The Hunting of the Snark

The phenomenon of expensive medical scheme contributions and above inflation increases has persisted for so long that people tend to lose sight of the fact that medical schemes aren’t happy about the situation either.

Think about it. We know that the number of people covered by medical schemes hasn’t been growing by much. If we leave GEMS out of the calculation then the growth has been pitiful. We also know that there is fierce competition between open medical schemes for members. Put those two facts together and what you get is the unhappy phenomenon of zero-sum competition. In other words any members won by one medical scheme will necessarily be at the cost of other schemes and the industry, as a whole, doesn’t gain anything.

The only way to break out of this situation is to expand the playing field to include new markets. I think everybody understands the socioeconomic realities of South Africa well enough to see why the only way that this can happen is if medical schemes expand into the low-income space.

So you can see why the industry desperately wants to be able to offer products in this space.

Now, to get into the low-income market you obviously need to be able to provide a low cost option. This is actually quite easy – just make it cheap.

If, however, you want to stay in the low-income market then you need to be able to provide a sustainable low cost option. This is hard to the point of being impossible. In fact the current regulatory environment means that the sustainable low cost option is even more elusive than Lewis Carroll’s Snark.

We have discussed this before but the difficulties were highlighted again when I sat at the Disco’s 2013 launch and saw them trying to put a positive spin on the changes they found necessary to make to the KeyCare range of options (it is vitally important to get the capitalization right or else the marketing people will have a fit).

Let’s just review what happened. Today (in 2012) if you earn less than R3,900 then you can join Discovery Health’s KeyCare Plus option from R485 per month. They will make you jump through seven flaming hoops to prove that your income really is that low. Let’s assume that you made the cut (and managed to put out the fire in you hair).

What Discovery has done for next year is to get rid of this lowest income band on the contribution table. So in 2013, if you want to remain on the KeyCare Plus option you will be paying R638 per month. My calculator tells me that this is a 31.55% contribution increase which is, um, a lot.

If that is too much and you can’t afford it then you are given another option: buy down to the KeyCare Core option (R511 but almost no day-to-day benefits) or pick the newly introduced KeyCare Access option (R450 per month). KeyCare Access is similar to what you currently have except for the bit where (with a few exceptions such as maternity) you have to make use of state hospitals. If you were happy with the idea of using private hospitals in the KeyCare network then KeyCare Access may not look all that appealing.

Discovery, despite its own world view, does not operate in a vacuum. There are other schemes on the market offering low cost options with private hospital cover and they often have contribution tables with salary bands. Given the choice I think many of the affected members who have the option will opt to leave Discovery.

Now according to the C4MS’s latest annual report there were around 187,000 members on KeyCare Plus at the end of 2011. Discovery let slip at their launch that about a quarter of these fall into the current lowest income band and will be affected, which gives us 46,750 members. That, my friends, is larger than quite a few of the other open medical schemes on the market. If only a proportion of these members decide to vote with their feet then the impact on the destination schemes could be significant (but not on Discovery itself).

And so I have some good news and some bad news for the schemes who suddenly find themselves offering products that low income earners will find more appealing than Discovery’s KeyCare option.

The good news is that you are likely to see plenty of new business next year. The bad news is that it isn’t going to be the kind of new business you want.

Now I want to be very clear here: Discovery Health is not doing this with the intention to harm these members or their competitors in this space. This is purely a natural reaction to the unfortunate dynamics of low cost options.

Simply put income bands on open medical schemes don’t work. In the long run, unless something drastic happens this may also prove to be true of low cost options.

Low cost options are typically designed with two specific types of customer in mind. The first is the stereotypical man in the blue overall who is very likely to belong to a trade union. The second is the young white collar worker in his 20’s who has opted not to buy medical scheme cover because they don’t feel they need it and because they don’t see it as value for money.

Both these populations are characterized as low-income and are very price sensitive. In the case of blue collar workers this is self-evident. In the case of the young workers the assumption is that everybody starts with a low salary which increases as careers progress (witness the legalized slavery that is the audit training contract system).

These are also the kinds of members a medical scheme would love to attract. Being able to cover blue collar workers allows them to cover the complete spectrum of the workforce which gets them into the lucrative corporate market. This market also tends to claim less than the traditional medical scheme member. Getting the young white collar workers on you hope to build some brand loyalty and that later on when they can afford it they will buy up to your more comprehensive and profitable options. Also – they are supposed to be young and vital and shouldn’t claim much.

The problem is that the price point that market research says would be ideal to reach these guys isn’t always achievable. A common solution then is to change the contribution table to include income bands. People like this because it feels just. The higher income people should be helping to pay for the low income people.

It all seems so logical. So why isn’t it working?

Discovery gave some clues in their launch presentation and the rest we can get from the C4MS annual report:

  • In 2011 KeyCare Plus made a loss of almost R350 million rands on contribution income of R2 billion. This doesn’t exactly point to a self-sustaining option.
  • Even before we start allowing for inflationary increases the option would therefore require an across the board contribution increase of around 17.5% just to get close to a break-even position
  • Discovery stated that the people in the lowest income band were actually the highest claimers on that option. We can’t see the details but this suggests that this group of people are responsible for much of the loss.
  • The use of the term anti-selection in the launch presentation suggests (although Discovery didn’t say this out loud) that the lowest income band on KeyCare Plus was full of people who they did not have in mind when they designed the option.

So what does the “wrong” member for KeyCare Plus look like? Like this:

Yup – another group that has low (verifiable) income and is very price sensitive is the common or garden variety pensioner. They have a very real need for affordable healthcare cover as well. The only difference being that they claim a lot more than the target market.

This presents us (and the authorities) with a dilemma. If the rules say that we have to have open enrollment and community rating and that discriminating on the basis of age, gender, claims history and race is forbidden then we cannot allow an open scheme to tell these pensioners that this affordable low cost option isn’t for them.

This was precisely the thing that sank the Low Income Medical Scheme (LIMS) initiative – not PMBs but how to ethically and legally reserve LIMS for the guys in the blue overalls.

So the pensioners join and they claim. Very quickly the option starts making losses. The only two things a medical scheme can do in this situation is to increase contributions (which defeats the purpose of a low cost option) or cut benefits (which isn’t really an option on a low cost option that has been cut to the bone – especially since the prescribed minimum benefits mean there are things you simply can’t cut). A third option is to close the option and cut your losses.

Depressing isn’t it?

What Discovery decided to do was to take a surgical approach. Since the problem was in the lowest income band it doesn’t make sense to punish the members on the higher bands for the losses. And so they abolished the lowest band and came up with KeyCare Access to offer an alternative. It solves Discovery’s problem but, in a zero-sum environment it doesn’t solve the industry’s structural problem.

In the meantime the Snark sustainable low cost option still seems to elude us and government and the C4MS keeps blaming the industry for not creating affordable low cost cover when it is their responsibility to create an environment that will allow this.

Excuse me, I need to go have a drink…


5 thoughts on “The Hunting of the Snark

  1. The only option left is to work with the supply side to get better value – for low and high end members, both. How about reducing avoidable complications of care, avoiding unnecessary procedures and testing, and integrating care so preventable hospital readmissions don’t occur?

    1. Hi Jomo

      The harsh reality is that the who, in terms of the age and state of health of the people who belong to your medical scheme, has a MUCH bigger impact on your healthcare costs than the what (cost of services and level of benefits).

      We definitely should look at managing the supply side costs as you suggest but this simply cannot be the only solution.

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