Medical scheme members are entering a period of steeper contribution increases and tougher financial choices.
Although the Covid-19 pandemic may feel like a distant memory, its financial aftershocks are still reverberating through South Africa’s medical scheme industry. During the pandemic, schemes kept contribution increases below inflation to ease the financial burden on members. Now, they are contending with the consequences.
According to the Council for Medical Schemes (CMS), schemes were able to support members in 2021 and 2022 by drawing on reserves accumulated during the early stages of the pandemic. These reserves helped to maintain cover at a time when many households were grappling with falling incomes and rising unemployment. However, this short-term relief came at a long-term cost: underpriced contributions led to a R6.73-billion insurance service result deficit in 2023.
To prevent the further depletion of reserves, the Registrar of Medical Schemes approved above-inflation contribution increases for both 2024 and 2025. The CMS said this step was necessary to restore financial stability following the temporary relief measures.
“The under-pricing of insurance services has necessitated corrective measures,” wrote Dr Musa Gumede, chief executive and Registrar of the CMS, in his foreword to the recently released 2023 Financial Performance Industry Report.
He added that the CMS advised schemes to phase in pricing corrections gradually to avoid sudden, sharp increases for members.
For members, however, this still means higher premiums in the years ahead – at a time when medical inflation and healthcare utilisation are both rising.
Claims, which dropped during the pandemic, surged again as members resumed postponed procedures and treatments. Coupled with an ageing membership base, this renewed demand added further pressure to schemes’ sustainability.
As the industry works to restore its financial footing, the CMS emphasised the importance of “proactive engagement and strategic interventions” to protect members and ensure the long-term viability of schemes. Higher contributions, it seems, are just the beginning.
Utilisation: more members, more claims, more strain
Healthcare costs continued to rise sharply in 2023, outpacing inflation and placing additional strain on members’ pockets.
“Relevant healthcare expenditure per average beneficiary per month increased by 8.7% from R1 840.48 in 2022 to R2 000.57 in 2023,” wrote Gumede.
This steep increase reflects a combination of greater benefit utilisation and rising service tariffs – pressures that are unlikely to ease any time soon. Claim levels were already on an upward trajectory before the pandemic. Although they dipped temporarily during the Covid years, the trend has resumed. Gumede warned they are likely to continue “unless drastic interventions are made”.
Increased expenditure, he noted, stems from changes in both utilisation and tariffs.
But the cost pressures are not only about inflation and service pricing. Changing demographics are also playing a role. In 2023, scheme membership grew by just 1.04%, while the average age of beneficiaries increased – a shift that poses challenges for sustainability. As Gumede explained, “Utilisation increases are closely linked to the worsening demographic profile of medical schemes.”
Older members tend to claim more frequently, and the industry is still dealing with the pent-up demand caused by the pandemic. According to the CMS, this surge in healthcare usage continued into 2024 – and has already been factored into the contribution increases approved for 2025.
To manage these rising costs, the CMS is prioritising structural reforms.
“The CMS is confident that the current, ongoing work on introducing a standardised benefit package and reviewing Prescribed Minimum Benefits will address this portion of claims expenditure,” Gumede said.
Tariffs rise as medical schemes battle cost pressures
Medical schemes posted a combined insurance service result deficit of R6.73bn in 2023, largely because of under-pricing.
“Significant repricing and benefit adjustments are necessary,” wrote Gumede.
Healthcare expenditure per beneficiary rose by 8.7% in 2023, lifting the healthcare expenditure ratio to 95.88% – up from a pre-Covid average of about 90%. The spike is driven by higher claims and a worsening demographic profile, with older members making up a growing share of the population.
Managed-care services are playing a larger role in containing these costs, with 99.19% of beneficiaries covered and R5.94bn spent on such services in 2023 – a 7.4% increase year on year. These include clinical protocols, provider networks, and medicine formularies. However, Gumede noted the CMS report “does not address the value proposition of these arrangements”.
