Managing Director at Xelus Specialised Risk Solutions, Michael Settas, explains why he believes the CMS statement that medical aids are in good health is an overly simplistic assessment of sustainability.
The recent claim by the medical schemes industry regulator, the Council for Medical Schemes (CMS), that the industry is in a sustainable position is in stark contrast to the pervasive problems currently inherent within the private healthcare sector.
The claim by the CMS that because “solvency levels are high, the industry is sustainable” is an incredibly simplistic assessment of sustainability. There is an urgent need for astute regulatory reform that will create efficiencies in both the delivery and financing of private healthcare in SA.
Medical schemes are forced every year to raise contributions well above CPI and, simultaneously, reduce cover levels. Most medical providers also increase their fees above CPI which then means that the out-of-pocket spend increases at rates of three or even four times CPI, forcing medical scheme members to purchase supplementary health insurance products to fill the gaps created in their medical scheme cover.
How can such a situation be considered sustainable?
Using the solvency matter as one example to demonstrate the plethora of inefficiencies that add to the sustainability problems facing medical schemes consider the following – the current regulatory solvency requirement for medical schemes is simply a flat rate of 25% of their annual contribution income. Where, how or why that formula was derived is anyone’s guess. It has no scientific or financial basis yet it has not been reviewed in decades.
Further to that, the statutory investment restrictions on these funds are rigid and inflexible. Collectively, medical schemes presently hold R50 billion in reserves and most of these funds must be invested in cash or cash equivalents according to regulations. This is both an inappropriate and inefficient manner of investing such substantial funds.
A risk based capital model would be far more efficient, as reserves would only be applied against measurable risks and investment criteria could then be set in accordance with the level of risk posed. These reserves could also be used by medical schemes to purchase institutional providers of healthcare services, such as hospitals and day clinics, which would partly offset the high levels of medical inflation that medical schemes face each year.
This would also inject much needed competition into the current supply chains of medical providers, many of which are monopolised and contain intrinsic conflicts of interest that are not in the best interest of patients.
A perfect example of such conflicts is hospital ownership by doctors. They can either be directly owned or via the purchase of public shares of listed hospital groups but there is no doubt that they create a moral hazard. Many countries have outlawed direct and indirect ownership of healthcare institutions by individual practitioners to avoid such conflicts.
Consider that the average share price growth of hospital groups Netcare and Mediclinic has been 28% and 30% per annum respectively for the past 14 years. That is astonishing, sustained growth – but the repercussion for members of medical schemes is that, in real terms, private hospital fees have more than doubled since 2000.
Couple these issues with extensive membership rights that are given to consumers via the same medical scheme regulatory framework, such as guaranteed acceptance at any age (open enrolment) and the prescribed minimum benefits (PMBs), medical schemes are stuck within an exceedingly inefficient and outdated healthcare system.
These are only some of many problems in the private healthcare sector and they reflect precisely why the current regulatory framework is anything but sustainable and that there is a dire need for government to urgently reform it if medical schemes are to survive.
Removing medical scheme regulation from the Department of Health and placing it under the Twin Peaks framework would be a good start. From there, the market conduct of, not only medical schemes, but also the providers of healthcare could be better regulated and monitored for efficiencies and conflicts of interest.
Hopefully the enquiry of the private healthcare sector that is currently underway by the Competition Commission will identify these problems and put forward similar recommendations. To continue in the current regulatory framework is simply a market failure in waiting.