Why medical schemes don’t exist to make a profit

Many medical aid members often complain that their medical scheme is making money off of them. But can your medical scheme really profit off of you? The simple answer is no. A medical scheme is a ‘not for profit’ entity that performs very distinct functions.

Michael Settas, director of Kaelo Xelus, highlights that the medical scheme (the scheme) and the medical scheme administrator (the administrator) are two separate legal entities, with distinct functions and responsibilities.

Damian McHugh, head of health marketing for the retail and corporate sector at Momentum Health, further explains that there are a range of services that schemes will often outsource to independent bodies, with the administrator being one of them. However, he notes that in South Africa the challenge in some cases is that the scheme and administrator have very similar names. For example, Momentum Health is administered by Momentum, and Discovery Health is administered by Discovery.

One of the difference between these two bodies is that the scheme is a not for profit organisation, while the administrator can run at a profit.

What is a medical scheme?

Barry Childs, joint CEO at Insight Actuaries and Consultants, reveals that all medical schemes’ main function is to facilitate the funding of private healthcare services. In South Africa, medical schemes are non-profit organisations that are owned by the members of the medical scheme. The scheme has an appointed principal officer, as well as a board of trustees, who make decisions in the interest of the scheme members.

McHugh elaborates: “A medical scheme is similar to a mutual fund, where the medical scheme and its reserves belong to the members and it’s actually governed by a board of trustees who are voted for by the members of that medical aid scheme. You can only be a trustee if you actually are a member of that medical scheme, you cannot be a trustee if you are a member of the administrator or a broker.”

He adds: “The administrator, or the holding company, be it that the company and the medical scheme have a similar name, has no right or no access to [member contributions]. They are two very separate legal entities and need to be governed as such.”

The relationship between the scheme and administrator

Tracy Janssens, branch head of healthcare at Alexander Forbes, notes that all medical schemes will disclose in their financials their non-healthcare expenditure, which includes administration fees. However, only a small portion of member contributions go towards outside parties which are able to operate at a profit.

“Generally the guideline for administration fees is less than 10% of the contribution and then there is a further [amount of], between 10-20% is generally what goes towards non-healthcare expenditure, for most schemes between 10-15%,” adds Janssens.

Childs clarifies that medical scheme administrators are companies that operate separately from the medical schemes that they manage. An administrator invests in technology and services, and employs resources to manage medical scheme functions, for example, collecting contributions, paying claims, handling queries, and offering managed care services on behalf of the medical scheme. Receiving an agreed fee for managing these functions, administrators generate a profit, differing from the non-profit model of a medical scheme.

Furthermore, Janssens highlights that administrators can administer as many medical schemes as they like, noting that the more efficient the administrator is, the bigger their profits will become.

The money issue

The portion of the medical scheme monthly contribution that goes to the administrator is generally indicated as a percentage of the contribution. However, McHugh has an issue with this industry standard of expressing the admin fee as a percentage. He says that the admin fee “should never be shown as a percentage of contributions.”

McHugh offers the following example to illustrate how the percentage depiction of member contributions that go towards administration is flawed.

Medical schemes offer different options, with varying prices offering different benefits. If one member pays R100 per month and another R1000 per month, yet both pay 10% of that in admin fees, the first member only pays R10, while the other pays R100. McHugh offers an alternative way to represent the funds going to the administrator.

“That’s one of the faults of us as an industry, we quote this number as a percentage of the contribution income, and that’s really false. You should divide that amount by the number of members in the scheme. So take what the fee is and divide it by the number of members, and you can work out what each member is paying for administration. Obviously the bigger your medical scheme is, the less that fee should be, because there are economies of scale. And if you do that number, that’s not what you find. Some of the bigger medical schemes whose economy of scale should be the biggest, actually pay the most, and that’s a problem,” says McHugh.

To further illustrate how your monthly contribution is divided, McHugh offers the following example: “Let’s say you pay R100 in premiums to a medical scheme; R10 goes to the administrator, it is probably anywhere between R7-R15, somewhere between 7-15% of the premium depending on [which medical scheme]. Now that R10 has to pay for the call centre, the claims systems, the brokers’ commission, the common term is non-healthcare costs.

“The other R90 goes into the actual medical aid fund. Even if there’s savings, the savings would get taken out of that, of the remaining R90. Let’s say R30 goes to savings, [that] doesn’t go into the scheme’s reserves because it’s member money, the scheme can’t access that savings account money for their own good, they hold it on behalf of the member. The other R60 then goes to pay hospitals, the chronic medicine and that type of thing. Obviously in some medical schemes there are no savings accounts, so they pay doctors and dentists and whatever, with the whole R90 going into the medical scheme.”

According to Janssens, there is a general trend of administration fees decreasing, or increasing in line with inflation. In contrast, medical aid scheme contributions generally increase at inflation plus 3-4%.

In addition, McHugh stresses that the medical scheme determines how much the administrator makes. “For consumers to be concerned is actually a good thing, because it’s there medical scheme and if the administrator is getting undue influence in the board of trustees, and let’s say gets their increases to a point where they are too high, the members are paying for that and as a result they need to make sure that those fees are not unreasonable for the administration service that they are receiving. That is a very key point.”

Medical scheme increases

Annual scheme increases are not based solely on the administration fee. There are other costs that medical schemes need to take into account when determining their annual increase. This includes doctors’ costs, as well as the cost of hospital administration and medication.

To help limit the increase, medical aid schemes (sometimes through their administrator) will negotiate with hospitals and doctors to get a good price for their members.

Janssens notes: “Generally most medical schemes have managed to negotiate fees increasing at inflation. The bigger problem for medical schemes right now is the ageing population, technology enhancements and over utilisation. A lot of people getting sicker at younger ages and chronic lifestyle diseases at younger ages, and then also obviously not enough young people entering the system. So with an ageing population, the older you get the more you claim, and that is more of the problem than the actual doctors and hospitals increasing fees.”

How annual increases should be calculated

According to McHugh, rather than implementing blanket increases to the monthly member contributions, members should be told how the increase is being calculated and broken up amongst the different expenses within the medical aid scheme.

McHugh explains: “If you go back to my R10/R90 example. Let’s assume that the increase in healthcare costs is not in the administration portion, it’s actually in the importing of medical technology, so the R90 needs to go up by 15%. If you increased the R100 by 15% and made it R115 and all the components were increased proportionately, but you actually needed the R90 to go up by 15% and the administration cost to let’s say go up by 10% and only make it go up by R1. You get a better spread with that, and that’s why I’m saying it’s often important to see the Rand based values that go to each of those portions, rather than just purely percentage.”

He added: “I think consumers and members of medical schemes should ask what they pay in Rands every month for the services that they get, rather than at what percentage level of my contributions, and then compare the Rand based levels of administrators across the market place.”

McHugh points out that if you are paying for a service, you should get value for what you pay. However, you need to keep in mind that the less you pay, the fewer benefits you will enjoy compared to someone who pays a higher premium for more benefits.

“The scheme pays the administrator, and if members aren’t happy with what they’re getting from a service perspective, or the cost of those things, then they should look at it in Rand terms and then compare the Rand against others, and if they’re not happy, they must go to their board of trustees who represent them [and ask] why are we paying so much money. It isn’t that they are members and they can’t have an influence, members have an absolute influence, that’s what those boards are for,” stresses McHugh.

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