Johannesburg - Many of South Africa's medical schemes are struggling with losses, and the situation doesn't look set to improve in 2008.
According to the Council for Medical Schemes' latest annual report, South Africa's schemes reported a collective loss of R922m, an improvement on the R2.1bn loss reported for 2006.
Of 122 schemes, 83 recorded operating deficits, 30 of which had operating deficits greater than R16m.
"This is quite a worrying picture," said Discovery Health CEO Neville Koopowitz, adding that he didn't expect the situation to change in 2008.
Discovery Health is SA's biggest medical scheme, with over 60% market share and approximately 926 451 principal members, each of which may come with family members - known to Discovery Health as beneficiaries.
Schemes are failing to attract new, healthy members; with people typically joining a scheme only when they are ill or require chronic medical treatment. This results in the pool of funds available to the scheme shrinking.
'Double whammy'
When a scheme eats into its reserves, it dealt a "double whammy" according to Discovery, as the scheme will have to make up for the loss in its operations and its investment returns will be lower.
This could hamper its efforts to meeting the required target set by government, and dampen the scheme's investment returns as the pool of funds grows year-on-year through investment returns.
In terms of regulation 29 of the Medical Schemes Act, the minimum accumulated funds (or reserves) of medical schemes should be at least 25% of gross contributions. When this is expressed as a percentage of gross contributions, the schemes solvency ratio is determined.
"If a scheme has been making losses, simply trying to make up those losses will be a challenge, but to then get the scheme's solvency ratio to 25% will also prove to be difficult," said Koopowitz, who added that it was "even more difficult" to maintain solvency in a tough environment.
When schemes incur losses, they have two options: either they increase the number of members - thereby drawing from a larger pool of funds and achieving better economies of scale - or they cut existing members' benefits to keep the fund going.
"It's the Holy Grail - because it's so hard to achieve a growing business as well as solvency at the same time."
Koopowitz said consecutive years of negative operating results threaten the sustainability of members' benefits; members' contributions are "critical" for the survival of the industry, he said.
Koopowitz said that it's not normally the young, fit and healthy that join medical schemes; when they are part of the scheme, their contracts are the first to lapse as membership is not seen as a priority expense for them.
Vitality a 'powerful remedy'
Discovery has attempted to keep existing members healthy and lure new customers to its scheme through its wellness incentive programme, Vitality.
The programme encourages its members to stay fit and healthy through benefits like gym contracts at attractive rates, getting nutritional advice or help with quitting smoking.
Vitality is a "very powerful" remedy, according to Koopowitz: "As Vitality makes people more healthy, the lapse rate is lower. Highly engaged vitality members also pay less for their contributions," he said.
- Fin24.com