Medical Funds – What funds a medical scheme?
Private medical funding in South Africa is viewed by many people as an absolute necessity to ensure that their healthcare is provided for. But how exactly do medical schemes fund their members’ claims, and do you really need a medical scheme to fund your healthcare expenses both now – and later – in life?
How medical scheme funds work?
To explain this, you need to understand how medical schemes (medical aids) operate.
In very simplistic terms, medical schemes use the income it receives through members’ contributions to pay claims as well as other non-health costs that are necessary to enable the effective administration of the Scheme. Ideally, the income generated by a scheme through member contributions should always at least be adequate to fund all the expenses claimed and paid out.
Thus, a medical scheme is actually similar to a trust in that it administers a medical fund where money is pooled from its members. In fact, a medical scheme has a board of trustees who are tasked to do just that: to ensure that the fund is built up and managed over time so that the scheme can continue to fund the benefits (or plans) it offers to its members. Basically, the trustees manage and look after the wellbeing of the fund, also referred to as ‘solvency’.
Comparing medical funds
There are funds of different sizes, but size isn’t necessarily the most important factor to look out for when choosing your medical aid. Each medical fund has a slightly different profile, which is based on factors such as member age and various other risk variables. All these variables are taken into account when actuaries are tasked to model and predict which benefits the fund can sustain. It is after this modelling and risk assessment, that the medical scheme might define new benefit options which then have to be approved and registered with the Registrar of Medical Schemes.
Private medical fund contributions
A medical scheme has several different options on offer which offer different benefits vs the member contributions. The scheme keeps a fund for each of these options so these are kept separately. Another interesting point to note is that certain benefit payouts may only happen from specific parts of the fund. For instance, the PMBs (prescribed minimum benefits) may only be paid out from that part of the fund which specifically has collected contributions with respect to the chronic conditions. The same applies to day-to-day benefits. This makes for a fairly complex way that the funding has to be calculated and managed, but it is imposed by the Registrar to ensure that the fund is well governed and accountable. There might even be interim contribution increases and benefit decreases mandated by the Registrar – although at Selfmed we have never had to impose either. It might be wise to run a comparison on the different funds (or ask your financial advisor to give you more details) about the health of the fund.
Medical Fund Administration & History
Some medical schemes do all the administration in-house themselves, whereas others outsource the administration side of the business to specialist call centres. Technically, the admin side of things is always accounted for separately from the scheme reserves.
The reality is that some medical scheme funds have been running for decades in South Africa (Selfmed was established in 1965), and this form of private healthcare funding has worked well and offered a service level that is – and remains – superior to the public healthcare in South Africa. Many other countries operate similar medical funding for their healthcare systems – in fact National Health insurance is much the same, except it is a nationalised initiative, similar to GEMS which is the scheme for government employees.
Once you have selected the right fund, the tricky thing really is just to decide which level of cover is right for your needs. A hospital plan might be suitable if you are relatively young and healthy, and if your primary concern is that there is unlimited funding in place for hospitalisation benefits which cover you for major medical.
Private vs Company funds – which one should you choose?
Depending on your terms of employment, you may have to join your company’s medical aid scheme (also called a Closed Scheme), which puts you into a risk pool with the other employees in your company, but where you will enjoy some tax benefits and your company will end up funding some of the contribution. Large companies often have their own medical scheme funds which are administered on their behalf, and even smaller SMEs might have a company group scheme, although the trend is more and more towards private funding – and you might score a better deal with an open scheme as well!
Post-retirement healthcare funding / Medical aid pre-funding
Companies running their own closed schemes have to take post-retirement funding into account when they set up medical funding programmes for their employees. This is referred to as “pre-funding”. Pre-funding basically means putting enough monies into the fund, so that there is enough once the employee retires and ceases to work for the company.
The same applies to individuals. If you in the fortunate position that you can fund your own healthcare expenses post-retirement through annuities alone, or are looking to put savings in place with which you can continue financing your monthly contributions, you are advised to do so earlier rather than later and plan appropriately.
Early planning will ensure that you have sufficient monies available to finance continued schemes contributions as you get older. Take medical inflation into account as well.
Hint: If in doubt about your company’s medical aid scheme, ask someone in Human Resources what the exact policies are with regards to post retirement funding and whether you are liable for any payments.
final word on Medical fund reserves
By law, is it required that all scheme needs to have a 25% solvency level. Should a scheme not manage to maintain their reserves at this level, the Registrar of Medical Scheme may put the fund under review, invoke changes to benefits and contributions and, in extreme cases, even put the fund under curatorship.
Overall, Selfmed has for the past 45 years remained a healthy medical scheme fund, and we’ve built up considerable expertise in administration and managing our members’ contributions.