Consumers should prepare for a rude awakening as medical schemes struggle to balance the costs of the Covid-19 pandemic.
This could result in a period of rate hikes above the usual rises above inflation, as there is no indication that the pandemic will end any time soon, with concerns that we may soon enter a fourth wave.
With experts predicting that full recovery from the pandemic will only be achieved in 2024, and a possible two-year period of medical schemes balancing Covid cases and normal surgical claims, medical schemes will seek to recover financially from the pandemic.
Cost pressures increase
Normally, medical plans would have announced their rate increases in December 2020. This was suspended when Covid-19 hit the country. Health plans have had to cope with the crisis without the luxury of increasing revenue from rate increases. The costs that some schemes have had to face are astronomical.
Read: Discovery Health Increases Medical Aid Contributions (May 2021)
Jeremy Yatt, Senior Director of the Fedhealth Medical Scheme, notes that by mid-July, the plan had paid R375 million in Covid-19 expenses since the start of the pandemic.
The main driver of this spending is the cost of hospital care of R40 million, followed by pathology claims (mainly Covid-19 testing) which amounted to R55 million.
Yatt points out that so far this year the average cost per Covid-19 hospital admission has been R163,000, with an average stay of 10 days per admission.
Fedhealth’s largest Covid-19 hospital bill so far has been 4 million rand.
Yatt claims that looking at 2020 and 2021 in isolation, it has been a story of two different halves. He says the scheme was positioning itself to implement rate increases by 2021, just like other medical schemes, but this had to be postponed.
This was never going to be a permanent stay of execution, as medical plans have to find a way to make up lost ground.
Yatt says Fedhealth will implement rate increases by 2022 alongside the rest of the industry. These increases will be based on the 2021 claims experience and future predictions about the pandemic and possible future waves.
“However, an important factor to consider this year is the impact that the return of elective surgeries will have after Covid. The pre-Covid statistics indicated some excessive services related to elective surgeries in the industry and the scheme would like to try to make sure we don’t revert to old habits. ”
Waves that turn into tsunamis
Yatt says that 2020 was a year characterized by hard blocks and consequently a large number of procedures were postponed as people tended to stay away from hospitals and chose to be admitted only when absolutely necessary.
While Covid-19 claims accounted for 5% of total contributions in 2020, the reduction in non-Covid-19 claims in 2020 as a result of these postponements was significantly higher than expected.
The plan has been badly affected by this year’s pandemic. Postponed procedures could not be postponed indefinitely, and as lockdowns eased, Fedhealth saw these procedures catch up, leading to large increases in non-Covid-19 related claims. Additionally, the peak of the second and most severe third wave of the virus occurred in 2021, prompting Covid-19 claims much higher than those seen in 2020.
The projection for Covid-19 claims for 2021 is around 10% of contributions, which is double that of 2020.
The time required to recover from the pandemic will largely depend on the experience of a plan throughout the pandemic.
Severely affected schemes are likely to take longer to build up reserves, as they have likely tapped into their reserves during the pandemic to ease the financial burden. This can affect future rate increases.
Yatt notes that another important factor will be the rebound in claims due to postponed procedures – schemes that experienced a large reduction in such claims will likely experience a major resurgence of these procedures at some point.
The fact that these procedures are carried out in the future may possibly add to costs due to inflation and / or exchange rate differences. Again, as Yatt cautions, this may be a key determinant of future rate hikes.
However, it is not that medical schemes are on the brink of financial ruin.
Medical plans follow the same principle as life insurers when it comes to risk management. They typically plan one event every 10-20 years that will have a significant financial impact. Therefore, while they have to momentarily dip into their reserve margins (a practice that all insurers actively want to avoid) medical schemes should not be significantly affected by the pandemic.
Medical schemes are strictly regulated by the Council for Medical Schemes (CMS). A part of the CMS regulation establishes that medical schemes must maintain a legal solvency reserve of at least 25% of contributions. These reserves are intended to serve as a buffer against any type of adverse claim experience that may arise suddenly.
Most medical schemes also perform regular calculations of a risk-based solvency amount that considers the specific risks of the scheme as opposed to more standardized solvency reserve measures (25%). When calculating risk-based solvency, a wide variety of scenarios are considered, one of which is a one-in-20-year risk event of severe financial consequences, such as a pandemic.
While insurance is widely viewed as a grudge purchase, the pandemic has highlighted the value of healthcare.
Yatt notes that during the 2021 renewal period, 5% of Fedhealth members downgraded to a lower option. This is marginally higher than what the scheme typically saw in the years leading up to the pandemic. Additionally, the scheme also noticed a decrease in the number of members who canceled their membership.
These two observations suggest that members are prioritizing medical aid as they have seen its value amid the pandemic.
This trend was repeated in the industry. CMS statistics show that Bonitas saw a 0.6% drop in membership during 2020. However, nearly 62% of members downgraded to more affordable mid-tier options. Momentum experienced a similar drop in membership to the scheme. Consumers were downgraded to more profitable plans or switched to providers that charged less for the same level of coverage.
The pandemic has created some winners.
CMS statistics show that Discovery increased its market share in 2020. It also posted lower opt-out numbers compared to previous years. Of the 6% of Discovery Health members who switched options at the end of 2020, half upgraded to a higher level of coverage and the other half dropped.
Read: Even in the pandemic, Discovery Health members ditch the most expensive plans
Bestmed grew its member base in 2020 and posted one of its lowest termination rates in recent years.
What does this mean for the consumer?
While members of medical plans were relieved not to face rate increases above inflation in late 2020, they may not be happy when medical plans announce their rate increases for 2022.
Everything indicates that medical schemes will have no choice but to implement these increases, and with these schemes forced to deal with massive cost pressures, we may see increases above the inflation rate very soon.
What the pandemic has highlighted is the value of health care. Rate increases can mean that there will be a lot of movement from comprehensive options to less comprehensive options. Additionally, there may be significant interest in these lower-tier options with the ability to upgrade once the pandemic is over.
Listen to Nompu Siziba’s interview with Annelé Oosthuizen of Alexander Forbes Health (or read the transcript here):