Alex Forbes Diagnose 2014

DIAGNOSIS
2014/2015
An analysis of key trends in the medical schemes

industry (20002013)
Alexander Forbes Health Technical and Actuarial Consulting Solutions
HEALTH
ALEXANDER FORBES HEALTH
Introduction
Welcome to the latest issue of Alexander Forbes Healths Diagnosis,

an analysis of key trends in the medical schemes industry.
Our Technical and Actuarial

Consulting Solutions (TACS) team is
proud to present this publication in
collaboration with our Research &
Product Development department and
we are confident that the content will
give you a comprehensive overview
of the financial and demographic
performance of medical schemes since
2000 as well as some of the challenges
currently faced by the industry.
This analysis covers key statistics

and trends over the 14-year period
from 2000 to 2013, based largely
on the consolidated financial results
for all registered medical schemes,
with specific focus on the ten largest
open and the ten largest restricted
membership schemes.
We believe this publication will serve
as a useful reference to trustees,
employers and industry commentators

by giving insight into the demographic
and financial trends of the industry.
If you would like to discuss any of
the issues addressed in more detail,
please speak to your Alexander Forbes
Health consultant or contact one of the
technical specialists listed at the end
of this publication.
DIAGNOSIS 2014/2015
Contents
1. Key industry developments
2. Performance indicators
2.1 Size and scale
2.2 Market share
2.3 Membership profile
2.4 Contributions
2.5 Inflationary trends
2.6 Healthcare (claims) expenditure
2.7 Non-healthcare expenditure
2.8 Financial performance
2.9 Investments
2.10 Solvency levels
6
6
11
12
16
17
19
21
23
26
28
3. Medical Schemes Sustainability Index
30
4. Conclusion
34
5. Alexander Forbes Health
35
3
1. Key industry developments

1998
The main developments in the medical schemes industry since the
promulgation of the Medical Schemes Act (131 of 1998) are:
The Medical Schemes Act

(131 of 1998) is signed into law.
It introduces prescribed minimum
benefits (PMBs), community-rated
contributions and open enrolment.
2000
The Medical Schemes Act
comes into effect and the
Council for Medical Schemes
(CMS) is established.
2003
The National Health Act (61 of
2003) gives a framework for a
structured and uniform health
system for the entire country.
Personal medical savings
accounts are limited to 25%
of gross contributions.
2006
2004
A Competition Commission ruling
bans the system of collective tariff
setting between schemes and
healthcare providers.
Single exit price (SEP) is
implemented for pharmaceutical
manufacturers.
National Health Reference Price
List (NHRPL) is first published by
the Department of Health.
Medical schemes must maintain a
minimum solvency level of 25%.
The CMS takes over publication

of the National Health Reference
Price List (NHRPL), a guideline
for healthcare service tariffs.
2005
The Government Employees
Medical Scheme (GEMS)
is registered.
The Childrens Act (38 of
2005) stipulates the age of
consent of minors to medical
and surgical treatment.
DIAGNOSIS 2014/2015
2013
The Financial Services Laws
General Amendment Act
(45 of 2013) amends the
Medical Schemes Act by widening
the definition of the business of a
medical scheme.
Schemes must hold members
medical savings account (MSA)
contributions separate from
scheme reserves and allow
interest to accrue to positive
MSA balances.
The National Health Amendment
Act (12 of 2013) provides for
the establishment of the Office
of Health Standards Compliance
(OHSC), a key building block
of NHI.
The Competition Commission
Inquiry into Private Healthcare
is announced.
The Protection of Personal
Information Act (4 of 2013)
(POPI) is signed into law.
2014
The 12-member board of the newly established Office of Health
Standards Compliance (OHSC)is named.
Second Draft Demarcation Regulations include an allowance for gap
cover products and hospital cash plans under strict conditions.
The Competition Commission Inquiry into Private Healthcare starts. A
final report is due by the end of November 2015.
The Draft Road Accident Fund Benefit Bill provides for a no-fault benefit
scheme and a new Administrator to replace the Road Accident Fund.
The Financial Services Board (FSB) introduces Treating Customers
Fairly (TCF), a market conduct framework of regulatory reform.
The National Department of Health publishes a National Health
Insurance (NHI) booklet.
2011
2012
The Taxation Laws Amendment Act (22 of 2012) provides for a new medical tax
credit system to replace medical deductions. The definition of a dependant is
widened in the Income Tax Act to be the same as the definition of a dependant in
the Medical Schemes Act.
Draft Demarcation Regulations propose the removal of most gap cover products and
hospital cash plans.
The Consumer Protection Act

(68 of 2008) comes into effect to
support and strengthen a
culture of consumer rights
and responsibilities.
The Green Paper on the National
Health Insurance Policy is
published for public comment.
2008
The Medical Schemes Amendment Bill is proposed but not
signed into law. It provides for the Risk Equalisation Fund
(REF), low-income benefit options, improved governance,
and an amendment of the definition of the business of a
medical scheme.
The Health Professions Council of South Africa (HPCSA)
scraps ethical tariffs, used by providers as a ceiling for
patient accounts.
2009
The Competition Amendment Act (1 of 2009) is signed into law. It provides a legal framework
and gives formal powers to the Competition Commission to conduct market enquiries.
The Protection of Personal Information (POPI) Bill is published to provide for the protection
of personal information processed by public and private bodies, including medical schemes
and other relevant industry stakeholders.
2010
Dispensing fee regulation is
introduced for pharmacists and
licensed health professionals.
The High Court rules the NHRPL
invalid and sets it aside.
The Board of Healthcare Funders
(BHF) court application to
seek clarity on the meaning of
Regulation 8(1) is dismissed by
the High Court.
The CMS publishes the PMB
Code of Conduct to ensure
compliance with Regulation 8(1)
pay in full.
2. Performance indicators
This section analyses some of the key statistics influencing the

performance of medical schemes.
When evaluating the performance of medical schemes, some of the key factors to consider are:
Size and scale
Membership growth and risk profile
Financial results and solvency levels.
2.1 Size and scale

Medical schemes in numbers
6 000 000
100
90
80
70
4 000 000
60
50
3 000 000
40
2 000 000
30
20
1 000 000
10
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Year
Beneficiaries in open medical schemes
Number of restricted medical schemes
Beneficiaries in restricted medical schemes

