Bad news for anyone with private medical aid in South Africa
The growing number of young people leaving medical aid is creating a negative feedback loop that threatens the sustainability of private medical aids.
Medical aid funds are pushing above-inflation premium increases because they are losing healthier members. This leads more of these members to leave, exacerbating the problem.
Luyanda Njilo, senior equity research analyst for healthcare at Nedbank Corporate and Investment Banking, warned that if the problem isn’t addressed within the next five to 10 years, medical aid schemes face collapse.
In an interview with The Money Show, Njilo explained that medical schemes operate on a risk-pooling system, where younger and generally healthier members help subsidise the healthcare costs of older, sicker members.
According to Njilo, the biggest change over the past decade has been the worsening financial position of South African households.
He noted that youth unemployment has risen sharply, limiting the number of young people who are able to join medical schemes.
As a result, many young adults are either unable to afford medical aid or are choosing not to join. “Young people are not getting jobs and therefore are not economically active to be able to join a medical aid scheme,” he said.
“Households in general are facing financial pressure and, as a result, are looking for ways to cut costs, and some of them are unfortunately dropping out of the medical aid scheme.”
Njilo said many young professionals are delaying joining medical schemes because they feel healthy and believe their limited income can be better spent elsewhere.
“The people who are supposed to be young professionals and now funding their own medical aid scheme are actually saying, ‘Listen, with the little money that I have, I’m still healthy,’” he said.
“‘I would rather not have a medical aid and then only join by the age of 34.’ That’s the problem we have.”
We’re going to be in big trouble
While medical schemes impose late-joiner penalties, Njilo said these measures have not been enough to reverse the trend because schemes still need younger members to support the risk pool.
He pointed to the significant difference in healthcare spending between age groups.
“People who are aged 65 make up 10% of members, but account for 30% of the costs incurred by the medical aid schemes, whereas people aged between 20 and 44 account for 33% of members, but only spend 24% of the cost,” he said.
“So even though you’re young, there will be a penalty for joining late, but the medical aid schemes will still take you on because you’re basically funding the cost for the older members.”
Njilo warned that the shrinking number of younger contributors is contributing to above-inflation premium increases, creating a cycle that threatens the sector’s long-term sustainability.
“The biggest risk that I’m seeing is that 52% of people who have a medical aid scheme are earning between R200,000 and R500,000 per annum,” he said.
“If your premiums are continuing to grow at 10% per year, and your salary is growing at inflation, which is around 3% to 4%, it becomes increasingly unaffordable to sustain a medical aid scheme.”
He said this creates a negative feedback loop where rising premiums force more members to leave, which in turn places even greater pressure on those who remain.
“We’re already seeing this pressure played through in the likes of GEMS, for example, where the solvency ratio has fallen below the regulatory requirement of 25%,” he said.
Njilo believes the industry faces a critical challenge over the next decade unless it can attract more young members and keep contribution increases affordable.
“That’s the big debate we’re having. I’d say five to 10 years. If we don’t solve the problem, we’re going to be in big trouble,” he said.
Loading ...