Why medical scheme increases are so high

A collective groan went up after medical scheme members received their recent premium increase announcements for 2017.

Loudest were probably Discovery Health Medical Schemes’ (DHMS) members who, as the largest group, are apt to make the most noise.

Consumers are under financial stress, burdened by sloth-like economic growth. To see medical premiums increase annually by more than consumer price inflation, is not easily accepted.

Household budgets are already stretched to limits and medical scheme membership makes up a significant part of monthly expenses.

As a medical scheme member myself, I am part of the group that sighs yearly when premium increases are announced.

Whatever scheme you belong to, you are not alone. Some of the open schemes that have announced their increase averages are for instance DHMS at 10.20%; Bonitas 11,90%; Momentum at 11.00%; Fedhealth at 12.70% and Medihelp at 10.90%. (See table below for more 2017 increases).

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Examples of premium increases for 2017:

Keep in mind that the average increase doesn’t mean it is the same increase on all options – it is the median over all the options. Bonitas and Medihelp are probably the only funds that have the same percentage increase on their upper and lower range options.

Usually the increases on options differ subject to how different cost factors affect each option, such as usage and tariffs of services.

In the Discovery stable for instance the Executive (11.9%), Comprehensive (11.9%) and Coastal Core (14.9%) plans saw the highest increases because of higher usage and service costs on these plans specifically.

Why so high

Medical scheme increases are generally higher than CPI, which stood at 6.1% for September 2016, because it is linked to medical inflation.

The general rule of thumb is that medical care and health expenses inflation is approximately 2% to 3% higher than CPI, according to the Alexander Forbes Health Diagnosis 2015/2016. This is a global trend and not limited to South Africa.

The following graph gives an indication of the average headline contribution increases announced by medical schemes since 2006 and compares this to average CPI:

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Source: Alexander Forbes Health Diagnosis 2015/2016 (An arithmetic average was taken for illustrative purposes and only included the medical schemes where this information is available. These increases are based on the headline increases announced by individual schemes and the method of calculation may vary. It does, however, provide some useful information about real contribution increases faced by members.)

This higher medical inflation is mainly due to high increases in healthcare service provider fees; a rising burden of disease; increasing utilisation of benefits; new medical technology; new medicine; the requirement to maintain reserves of 25%; and benefit enhancements.

Basically it means that healthcare service costs (so-called supply-side inflation) are higher and the main driver of contribution increases, but there is also cost pressure from members, which medical schemes calls “demand-side inflation”.

Compared to a decade ago, schemes in general treat more people with diseases such as cancer, diabetes and chronic illnesses.  And each year, more members use more of the benefits available to them, which increases healthcare costs for the scheme.

DHMS says this is mainly due to the impact of adverse selection. This means more members tend to join and remain on the scheme because they have an immediate need for the benefits, as opposed to joining the scheme without claiming.

Remember that schemes work on the concept of risk pooling, where the risk contribution charged to members is based on a combination of expected medical and non-healthcare expenses; as well as the returns expected from the scheme’s assets.

On the supply-side schemes can negotiate costs for instance with network providers to lower fees for certain services. They are not able to negotiate costs of medicine though, as these are regulated.

If schemes can’t fund the increased expenses out their investment income, they have to increase contributions to carry the costs.

The role of reserves

The Medical Schemes Act requires that medical schemes have a solvency level of 25%. This is usually maintained through a combination of investment return on existing reserves and an extra increase in contributions.

The extra contribution increase required to maintain solvency differs among schemes, depending on their level of investment income and solvency rate.

To stay or not to stay

Medical scheme membership can form a substantial part of a family’s monthly expenses and premium increases are not taken to kindly. And maybe because schemes announce their increases towards the end of the year, at a time when you realise that the December holiday expenses are coming, it’s even worse.

Don’t change to another scheme or plan just because the premium increase of it is lower than your current option. To get the best value for your money, compare the benefits, exclusions, added value and service delivery and how it will cover for your specific needs.

Maybe even more than with other “insurance grudge purchases”, medical cover can be quite a lifesaver if you need proper medical care.

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