Number of open medical schemes
2011
2012
2013
Number of medical schemes
Number of beneficiaries
5 000 000
DIAGNOSIS 2014/2015
In 2013, the number of medical

schemes continued to decline. At
the end of 2013, there were 87
registered medical schemes in South
Africa, a decrease from 97 in 2011
and 92 in 2012. During 2013,
four restricted membership medical
schemes amalgamated into the
open medical scheme market. These
included IBM SA Medical Scheme and
Nampak SA Medical Scheme, which
both amalgamated with Discovery
Health Medical Scheme, and Sappi
Medical Aid and Minemed Medical
Scheme, which both amalgamated
with Bestmed Medical Scheme.
There was one open medical scheme
amalgamation, with ProSano Medical
Scheme amalgamating with Bonitas
Medical Fund. While there were
three liquidations during 2012, none
occurred in 2013.
The downward trend in the number
of medical schemes from 144 at
the end of 2000 to 87 at the end of
2013, representing a 40% decrease
in the number of registered medical
schemes in 13 years, is the result
of continued amalgamations and
liquidations (voluntary and involuntary)
across the industry. The number of

open medical schemes has decreased
by 23 (49%) compared to a decrease
of 34 (35%) restricted medical
schemes over this period. Our view
is that this consolidation is driven
partly by the difficulty in maintaining
the sustainability of small schemes
in the current environment and for
restricted schemes in particular, by
the significant amount of management
time needed to manage an employerbased restricted scheme.
This consolidation in the industry
has continued into 2014 with the
following schemes amalgamating
during the year:
Discovery Health Medical Scheme
and Altron Medical Aid Scheme
(1 January 2014)
Topmed Medical Scheme and Pharos
Medical Plan (1 January 2014)
and Afrox Medical Aid Society
(1 May 2014)
and PG Bison Medical Aid Society
(1 May 2014).
Despite the continued decrease in

the number of medical schemes,
the industry has still grown by
1.3 million (49%) principal members
and 2 million (30%) beneficiaries
since 2000. The 87 medical schemes
operating in South Africa at the end
of 2013 served a total of 3.9 million
principal members and 8.8 million
beneficiaries, a growth of 1.6% and
1.1% respectively from 2012.
A total of 58.2% of principal members
participated in open medical schemes
at the end of 2013 with the balance
of 41.8% participating in restricted
medical schemes. This compares to
57.6% and 42.4% respectively at the
end of 2012. This is the first time
that the market share of open medical
schemes has increased since 2005, as
membership growth on the Government
Employees Medical Scheme (GEMS)
has served to decrease the market
share of open schemes since its
registration in 2006.
The graph on the following page shows
the percentage annual growth in
medical scheme membership over
the last 13 years.
Despite the continued decrease in the

number of medical schemes, the number
of covered lives has still grown.
Annual percentage growth in membership

30%
Percentage annual growth rate
25%
20%
15%
10%
5%
0%
-5%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
All schemes
Open schemes
There is a stark contrast in the trends

in the annual growth rate of open and
restricted medical schemes, with the
most notable difference observed in
2006 with the registration of GEMS.
Since 2006, the growth rate in open
medical schemes has fluctuated
between 0% and 3% per year. While
the rate of growth in the restricted
scheme environment has exceeded 5%
for most years since 2006, this growth
has slowed considerably to 0.3% from
2012 to 2013.
The minimum membership requirement
set by the Council for Medical Schemes
(CMS) for registering a new medical
scheme is 6 000 principal members.
At the end of 2013, there were
two open medical schemes and 29
restricted schemes with fewer than
6 000 principal members. The open
schemes with membership below this
threshold were Medimed Medical
Restricted schemes
Scheme (5 446 principal members)

and Makoti Medical Scheme
(2 633 principal members).
A small membership base generally
results in a more variable claims
experience, which increases the
risk of contributions not being set
at an appropriate level to cover all
claims and expenses. This variability
is compounded further by the
negative impact of high cost claims,
especially in the current environment
where schemes are required to pay
in full for the cost of prescribed
minimum benefits, regardless of
the rates charged. Some of this risk
can be mitigated where schemes
are administered by one of the
larger administrators and can rely
on their administrator to negotiate
reimbursement rates with healthcare
service providers on their behalf.
Despite the risks

involved in small
medical schemes and
the fact that many are
amalgamating, there
are still a fair number of
small schemes that are
performing well. Of the
31 schemes with fewer
than 6 000 members,
13 achieved a surplus
before investment
income in both 2012
and 2013, which
indicates a combination
of a good profile as a
well as sound financial
and risk management.
DIAGNOSIS 2014/2015
The graph below ranks the top 10

open schemes and top 10 restricted
schemes in terms of the number of
principal members as at 31 December
2013. This represents 85.5% of all
principal members participating in
registered medical schemes, or 92.4%
and 75.8% of principal members
participating in open and restricted
medical schemes respectively.
While we have continued to include

the largest ten open medical schemes,
this year we have also included the
largest ten restricted medical schemes,
rather than just the largest five, in
order to provide relevant analysis to a
broader audience. In addition, many
of these schemes could be deemed to
be competitors of some open schemes.
As an example, members eligible to
join Profmed could also be eligible to
join any of the open schemes. Other

schemes such as LA Health Medical
Scheme (LA-Health) and SAMWUMED
would be relevant to employees of local
government who would also be able
to join specified open schemes. As a
result, some employers or individual
members would compare these open
and restricted schemes together when
making decisions relating to medical
scheme cover.
Membership by medical scheme

1600 000
Number of lives covered
1400 000
20%
1200 000
10%
1000 000
800 000
0%
600 000
-10%
400 000
-20%
200 000
Bo
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ry
Percentage growth from 2012 to 2013
30%
Medical scheme
2013 principals
2013 dependants
The ranking by size of the top 10 open

medical schemes has remained largely
unchanged since 2012. As a result of
two amalgamations, Bestmed Medical
Scheme moved up two places to
number 5, moving Medshield Medical
Scheme (Medshield) and Fedhealth
Medical Scheme (Fedhealth) down
one position each to positions 6 and 7
respectively. Liberty Medical Scheme
(Liberty) and Sizwe Medical Fund
(Sizwe) switched between positions
8 and 9 and KeyHealth re-entered
Growth in principal members
the top 10 in 2013, with 36 019

members, replacing Resolution Health
Medical Scheme (Resolution) from
2012. Resolution is now the 11th
largest open medical scheme with
34 559 members at the end of 2013,
a decrease from 40 724 at the end
of 2012.
There has been some movement from
2012 to 2013 in the positions of
restricted schemes, with Platinum
Health moving down from number 5
Growth in dependants
to number 6, as a combined result of

a decrease in members on the scheme
and an increase in members on LAHealth. The new schemes included
in this years analysis are LA-Health
Medical Scheme, SAMWUMED,
Sasolmed, Motohealth Care and
Profmed. Nedgroup Medical Aid
Scheme is the 11th largest restricted
medical scheme with 27 328 members
at the end of 2013, compared to
Profmeds 27 442 members.
The 20 schemes in the graph on the

previous page experienced significantly
different membership growth during
2013, with 12 schemes experiencing
positive growth and the remaining
eight experiencing a reduction in
membership numbers. Discovery
and GEMS, the largest open and

restricted schemes respectively, both
continued to grow their membership
during 2013, by 4.6% and 3.3%
respectively. It is interesting to note
that the growth in dependants for the
majority of schemes (13 of the 20)
was lower than the growth in principal

members, indicating that on average,
net membership growth is being
driven through the registration of
fewer dependants and hence smaller
family sizes. This is illustrated in the
graph below.
Trend in average family size