Schemes also leaned on risk transfer arrangements such as pharmacy benefit management, paying R5.19bn in capitation fees and deriving R5.63bn in value. Yet the sector is still recovering from below-inflation contribution increases in 2021 and 2022, granted to ease pressure on members during the pandemic.
To reverse the trend of underfunding, the CMS approved contribution increases above CPI for 2024 and 2025.
The CMS is also participating in efforts to establish a multilateral negotiating platform for setting reference tariffs – an initiative that could bring relief to schemes currently facing tariffs not subject to a competitive process.
Administration costs rose by 6.05% to R246.64 per member per month, in line with inflation. Most of this was spent on customer service, claims management, and data control.
Broker fees remained below the statutory cap, at 79.13%.
Despite poor investment conditions – reflected in the JSE All Share Index’s modest 5.26% return – schemes ended 2023 with a R1.35bn net surplus, supported by conservative cash holdings that shielded them from market volatility.
Solvency: schemes are safe – for now
The good news is most medical schemes are still financially stable. Solvency across the industry stood at 43.45% in 2023, well above the legal minimum of 25%. That means schemes still have a financial buffer.
But that buffer is shrinking. Despite recording a net surplus in 2023, the medical schemes industry saw its solvency ratio decline from 47.14% in 2022 to 43.45% in 2023. According to Gumede, this decrease is largely because of how solvency is calculated.
“The solvency of medical schemes is calculated by excluding unrealised fair value market movements on scheme investments,” Gumede explained. As contribution income continues to grow, the solvency ratio is expected to dip further before stabilising.
Gumede pointed out that the current solvency level of 43.45% remains well above the statutory minimum of 25%, and still stronger than pre-Covid-19 levels of 34.54% in 2018 and 35.61% in 2019.
Solvency concerns spotlight pressure points in medical schemes
Despite industry-wide efforts to stabilise finances, three medical schemes fell short of the 25% statutory solvency requirement in 2023.
Sizwe Hosmed Medical Scheme and Medihelp – two open schemes covering 7.39% of beneficiaries – and restricted scheme Transmed Medical Fund, with just 0.46% of that market, failed to meet the minimum solvency threshold.
The CMS closely monitors schemes below the 25% solvency ratio by having regular meetings with them to assess their performance against their business plans.
Sizwe Hosmed’s expenditure continues to outpace contributions, with the scheme seeing a 17.19% increase in relevant healthcare expenditure per average beneficiary per month (PABPM) in 2022 and 4.12% in 2023, compared to revenue growth of just 2.83% in 2023.
As the report notes, “The lower solvency level is due to the scheme’s increased level of relevant healthcare expenditure.”
The scheme submitted three business plans during the year. The first was withdrawn, the second was rejected because of “questionable” claims assumptions, and the third was deemed unreliable after actual results diverged significantly from projections. A statutory manager was appointed.
Read: Medical scheme placed under statutory management as reserves plummet
Although the 2025 business plan has since been approved, the CMS remains concerned about the scheme’s understanding of its claims dynamics.
Medihelp’s position is rooted in a decision to underprice during the Covid-19 pandemic to support members.
Read: Medihelp’s solvency ratio drops below threshold amid high claims and rising costs
This relief effort led to a 3.89% drop in insurance revenue PABPM from 2021 to 2022, well below CPI. CMS noted in the report that pricing had been corrected for 2024, and the scheme’s business plan was approved.
Transmed Medical Fund continues to be hampered by demographics. Its member base is older than the industry average, with the Guardian option reaching a staggering 94.53% pensioner ratio. The Prime option is even more extreme, with just 237 beneficiaries, an average age of 75.51, and a pensioner ratio of 83.54%.
The CMS warns that schemes with ageing profiles face the threat of a “death spiral”, where escalating costs drive away younger, healthier members, compounding the problem.
To its credit, Transmed recorded insurance surpluses on all options except Prime and has secured approval for its business plans for 2024 and 2025.
