Why the Size of Your Medical Scheme Doesn’t Matter
Most medical schemes have reported their annual membership fee increases for 2014. Many South Africans may be planning to switch from one medical aid to another, thinking that their current scheme is too expensive. There is the perception that the size of a medical aid is important when deciding to switch, but this is a red herring, says Brian Watson, an executive at Genesis Medical Scheme.
“Size is of no particular relevance to the success of a medical scheme,” he says. “What really matters is the solvency ratio and the ability of a medical aid to pay the medical bills incurred by its members. So what is regarded as a “small” medical scheme, but which has higher reserves than a larger medical scheme, in terms of the number of members, may in fact be stronger than a larger scheme that has lower reserves.”
Watson points out that The Medical Schemes Act requires medical schemes to have reserves of at least 25% of the total contributions paid by members in a year. “The fact is that the higher the solvency ratio, the greater the ability of the scheme to pay its member’s claims,” says Watson. “For example, a medium sized medical scheme like Genesis had, at the end of 2012, about R257 million in reserves. Genesis insures around 20 000 lives and would therefore have around R12 692 per beneficiary in reserves to pay claims. By contrast, all open medical schemes in South Africa maintained an average of only R4 192 in reserves per beneficiary.”
Dr Jonathan Broomberg, CEO of the company that administers Discovery Health Medical Scheme, recently made allegations against Genesis Medical Scheme on national radio to say that in respect of 2012, Discovery’s top 100 claims would have wiped out Genesis Medical Scheme.
Broomberg is of the opinion that the size of a medical scheme in terms of member numbers, matters more than the actual reserves per member. In his argument, he compared the financial reserves Genesis Medical Scheme had at the end of 2012 to the top 100 claims made by Discovery members the same year and said that should Genesis have received these 100 claims, the medical scheme would have been ‘finished’.
In response, Watson says that these claims have no statistical basis. “On the basis that 100 claims would wipe out Genesis, each claim would have an average amount of R2.56 million. Genesis Medical Scheme insures some 20 000 lives and, accordingly, 100 of these lives equal 0.5% of the total lives insured. Discovery Health Medical Scheme insures around 2.4 million lives and if 0.5% of the total submitted claims equalled R2.56 million each, Discovery would have to pay R31 billion. This is nearly four times the sum of money the scheme had in reserves at the end of 2012.
“Many industry players may debate this point, but there can be no debate around a mathematical certainty”, adds Watson.
He points to a study by actuarial firm, Towers Watson, which shows that there is no correlation between the average incidence of large hospital claims and the size of a medical scheme. What this means is that the chance of Genesis registering claims of R256 million in any year is the same as the chance of Discovery registering claims of R31 billion. Based on this study, an extremely bad year for Genesis which may only occur once every century, might result in large claims of R11 million or only 4% of the Scheme’s reserves.
In its Circular 4 of 2013, The Council for Medical Schemes stated that there is no proven benefit for members who belong to big medical schemes in terms of lower costs as a result of economies of scale.
Concludes Watson: “Bigger is completely irrelevant when measuring the sustainability and the ability of any medical scheme to pay claims, as the numbers show. The reality is that the access to affordable health care is an essential many South Africans cannot live without.
“However, when membership cost increases are in excess of the CPI, it tends to create affordability challenges for members. By looking out for value and sustainability as opposed to being fixated on the size of the medical scheme, South Africans can comfortably afford the benefits of quality healthcare and rest assured that their claims will be covered.”