3.0
2.8
Average family size
2.6
2.4
2.2
2.0
1.8
1.6
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
All schemes
Open schemes
The average family size for the

entire medical schemes industry has
decreased since 2000. This may be
due to affordability constraints of
members who can no longer afford to
provide medical cover for their entire
family, which may become more of an
issue once children become ineligible
for employer subsidies of medical
scheme contributions.
10
Restricted schemes
In addition, as members dependent

children become self-supporting, they
become ineligible for membership as
dependants on their parents medical
scheme and in turn become principal
members themselves. This has a direct
impact on the average family size in
two ways:
Dependants being removed from a
medical scheme reduce the average
family size.
Individuals joining a medical scheme
as single members will also reduce
the average family size.
The decrease in family size has

been most evident in open medical
schemes, while the average family size
in restricted schemes has remained
relatively stable since 2006. This is
most likely due to many employers with
restricted medical schemes offering
pre- and/or post-retirement subsidies
for their employees and in some cases,
employees dependants. The receipt of
an employer subsidy will assist in the
affordability of contributions, which
would enable the participation of more
dependants in these schemes.
DIAGNOSIS 2014/2015
2.2 Market share

partially offset by individuals leaving
the medical schemes industry, possibly
due to affordability constraints among
other reasons.
Scheme (Discovery) with a net growth

of 51 897 principal members and the
GEMS with a net growth of 21 812
principal members. This growth was
The industrys net growth of 62 836

principal members during the 2013
financial year was largely driven by
growth on Discovery Health Medical
Market share by principal members

GEMS
Discovery
2010: Medcor
2012: Pre-92 Medihelp pensioners
2014: Altron, Afrox, PG Bison

2013: Nampak, IBM
2012: Edcon
2010: Afrisam, Umed
2004: AngloGold
31%
2%
29%
18%
16%
27%
16%
28%
30%
2001
25%
24%
All restricted medical

schemes (excluding GEMS)
2006
54%
43%
30%
2011
2013
2001 to 2013:
Net reduction of 34 schemes
Discoverys total market share based on

the number of principal members has
increased from 16% in 2001 to 31%
in 2013, compared to a decrease in
market share for the rest of the open
schemes from 54% in 2001 to 27%
in 2013. This decline in open medical
scheme membership (excluding
Discovery) is due to many members
and employers choosing to move from
their current medical scheme to join
Discovery and the transfer of eligible
27%
All open medical

schemes (excluding Discovery)
2001 to 2013:
Net reduction of 25 schemes
public sector employees to GEMS since

its inception.
In 2013 GEMSs total market share
was 18%, compared to 2% in 2006.
The rapid growth in membership
includes eligible government
employees transferring from other
open schemes, the amalgamation
with Medcor in 2010 and the transfer
of a group of approximately 16 000
pensioners from Medihelp to GEMS
early in 2012. The increase in GEMSs

market share has also been assisted
by continued new member growth
stimulated by an attractive employer
subsidy. The total market share of
the balance of the restricted schemes
has decreased from 30% to 24%,
driven mostly by amalgamations of
restricted schemes into the open
medical scheme environment.
11
2.3 Membership profile

One of the most important contributing
factors to a schemes performance is the
risk profile of its members, with some of
the key statistics being:
Average age of beneficiaries

Pensioner ratio (defined as the percentage of
beneficiaries over the age of 65 years)
The following section considers these factors in detail.
Trend in average age of beneficiaries

35
34
33
32
31
30
29
28
27
26
25
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
All schemes
Open schemes
Restricted schemes
Note: Average age and pensioner ratios were recorded in the CMS Annual Report from 2005 only.
The average age of beneficiaries in

the medical schemes industry has
remained fairly constant since 2005
with a marginal decrease in the last
year, from 32 years in 2012 to 31.9
years in 2013. The trends for open
schemes and restricted schemes have
moved in opposite directions, however,
with the average age in open schemes
increasing by 2 years since 2005 (from
31.5 years to 33.5 years) and that in
12
restricted schemes decreasing by 2.3

years since 2005 (from 32.3 years to
30 years).
This divergence in the trends for
open and restricted schemes started
after 2006. This was the first year
of operation for GEMS and this
was combined with a change in the
employer subsidy for government
employees participating on GEMS.
The attractive subsidy appears to have

encouraged a consistent movement
of younger members from the open
scheme environment onto GEMS.
On the other hand, the subsidy
for pensioners who were previous
employees in the public service did
not change with the establishment of
GEMS and, as such, there has been
no incentive for these members to
consider transferring to the scheme.
DIAGNOSIS 2014/2015
With the consolidation experienced

in the industry over the last few
years, many restricted schemes have
amalgamated into the open medical
scheme market. Amalgamations
generally occur where schemes are no
longer sustainable due to membership
size, membership profile or poor claims
experience. As a result, restricted
schemes that have amalgamated into
the open medical scheme environment

as a result of poor claims or a poor
profile would have had a higher average
age. The exit of older than average
members from the restricted scheme
environment has therefore resulted in
a decrease in the average age.
The same argument explains the
increase in average age in the open
scheme environment.
As a scheme ages, we expect an

approximate increase in average
claims of 2% to 3% per year. This
is shown in the claims curve below,
together with a representation of
individuals general needs. Note that
specific needs will depend on an
individuals own circumstances.
Family with children
Middle-aged
Retired or retiring
Hospital cover
Limited or no
day-to-day cover
Hospital cover
Day-to-day cover
Maternity benefits
Limited chronic benefits
Hospital cover
Higher day-to-day cover
Chronic benefits
Hospital cover
Comprehensive day-today cover
Higher chronic benefits
Cover for joint
replacements and other
age-related conditions
Average claim per member
Young and single
10
Individual claims
15
20
25
30
35
Age
40
45
50
55
60
65
70+
Family claims
13
The following graph considers the average age of each of the schemes included in this years analysis.
It also includes the change in the average age of each of the schemes from 31 December 2010 to
31 December 2013 (a three-year change).
-3
-4
-5
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Change in average age
10
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25
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30
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35
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40
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45
50
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Average age
Medical scheme
Three-year change
2013
While absolute age is important, the

change in average age also serves as
a key indicator for medical schemes
as any changes in profile would result
in the medical scheme needing to
take corrective action in its pricing
of benefits, especially if the age were
to increase.
Of the 20 schemes shown above,
KeyHealth and Transmed clearly
have the highest average age
of beneficiaries. Transmed is
characterised by an extremely high
14
pensioner ratio, due partly to the

voluntary nature of membership as
well as the post-retirement subsidy
offered to pensioner members.
Medihelp and LA-Health experienced
the largest decreases in the average
age of beneficiaries over the three-year
period. The decrease on Medihelp
was caused mostly by the transfer of
a large group of pensioners to GEMS
as noted earlier, while the decrease on
LA-Health was a result of significant
growth in younger members.
DIAGNOSIS 2014/2015
Trend in pensioner ratio

10%
9%
8%
Pensioner ratio
7%
6%
5%
4%
3%
2%
1%
0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
All schemes
Open schemes
Similar to the trends in the average

age, the pensioner ratio, defined as
the percentage of principal members
over the age of 65 years, of restricted
schemes has decreased in general
since 2005 while the pensioner ratio
in the open scheme environment
has increased since 2005. However,
the trend across schemes, whether
restricted or open, has been slowly
Restricted schemes
increasing in the last few years since

