Why is your medical aid expensive?
In response to my blog last week about medical schemes in SA carrying too much cash on their balance sheets, many people indicated that they are unhappy with how much they pay for medical aid. Most responders felt that they got too little back from their medical aid and that it was poor value for money. In this blog, I would like to explore this contention. Do we pay too much for medical aid? If so, why is our medical aid expensive? What can be done to reduce the cost of medical aid?
Do we pay too much for medical aid in SA?
Before I address this question, it is important to dispel a number of misconceptions about medical aids (and medical schemes):
- Medical schemes are not-for-profit entities, which are run on principles of mutuality and solidarity. It is important to differentiate between an administration company (e.g. MetHealth), which receives administration fees from schemes it administers (e.g. GEMS). The schemes do not make profit for a shareholder. Any surplus that is produced during the year, remains in the scheme and helps to boost its solvency. If you are paying too much for your medical aid, it is not because the scheme is making profits from you;
- Medical schemes pay out 87% (in 2013) of your contribution in claims, with the rest of your contribution being used to:
- Pay for administration (GEMS pays MetHealth, DHMS pays Discovery, etc.) – it costs money to collect contributions and to pay claims. The amount paid for administration as a proportion of contributions is well below what would be charged by a life insurer or a short-term insurer, so you are getting a good deal;
- Pay for managed care – it costs money for managed care companies to negotiate fees with hospitals, doctors/specialists and pharmaceutical companies. Without managed care, costs would be even higher; and
- Ensure the solvency of the scheme – medical schemes in SA have to maintain surpluses in excess of 25% of annual premiums to satisfy the Council for Medical Schemes. Sometimes as a result of high growth rates, a change in the mix of business or weak investment returns, some of your contribution will be used to increase the buffer in the scheme;
- The claims ratio of medical schemes (87% of contributions in 2013) is meaningfully higher than that of short-term insurers and life assurers which typically pay out less than 70% of premiums in claims – the remainder being used to cover administration costs, commission and to produce a profit. If you are paying too much for your medical aid, it is not because the scheme’s claims ratio is too low;
- The majority of your medical aid contribution goes to cover eventualities that require hospitalisation. Typically less than 25% of your contribution (sometimes much less if you are on a cheaper plan) will go towards doctors (and specialist) visits and medicine. When comparing what you get out every year relative to what you put in, you need to compare the small contribution to doctors’ visits and medicine to the number of times you actually visit a doctor (or buy medicine in that year);
- Medical schemes are a form of insurance and not an investment. This means that it is only those that are unlucky enough to become sick that are likely to get more out of medical aid than they put in. If you don’t have a triple bypass, if you don’t develop breast cancer, if your daughter does not get leukaemia and if your son is not in a serious car accident, you are likely to get out less than you put in. If you are in that situation, well done, you have been very lucky; and
- Medical expenses increase as you get older, but your medical aid contributions do not. This means that if you are a young member of a medical scheme, your contributions are helping to pay the medical claims of old people in the scheme. On the flipside, when you get old, other young members will help to pay your claims
So, once we have taken account of these misconceptions, is it true that your medical aid is expensive? And how should we measure this? In 2014, the average monthly gross contribution for a family to medical schemes in SA was R3056. If there was not a large proportion of families that only had hospital plans, this average contribution would have been even higher (estimated at R3700p.m. in 2014).
This is a great deal of money, considering that the average compensation per employee in SA was only R14700p.m. in 2014. As a result, households on average paid out c.25% of their monthly income in medical aid (assuming one bread-winner per family). In the USA, which is one of the countries with the highest spend on medical insurance, the average family contributed 16% to medical insurance in 2012 (based on average medical insurance spend of $8200 p.a. and average household income of $51700 p.a.). Based on this comparison, your medical aid is expensive.
Now let’s look at this in a different way. What has medical aid inflation done over recent years compared to CPI (consumer price index)? To do this, I have compared the average monthly medical aid contribution in 2013 to that in 2004 and calculated the average increase p.a. over the period and compared it to the average CPI over the same period. The average increase over this period of 8.8% p.a., exceeded the average CPI over this period of 5.8% p.a. by 3% p.a. This means that medical aid has certainly become more expensive on a relative basis.
Therefore, based on a comparison with the USA (one of the most expensive markets) and relative to history, your medical aid is expensive. The question to be answered now is why?
Why is medical aid in SA expensive?
In my opinion, there are a number of reasons why your medical aid is expensive in SA, some of which are general issues worldwide and some of which are specific to the SA environment. Globally, medical inflation has been exceeding inflation over the recent history. Over the 5 years from 2009 to 2013, global medical inflation exceeded normal inflation by 5.5% on average (well above the experience in SA). The most important drivers of medical inflation globally are technological advances, an ageing population and poor lifestyle. In SA, new medical technologies as well as increased radiology and pathology investigations has driven costs upwards. This is expected to continue.
However, over and above the global trend for medical inflation to be above normal inflation, there are other country-specific reasons why your medical aid in SA is expensive:
- Prescribed Minimum Benefits;
- Adverse selection by age and gender;
- Shortage of healthcare professionals; and
- High required solvency.
The Medical Schemes Act requires that all medical schemes in SA provide a set of Prescribed Minimum Benefits (PMB) to their members. This includes an extensive list of 270 conditions (some of which are very expensive to treat) as well list of 25 chronic diseases. What the PMBs mean is that if you want to be covered under a medical scheme, it is all or nothing – you are either covered for all the PMBs or you are not allowed to buy medical aid. Because the PMBs are so extensive, this makes even the most basic hospital plan in SA very expensive. If the Act had allowed for a less extensive list of conditions to be covered, the cost of medical aid could be reduced and more people would be able to afford it. Currently people do not have a choice in this regard and many have to go without private healthcare altogether rather than being able to afford a reduced list of benefits.
