A dragon’s hoard

Two articles that I want to highlight this week.

The first is the announcement of a 2013 contribution increase of around 10.3% from GEMS. The second is an article titled “More fat than muscle?” that was carried in the Financial Mail last week.

My goodness. A show of hands please. Who thinks this is a flattering picture?

Anyways, the article starts out by pointing out that the average medical scheme contribution increase (approved by the C4MS – just in case anyone forgets) are quite high and above the CPI+3% mark (that has taken on a life of its own). The piece then wanders into a discussion of the balance of power between medical schemes and provider groups and apparently comes to the conclusion that this is the sole reason for the high increases. In doing so it completely misses the point.

The two largest medical schemes in the country (GEMS and Discovery) both put through double digit contribution increases for 2013. Both were quick to point out that the increases are larger than they would otherwise have been, not because the schemes are in trouble, but because they are growing and the C4MS is riding them hard to get their reserves up to the minimum levels required by regulation.

Since they are so very large their influence on the industry average contribution increase cannot be ignored when making statements about medical scheme contribution inflation. Of course the CMS Indaba held last week just highlighted again how lazy C4MS officials are when it comes to allowing for such complications. So they didn’t.

Back in July an imp of an actuary made the point at the BHF conference that the level of reserves required by regulation is plain silly, especially in the case of these super schemes.

Should GEMS and Discovery get to the minimum 25% solvency level they will be like Smaug the dragon from the Hobbit (coming soon as a movie!): sitting on a giant pile of gold. What does a dragon need gold for anyways? To buy fire extinguishers? Throat lozenges?

The regulations require these two schemes combined to hold around R11 billion in cash (or close to cash – it will still be unproductive money) to protect against a rainy day. R11 billion?! That speaks more to meteorological events of a biblical scale than your common or garden variety rainy day.

If the goal of the exercise is to protect schemes from uncertain claims experience then there are other, much more efficient ways to achieve that such as (properly regulated) reinsurance. The C4MS’s relationship with reinsurance is an interesting story in itself. Suffice it to say that the C4MS waged a successful holy war that resulted in a situation where the use of reinsurance by medical schemes is so uncommon that we can ignore it in this discussion.

Now the only legal way a medical scheme can build the required mountain of gold is by taking (more) money from their hard pressed members in the form of higher contributions. The C4MS’s blind insistence that schemes comply with Regulation 29, combined with the fact that these regulations have been left unchanged since 2000, is a significant factor making medical scheme cover more unaffordable.

Funny how they never talk about this aspect. Much more fun to bash healthcare providers I guess.

Come to think of it the current Registrar rather does like bashing everything and everyone..

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8 thoughts on “A dragon’s hoard

  1. Bursar, it appears that both Disco and GEMS are proposing increases at the AVERAGE 11% mark for next year. Surely, if they are negotiating the particularly more favourable hospital tariffs that they say their size warrants, then why is this not being passed on to members? GEMS is way behind the solvency curve and Disco only just –so what benefit to members does their massive size present? Smaller schemes, apparently, do not enjoy the favourable tariffs from the hospitals, yet they are offering cheaper contributions for the same or better benefits – so what’s it all about Alfie? Does a bigger size really mean nothing more than much bigger risk? Clearly the issue of reg 29 is not bothering anyone but C4MS who appear to pay little more than lip service to the Act. GEMS should have been at 25% years ago and Disco has benefit options that have never made a surplus and probably never will as they are hopelessly underpriced. If you break the reserves down, Disco has about R3 000 odd per beneficiary which is more or less in line with the entire industry average. Is it then right to suggest that they are carrying too much in reserve?

    1. Hi Richard. Thanks for the comment.

      I think we should be careful to separate the issues here. They are (in no particular order) healthcare costs, negotiating power, efficiency through scale, competition issues and insurance risks.

      The point of my post is that, on a strictly technical level big schemes don’t need to hold so much cash to protect against bad experience because of something to do with statistics (which was never my strong point).

      Now these two super schemes have to put through big increases because they have to build these massive reserves. Not because they need them, but because the regulations are too inflexible to deal with the difference between high risk and low risk schemes.

      Remember that when these regulations were originally written Discovery was less than half its current size and GEMS didn’t exist.

      So that was my main point. I won’t go into the rest here. You have given me some ideas for future discussions on the other issues…

      1. Thanks for the reply and forgive this belated response. The issue central to medical schemes is surely their ability to settle claims. When you talk of “size” I assume that you are referring to number of members rather than size of reserves. It is all about the money not members. That would mean that even a “small” scheme by membership can actually pack the financial punch of what you seem to refer to as a big scheme because it has many more members. A small scheme with money can certainly take on the large scheme with members and no money. Most of the large schemes, by your reckoning, only just make reg 29 solvency margins. Does this mean that they have underpriced their options or do they have high claims (aka high risk) – a fact that, if true, would put them at high risk anyway and therefore require high reserves?

      2. I am talking about size in terms of members – from the insurance point of view more members means less uncertainty (so they tell me).

        Medical schemes should hold reserves to protect themselves against this uncertainty. There is a very big difference between having (and using) an emergency fund to protect yourself against the unexpected and using it to buy groceries (or pay normal claims).

        Of course if a scheme has waaaayyy more reserves than it needs then it could “spend that money” and pack a financial punch as you say.

        Most open schemes only barely make the 25%. This is because of competitive market pressures: schemes are rewarded by new business if their contributions are affordable, not if their reserves are high. So we have Discovery Health which has publicly stated that it will meet the 25% because that is the law but will go no further than that.

        Their problem at the moment is that they are below 25%. The point of my article was that Discovery’s large increases are NOT because they are in financial trouble but because they need the extra money to comply with the regulations and that given their size the regulated 25% is probably overkill.

        The other thought I had (see the post “I bin thinkin'” on the blog) was that, if the regulations changed and Discovery could suddenly get away with much less than the current 25% then that could cause a severe disruption in the competitive dynamics of an already lopsided market.

  2. We are missing each other. I understand your point clearly. My point is that the bigger the number of members, perhaps, the bigger the risk. It is all about health risk profile and then the money available to meet the liabilities that may arise from a less than ideal health risk profile. The theory is that the gross contribution must have a 25% solvency reserving. This means that every contribution ought to include the 25% (I did say theory!). Where schemes purposely under price to gain and attract members, they get into trouble later – as is happening now. Having less money will not change the liability of the scheme (the health risk profile) – contingent or otherwise!

    Anyway, we perhaps need to debate further over a cold one.

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