Finding the best medical scheme for your needs means finding a healthy scheme with suitable benefits. In this part of our series on how to manage your money, we look at the factors that will help you identify schemes that are financially strong and that have a growing membership.
When you join a medical scheme, you should be sure it is one that is financially sound, because when medical schemes get into financial difficulty, members often suffer. Schemes in financial trouble slash benefits and hike contributions. Younger, healthier members and employer groups usually move to a stronger scheme, but members with health problems or who are at an age at which they fear they could need medical cover at any stage, often have difficulty changing schemes because waiting periods are imposed when you change schemes.
In the worst-case scenario, the scheme may go into liquidation, and you as a member may be left with unpaid bills.
Last year, five schemes were liquidated. At least one had run up debts amounting to millions, and members were left with unpaid bills - in some cases hospital bills of thousands of rands.
Schemes that face an uncertain financial future often seek out other schemes with which to merge. There is currently a lot of consolidation in the medical scheme industry. This may not be a bad thing, but you should be careful when choosing a scheme that it isn't about to merge with one that you would perhaps not have chosen.
Employee benefits
If belonging to a medical scheme is a condition of employment and you work for a large company, your employer may have set up a restricted scheme for you and your colleagues.
Alternatively, your employer may have chosen an open scheme (that must admit anyone) or a range of open schemes from which you must select one to join.
If you are free to join a scheme of your choice, you should consider using an accredited and suitably experienced adviser or broker who knows the medical scheme market well. There is no additional charge for using a broker - they are paid by the scheme you join at a rate of three percent of your contributions to a maximum of R67.98 a month.
If your employer has chosen your scheme or set up your scheme, hopefully it has also taken good advice.
If you believe it has not chosen wisely or your scheme has run into difficulties, you and your colleagues should ask your employer (possibly through a union or staff association) to consider getting good advice on schemes that can provide the best cover for your needs.
If your employer appoints a healthcare broker and you are not happy with his or her advice, you can consult your own broker. However, remember that restricted schemes don't pay broker's commission and you will have to make another arrangement to pay the broker directly for his or her services.
If your employer has set up a restricted scheme or has chosen an open medical scheme or schemes for you to join, it will probably subsidise your contributions only if you join a designated scheme.
If you are a member of a scheme and a broker is involved, on this page you will find details of the things he or she should have taken into account when choosing a scheme for you.
If you are making your own choice, the factors listed on this page are the things you need to research.
Finding the information
To find the information, you will need to consult the annual report of the Council for Medical Schemes, which is published in September each year. In this report you will find data for the previous year relating to schemes' membership and finances.
Besides the vital statistics of all schemes, you will find information on action taken against trustees who are not acting in the best interests of the scheme's members, and the names of schemes with high volumes of complaints.
The reports are available on the council's website, www.medicalschemes.com
Global Credit Ratings (GCR) is an agency that rates schemes each year. But it does not make public its medical scheme ratings - you have to subscribe to get these. However, a broker should have access to them, and individual schemes should be able to tell you what their rating is.
SERVICE
This refers to the scheme's administration - specifically, how quickly claims are paid. Service levels can be difficult to determine, but you can:
- Ask the scheme how quickly claims were paid in the past 18 months, on average;
- Ask members of the medical scheme about their experience of service levels;
- Ask healthcare service providers, such as doctors, pharmacists and hospitals, what they think of the scheme's service levels; and
- Ask the scheme's principal officer or chairman of the board of trustees questions about the administrator's service levels.
If a scheme has poor service levels, healthcare service providers may ask members to pay in cash and to claim back from the scheme. This could leave members out of pocket for some time and result in their being dissatisfied with the scheme.
GOVERNANCE
Often medical schemes that have financial problems also have governance problems - problems with the way the board of trustees runs the scheme - but sometimes financially strong schemes attract people intent on abusing the scheme's assets.
Ideally, look for a scheme that has a board of professional, suitably qualified trustees. The trustees should be transparent, should avoid conflicts of interest and should be seen to be making decisions in the interests of the scheme's members.
Also look out for schemes that are a source of numerous complaints from members - this may be an indication of either governance or administration problems.
THE SCHEME'S SIZE AND MEMBERSHIP PROFILE
Number of members
With medical schemes, bigger is often better. The competitiveness of a scheme depends largely on the profile and size of its membership base. Bigger schemes have greater bargaining power with healthcare service providers and should be able to provide more competitive benefits. They should also achieve economies of scale and be able to negotiate competitive administration and managed care contracts.
Larger medical schemes typically have a bigger pool of reserves, which makes them better able to withstand periods of high claims. They also run less risk of their contribution income being depleted by high claims from sicker, older members because there are more younger, healthier members to subsidise the high claimers.
A medical scheme with only a few thousand members may be new and growing, but if its member numbers are falling it may need to consider merging with another scheme or it could face liquidation.
Membership growth
You or your broker should also consider whether the number of members of a scheme is growing or declining.
