National Health Insurance
Risk Pooling in Medical Schemes
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The number of medical schemes declined from 305 in 1974 to 170 in 1994. The trend towards greater consolidation continued in the last fifteen years with a reduction to 119 schemes in 2008 and a further six mergers or liquidations in the year to 113 schemes. Over the period since 1974, medical scheme beneficiaries have more than doubled to reach 7.875 million by end December 2008.
Figure 2: Historic Beneficiaries and Medical Schemes
The growth in beneficiary numbers and decline in number of schemes is good for risk pooling as it means that risk pools should be becoming larger. The average registered scheme size was under 10 000 beneficiaries in 1974, growing to some 31 000 by 1994 and 70 000 by 2008. However average figures are very misleading as there are substantial differences in sizes of schemes. The graph below shows scheme size at the end of 2008 and shows that open medical schemes (that anyone can join) are generally larger than restricted schemes (that are typically employer or union-based).
Figure 3: Size of Medical Schemes in December 2008
McLeod & Ramjee found that of the 146 schemes registered in 2000, only 117 (80.1%) were still registered at the end of 2005. Twelve of these schemes had liquidated and 17 had amalgamated with other schemes, with the majority of the activity occurring in the restricted scheme market. Consolidation activity has continued as schemes losing a large proportion of their members to the Government Employees Medical Scheme (GEMS) are typically left with smaller risk pools and higher claiming profiles which are unsustainable.
GEMS was registered in January 2005 and became operational in January 2006. Government has used a higher medical scheme subsidy for those choosing GEMS rather than an open scheme, as well as insisting that all new employees may only join GEMS, to grow membership rapidly. By December 2008 GEMS had reached 825,000 lives, making it the largest restricted scheme and the second largest medical scheme in South Africa.
One open scheme, Discovery Health Medical Scheme, now dominates the market having grown from its inception in 1993 to 1.953 million beneficiaries by December 2008. This scheme is more than three times the size of its nearest open scheme competitor, Bonitas Medical Fund at 608,000 lives. Discovery Health Medical Scheme alone accounts for 40% of the open scheme market and 25% of all medical scheme beneficiaries.
In USA the minimum risk pool size to accept full healthcare risk is at least 20,000 beneficiaries. In 2008 in South Africa, 71% of open medical schemes and only 29% of restricted schemes were that large, as illustrated above.
Despite substantial merger activity in recent years, there are still many small restricted membership schemes clustered in industries that have not amalgamated. A good example of this is in the retail sector where there are separate schemes for Edcon, Foschini, Massmart, Shoprite, Pick ‘n Pay and Wooltru. None of these is larger than 20,000 lives individually, but together would create a scheme of some 62,000 lives. While similar mergers have been discussed in this and other industries in the past, one of the issues that is not resolved is how to combine medical schemes with very different solvency levels. Each employer group typically feels their company and staff should benefit from a scheme with high solvency levels. This ring-fencing of assets is not feasible under existing medical scheme legislation but is a simple amendment that would facilitate and encourage larger risk pools.
An important point is that scheme size is not risk pool size in all cases as schemes are allowed to create separate packages of benefits called “options”. Each option in a medical scheme is a separate risk pool as legislation requires each option to be financially self-sufficient and self-sustaining. This means that risk pooling occurs at option level which results in even greater fragmentation of risk pools. The table below shows that there were 355 separate risk pools in 2008, of which only 80 were sufficiently large to accept full healthcare risk, using the USA definition. There were 1.7 million beneficiaries in risk pools that are too small by this definition.
Table 2: Size of Medical Schemes and Options in December 2008
The Registrar is increasingly refusing to register minor variations in benefit package as separate options. There were 435 options in the year 2000, reducing to 401 in 2005 and 355 options in 2008. Nearly half (47%) of all restricted schemes have only one option and only 13% have more than three options. Open schemes, in attempting to provide a wider choice for competitive reasons, typically have four to five or even more options. No open scheme in 2008 had less than three options and 71% had more than three options.
The highest number of options in one scheme was 21 in 2005 for Momentum Health, reducing to 16 in the same scheme since 2006. In 2008 only four of the 16 options in Momentum Health were larger than 20,000 beneficiaries. In contrast, while Discovery Health Medical Scheme had 14 options, 13 of these were larger than 20,000 beneficiaries and, by the Milliman definition, viable risk pools in their own right.
The very high number of options across all schemes is worrying as each represents a separate distinct package of benefits. A high number of options is not good for consumers as it makes comparisons between schemes very difficult for members. In the open scheme market in 2008, members had a choice of 191 distinct benefit packages. The lack of comparability means that brokers become needed to assist in the choice and this also increases costs. Members find it difficult to compare products to see which offer the best value for money. The high number of options also means higher marketing costs by schemes as they attempt to differentiate themselves in the minds of consumers and competition becomes established on the basis of factors other than cost.
A high number of options is also not good for healthcare providers. Doctors, pharmacists and hospitals struggle to know whether a particular treatment or drug is covered and have to deal with the particulars of each benefit option in order to be sure. Prescribed Minimum Benefits (PMBs), in place since January 2000, cover only about half of medical scheme expenditure. Even PMBs, which are meant to be a common package of benefits offered by all options, have different administrative requirements in different schemes. All of this additional time and administration complexity adds to the costs of providing healthcare.
The International Panel that reviewed the work on risk equalisation in 2004, also commented on the very high number of options allowed in South Africa, recommending greater standardization: “stakeholders should design a comprehensive basic benefit package to deal with deficiencies in the existing minimum benefit package. They recommended that funds be allowed to offer only a limited standard set of benefit packages above the new basic package. These standardized packages would mean a substantial reduction in the administration burden faced by practitioners and should also lower administration and acquisition costs in medical schemes. Consumers would no longer be confronted by a confusing array of options and would instead be able to compare packages and make decisions based on price, network availability and quality.” While there was strong agreement with these recommendations in 2004, the intention to reform options in 2006 and a PMB review process in 2008, standardised packages have not been implemented.
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