GEMS faces insolvency threat

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The Government Employees Medical Scheme (GEMS) could be insolvent by financial year-end if drastic cost-containment measures are not instituted, reports Business Day.

This would mean the scheme would need to be bailed out by the Treasury or amalgamated into a different scheme, forcing significant changes in benefits for its 1.8m members.

The report said it would be a big blow to those in government who hoped the scheme could provide a viable funding model for the proposed National Health Insurance. It would also be an embarrassment for the Council of Medical Schemes, which has used its discretion to avoid putting the scheme under curatorship, despite its longstanding failure to meet the industry’s minimum statutory requirements.

The report said several sources within the industry, who spoke on condition of anonymity, claim the scheme’s solvency ratio has plummeted in the first eight months of 2016, and may be as low as 5% or 6% — almost 20percentage points below the required level.

Also, the report says internal documents show if the current trend continues, the schemes’ deficit for 2016 could increase to R1.2bn, and its reserves could fall as low as 2% by February 2017. This was confirmed by a second independent industry source. The scheme’s strained financial position means that if it is to survive, its members will face contribution increases that are almost double inflation, and will have their benefits curtailed drastically.

The report says the scheme’s principal officer, Guni Goolab, confirmed recently benefit redesign was already under way, and the scheme would introduce underwriting for the first time to protect itself from entry selection. According to the internal communication, the scheme “would need a 15% contribution increase to balance the books. It is hoping for a 2%-3% decrease in this increase to be made possible by intensified managed care and benefit design.” It will also introduce co-payments on some procedures, such as Caesarean sections.

The report said Goolab was unwilling to respond to claims that the scheme’s current solvency ratio is in the region of 5-6%, but disclosed that reserves had declined to 9.46% at the end of December 2015. Since then, reserves have fallen further. “In the last six months, we have picked up a significant increase in our claims,” Goolab said. “We have seen a decrease in reserves during this year but it is being managed.”

Regulation 29 of the Medical Schemes Act requires all medical schemes to maintain accumulated funds of at least 25% of gross annual contributions in reserves. Medical schemes that fall short of this requirement are required to notify the Council of Medical Schemes of the underlying causes of failure, and corrective action to be taken.

According to the medical schemes council, a scheme is placed on close monitoring if it continues to have a solvency of less than 25%. An independent industry source has stated that if the scheme solvency is currently at 5%, it will require annual contribution increases of about 14% for the scheme to reach the statutory 25% level by 2020, failing which benefits will also have to be reduced.

The report says historically, the scheme’s reserve levels have been low due to rapid membership growth during its early years. However, the recent industry-wide spike in claims has made matters worse. A big concern for the scheme was a lack of reason for the sudden rise in claims, Goolab said. “Over the past several years, Gems’s demographic and risk profile has remained stable. However, we have seen an increase in the number of members who join for only a few months,” said Goolab.

In 2015, the scheme identified 5,000 members who joined the scheme for less than a year. Of those members, almost 70% were admitted to hospital – way above the industry average.

The report quotes Goolab as saying the scheme claims ratio was more than 90%. “We experienced abnormally high claim rates in February and April, primarily as a result of a higher number of hospital admissions,” said Goolab. “We were proactive in alerting the council to that and they told us that this an industry-wide problem,” he said.

The medical schemes council said Gems had an approved business plan in place, and projects that it will reach the 25% solvency level by 2020. Should the scheme not be successful in the implementation of the proposed business plan, the Council of Medical Schemes would “engage with the scheme to consider reasons for the scheme not keeping to its business plan”, council spokesperson Elsabe Conradie said.

The report says unlike other medical schemes, Gems has never imposed waiting periods or underwriting exclusions. This practice means that members can join the scheme and have immediate access to full benefits, irrespective of pre-existing health conditions.

The medical schemes council is currently reviewing the solvency requirement for the industry as there has been criticism that it is too high. The council said that the implementation of a new risk-based solvency framework would benefit schemes such as Gems, as it would, in general, require large schemes to hold reserves below the 25% solvency requirement.

Business Day report

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