Your medical scheme more pricey

November 21, 2007

Your medical scheme more pricey

Thursday, October 25, 2007

Higher inflation is starting to nip at the heels of private healthcare users; the 2008 medical scheme contribution increases are higher than they have been for several years past.

The last few years have been relatively kind to medical scheme members, especially those in the country’s biggest scheme, Discovery. From 2005 to 2007 scheme increases were fairly benign (Discovery 2005: 5.4%, 2006: 6.9%, 2007: 7.9) and (Liberty 2005: 6.0%, 2006: 5.5%, 2007: 9.5%-11.6%).

The facts
This year, however, scheme increases are up. Discovery Health Medical Scheme’s (DHMS) increase is 9,8% (on the basis of the weighted average across offerings), and Liberty Medical Scheme’s is 10.9%. These two schemes are the first to announce their 2008 contribution increases, but it is likely that other schemes will also post increases that top those of recent years.

There are various reasons for this. First, inflation is higher in general. Everyone is familiar with the consumer price inflation (CPI) figures we have seen out of South Africa this year. CPI has constantly edged up over the upper range of 6% set by the Reserve Bank. In July, it stood at 7%, and in August it was at 6.7%.

According to Discovery Health CEO Neville Koopowitz, the generally inflationary environment has meant higher contribution increases. "The underlying cause of the increases has been the higher CPIX. CPIX is the base figure you plug in to these calculations, and as you know, it has broken through 6% recently, when it used to be between 4% and 5%. So that puts you in a difficult starting position. Typically, internationally medical inflation is 2% to 3% higher than CPI."

Discovery’s contribution increase falls almost within the range of CPI plus 3%, while the Liberty’s increase is slightly higher. Yet CPI is not the only driver. Continuing high medical inflation has further added upward momentum to the increases. According to figures released by Discovery earlier in the year, private hospital costs have seen grown at a compound annual inflation rate of over 12% for the past five years, more than double the CPI target of the Reserve Bank.

Prices on the up
The cost of specialists has also been increasing rapidly, at a compound annual inflation rate of around 9%. These factors, combined with the high cost of new medical technology, and the reality of an ageing population in medical schemes, have pushed contribution increases upwards.

Other factors are also contributing to the upward trend of scheme increases. Heidi Kruger, spokesperson for medical scheme industry group the Board of Healthcare Funders, offers the following explanation for the higher increases. "The registrar’s (Medical Schemes Registrar) report for 2006 highlighted the fact that claims were higher than contributions that year, and schemes had to dip into their reserves to come out even."

Cash reserves
All medical schemes are legally required to keep an amount equal to 25% of annual member contributions in reserve to cover cash flow problems. In 2006/7, the contributions schemes received were insufficient to cover their payouts (claims) making it necessary for them to use reserves to finance claims.

"Last year’s increases were low, even though medical inflation, driven by private hospitals and specialists, was very high. Schemes had to dip into reserves. They are now mitigating this problem, because they can’t keep dipping into reserves."

The higher increases this year might represent an effort by schemes to rebuild their depleted reserves and ensure they have sufficient cash to meet their claims in the next year. Given all these factors, it is likely that we will continue to see higher contribution increases as other medical schemes announce their figures in the next few weeks.

Felicity Duncan for Moneyweb

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