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The lowdown on medical scheme cost hikes

THIS is the time of year medical scheme members receive communications from their schemes about proposed contribution increases and benefit changes. (This goes for all members of all medical schemes, and the example below is no reflection on Liberty Medical Scheme or the COMPLETE Standard Option).

Fin24 received a letter and subsequently an email from user Hercules Venter, who is a member of Liberty Medical Scheme. He writes:

I don’t usually make waves. But this just did not make any sense. I do understand that medical schemes like to bend numbers to their favour and that they are still a business that has to make money. I just don’t understand having to pay an increase of 11% on my contributions but my benefits only go up with 6%. Maybe I just don’t understand and you will be able to make sense of it.  

He subsequently sent the following extract from the letter he had received:

COMPLETE Standard

Please be aware of the following changes to your current option choice for 2016

1. A 6% increase to all benefits excluding prosthesis, crime trauma and specialised radiology where the 2015 limits remain. The 6% increase is in line with the general rise in prices and inflation.

2. COMPLETE Standard offers you complete peace of mind for all aspects of your medical needs. To maintain this comprehensive level of cover, and to keep pace with above-inflation medical costs, there will be an increase of 11% in contributions for this option choice. This means that your new monthly contribution for 2016, based on your current option choice, will be RXXXX.

In response to the query, a spokesperson for Liberty Medical Scheme confirmed that the 6% increase was for benefits that rise by more or less the consumer price index each year and are negotiated with healthcare providers such as hospitals, specialists, general practitioners, etc.

The 11% increase was for the Complete Standard contribution, which was influenced among others by the ageing effect and high claiming pattern of members on that option for the year.

This user query gives rise to questions which many medical scheme members are asking, especially at this time of year when increases for the different schemes and the options within them are made known.

Q: Why is my contribution increase bigger than my benefit increase?

A: Worldwide, medical inflation tends to be higher than other inflation. There are many factors driving this, from the high cost of private healthcare (both hospitals and doctors), high profit margins of some pharmaceutical companies, and the high cost of new medical technology, to name but a few.

In South Africa there has been an increase in the claim patterns of medical scheme members over the last  few years, and this has also contributed to spiralling costs.

Q: Is a medical scheme a business that has to make money?

A: According to the Medical Schemes Act of 1998, medical schemes may not be profit-making organisations. All their income comes from two sources only: member contributions and investment returns on the reserves. And the expenditure? Administration costs and the paying out of medical claims.

A medical scheme has no shareholders, and may not register a profit as such. All excess funds go into the reserves.

Q: What happens to the money I don’t use?

A: It is used to pay the claims of other members who might be having high medical expenses. Next year, they could be paying for you if you need a big operation. That’s how a medical scheme works. That is why it is in the interest of all schemes to try and attract young and healthy members.

Any money that is not spent on paying out members' claims or administration costs goes into the reserve. A scheme is required by law to have at least 25% of its contributions in reserve.

Q: Why do different options have different increases?

A: Different options have different member profiles. Some options may have many high-claiming members, and others may not. The average age of the members on an option may be high, which invariably leads to more substantial claims.

Specific high-cost cases within a particular option may also drive increases. Options, like people, can have good years and bad years. A good year will have low contribution increases as a result, a bad year the opposite. No one can predict this.

Q: Can a scheme refuse a member who is likely to be a high claimer?

A: No, it may not. The scheme may only impose an initial three-month waiting period on new members, exclude a member for an existing condition for 12 months, or impose a late-joiner penalty (up to 75%) on someone who has not been a member of a South African medical scheme on a continuous basis.

Q: Who decides on the percentage of increases for each option?

A: The trustees of the scheme, of whom at least half are member-elected. These decisions are made in conjunction with financial experts, who take a look at things such as claim patterns, member profiles, reserve funds, high-cost cases and investment returns.

Above all, the fund has to be financially sustainable so that it can continue to serve its members. A fund which pays out more than it receives in contributions will soon be bankrupt.


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