SOUTH AFRICAN MEDICAL AID INDUSTRY REMAINS SOUND DESPITE CHALLENGES, SAYS ALEXFORBES HEALTHCARE

The Alexforbes Healthcare’s Medical Aid Insights publication, compiled by the Technical and Actuarial Consulting Solutions team, provides a comprehensive view of the performance of the South African medical schemes’ industry. It also showcases both the changes and challenges the industry is currently facing, and analyses the experience of the top 10 largest open and restricted schemes by principal membership over the period 2000 to 2022. The latest analysis is based on the 2022/23 CMS Annual Report.

2023/24 Highlights

Alexforbes Healthcare recent analysis of medical schemes highlights the following:

  • The number of open medical schemes has decreased by 31 (66%) compared to a decrease of 42 (43%) for restricted medical schemes over the past 23 years. The large decrease can be explained by the difficulties in maintaining the sustainability of small schemes in the current environment, as well as the significant amount of time required to manage an employer-based restricted scheme.
  • The principal membership of open schemes grew by 1.2%, while the principal membership of restricted schemes grew by 1.1% from 2021 to 2022. The 71 medical schemes operating in South Africa at the end of 2022 had a total of 4.11 million principal members and 9.04 million beneficiaries.
  • At the end of 2022, there were 3 open medical schemes and 26 restricted schemes with fewer than 6 000 principal members. A small membership base generally results in a more variable claims experience, which increases the risk of contributions not being set at an appropriate level to cover all claims and expenses.
  • Out of the top 10 largest open and top 10 largest restricted medical schemes, 16 schemes did not have sufficient contribution income to cover claims and expenses in full. Consequently, they made use of investment income, and reserves in some cases, to subsidise the costs incurred. Of these 16 schemes, 12 schemes did not have sufficient investment income, resulting in a negative net result for the year.
  • The average age of beneficiaries has been consistently increasing from 2012 to 2022. This average age is indicative of the likely claims profile, which needs to be considered when pricing its benefits. As a scheme gets older, we expect the average claims per member to increase by 2%.
  • The average family size for the medical schemes industry has declined since 2000 except for 2020. This indicates that historically, fewer dependants per principal member are being registered on medical schemes over time. This may be due to affordability constraints of members who can no longer provide cover for the entire family. Additionally, as dependants become self-supporting adults, they end up becoming principal members themselves. The average family size remained the same from 2021 to 2022 at 2.2.

The report highlights the change in the distribution of members by age over the past 16 years. The graph below shows the proportion of members across age bands during 2005, 2015 and 2021. It is characterised by two peaks, meaning the majority of the industry’s members are in the 5-19 and 30-44 year age bands. It is concerning that there has been a decrease in the proportion of young working members seeking medical scheme coverage. This is with an exception in growth in the age group 35-39 years, which may be attributed to females seeking medical protection during childbearing age. The distribution of membership by age group for 2022 was not made available in the annexures to the 2022/23 CMS Annual Report.

Of the 20 schemes included in this year’s Medical Aid Insights, Compcare and Profmed have the highest average age of beneficiaries in the open and restricted medical scheme industries, respectively. Over the last three years, Fedhealth has aged the most (2.5 years) and KeyHealth has experienced the largest decrease in average age (2.2 years). As in previous years, Polmed has the lowest average age out of all the schemes considered.

Solvency ratio of schemes

The current medical scheme regulations require accumulated funds (solvency reserve) of at least 25% of annual contribution income (or three months of contributions) in order to be compliant with the Medical Schemes Act 131 of 1998. As the calculation of the level of solvency is related to the level of contribution income, a scheme would have to increase its accumulated funds by as much as the year-on-year contribution increase to maintain its solvency level. This is a relationship that may cause the solvency percentage to change over time due to reasons not related to the amount of the accumulated funds but more due to the experience of a scheme’s membership and financial results.

It is reasonable to expect that medical schemes would rely less on their investment income to subsidise claims and expenses. Where medical schemes do not achieve operating surpluses, they rely on the investment returns earned over the year to fund part of their claims and non-healthcare expenditure. In 2022, 20 out of 71 schemes (28%) achieved an operating surplus.

On average, restricted schemes have maintained higher solvency levels compared with open schemes. In 2020, the average solvency for all schemes increased significantly because of the large surpluses resulting from Covid-19. In 2022, the average solvency for all medical schemes increased to 47.2% from 46.7% in 2021, and from 44.6% in 2020. The solvency level for open schemes decreased from 39.6% in 2021 to 38.0% in 2022, while the overall solvency level for restricted schemes increased from 56.2% in 2021 to 59.5% in 2022.

Sustainability Index

The Sustainability Index, a measurement tool offered by Alexforbes Healthcare, attempts to assess the combined impact of key performance statistics on the sustainability of a medical scheme. The medical schemes are ranked from highest to lowest to show their relative sustainability. The index aims to provide a comparative assessment between schemes. It has been rebased to 2012 so that the index reflects more relevant and updated information from the last 10 years. This is in contrast to the previous Medical Aid Insights report where the base year of 2006 was used.

The index outputs a value that represents the sustainability of a medical scheme based on a number of metrics, including the size of the scheme relative to other schemes in the industry; membership growth in the scheme over time; the average age of beneficiaries of the scheme and how it changes over time; the scheme’s actual solvency relative to the requirement in the regulations to the Medical Schemes Act; and trends in the scheme’s solvency over time. It is important to note that this index is sensitive to the starting year used, which has been selected as 2012, and the relative ranking of the medical schemes are more important than the absolute score.

The index shows that the largest increase in 2022 was for Polmed, which improved their score in 2022 by 30.3%, while Umvuzo increased by 18.6%. The open schemes trailed by a small margin, with Bonitas improving their score by 18.2%, followed by Medshield with a 14.1% increase. LA Health is the highest ranked out of the restricted schemes, followed closely by GEMS and Umvuzo. Discovery is the highest ranked out of the open schemes, followed closely by Bestmed and Bonitas.

Conclusion

Overall, the profile of the industry remained stable, while most schemes incurred operating losses, primarily due to increases in claims ratios. The results for 2022 indicate a return to pre-Covid-19 levels of claims, and this trend is expected to continue into the medium term. In line with this trend, we have observed that contribution increases for schemes in 2023 and 2024 have exceeded the increase in CPI. With industry reserve levels at record highs, it is imperative that schemes maintain the level of contributions in line with the increase in claims should this trend continue indefinitely.

You can view the full survey here