profit-seeking administrator that benefits. Remember, they just get a fee per member for administration. The people who benefit are the other members of the scheme. There is more money in the fund available to pay their claims, to protect the surplus and to reduce contribution increases next year.

When someone’s cosmetic surgery is approved by the scheme, the other members pay the price.

When someone’s experimental R25m surgery is approved, there is less money to pay other members’ medical bills.

When you claim sunglasses against your prescription spectacles allowance, the other members are paying for your fraud.

When your neighbour goes straight to a specialist when it was not indicated or required, your contributions will need to increase next year, or your benefits will be cut.

The administrators take a fee for administration, regardless of the claims that are approved or declined.

So the administrators really don’t care about paying claims?

Ok, you have a point. There are some smaller considerations:

  1. Lower claims mean the scheme has higher surplus. Higher surplus means lower contributions in future. Lower contributions in future makes the scheme attractive to new members. More members = more fees for administrator.
  2. Lower claims means higher surplus (same as point 1, keep with me), which means less regulatory pressure on surplus, which in turn means less pressure on fee negotiations.
  3. In the Bad Old Days, some administrators provided reinsurance to the medical scheme. The reinsurance had two effects (and I’m not drawing conclusions about intent here): First, it protected the scheme against really bad claims experience. Second, it granted the administrator access to “risk profits” if claims experience was good. Obviously this creates an incentive to not pay claims. This hasn’t been the case for nearly 10 years.

There are other areas of moral greyness. For a while, many administrators had their employees as principal officers of the scheme. Clearly this is a conflict of interest and is a thing of the past (as far as I know).

OK, but why do my premiums go up every year?

This is an incredibly important debate, and is a part of the debate around the proposed National Health Insurance. There are many reasons – here are a few:

  1. Goods and services increase at different prices. Some items increase faster than inflation, others increase more slowly. Not every item in the basket that comprises CPI, or the items that aren’t even in CPI, increases at the same rate. (but yes, medical inflation has been high)
  2. Many medical supplies are imported, meaning that currency changes (for better and for worse) impact the price more than locally produced goods. Our currency is relatively strong just at the moment measured over a short period, but overall it has been depreciating against major first-world currencies for decades.
  3. The Competition Commission actually restricted the ability of medical schemes to bargain collectively for lower scales with medical service providers. In the interest of competition this makes sense, but with a relatively small number of private hospital groups, the balance is arguably stacked against the medical schemes.
  4. Medical service providers are for-profit individuals and corporations. Our health is important to us, and so we will pay for good healthcare if we can afford it. Prices will balance where supply and demand place it. The same way houses in exclusive areas will increase more quickly over time than average, as it becomes more exclusive.
  5. Many schemes have had solvency levels below the required 25%. They need to take in more contributions each year than they pay out in claims in order to improve their solvency position. As contributions increase, so does the required solvency margin since it is measured as a percentage of premiums!
  6. Fraud. Medical services providers and medical scheme members manipulate the system, safe in their misguided ideas that they are only ripping off some faceless corporate that already makes too much money. The direct cost of these inappropriate claims, plus the indirect costs of fraud prevention are a poison to the system.

So this means the NHI is a good thing?

Hold on, no, where did you get that idea? Just because there are problems with the current setup doesn’t make any available alternative better! Some sort of national health insurance could be a good idea. However, first it must be designed so as not to break the parts of our system that are working.

Government expenditure, in real terms, per capita on healthcare has declined in this millennium. This at the same time as the percentage of expenditure on HIV/AIDS and TB has increased. Income inequality in our country is high – to try to provide everyone with a first-world level of healthcare when our average GDP per capita is a tenth and lower of many developed countries is not possible.

We already have too great an exodus of trained doctors leaving our country after having been expensively educated with huge government subsidies. Many would argue that we also have deteriorating standards of education for these doctors.

Hospital staff and management are understandably demotivated, but all too often lacking in skills too.

None of these are issues that can be magically fixed with a new structure and a hefty new tax to weigh on the economy.

It seems like there is no way out then?

Well no. We have a country filled with smart people who care greatly about the state of the nation. We have excellent healthcare facilities and skills, just not enough. We have a financial infrastructure that many developed countries would be proud of.

We have challenges, but if these challenges can be met with apolitical, carefully thought-through and planned policy, we can improve the system and provide better access to healthcare over time.

But first, we need to stop abusing our medical schemes, and stop the ignorant complaining about medical schemes’ approaches to paying claims.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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    1. I’ve done a fair amount of work in the space, which I suppose is why I’m aware of it. Can you imagine how infuriating it is to watch Carte Blanche and listen to Cape Talk with callers and presenters equally confused?

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