The medical schemes industry is at a crossroads. On the one hand, government is moving towards a system of social health insurance and using regulation to align the industry with these moves. On the other hand, the industry is looking for more efficient ways of operating.
Every year, medical aid becomes more costly, but offers less value in return. Annual price increases of double consumer inflation have become the norm. Medical aid is in danger of pricing itself out of the reach of members, a significant proportion of whom change to less comprehensive plans each year. It has failed to meet government's objective of reducing costs to make it affordable to the low-income market.
In its search for answers, Mx Health, SA's third-largest medical aid administrator, put together a panel to debate the pros and cons of allowing medical schemes to operate on a for-profit basis.
The panel comprised Mx Health CEO Neels Barendrecht, Actuarial Society health committee convener Roseanne da Silva, adviser to the registrar for medical schemes Alex van der Heever, Pro-Active Health Solutions CEO Joe Seoloane and Discovery Health MD Barry Swartzberg.
Medical schemes are mutual funds, not-for-profit entities managed by boards of trustees. Any surplus of contributions over payouts is retained in the scheme each year to build its reserves, which belong to the scheme's members. Medical aid administrators and managed care organisations are the for-profit companies that are contracted by schemes to manage risk on their behalf.
The debate did not become polarised with the regulated not-for-profit model on one side and the for-profit model on the other. Most speakers expressed sympathy for a hybrid model and believe there is a place for for-profit medical schemes in the open schemes market, but it is more appropriate for closed (restricted membership or employer-based) schemes to operate on a not-for-profit basis.
In hosting the debate, Barendrecht said he was not trying to create a lobby group for the for-profit model, but rather foster discussion on how the present model can be improved.
The problem with the present model, according to Swartzberg, is that schemes do not have the same incentives as administrators, brokers, doctors, hospitals and other for-profit players.
Scheme governance can be poor. Schemes are run by trustees who carry enormous fiduciary responsibilities, but often do not have the skills or experience to manage schemes properly.
Swartzberg also criticises the inefficiency of the present system because it forces schemes to use members' contributions when wanting to obtain a loan or raise capital. A far easier way to capitalise schemes, he says, would be to allow them to operate as for-profit entities, which would allow them to raise money through shareholders.
One of the most appealing features of the for-profit model is that it offers a solution to the solvency question. At present, schemes have to meet a statutory reserve requirement that involves holding 25% of gross contributions in reserve by 2004. Schemes cannot raise capital, so they have to build their reserves from members' contributions. Those that have failed to gradually increase their reserves over the years could be forced to increase contributions to meet the reserve requirements.
Da Silva provides the following example to illustrate how the solvency requirement has forced schemes to raise their contributions in excess of their actual costs. Assuming claim and administration costs were projected to increase by 16,7%, a scheme that had an 8,7% solvency margin in 2002 would have to increase its contributions by 36,4% to meet the 22% solvency requirement at the end of 2003. Almost 20% of this increase would be a buffer to build reserves.
A scheme with a 17,5% solvency margin would have to post a 24,8% increase, of which 8% would be to build reserves. If the latter scheme also doubled its membership in January 2003, it would need to increase contributions by more than 36% to meet the 22% solvency requirement. Of this increase, almost 20% would be to build reserves.
Consequently, there has been much criticism of the solvency requirement by the sector and there is no doubt that, though it is necessary for schemes to be well reserved, 25% is a crude measure of financial soundness.
In a for-profit system, shareholders and business owners would put up (at least some) of the capital to meet the reserve requirements, enabling the scheme to keep its prices down, argue Swartzberg and Barendrecht.
The sector attracts little investment because it is impossible to earn a return on capital in a not-for-profit industry. And, since no lending of seed capital is allowed to a scheme, it makes it difficult for a new scheme to enter the market.
Barendrecht discovered this when he attempted to back Pathfinder Medical Scheme, a low-income scheme mainly for the low-income market. Mx Health granted a R3m loan to the scheme, but after nine months of deliberating, the council for medical schemes refused to permit the loan. Mx Health had to write it off as a donation.
Another shortcoming of the not-for-profit model, according to Swartzberg and Barendrecht, is that administrators have little incentive to reduce their costs because their income is constrained to the registrar's benchmark of about 10% of contributions.
A for-profit scheme would align incentives for the scheme and the administrator, if the latter shared in the risk of running the scheme.