2011. This indicates that a higher
percentage of older and, most likely,
less healthy members are participating
in the medical scheme environment.
This is either as a result of fewer
younger members joining medical
schemes or younger members joining
at a rate that is not in line with the
rate of ageing.
The above may point to the question

of whether the current entry level
controls available to medical schemes
to manage anti-selective behaviour,
such as waiting periods and late joiner
penalties, are indeed sufficient to
manage the systemic risk of an open
enrolment environment.
15
2.4 Contributions
Medical schemes work on the
concept of risk pooling, where the
risk contribution charged to members
is based on a combination of
the following:
The expected medical expenses
of the entire membership
group (claims)
The costs associated with any
administration of claims and
day-to-day operations (nonhealthcare expenses)
The interest or returns expected from
the schemes assets.
Where the schemes claims and

expenses exceed contributions,
investment income is required to
subsidise this shortfall. Any remaining
investment income is then added to
the reserves of the scheme and serves
to increase its accumulated funds.
However, where investment income is
not sufficient to cover this shortfall, the
scheme is forced to use its reserves,
which serves to decrease accumulated
funds and hence solvency levels.
Although medical schemes are not
supposed to use investment income
when setting contribution rates, in
reality, they are often forced to do so
for reasons including increasing costs
In simple terms, medical scheme pricing

could be described by four main factors,
illustrated in the following equation:
of claims, adverse claims experience

and cross-subsidisation between
benefit options.
The graph below considers the
allocation of risk contributions of the
top 10 open schemes, together with
the totals for open and restricted
schemes and the industry as a whole.
Where the contribution to reserves sits
below the 0% line, schemes have used
part or all of their investment income to
fund for claims and expenses. In some
cases, where investment income has
not been sufficient, schemes have had
to use their reserves, placing additional
pressure on solvency levels.
Contributions + Investment Income Claims + Expenses
Allocation of contribution income in 2013

Percentage of gross contribution income
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
O
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n
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In
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Medical scheme
Medical savings account
16
Healthcare expenditure
Non-healthcare expenditure
Contribution to reserves
DIAGNOSIS 2014/2015
2.5 Inflationary trends

The diagram below compares medical
scheme contribution inflation, and
medical care and healthcare expense
inflation trends, to CPI inflation over
the past 14 years, where:
CPI inflation is the weighted average
price inflation in different sectors
and indicates the general level of
price increases. Viewed in isolation,
it doesnt necessarily give a true
reflection of cost pressures in a
particular sector. Individual sectors
may experience cost increases that
differ from CPI inflation, as is the
case in the healthcare sector.
Medical schemes contribution

inflation is calculated for all medical
schemes who submit annual
financial returns to the Registrar
of Medical Schemes. Percentage
increases are based on the average
contribution per principal member
per month, and allow for normal
medical scheme contribution
increases, as well as buy-ups and
buy-downs to other benefit options.
Changes in contributions due to
family size or family composition are
also taken into account.
Medical care and health expense

inflation is measured by Statistics
South Africa and is based on that
component of CPI which relates to
doctors fees, nurses fees, hospital
fees, nursing home fees, medical
and pharmaceutical products and
therapeutic appliances.
Consumer
price inflation
Medical scheme
contribution
inflation
Medical inflation
5.8% per year
7.5% per year
7.9% per year
14-year period
The general rule of thumb used in the industry

is that medical inflation (medical care and
health expenses inflation) is approximately
2% to 3% higher than CPI inflation, with this
variance being mainly due to:
High increases in healthcare service provider fees

A rising disease burden
Increasing benefit utilisation
New medical technologies
The requirement to build reserves to 25%
Certain benefit enhancements.
Over the 14-year period, medical care and health expenses inflation has been on average 7.9% per year, while CPI
inflation averaged 5.8%, resulting in a gap of 2.1% per year. During the same period, average medical scheme
contribution inflation was 7.5% per year, resulting in actual increases in medical scheme contributions per principal
member exceeding CPI inflation by at least 1.7% per year.
17
These differences in inflationary trends

have reduced in recent years and this
is most likely as a result of efforts by
medical schemes in managing the
costs charged by providers. While this
would have a direct impact on medical
scheme contribution increases, the
further reduction in the gap between
average medical scheme contribution
inflation and CPI inflation indicates
the extent of member buy-downs
to lower cost benefit options, new
entrants joining low-income options,

and changes to family size, possibly
through the removal of dependants due
to affordability constraints.
The graph below provides a high-level
indication of the average headline
contribution increases announced by
medical schemes from 2006 to 2014
and compares this to average CPI.
Note that we have taken an arithmetic
average for illustrative purposes
and have only included the medical

schemes where this information
is available. Also note that these
increases are based on the headline
increases announced by individual
schemes and the method of
calculation may vary. It does, however,
provide some useful information
regarding real contribution increases
faced by members.
Average contribution increases
Average headline contribution increase
12%
10%
8%
6%
4%
2%
0%
Discovery
Bonitas
Momentum
Medihelp
Bestmed
Medshield
Fedhealth
Liberty
Sizwe
CPI
Medical scheme
The average headline contribution increases for the top nine open
medical schemes have far exceeded average CPI since 2006; in fact,
by an average of 3.4%.
18
DIAGNOSIS 2014/2015
2.6 Healthcare (claims) expenditure

One of the main components
influencing the performance of
a medical scheme is its claims
experience. We consider the
claims ratio as well as the actual
level of claims that are paid by
medical schemes.
Healthcare expenditure includes all

payments made in respect of claims
incurred by members. The risk
claims ratio is defined as the ratio
of risk claims to risk contributions
(the proportion of contributions that
are used to fund claims, excluding
any allowance for medical savings
accounts). The risk claims ratio for

all medical schemes decreased to
86.4% in 2013 from 87.7% in 2012.
In 2013, open medical schemes had
a total risk claims ratio of 83.7%
compared to the 89.9% experienced by
restricted medical schemes.
2004
2009
Trend in claims ratios
Risk claims as a % of risk contributions
120%
110%
100%
90%
80%
70%
60%
2000
2001
2002
2003
2005
2006
2007
2008
2010
2011
2012
2013
Year
All schemes
Open schemes
Restricted schemes do not always have

to fund for certain non-healthcare
expenditure items such as distribution
costs and broker fees and, as a result,
can often afford to use a higher
percentage of risk contributions
towards risk claims than open
medical schemes. This trend is clearly
illustrated in the graph above.
The graph above also shows a cyclical
trend. This is most likely caused by the
lag effect of medical schemes annual
pricing exercises. Where a scheme
has experienced adverse claims
Restricted schemes
during the year, it would usually only

correct that experience through higher
contributions or benefit reductions
(and hence lower relative claims) in the
next financial year, and this corrective
action often needs to take place over at
least two years.
Medical schemes usually perform their
benefits and contributions reviews in
September of each year, using data
for only a part of that year. Where
experience has been adverse in the
first part of the year and is therefore
included in the data used for the
85% line
purposes of pricing, allowances can be

made to make up for this experience in
the next financial year. However, where
the adverse experience occurs in the
latter part of the year and has therefore
not been allowed for in the pricing of
benefits into the next year, this adverse
experience must be made up two
years later. In addition, the adverse
experience in the latter part of the year
has a direct impact on the reserves and
solvency levels of the scheme going
into the next year and this must also be
made up.
19
In general, medical schemes with a

risk claims ratio of above 85% face the
challenge of achieving an operating
surplus (contributions less claims
and expenses) while containing nonhealthcare expenses below the CMS
generally accepted guideline of 10% of
contributions and building reserves to a
sustainable level.
Although 85% is the generally

accepted benchmark for the claims
ratio, the ideal ratio for a particular
scheme will depend on its current
circumstances such as the current
adequacy of contributions, the level of
non-healthcare expenses, the need for
reserve building and the schemes longterm strategy.
The graph below illustrates the average