Adverse selection in the context of a medical scheme means that people that are sick or know they will need treatment are more likely to buy medical aid than people that are healthy and are less likely to use the medical aid. This is just human nature. However, for medical aid to work properly, you need healthy people to contribute so that there is enough money to pay for the needs of sick people. You need certain people to get less out of their medical aid so that other people (the sick people) can get more out. There are two types of adverse selection in SA that are a problem and contribute to why your medical aid is expensive, namely age and gender selection.
If you look at the age profile of medical schemes in SA, there is a big gap in membership between the ages of 19 and 35. People often stay on their parents’ medical aid until they start working and then very often go without cover until they are older. This is because they are less likely to be sickly at this age. Similarly, it is interesting to note that between the ages of 20 and 35, the proportion of female members in medical schemes rises and then falls off again from age 40. This is because women during child-bearing ages are more likely to need medical aid for maternity benefits.
The problem with not enough young people being on medical aid and too many women dropping their medical aid after their child-bearing ages is that this increases the cost of medical aid for everyone else. If people were more inclined to join medical schemes early and stay on them for their whole lifetime, the cost would reduce for everybody. This is why there is a drive to make medical scheme membership compulsory and many companies enforce this with their own employees. If you are forced to join, you cannot make adverse selection decisions that will increase cost for your fellow members.
Medical schemes, with the help of managed care firms, negotiate with hospitals, pharmaceutical companies and doctors for the best possible rates for their members. Although they are reasonably successful in achieving this when it comes to hospitals, pharmaceutical companies and general practitioners, the rates for specialists are often very high. This is because we have a shortage of specialists in SA and they have pricing power. This is exacerbated by the fact that many of the PMBs have to be treated by specialists. As a result, this makes your medical aid too expensive.
Finally, because medical schemes in SA are not-for-profit, you as the member are responsible for the scheme to have sufficient capital. During the early years of the new Medical Schemes Act (post 1999), members had to pay more into medical schemes than needed for their cover so that solvency levels could be built up to the regulated 25% of annual contributions or even higher. Even today, if medical schemes grow fast or their built-up capital fails to increase in line with medical inflation, members have to fork out to maintain the solvency (a portion of annual contribution will be used to boost solvency). This situation is made worse by the fact that a 25% solvency level is very high and that most schemes invest this money too conservatively. If the Council for Medical Schemes (CMS) were more accommodating (requiring solvency in line with underlying risk, which should be lower) and encouraged schemes to invest in higher-yielding assets, there would be a reduced need for contributions to fund solvency increases. In fact, contribution increases could be lower as the performance of the capital can help to boost the performance of the scheme.
How can we reduce the cost of medical aid in SA?
There are a number of things that can be done in SA to reduce the cost of medical aid, some of which will require the regulator to step and others will require medical schemes to make changes. There are, however things that you can do to reduce the cost:
- We need more young people to join medical schemes and more women to stay on medical aid after their child-bearing age. Remember, medical aid is a form of insurance, not an investment – join when you are young and receive the benefits when you are older;
- Compulsory membership to medical aids should be mandated, especially for low cost benefits options, so that costs can be kept low;
- The CMS should consider allowing an alternative medical scheme product with reduced PMBs. This will not cover as much, but more people will be able to afford private medical treatment – the public sector would still be available to those people for conditions not covered under reduced PMBs;
- The CMS should consider a different solvency regime for medical schemes that reduces the level of capital to what is actually needed to protect the well-being of schemes;
- Medical schemes should invest their capital more aggressively so that returns can beat medical inflation, reducing the need for a part of contributions to be used for this purpose;
- We need more skills in the SA medical industry, especially more specialists. We should try and reverse the trend for medical professionals to get their training in SA and then to go and work in other countries. This is related to the general trend in SA for us to lose skills;
- Medical schemes should continue negotiating lower fees from hospitals, pharmaceutical companies, doctors and administration companies – the larger schemes are, the more their bargaining power would be, so increased membership of young people could help here as well; and
- Most importantly, we should do more to prevent people getting sick in the first place. There should be more done to encourage people to stop smoking, eat better, get more exercise, prevent TB getting out of hand, receiving antiretrovirals if they are HIV positive, etc.
Your medical aid is expensive, but not as expensive as you may think. You are currently covered for a wide range of conditions and if you are one of the unlucky, those that need a heart transplant, those that develop cancers that are very expensive to treat, those that are involved in bad car accidents, those that have children with childhood illnesses, etc., you will be well looked after. If you are one of the lucky, it may seem as if you are wasting your money and paying much more out than you get. However, like spending your whole life paying insurance for fire protection on your house, you would probably prefer not to claim, because if you do, it means your house has burnt down. Accept that medical aid is insurance and what you are ultimately buying is peace of mind – when things go badly wrong, you will not be ruined financially or have your life shortened.
At the same time, let’s do what we can to reduce the cost of medical aid under the constraints above. Join, even if you are young and healthy; lobby the CMS for an alternative set of PMBs and for a different solvency regime; lobby your medical scheme to invest your assets more aggressively and continually negotiate better rates on your behalf; lobby government to create a more attractive environment in SA to retain skills; and try and live a healthier life – give up smoking, eat more healthily, get more exercise, get tested for HIV, get your persistent cough checked out, get your cholesterol tested, get a pap smear, etc.
Together, we can tackle this problem and make the future a healthier and less expensive destination.
What do you think of my assessment? Were you aware that most of your medical aid contribution is to cover you against hospital treatment? Did you know that the range of conditions you are covered for is so wide? Were you aware of the impact of adverse age and sex selection? Are you doing something to improve your health or would you consider it? I would love to read your feedback.
In the mean time, keep your talking straight!