Medical schemes with ageing member profiles 'could become unaffordable'
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Ageing membership profiles and a growing proportion of over-65s could herald future medical scheme contribution increases well in excess of medical inflation. The ability of schemes to attract younger members will directly affect their ability to manage future increases.
This is the view of Jill Larkan, head of healthcare consulting at financial and wealth advisory firm GTC. She says many medical schemes have announced their benefit and premium increases for 2022. Some have announced increases in line with previous years, while others are delaying increases until March, April or even September 2022.
Larkan says the delayed increases are especially welcome, as many families continue to experience financial strain as a result of the economy’s slow recovery following the easing of Covid-19 restrictions.
Whether delayed or not, Larkan says that we will continue to experience regular annual increases in medical scheme contributions invariably ahead of headline inflation. But what drives these increases? What should we be budgeting for into the future, and how should financial advisers be using this information to better plan wealth-management scenarios for their clients?
“If one looks at long-term trends that influence the price of medical scheme contributions, few are as important as the age profile of a scheme’s membership base,” says Larkan.
“The age profile of a scheme’s members is directly linked to its benefit payment expenses and therefore to price. Statistically, older members use more benefits than younger members; however, on the same option they both pay the same contribution amount. Young members effectively cross-subsidise older members. The long-term sustainability of medical schemes is dependent on being able to continually entice younger entrants to balance an otherwise ageing membership.
“Without a continued inflow of younger members, the scheme will be forced to increase contributions by more than the medical inflation rate year-on-year, unless it reduces benefits, and the scheme will eventually become unaffordable. It is indeed possible that this ‘unaffordable’ point is close for some of the smaller medical schemes at the moment, especially when one considers that most pensioners live on fixed or nominally increasing pensions. Contributions, in excess of inflation, quickly become unaffordable, resulting in withdrawal from the medical scheme and resultant reliance on public healthcare benefits, or family support.”
Larkan emphasises that it is vital for all members (and their financial advisers) to be aware of the following three metrics in relation to their scheme:
1) The average age of members;
2) The trend of the average age over several years; and
3) The pensioner ratio of the scheme.
In the Council for Medical Schemes (CMS) Annual Report for the year ended December 31, 2020, Larkan draws attention to the specific reference to age profiles, pensioner ratios and usage patterns within medical schemes.
The CMS notes that the average age of all members of medical schemes increased from 32.5 in 2016 to 33.4 years in 2020. The report also notes an increase in the pensioner ratio (the percentage of members over the age of 65) from 7.9% in 2016 to 8.9% in 2020.
“These continued aging trends could herald future contribution price increases, if not balanced by the introduction of new young members. Those medical schemes with the product and marketing capacity to successfully entice younger South Africans to join will be better positioned to resist these inflationary pressures in the long term than those schemes which can’t, or which are too small to absorb this impact,” Larkan says.
For more on health care and medical cover, read the November edition of IOL MONEY, our free monthly digital magazine, available here to read or download.