claims and contributions paid per
beneficiary per month (PBPM), as well
as the risk claims ratio in 2013, for the
20 schemes included in the Diagnosis
this year. Only 5 of the 20 schemes
achieved a claims ratio below 85%.
R2 000
100%
R1 800
R1 400
90%
R1 200
R1 000
85%
R800
80%
R600
R400
Risk claims ratio
95%
R1 600
75%
R200
Bo
co
is
ni
t
M
om as
en
tu
m
M
ed
ih
e
Be lp
st
m
e
M
ed d
sh
i
Fe eld
dh
ea
lth
Li
be
rty
Si
z
Ke we
yH
ea
lth
G
EM
S
Po
lm
Ba ed
nk
m
e
Tr
an d
sm
LA ed
Pl
-H
at
ea
in
um lth
SA He
al
M
W th
U
M
Sa ED
M
s
ot
oh olm
ed
ea
lth
C
ar
e
Pr
of
m
ed
70%
ve
ry
R0
Average contribution/claim per beneficiary per month (PBPM)
Claims and contributions by scheme
Medical scheme
Average contributions PBPM
While claims ratios indicate the

adequacy of contribution levels,
the actual average claims paid
per beneficiary indicate the level
of benefits provided by a scheme.
The graph above clearly shows that
KeyHealth paid the highest amount in
claims per beneficiary during 2013,
followed by Sasolmed and Fedhealth.
These three schemes also had the
highest contribution income per
beneficiary during the year.
20
Average claims PBPM
85% line
The actual healthcare costs funded by

medical schemes are driven largely by
the distribution of members between
options, the profile of members, and
the structure of benefits provided on
various options, such as traditional or
new-generation plans.
The utilisation of services is influenced
by demographic factors (age profile
and pensioner ratio), the incidence
and distribution of disease (often
2013 claims ratio
called disease burden) and advances

in diagnostic technology and biological
drugs. However, owing to the errors in
the utilisation statistics contained in
the CMS Annual Report, as highlighted
by Circular 43 of 2014, we have not
included an in-depth analysis of the
latest utilisation statistics as we do
not feel that this would provide an
objective view of the current situation.
DIAGNOSIS 2014/2015
2.7 Non-healthcare expenditure

Non-healthcare expenditure (NHE)
includes administration fees, managed
care costs, broker commission,
distribution costs, bad debts and
reinsurance costs. The CMS has a
general guideline for medical schemes
of maintaining NHE at or below 10% of
contribution income.
Total NHE, as a proportion of gross

contribution income (GCI), decreased
very slightly to 11.1% in 2013 from
11.2% in 2012 and 11.3% in 2011.
The slight but steady decline in nonhealthcare expenditure since 2006
allows for a larger component of
member contributions to be available

for paying claims, which reduces the
need for higher future contribution
increases and allows for some level of
reserve building.
Trend in non-healthcare expenditure

20%
18%
16%
NHE as a % of GCI
14%
12%
10%
8%
6%
4%
2%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
All schemes
Open schemes
Restricted schemes are expected

to have lower non-healthcare costs
primarily because they have lower
or no distribution expenses or broker
fees and certain operating expenses
may be subsidised by the participating
employer(s).
In 2013, NHE as a proportion of
gross contribution income was 13.3%
Restricted schemes
(2012: 13.6%) for open schemes

and 8% (2012: 7.7%) for restricted
schemes. This low level of NHE within
restricted schemes is driven to a large
extent by GEMS. Excluding GEMS from
this calculation would result in NHE
as a proportion of gross contribution
income being 8.7% for restricted
medical schemes in 2013.
10% line
On the assumption that NHE increases

with CPI, whereas contributions
increase in line with medical inflation,
which is usually more than CPI each
year, we would expect the proportion
paid to NHE to decrease over time,
irrespective of whether additional cost
control measures are introduced. As a
result, a more suitable measure of NHE
is the absolute cost per member.
21
12%
R250
10%
R200
8%
R150
6%
R100
4%
R50
2%
R0
0%
es
ed
om
en
ni
ve
Bo
co
is
NHE as a % of GCI
R300
pe
n
tri
ct
ed
In
du
st
ry
14%
ih
Be elp
st
M me
ed d
sh
Fe ield
dh
ea
lt
Li h
be
rty
Si
Ke zw
yH e
ea
lth
G
EM
Po S
lm
Ba ed
nk
m
Tr
e
an d
sm
Pl LA- ed
at
H
e
in
um alt
h
SA He
al
M
W th
U
M
M Sa ED
ot
so
oh
l
ea me
lth d
C
a
Pr re
of
m
ed
16%
R350
tu
m
R400
ta
s
18%
ry
R450
NHE expenses per member per month
Non-healthcare expenditure by scheme
Medical scheme
Administration expenses
Managed care
The graph above illustrates the

components of NHE for the top 10
open and top 10 restricted schemes for
2013 as well as for open and restricted
schemes and the medical schemes
industry as a whole.
The marked difference between
non-healthcare expenses of open and
restricted medical schemes is evident
from the graph above.
Broker & marketing fees
Bad debts
NHE as a % of GCI
As shown in the graph below,

administration costs have decreased
as a proportion of total non-healthcare
expenses over the years driven by a
proportionate increase in managed care
fees, while bad debts and broker fees
have remained fairly consistent.
Even after excluding broker fees, the

pure administration costs of open
and restricted medical schemes are
significantly different. In our previous
Diagnosis, we suggested that the
reason for this difference was higher
marketing costs of open medical
schemes. However, with broking and
marketing fees being combined in the
reporting for 2013, this is not the case.
Trend in types of non-healthcare expenditure

100%
Percentage of total cost
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2004
2005
2006
2007
2008
2009
2010
2011
Year
Administration expenses
22
Managed care
Broker fees (& marketing)
Bad debts
2012
2013
DIAGNOSIS 2014/2015
2.8 Financial performance

One of the key factors used to measure the
performance of a medical scheme is the
operating result. A schemes operating result
is an indication of its financial soundness
after claims and non-healthcare expenditure
are deducted from contribution income.
It shows the surplus or deficit before
investment income. Drivers of strong financial
performance by medical schemes include:
Appropriate benefit pricing

Adequate risk management and claims control
Favourable age and risk profile of the
membership base
Low non-healthcare expenditure.
R1 551.78 million. Restricted

schemes achieved an overall operating
surplus of R925.24 million (2012:
R86.81 million) and open medical
schemes achieved an operating surplus
of R626.54 million (2012: deficit of
R61.06 million).
There was a significant improvement

in the overall operating results of
the industry from 2012 to 2013.
In 2013, the industry managed
to achieve the most substantial
operating surplus since 2004: total
risk contributions exceeded risk claims
and non-healthcare expenses by
In 2013, 33% (8 of 24) of open

schemes and 57.1% (36 of 63)
of restricted schemes achieved an
operating surplus. By comparison,
48% (12 of 25) of open schemes
and 55.2% (37 of 67) of restricted
schemes achieved an operating
surplus in 2012.
Trend in operating results

R3 000
Operating result (R million)
R2 000
R1 000
R0
-R1 000
-R2 000
-R3 000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
Open medical schemes
Restricted medical schemes
All medical schemes
23
Trend in net results

