Cape Medical Plan (CMP) has released a breakdown of South Africa’s medical aid industry in an attempt to clarify what medical scheme cover is supposed to do, as well as how and why products are designed and structured.
“It’s important to understand that the majority of medical scheme products are made up of two funding pools – insured risk and the savings funding pool,” the insurer said.
“It’s also vital to remember that medical schemes have to ensure that all legitimate claims are paid, and should fully support the concept of Prescribed Minimum Benefits (PMBs), while sticking to the rules thereof.”
Product structure and pricing
As mentioned above, medical scheme products are usually made up of two funding pools:
- insured risk;
- savings funding pool.
“Insured risk is the money collected from all members to pay for collective benefits across all scheme products for the entire membership and forms part of the total monthly contribution if you’re on a product that has a Medical Savings Account (MSA),” said CMP.
If you are on a hospital plan or only have hospital cover, it forms the total monthly contribution, as these products don’t have a savings component.
The savings funding pool portion of the total monthly contribution is only available in certain products and is created by individual money that can be used to fund almost any medically-related expense a member chooses, except for PMBs.
Medical schemes, unlike companies, do not operate for profit, noted CMP.
“Simply put, medical schemes are a collection of people who agree to a set of rules for the payment of certain benefits in return for a contribution which has to be paid monthly,” said CMP.
“As a result, all medical schemes are registered as Section 21, not-for-profit entities.”
Contributions are increased mainly due to the continuous price increases implemented by hospitals and specialists as a result of the rise in medical inflation and the lack of regulation regarding what they can charge.
Benefits, on the other hand, are what you are covered for on your chosen product and they are in return for your monthly contributions.
Who else are you subsidising?
The Medical Schemes Act prohibits schemes from cross-subsidising between products. However, cross-subsidisation within a product is allowed, said CMP.
This begs the question: if certain members are clearly subsidising some of their fellow members, why can’t members from other products that the scheme offers, cross-subsidise the members of a product with lower contribution s- especially with those that have similar benefits?
“Not only is it against the law, if such a degree of cross-subsidisation were to take place, the product could become unstable,” said CMP.
“This would happen due to incorrect contribution levels for the product being subsidised. Every product offered by a scheme must be self-funding and therefore, the scheme may not knowingly allow one product to cross-subsidise another for the year ahead.”
A careful balance
CMP notes that cross-subsidisation will never yield perfect results but these calculations are all that schemes have to work with.
“This is why schemes have benefit rules that are sometimes not perfect and can be quite inflexible in certain circumstances. Nevertheless, without them, they would end up with a large underfunded benefit spend every year, resulting in massive increases in contributions – and that is not ideal.”
However, achieving this balance requires some very careful costing and forecasting regarding benefit usage, said the insurer.
“The only way to make accurate decisions is to have clear rules about what will and won’t be paid out, as well as to properly build into calculations the statistical usage of benefits that has been experienced to date, together with the probable cost and price increases for medical services for the year ahead.”
“Schemes look at demographics, claiming ratios and benefit structure, which includes hospital and service provider pricing.”