Consumers face rude awakening as Covid impacts medical schemes

Consumers should prepare themselves for a rude awakening as medical schemes are struggling to balance the costs of the Covid-19 pandemic.

This could result in a period of rate hikes higher than the usual above-inflation increases as there are no signs of the pandemic ending any time soon, with concerns that we will soon be entering a fourth wave.

Cost pressures rise

Ordinarily, medical schemes would have announced their rate increases in December 2020. This was put on hold as Covid-19 impacted the country. Medical schemes have had to deal with the crisis without the luxury of increased 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, principal officer for Fedhealth Medical Scheme, points out that, as of mid-July, the scheme had paid R375 million in Covid-19 expenditure since the onset of the pandemic.

The largest driver of this expenditure is the cost of hospital care at R240 million, followed by pathology (mostly Covid-19 tests) claims that 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 account so far has been R4 million.

Yatt states that when looking at 2020 and 2021 in isolation, it has been a tale of two distinct halves. He says the scheme was positioning itself to implement rate increases for 2021, as were other medical schemes, but this had to be put on hold.

This was never going to be a permanent stay of execution as medical schemes have to find a way to make up for lost ground.

Yatt says that Fedhealth will be implementing rate increases for 2022 along with the rest of the industry. These increases will be based on the 2021 claims experience and future predictions around the pandemic and potential further waves.

“However, an important factor to consider this year is how much of an impact the return of elective surgeries will have post-Covid. Pre-Covid statistics indicated some over-servicing related to elective surgeries in the industry and the scheme would like to try and ensure that we don’t go back to old habits.”

Waves that become tsunamis

Yatt says 2020 was a year characterised by hard lockdowns and, consequently, a large number of procedures were postponed as people tended to stay away from hospitals and opted 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 larger than expected.

The scheme has been severely impacted by the pandemic this year. Postponed procedures could not be put off indefinitely, and as lockdowns eased Fedhealth saw a catch up of these procedures – leading to large increases in non-Covid-19 claims. Furthermore, the peak of the second and more severe third wave of the virus occurred in 2021 leading to much higher Covid-19 claims than seen in 2020.

The projection for Covid-19 claims for 2021 is around 10% of contributions, which is double that of 2020.

Postponed procedures

The time taken to recover from the pandemic will be highly dependent on the experience of a scheme throughout the pandemic.

Schemes that are severely impacted will likely take longer to build up reserves as they were likely to have turned to their reserves during the pandemic to ease the financial burden. This may impact future rates increases.

Yatt points out that another important factor will be the rebound in claims due to postponed procedures: schemes that experienced a large reduction in such claims will at some point likely experience a large resurgence of these procedures.

The fact that these procedures will take place in the future may possibly compound the costs due to inflation and/or exchange rate differences. Again, as Yatt warns, this may be a key determinant of future rate increases.

Careful planning

It’s not like medial schemes are on the verge of financial ruin, however.

Medical schemes follow the same principle as life insurers when it comes to risk management. They typically plan for a one in 10- or 20-year event that will have a significant financial impact. Therefore, while they have to momentarily dip into their reserve margins (a practice all insurers actively want to avoid) medical schemes should not be significantly impacted by the pandemic.

Medical schemes are tightly regulated by the Council for Medical Schemes (CMS). One piece of regulation from the CMS states that medical schemes are required to hold a statutory solvency reserve of at least 25% of contributions. These reserves are meant to serve as a buffer against any sort of adverse claim experience that may suddenly arise.

Most medial schemes also undertake regular calculations of a risk-based solvency amount which considers the risks specific to the scheme as opposed to the more standardised solvency reserve measures (25%). In 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.

Moving around

While insurance is widely regarded as a grudge purchase, the pandemic has highlighted the value of medical aid.

Yatt points out that during the 2021 renewal period, 5% of Fedhealth’s members downgraded to a lower option. This is marginally higher than the scheme typically saw in pre-pandemic years. In addition, the scheme also noticed a decrease in the number of members cancelling their membership.

These two observations suggest that members are prioritising medical aid as they have seen its value amid the pandemic.

This trend was replicated in the industry. Statistics from the CMS show that Bonitas recorded a 0.6% drop in membership during 2020. However, almost 62% of members downgraded to more affordable, mid-level options. Momentum experienced a similar dip in scheme membership. Consumers scaled down to more cost-effective plans or swapped to providers that charged less for the same level of cover.

The pandemic has created some winners.

The CMS statistics show that Discovery grew its market share in 2020. It also recorded 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 cover and half bought down.

Read: Even in the pandemic, Discovery Health members ditch pricier plans

Bestmed grew its membership base in 2020 and registered one of its lowest termination rates in recent years.

What does this mean for the consumer?

While medical scheme members were relieved they did not face above-inflation rate increases at the end of 2020, they may not be happy when medical schemes announce their rate increases for 2022.

All indications are that medical schemes will have no choice but to implement these increases, and with these schemes being forced to deal with massive cost pressures, we may see above inflation rate increases very soon.

What the pandemic has highlighted is the value of medical aid. The rate increases may mean that there will be a lot of movement from comprehensive to less comprehensive options. In addition, there may be significant interest in these lower level options with the possibility of upgrading once the pandemic is over.

Listen to Nompu Siziba’s interview with Annelé Oosthuizen from Alexander Forbes Health (or read the transcript here):