R5 500
R5 000
Net result (R million)
R4 500
R4 000
R3 500
R3 000
R2 500
R2 000
R1 500
R1 000
R500
R0
-R500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Year
Open medical schemes
Restricted medical schemes
All medical schemes
Schemes incurring operating deficits

have to rely on investment income to
achieve a breakeven result on a net
level. During 2013, the addition of
investment and other income resulted
in schemes achieving an overall net
surplus of R5 255.72 million. Open
schemes achieved an overall net
result of R2 332.16 million (2012:
R1 642.99 million) and restricted
schemes achieved an overall net
surplus of R2 923.56 million (2012:
R2 047.59 million).
In 2013, 75% (18 of 24) of open

schemes and 93.7% (59 of 63) of
restricted schemes achieved a net
surplus. By comparison, 84% (21 of
25) of open schemes and 86.6% (58
of 67) of restricted schemes achieved a
net surplus in 2012.
the financial performance of the top 10
open schemes and top 10 restricted
schemes ranked according to size.
Schemes incurring operating deficits have to rely on investment

income to achieve a breakeven or positive result on a net level.
24
DIAGNOSIS 2014/2015
Of the 20 schemes considered in this years Diagnosis, 10 did not manage to achieve a surplus
at an operating level and therefore had to rely on investment income to subsidise claims and nonhealthcare expenditure during 2013. In addition, two schemes achieved a net deficit which reduced
accumulated funds.
Schemes financial performance for 2013

R1 600
R1 200
R1 000
R800
R600
R400
R200
R0
SA
Sa
ED
M
so
ot
lm
oh
ed
ea
lth
C
ar
e
Pr
of
m
ed
lth
ea
lth
ea
Pl
at
in
um
ed
m
-H
LA
ns
Tr
a
ed
ed
nk
Ba
lm
Po
EM
lth
ea
yH
zw
Si
Ke
ni
ta
M
s
om
en
tu
m
M
ed
ih
el
p
Be
st
m
ed
M
ed
sh
ie
ld
Fe
dh
ea
lth
Li
be
rty
Bo
is
co
ve
ry
-R200
Operating/net result (R million)
R1 400
Medical scheme
Operating result
Net result
25
2.9 Investments
most medical schemes have adopted
very conservative investment strategies
as shown in the following graph. The
graph shows the asset allocation for
19 out of the 20 schemes under
consideration in this publication
and reflects what is available in the
schemes annual reports.
and therefore had to draw on their

investment returns, placing additional
pressure on solvency levels.
Where medical schemes do not

achieve surpluses at an operating
level, they become reliant on the
investment returns earned over the
year to fund part of their claims and
non-healthcare expenditure. In 2013,
49.4% (43 of 87) of medical schemes
failed to achieve an operating surplus
This strategy is not sustainable unless

investment returns are able to keep
pace with, and preferably exceed,
claims inflation. At present, however,
Asset allocation as at 31 December 2013

100%
60%
90%
50%
40%
70%
60%
30%
50%
20%
40%
30%
Solvency
Asset allocation
80%
10%
20%
0%
10%
0%
sc
Di
r
ve
Bo
a
nit
ed
lp
ihe
stm
ed
Be
ed
ld
hie
dh
Fe
h
alt
ty
er
Lib
-10%
e
izw
yH
Ke
h
alt
EM
ed
ed
ed
h
alt
h
alt
d
re
ed
ED lme
lm
Ca ofm
e
M
km nsm -He
o
o
H
U
n
h
r
s
P
lt
a
P
W
Ba
LA num
Sa hea
Tr
M
i
o
t
SA
at
l
o
P
M
Medical scheme
Cash & money market
Other
Bonds
Equities
Property
Collective investment vehicles
Solvency
Note: The annual financial statements for Momentum did not provide enough detail to perform this analysis.
There are various asset class limits

placed on medical schemes in
Annexure B of the Regulations to
the Medical Schemes Act, but most
schemes are operating well inside the
limits for riskier asset classes. The limit
on equities is 40%, with the limit on
property being 10%. This implies that
schemes could have up to 50% of their
investments in these higher-risk asset
26
classes whose returns are generally

expected to exceed CPI inflation. The
allowable exposure to conservative
asset classes, such as cash, money
market instruments and bonds, is
unlimited. The only restrictions on
these asset classes are on the exposure
to specific issuers, to ensure some level
of diversification.
DIAGNOSIS 2014/2015
To maintain solvency year on year, the percentage increase in

accumulated funds needs to equal the percentage increase in
total contributions.
Medical schemes preference for

cash in particular appears to be
driven by concerns about risks related
directly to the investments (making
negative returns and losing scheme
assets). However, for the long-term
sustainability of the scheme, average
returns below medical inflation may
pose a greater risk, especially for
schemes that rely on investment
returns when they fail to achieve an
operating surplus.
In particular, claims expenditure
tends to grow faster than inflation,
as discussed in sub-section 2.5
on inflationary trends. To maintain
solvency year on year, the accumulated
funds need to increase in line with the
increase in contributions. If investment

returns cannot keep pace with the
increase in claims inflation and
accumulated funds increase at a rate
less than contributions, then solvency
levels will decrease, resulting in a need
to either increase contributions further
(which would exacerbate this issue)
or reduce benefits.
As a result, for schemes failing to
meet the solvency requirement,
low investment returns due to
conservative asset allocations may in
fact be increasing financial risk for
the scheme. For schemes meeting the
solvency threshold, this can be eroded
over time if returns are below claims
inflation, and they may be missing
an opportunity to maintain affordable

contribution increases in the future.
Where a scheme meets the regulatory
requirement of 25% solvency and is
thus sufficiently provided for, there
is a strong argument to invest at
least some of the reserves in more
risky asset classes as allowed by
Annexure B. Conversely, schemes that
are not currently meeting the 25%
regulatory solvency requirement may
increase their expected return by
investing in more risky assets, which
will then increase the reserves held and
thereby the solvency ratio. This would
depend on the absolute value of the
asset base and other specific features
of each medical scheme.
27
2.10 Solvency levels

The solvency ratio is the level of
reserves (accumulated funds) that
a medical scheme needs to hold as
a percentage of gross annualised
contributions. Regulation 29
promulgated in terms of the Medical
Schemes Act (131 of 1998) prescribes
that medical schemes maintain a
minimum solvency ratio of 25%.
The graph below shows the solvency
levels of open and restricted schemes
against the statutory level over the
past 14 years. The increase in industry

solvency levels from 2000 to 2004 is
primarily attributable to the calculated
efforts of medical schemes to build
reserves to the prescribed minimum
solvency level that was required by
31 December 2004.
Restricted schemes on average have
maintained higher solvency compared
to open schemes. From 2006,
the solvency level for all restricted
schemes declined because of rapid
GEMS membership growth. The

average solvency of open schemes has
remained relatively stable since 2006.
In 2013, the average solvency for all
schemes was 33.3% (2012: 32.6%).
The solvency ratio of open schemes
increased to 29.7% in 2013 (2012:
29.1%). Restricted schemes solvency
levels increased for the first time since
2007, from 37.4% in 2012 to 38.2%
in 2013.
Trend in solvency levels