Under Barendrecht's model, managed care organisations (MCOs) would run schemes on a risk basis, sharing in the upside, when they save schemes money, and the downside, when costs exceed their projections. A scheme would have one service-level agreement with an MCO, including the risk-sharing model. The MCO would then decide whether to provide administration in-house or outsource to a third-party administrator.
As a managed care company, Mx Health has saved schemes millions of rand through managed care programmes, but is frowned on by the regulator if its administration/managed care fee exceeds 10% of contributions.
"Why can't I share risk with them? Why can't I share in 10% of the savings that I achieve for the scheme?" asks Barendrecht. "Health-care risk is hard to manage and requires an enormous investment in research & development (R&D), technology and human resources."
He says administrators should invest in industry R&D and information systems to run managed care, but because the returns are inadequate, administrators invest poorly in systems and skills and do not do enough research into the programmes and tools required to operate managed care.
"There is no incentive for administrators to improve health-care costs, efficiency or quality and no reward for spreading risk across a large membership base," says Seoloane.
The benefits of a for-profit model would be to capitalise the industry, which would be run on business lines, leading to better service and greater investments in skills and technology, while creating incentives for better risk management.
According to Van der Heever, government says there is no place for for-profit schemes at present because they will undermine government's social objectives of broadening access to affordable quality care. This is because for-profit schemes would compete on the basis of risk selection, cherry-picking the best risks through clever marketing programmes and subtle benefit design, and neglecting their social responsibility to make cover more accessible and affordable.
Van der Heever warns that for-profit schemes could easily result in an increase in the cost and a reduction in the quality of medical cover.
"The industry has seen systemic cost increases over the past 20 years, but membership has still increased," he says. "Because people feel exposed and vulnerable without cover, it is quite easy for a scheme to pass costs on to members."
He explains that profits are often created in a scheme by reducing benefits and increasing contributions. The wider the margin between the two, the greater the profit.
Van der Heever says that between 1993 and reregulation in 1998, the high-income open-schemes market operated with a profit incentive and all it achieved was to move 3m members from closed schemes to the open-schemes market. In this way, much of the surplus in the industry has been used to pay brokers to shift members around.
There was also a general decline in benefits. The gap between what medical aid costs and the benefits it confers is widening. Between 1976 and 1993 this gap averaged R20/month. By 1999 it was R40/month, but by 2001 it had reached R77/month.
"All we have seen over this period [1993-1998] is a huge escalation in nonhealth-care expenditure and little growth in overall membership," says Van der Heever. "So we can look to SA to see the effect of a for-profit solution within the open-scheme environment."
He says government's main concern with the for-profit model is that it allows too much scope for risk-selection, the targeting of younger and healthier members.
"To allow schemes to operate on an entrepreneurial basis in this environment could result in windfall profits accruing to a scheme because it has managed to attract a younger and healthier group of members and not because it operates more efficiently or offers better benefits," says Van der Heever.
Da Silva believes there are many efficiencies to be gained from a for-profit environment, but the most important thing is to strike a balance between government's social objectives and the need to ensure that the private health-care sector is competitive in terms of attracting skills and addressing people's health-care expectations.
She suggests a three-tiered environment as a compromise. At the bottom is a basic level of cover for the low-income market. The medium tier operates on the social solidarity principles of the present medical-schemes environment and on top of that there is a high-income tier, which operates on a for-profit basis for people who wish to buy top-up cover. The most important thing is to ensure the top tier does not compromise the sustainability of the lower two tiers.
"We are seeing a significant buy-down in cover. There is a role for the for-profit model to provide access to higher levels of cover for those who can afford it," she argues.
Seoloane believes for-profit medical schemes would not necessarily improve the situation because the entire health-care system needs to be overhauled.
"The present environment is not ready for for-profit medical schemes," he says. "The problem lies in the fundamental structure of our health-care funding, delivery and regulation systems. We have not got these basics right.
"We also need to learn from developed nations that have tried both models and assess if our environment can accommodate both systems. Maybe the two approaches are not mutually exclusive, but we have to be open-minded and find common ground."
Barendrecht feels the solution is a hybrid model. He believes for-profit and not-for-profit schemes should co-exist and that regulation can be employed to prevent the worst excesses of the for-profit system.
