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Medical Schemes
Saturday, December 1, 2012
Where the money goes

Most medical scheme members concern themselves with little more than affordability with, perhaps, only a vague understanding of what they are covered for. But it would certainly be in their interests to appreciate the ‘inner workings’ of their medical scheme and having some idea about the way their contributions are spent.


Remarks Liberty Medical Scheme Executive Principal Officer Andrew Edwards, “As custodians of our members’ contributions, it is first and foremost our duty to facilitate the best quality healthcare possible, taking their financial means into account. Members also need to remember that all profits go to themselves in the form of reserves or to keep future contribution increases as low as possible.”
The main focus is often on spiralling healthcare costs. But we should not lose sight of the fact that over the last five years, the quality and standard of healthcare in private facilities have vastly improved.
According to figures medical schemes collected R107,4 billion in contributions in 2011. Of this 87,2% was spent on claims. Restricted schemes (company schemes for employees only) spent a significantly lower proportion of contribution income on expenses (7.7% compared to 13.7% by open schemes). “This is not unexpected as these schemes do not incur significant marketing and distribution costs and are generally simpler to administer.
Schemes also derive income from investment activities, and are required by law to maintain a minimum reserve level (solvency ratio) of 25% of premium income.
Generally, the increase in expenses has been lower than the rate of inflation rate. However, claims costs per beneficiary have continued to exceed inflation (which was 5% for the period) and stood at a 7.6% increase for 2011, according to the annual report of the Council for Medical Schemes.
A number of medical scheme options offer a savings facility for members to pay a fixed sum up to a maximum of 20% of their gross contributions. This is intended to help pay the members’ portion of any healthcare costs. Unexpended savings amounts are accumulated for the long-term benefit of members and interest is paid on the balances at the rate determined by the Trustees. Interest is charged on savings advanced to members as per the rules of the Scheme and the Medical Schemes Act.
In terms of claims expenditure, the annual report shows that hospitals, at 36,6% of claims costs, continue to account for the biggest slice of gross claims paid by medical schemes. Per member per month amounts paid to mostly private hospitals increased by 7,1% from 2010 to 2011. Medical specialists accounted for 22,8% of claims expenditure, followed by medicines at 16,3% which was relatively low. This is due to the fact that the Single Exit Price (SEP), forcing medicine manufacturers to their products at one price to all their customers, regardless of the nature of the customer’s order size and consumption levels, did not increase in 2011. General practitioners accounted for 7,3% of claims paid, and dentists for 3,5%.
Expenditure on chronic conditions in terms of Prescribed Minimum Benefits apply, increased significantly from 2010 to 2011 with prevalence increasing for most major chronic conditions and hypertension topping the list. Comments Edwards, “Regulation 8 of the Medical Schemes Act stipulates that medical schemes must pay for the diagnosis, treatment and care of all PMB conditions in full, without any co-payment from the member. Despite a number of court applications to mitigate the open ended liability created by PMBs the status quo is still applicable.”
He says the fees paid to administrators constitute the biggest share of schemes’ non-health expenditure, with open schemes paying on average R52 per principal member per month in broker fees in 2011 as opposed to R49 in 2011. This equates to R2.11 of every R100 of contribution income.
“Liberty Medical Scheme, however, managed to contain administration costs, which, on average, were lower than the industry norm for the past three years.”
Other non-healthcare costs are incurred by marketing activities (mostly for open schemes), administration, managed care fees, trustee remuneration. In instances were medical schemes do manage to make a profit, this goes straight back to the scheme, contributing to the solvency ratio and reserves, and assisting to keep premium increases to a minimum.
“Unfortunately, mainly due to high claims costs, industry schemes do not show a profit. As a result they have to rely on their reserves to compensate for the operating deficit.”
 

Copyright © Insurance Times and Investments® Vol:25.12 1st December, 2012
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