70%
60%
Solvency
50%
40%
30%
20%
10%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Year
Prescribed minimum solvency
All restricted medical schemes
In 2013 nine medical schemes

were unable to achieve the statutory
minimum solvency level of 25%:
28
All medical schemes
All open medical schemes
Restricted medical schemes (excluding GEMS)
Discovery
Hosmed
Liberty
Pharos (amalgamated with Topmed on 1 January 2014)
Resolution
Thebemed
GEMS
Transmed
Umvuzo
2013
DIAGNOSIS 2014/2015
The graph below illustrates the change in solvency levels from 2010 to 2013 for the 10 largest open and
10 largest restricted schemes in terms of principal members. Four of these schemes failed to reach the
25% regulatory solvency level at the end of 2013.
Three-year change
ed
m
e
ar
C
of
Pr
ed
lm
lth
oh
ea
so
Sa
ot
M
SA
ea
H
ea
um
Pl
at
in
LA
-H
ed
ns
Tr
a
nk
Ba
lm
Po
EM
lth
ea
zw
yH
Ke
Si
be
Li
ea
ie
dh
Fe
sh
ed
st
el
Be
ed
ih
tu
ta
en
ni
M
om
ve
Bo
co
is
D
ED
-25%
lth
0%
lth
-15%
ed
10%
ed
-5%
20%
5%
rty
30%
lth
15%
ld
40%
ed
25%
50%
35%
60%
ry
Solvency in 2013
Solvency levels by scheme
Medical scheme
Three-year change
2013
The suitability of the current solvency

framework requiring schemes to
allocate a minimum of 25% of gross
contributions to reserves has long
been debated. Reasons that support
the need to revisit the current
framework include:
Appropriateness of a one size fits
all approach. Medical scheme
claims experience is likely to be
more stable for larger schemes, so
the solvency requirements should
be less onerous, while solvency
requirements for smaller schemes
should be higher.
25% line
On the one hand, schemes showing

membership growth are penalised
from a solvency perspective. On the
other hand, schemes losing members
are rewarded. This is due to the
nature of the solvency calculation
formula. Therefore, schemes that are
growing are less competitive because
of the need to build and maintain
solvency levels.
Alexander Forbes Healths submission

proposes using a Risk Based
Framework as the most appropriate
measure for medical schemes in
South Africa. The Risk Based
Framework considers the size and the
specific risk exposure of a scheme
to measure the minimum amount
of capital required to support the
schemes overall operations.
Through Circulars 12, 17 and 28

of 2012, the CMS invited industry
stakeholders to make submissions on
an appropriate solvency framework for
medical schemes.
To date, no feedback has been

received from the regulator, although
it is understood that many parties
provided input into an appropriate
solvency framework.
29
3. Medical Schemes Sustainability Index
With the continued consolidation of medical schemes in the industry as well as rising claims costs, the
sustainability of medical schemes and the assessment thereof have become increasingly important for all
industry stakeholders. Throughout this publication we have analysed key statistics of medical schemes but
it is difficult to assess how their collective impact affects the sustainability of a medical scheme.
The Alexander Forbes Health Medical Schemes Sustainability

Index attempts to do this by combining certain key factors and
considering their impact to a medical scheme in future years. The
index has been calculated from a base year of 2006 and considers
the following factors:
The size of the scheme relative to the average scheme size in the industry. A larger membership base would reduce
volatility in the claims experience and benefit from economies of scale.
Membership growth over time indicates that benefits are attractive. In addition, an increase in size serves to reduce
volatility of the schemes claims experience.
The change in the average age of beneficiaries over time. An increasing average age indicates a worsening profile and
higher expected claims. This would require a medical scheme to adjust its base pricing for benefits through either
contribution increases or benefit reductions.
The operating result of the scheme relative to the industry each year as this would indicate the medical schemes
performance relative to its peers.
The change in the operating result per beneficiary each year. The operating result should give an indication of
the suitability of current contribution levels and whether higher or lower contribution increases can be expected
in the next year.
The change in the accumulated funds per beneficiary held at the end of each year. Accumulated funds essentially
act as a buffer against adverse claims experience, and an increase in the accumulated funds per beneficiary would
improve this buffer.
The schemes actual solvency relative to the statutory requirement. Although there is debate regarding the suitability of
the current statutory requirement, schemes whose solvency is below 25% are required to have business plans in place
with the CMS and their contribution increases would include an element of additional reserve-building going forward.
Higher than average contribution increases would have a negative impact on the schemes marketability.
The trend in the schemes solvency. Increasing solvency levels over time would also support the sustainability of a
medical scheme.
Using a base year of 2006, these

factors are considered for each of the
years from 2007 to 2013 with the final
index score reflecting the cumulative
impact over this period. The medical
schemes are ranked from highest to
lowest to give an indication of their
relative sustainability. It is important
30
to note that the purpose of the index is

to provide a comparative assessment
between schemes, and as such, the
relative positioning is more important
than the absolute score. It is also
important to note that small differences
in the scores (between 10 to 20 points)
are not material.

the 2012 and 2013 index scores for
each of the top 10 open and top 10
restricted medical schemes, using a
base year of 2006.
DIAGNOSIS 2014/2015
200
20%
150
15%
100
10%
50
5%
0%
co
is
lm
Po
es
pe
sc
he
st
he
du
sc
In
ed
ct
tri
R
es
Change from 2012 to 2013
25%
Fe very
dh
e
LA alth
-H
e
Ba alth
nk
m
M ed
ed
ih
Sa elp
so
lm
ed
SA GE
M
M
S
W
U
M
ED
Bo
ni
M
t
ed as
sh
M
i
om eld
en
tu
Pr m
of
m
ed
Si
zw
B
e
Pl
at es
tm
in
um e
d
H
ea
K
lt
M
ot eyH h
oh
e
ea alt
lth h
C
ar
e
Li
b
Tr ert
an y
sm
ed
250
ed
30%
es
300
ry
Index score (base year: 2006)
Medical Schemes Sustainability Index: 2012 and 2013 (base year: 2006)
Medical scheme
2012
2013
2013 change
At an industry level, the index has

increased consistently since 2006.
This is driven by an increase in
the membership base, the level of
accumulated funds and the current
level of solvency of 33.3%. The index
has also consistently increased for both
restricted and open schemes. This was
driven by increased accumulated funds
and improving operating results for
open medical schemes and improved
solvency levels and membership growth
for restricted medical schemes.
In 2013, all of the top 20

schemes had an increase
in the index value, with
the largest increases seen
by Sizwe and GEMS.
Sizwes membership base reduced

significantly during the year. This was
offset by an immediate improvement in
solvency and a significant turnaround
in the operating result (from a deficit of
R57.4 million in 2012 to a surplus of
R117.9 million in 2013).
A slowdown in the growth of
beneficiaries on GEMS, combined with
an improved operating result (from a
deficit of R144.6 million in 2012 to
a surplus of R776.9 million in 2013),
improved the schemes solvency level
from 7.9% to 11.7%. Despite the
improvement in the index over the last
year, GEMS currently ranks at number
eight on the index due to an increasing
average age as well as solvency being

well below the regulated minimum
of 25%.
Discovery is currently ranked second
on the index owing to its increasing
membership and strong financial
performance over the last few years.
Despite its high ranking, the growth in
its index score has slowed down as a
result of solvency levels, which have
remained below the 25% requirement
since 2010.
The following two graphs show the
trend in Index scores from 2006 to
2013, for open and restricted medical
schemes respectively.
31
Open scheme index trends