A scheme should always be signing up new, ideally younger and healthier, members, because if it doesn't, its membership base will get older each year and the cost of their claims will increase.
As long as there is no way to compensate schemes for having older or sicker members, schemes need to continually attract younger members to subsidise the costs of the older members.
A steady decline in a scheme's membership could indicate that members are unhappy with the scheme's administration or its benefits.
A scheme should, however, not be growing at all costs - for example allowing new members to join without waiting periods. Such growth can ultimately be detrimental to the scheme.
Exposure to Gems
In 2006 the Department of Public Service and Administration established a restricted medical scheme, the Government Employees Medical Scheme (Gems), for all government employees.
The government has been incentivising its employees who were members of other medical schemes to move to Gems by offering a higher subsidy to Gems members than to members of other schemes. As a result, government employees have been leaving other open medical schemes in large numbers. This has affected - and continues to affect - schemes that have a high proportion of government employees among their members.
These schemes stand not only to lose members to Gems, but the loss of such members may impact negatively on claims, because government employees are generally lower-claiming members.
Rating agency Global Credit Ratings keeps track of the exposure to government employees of each open medical scheme it surveys.
Average age and pensioner ratio
You or your broker should also consider the average age of a scheme's members and dependants as well as the pensioner ratio. If a scheme has a higher average age and/or a higher pensioner ratio than the average age or average pensioner ratio for all schemes, it will face higher claims and hence probably charge higher contributions than schemes with a lower average age.
THE FINANCIAL STABILITY OF THE SCHEME
Solvency ratio
Medical schemes are required by law to have an amount of money set aside as reserves that is equal to or higher than 25 percent of its annual income from contributions. The percentage of its income it has in reserves is known as its solvency ratio.
If a scheme does not have the required reserves, it will have to devise a plan to raise them, which will involve increasing its contributions and/or decreasing its benefits. This plan must be submitted to the Council for Medical Schemes.
You or your broker should evaluate medical schemes with less than the required solvency ratio and those with a declining solvency ratio more stringently than those that meet the required ratios.
If a scheme's membership is growing rapidly, its contribution income will rise steeply. If the contributions increase without a similar increase in the reserves, the solvency ratio will decrease. The converse may be true of schemes that lose members rapidly, unless the remaining members are high claimers (older and sicker members).
Operating loss/profit
A scheme makes an operating loss if the contributions it collects are less than what it pays out in claims and costs, such as those for administration.
If a scheme has reserves below those required by law, then an operating loss, especially a big one, will only exacerbate this situation.
If a scheme has reserves well above the level required by law, it may be deliberately setting contributions lower than is required to meet the expected expenses knowing that it will dip into its reserves.
Beware of schemes that have consistently been making operating losses, especially growing losses, for a few years.
Also check the operating results of each benefit option offered by a scheme - the figures are reported separately. If a particular option is not doing well, the scheme's trustees may close the option or implement steep contribution increases.
Contribution increases
The size of the increases a scheme requires each year in contributions is another indication of how it is performing financially.
Most schemes' increases are within a fairly narrow range, and a scheme that has higher-than-average increases may be in financial difficulty.
Schemes that implement interim (mid-year) increases may also be in financial trouble or may be consistently under-pricing their contributions.
Sometimes schemes purposely run options at a loss to gain members, but such discounted contributions are not sustainable, and an interim increase or steep annual increase is likely to be implemented later.
Claims ratio
Take note of how much a scheme spends on members' claims and how much it spends on non-healthcare costs such as administration, broker commission and managed care. Compare this with the average claims ratio for all medical schemes. For example, last year, the average claims ratio for all schemes was 86.9 percent, which means that, on average, schemes spent R86.90 of every R100 you contributed on healthcare benefits and R13.10 on non-healthcare expenses.
The Council for Medical Schemes is of the view that all non-healthcare expenses should be limited to about 10 percent of income from contributions .
Remember, however, that if a scheme has low contribution rates, its administration costs may account for a higher percentage of income than is the case with a scheme with higher contributions.
If a scheme's non-healthcare costs are higher than the average, members must get value for money for those expenses - for example, a superior administration service.
Credit rating
Global Credit Ratings (GCR) rates a number of open medical schemes on their claims-paying ability.
This rating is a measure of a scheme's capacity to service their claims over a 12- to 18-month period.
Before rating a scheme, GCR takes into account a number of factors, including:
- How quickly the scheme's investments can be realised to pay claims;
- The number of months' claims that a scheme can pay from its cash reserves;
- The scheme's balance sheet;
- The number of months' claims a scheme can pay from its overall reserves;
- The size and profile of a scheme's membership base; and
- The scheme's solvency ratio.
The highest rating an open or a closed medical scheme in South Africa can be accorded is AA+.
Schemes with BBB+, BBB or BBB- ratings have adequate claims-paying ability and adequate protection.
Schemes pay GCR to rate them and agree to their rating being made public.
- The best scheme and option for you may require an analysis of your healthcare needs and the scheme's benefits. We will cover these issues over the next few weeks.