There has been a ruckus recently because Discovery Health Medical Scheme has continued to fail to meet its 25% solvency ratio required by law.
The question Discovery Health members are asking is: are their benefits safe? Can Discovery Health meet member claims?
Technically, Discovery Health has not met its legal obligation in terms of its solvency ratio. The Council of Medical Schemes says schemes that are not at solvency ratios of 25% are not 100% protected. The more a scheme falls below the 25% solvency level, the greater the risk.
“The reserves serve as a protector against unexpected losses which, if no provisions are made, might leave the scheme in huge financial losses,” says Phumla Khanyile, communications officer at the council.
Discovery CE Adrian Gore argues that Discovery Health is in good shape and in no way at risk of default. Healthcare analysts agree and say that Discovery Health is “incredibly solvent” and the scheme has an AA rating from the Global Credit Rating Company; the highest possible rating.
So it would appear that members are safe from default risk. So, why the fuss?
This raises the question of how to define solvency. Government has said that all medical schemes should ring-fence 25% of their annual premium income in a safe investment to ensure there are always funds available to meet claims.
However, it does not take the size of the scheme into consideration. This can be bad news for members of small funds, where the solvency ratio might not be high enough to protect against default, as well as members of large funds who might be “over-insured”. For example, a small fund with 10 000 members contributing R2 000 a month would have an annual premium income of R240-million and therefore R60-million in reserve. A large fund such as Discovery Health, which has 800 000 members contributing R2 000 a month has an annual premium income of R19-billion and, at 25% solvency ratio, would have reserves of R4,8-billion.
The last annual report stated that Discovery Health stood at 18%, well below the legal requirement. However, that still translates into reserves of R3,4-billion. Gore says the solvency ratio at present is 22% and on track to meet the agreement with the register to have a 25% solvency ratio by 2008.
The registrar was unable to confirm this as it has not had the management reports for June yet.
Gore argues that for a fast-growing fund it is difficult to meet the requirements as the fund signs on 1 000 new members a day. This means from the first day a member joins, Discovery has to put away R6 000 in a money market account as part of the solvency requirements. Every month Discovery has to increase its solvency fund by R25-million.
But Fedhealth, which grew its membership by nearly 20% last year, has managed to maintain its 25% solvency ratio.
The problem for Discovery Health members is that while the high solvency ratio might seem unfair considering the size of the fund, it is law and Discovery Health is going to have to work hard to achieve the ratio. This means two options, a higher percentage of premium income will have to go to reserves, resulting either in higher premiums or lower benefits, or Discovery Health will have to cut administration costs.
Members will have to watch their benefits and premiums going forward. However, Discovery Health’s massive size, four-times bigger than its next competitor, can be advantageous to members. Larger funds create tremendous buying power, which can assist to reduce medical costs.
The Global Credit Rating Company states: “Discovery Health’s leading market position ensures that the scheme is well placed to benefit from enhanced purchasing power and scale economies.”
But, with such dominance, comes other issues, such as administration — the only way Discovery can make money from its health division.
The medical scheme industry is not in a good state of health. It is no secret that Discovery Health’s massive growth rate has been at a direct cost to other funds in loss of healthy members. There are funds that might be too small to provide adequate risk cover and, on the other hand, they are at risk from a dominant player that has the potential to destroy competition.