240
220
Index score
200
180
160
140
120
100
2006
2007
2008
2009
2010
2011
2012
2013
Year
Discovery
Bonitas
Medshield
Fedhealth
Momentum
Liberty
Medihelp
Sizwe
There has been a general increasing

trend in index scores of open schemes
since 2006. Many schemes scores
have improved consistently over
this period, but some schemes,
such as Liberty and Medihelp, have
experienced a slowdown in this growth.
KeyHealth ranked near the bottom
for most of the last few years due
Bestmed
KeyHealth
to solvency levels below 25% and

reducing membership levels. However,
steady improvement has been observed
since 2010, as solvency levels have
consistently increased and were above
25% for the first time in 2013. In
addition, the scheme has achieved
significant operating surpluses in
recent years, resulting in higher
accumulated funds.
There has been a general increasing trend in index scores of open

schemes since 2006.
32
DIAGNOSIS 2014/2015
Restricted scheme index trends

280
260
240
Index score
220
200
180
160
140
120
100
80
2006
2007
2008
2009
2010
2011
2012
2013
Year
GEMS
Platinum Health
Polmed
Bankmed
SAMWUMED
Transmed
Sasolmed
LA-Health
Motohealth Care
Polmed is currently ranked number

one on the index and has improved
significantly since 2010. This is due to
the schemes size, membership growth,
increasing accumulated funds and
solvency levels.
Profmed
Although Transmeds index score

has improved in the last two years, it
still ranks last because of an ageing
profile, a continuous reduction in
membership and solvency levels below
the regulatory requirement of 25%.
33
4. Conclusion
From this years analysis, the following key observations can be made:
The number of medical schemes decreased to 87 in 2013 from 92 in 2012.
The number of principal members increased marginally by 1.6% in 2013 (2012: 2.3%). Principal members in 2013 totalled
3 878 267 (2012: 3 815 431).
The average age of beneficiaries has decreased slightly to 31.9 years in 2013 (2012: 32 years), with the pensioner ratio
remaining stable at 7.1%.
Family size has continued to decrease. In 2013 the average family size was 2.26 compared to 2.27 in 2012.
The risk claims ratio for all schemes decreased to 86.4% in 2013 (2012: 87.7%).
Total non-healthcare expenditure as a percentage of gross contribution income remained stable at 11.1% in 2013.
In 2013, 50.6% (44 of 87) of schemes achieved an operating surplus. By comparison, 53.3% (49 of 92) of schemes achieved
an operating surplus in 2012.
During 2013, most scheme assets were held as cash, either in bank accounts or via money market instruments.
The average solvency for all schemes increased to 33.3% in 2013 compared to 32.6% in 2012.
All 20 schemes included in this years analysis experienced an increase in the Medical Schemes Sustainability Index value.
The 2013 financial year saw

continued consolidation through
the amalgamation of unsustainable
medical schemes, which should
serve to improve the sustainability
of the industry as a whole. In
addition, the profile of the industry
is mostly stable and the overall
financial position is sound.
34
Despite this, the medical schemes industry in South Africa

faces unique challenges in the build-up to full implementation
of National Health Insurance. The demarcation between health
insurance policies and medical scheme cover, findings of
the inquiry into private healthcare sector pricing and further
regulatory reform by way of the Medical Schemes Amendments
Bill are likely to transform the landscape of private healthcare
funding over the next decade.
DIAGNOSIS 2014/2015
5. Alexander Forbes Health
Technical and Actuarial Consulting Solutions (TACS) is a professional

independent actuarial and consulting unit within Alexander Forbes
Health (Pty) Ltd. The Alexander Forbes Health team has been
delivering innovative and customised healthcare solutions to corporate
clients, medical schemes and individuals since 1991.
For more information please contact:
Roshan Bhana
Branch Head: TACS
bhanar@aforbes.co.za
011 269 1798
Casper De Vries
Actuarial (Coastal), TACS
devriesca@aforbes.co.za
021 809 3626
Anthea Towert
Scheme Consulting, TACS
towerta@aforbes.co.za
011 269 0507
Kristin-Ann Cronj
Research & Product
Development
cronjek@aforbes.co.za
011 269 0814
Alison Counihan
Actuarial (Sandton), TACS
counihana@aforbes.co.za
011 269 0557
We would like to thank the following members of the Technical and Actuarial Consulting
Solutions (TACS) and Research & Product Development teams for their contribution to this
years publication:
Cecilia Augustine
Stefan Bekker
Roshan Bhana
Anne Cabot-Alletzhauzer
Kristin-Ann Cronj
Natalie De Wit
Anthea Towert
Amy Underwood
Sources: C
ouncil for Medical Schemes Annual Reports (2000 to 2013). Audited annual
financial statements of medical schemes.
35
Head office Sandton

Alexander Forbes, 115 West Street, Sandown
PO Box 787240, Sandown, 2146
Telephone (South Africa): 011 269 0000
Telephone (international): +27 11 269 0000
Fax (South Africa): 011 263 1111
Fax (international): +27 11 263 1111
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Telephone: 011 269 2690

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hcclientservices@aforbes.co.za
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The information in this document belongs to Alexander Forbes. You may not copy, distribute or modify any part of this document without the express written permission of Alexander Forbes.
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DIAGNOSIS

An analysis of key trends in the medical schemes

Alexander Forbes Health Technical and Actuarial Consulting Solutions

ALEXANDER FORBES HEALTH

Welcome to the latest issue of Alexander Forbes Healths Diagnosis,

Our Technical and Actuarial

This analysis covers key statistics

employers and industry commentators

3. Medical Schemes Sustainability Index

5. Alexander Forbes Health

ALEXANDER FORBES HEALTH

1. Key industry developments

The Medical Schemes Act

The CMS takes over publication

The Consumer Protection Act

ALEXANDER FORBES HEALTH

This section analyses some of the key statistics influencing the

2.1 Size and scale

Beneficiaries in restricted medical schemes

Number of medical schemes

In 2013, the number of medical

across the industry. The number of

Despite the continued decrease in

Despite the continued decrease in the

ALEXANDER FORBES HEALTH

Annual percentage growth in membership

Percentage annual growth rate

There is a stark contrast in the trends

Scheme (5 446 principal members)

Despite the risks

The graph below ranks the top 10

While we have continued to include

join any of the open schemes. Other

Membership by medical scheme

Number of lives covered

Percentage growth from 2012 to 2013

The ranking by size of the top 10 open

Growth in principal members

the top 10 in 2013, with 36 019

to number 6, as a combined result of

ALEXANDER FORBES HEALTH

The 20 schemes in the graph on the

and GEMS, the largest open and

was lower than the growth in principal

Trend in average family size

Average family size

The average family size for the

In addition, as members dependent

The decrease in family size has

2.2 Market share

Scheme (Discovery) with a net growth

The industrys net growth of 62 836

Market share by principal members

2014: Altron, Afrox, PG Bison

All restricted medical

Discoverys total market share based on

All open medical

public sector employees to GEMS since

early in 2012. The increase in GEMSs

ALEXANDER FORBES HEALTH

2.3 Membership profile

Average age of beneficiaries

The following section considers these factors in detail.

Trend in average age of beneficiaries

The Consumer Protection Act

Medical schemes contribution

Medical care and health expense