/ 15 October 2008

Selecting the right medical scheme

It is that time of year again when your medical scheme will inform you of the annual increases, but it is also an opportunity to review your current medical scheme and see if it lives up to its promises, writes Maya Fisher-French.

How financially stable is the scheme?
When selecting a medical scheme, financial stability is critical. You do not want the scheme to go insolvent the day you need to make a major claim. This year two medical schemes ran into trouble: Renaissance Medical Scheme and Humanity Medical Scheme. Renaissance used low premiums to attract members but did not pay out claims. Choosing the cheapest premium should not be the first on your check list.

Solvency rates
Legislation requires solvency rates to be at 25%. This means the medical scheme has the equivalent of 25% of annual premiums held in reserve. But new or growing schemes may have solvency ratios of under 25% and schemes that are losing members may have increased solvency rates.

Solvency rates are not the only factor to consider. Growth or decline in membership is a key measurement. Many funds are currently at risk as they have government employees who will be moving across to the Government Employees’ Medical Scheme (Gems).

When selecting a scheme, ask your broker how many members are likely to move to Gems. A medical scheme which is growing its membership tends to be in a healthier position as the larger the membership, the more diversified the risks.

According to Discovery, a medical scheme needs to have about 25 000 members to be sustainable and at least 50 000 members to have buying power in the market and keep costs under control. Discovery says that the ability to control costs has brought medical inflation to about three points above inflation.

Without being able to control these costs, medical inflation would rise to about 20%. Within five years we would be paying 30% more per month than if costs were contained.

The average age of the membership is important. Currently the industry average is around 42 years old. The older the average age of the scheme, the more claims a scheme could experience, putting pressure on future premiums.

Operating profits or losses
Operating profits can be one measure to understand the long-term viability of a medical scheme. Operating profits/losses are the difference between the scheme’s expenses (claims and operating costs) and its income (premiums).

Discovery is one of the few medical schemes which maintains an operating surplus — in its case more than R50 per member per month. Discovery says that if a scheme is running at a loss, it is losing money and this will eat into its solvency ratio.

To make up this shortfall, the medical scheme will either have to increase premiums above medical inflation or cut benefits. Discovery argues that competitors such as Liberty Health and Fedhealth, which have run operating losses, eventually have to find that extra income.

However, Jeremy Yatt, chief executive of Fedhealth, argues that this is all smoke and mirrors. Although Fedhealth runs an operating loss, once the investment income from the reserves (R500-million) is accrued, they are running a profit.

He says that Fedhealth’s strategy is to run an operating loss before investment income because that means premiums are set at the right level. The investment income from the reserves should be put to work to lower premiums.

He argues that any medical scheme running an operating profit before investment income is charging its members too much money or not paying out enough claims.

Administration costs
The higher the administration cost of the fund, the less money is going towards benefits. The Council of Medical Schemes would like to see administration costs at about 10% of premiums. Currently the average is about 13,8%. If a scheme is substantially above that, you may be paying too much to non-healthcare costs.

Premium increases
Medical schemes are required to announce a single average percentage of the increase in their premiums relative to their benefits. But this can be misleading as different options within a scheme will experience different increases.

It is therefore important to understand the premium increase on your specific plan and also to compare the benefits from the previous year. Medical schemes with rate increases below the medical inflation rate may be trying to use lower premiums to attract new members, but this is unsustainable, so don’t use price as the only measure.

What does the scheme pay from risk cover?
When buying into a scheme many promises are made, but unfortunately in some cases members discover the reality only when it comes to claims.

The Council of Medical Schemes report shows which medical schemes paid the most claims from risk rather than savings. Liberty Health topped this table.

Although a high level of savings may look good on paper, you need to understand what exactly will be paid out of savings and what out of risk. A medical scheme that pays more benefits from risk could be offering better value for money.

Andrew Edwards, head of Liberty Health, says savings are paid rand for rand. So for every rand that is paid out you have put in. Once that is depleted you will pay out of your own pocket. As the tax benefits on medical schemes have been reduced, Edwards says you should rather save your day-to-day medical expenses in a money-market account that offers better interest rates. Liberty Health focuses on providing higher risk benefits.

Fedhealth follows a similar philosophy and its focus is on covering the big events rather than day-to-day benefits. Both Fedhealth and Liberty Health reimburse at 300% of the National Health Reference Price List (NHRPL) and offer higher limits for serious treatments such as oncology.

When selecting your scheme, pay attention to what is covered by risk rather than what is depleting your savings. What rate does the scheme pay for in-hospital events? How many chronic conditions does it cover? Are visits to the casualty ward paid from risk or savings? Does the scheme offer crime trauma benefits? Is oral contraception paid from risk or savings? The more that is paid from risk, the less you are paying from savings which come straight out of your pocket.

What does your doctor charge?
Edwards says it is important to understand the rate your medical provider charges and ensure that your medical fund covers this fee.

If your doctor charges 300% of the NHRPL, then you need to choose a scheme that pays out at that rate. By the same token, why pay for a more expensive scheme which pays out at 300% when your doctor charges only 200%?

You should ask your doctor who his or her preferred medical scheme provider is because he or she will be working closely with that scheme. It is easier if you, your doctor and your scheme are all on the same page.
Discovery Health has created a direct payment plan with many doctors and specialists through which claims are paid directly and only a portion of the consultation is paid from your savings.

Buying the right option for your needs will result in an improved claim experience.

What are the lifestyle benefits?
All schemes want to attract young healthy members to reduce the claims level. Because of government requirements medical schemes have to take on any new members irrespective of health. As a result people tend to anti-select; in other words they take out medical benefits only when they are already ill.

To attract healthy people, schemes offer lifestyle benefits. Discovery, for example, offers Vitality which provides a range of benefits and encourages healthy lifestyles.

Fedhealth offers interest-free loans for cosmetic procedures. But these are only for “younger” type procedures such as cosmetic dental surgery, laser eye operations, breast enlargements and reductions, as well as otoplasty. Procedures such as varicose veins and face lifts do not qualify.

Fedhealth has also introduced pet insurance as part of its standard offering. Liberty Health segments its market according to needs and in its Gold Plus plan for families it covers medication for acne and ADD from risk cover.