The Council of Medical Schemes (CMS) recently announced that 2024 monthly premium increases should be capped at 5%, but with permission, this could rocket up by 8%. But how do medical schemes calculate premiums and is this different from how the proposed NHI plans to do it?
The NHI will buy healthcare services for its members with a central pool of funds, just as private medical schemes currently do, writes Zano Kunene for Bhekisisa.
Privately run medical schemes such as Discovery Health or the Government Employees Medical Scheme are not-for-profit trusts made up of funds from their members’ monthly contributions. This means the money belongs to the members, for their benefit, not the scheme’s administrators’.
But while medical aids use a fee-for-service model, meaning it pays for each service individually once rendered, the NHI will use a capitation model. This means it will calculate how much to pay a service provider based on how sick or healthy people in a certain area are, using a formula that calculates how many patients that provider is likely to see in a particular year.
According to the current plan for the NHI’s payment model, it will give a set amount of funds to administration units in each of South Africa’s 52 health districts.
These units will then contract providers for different services, whether it’s eye care, vaccinations, health screens, general GP visits or anything else that will be included in a fixed, basic package of services, and pay them a set fee in advance based on the number of patients expected to need a specific service in the area.
But just as medical aids do now, the NHI will negotiate with service providers to decide on a fee structure that makes sense, so that they’re “involved both in designing and (setting) the scope of the contract”, says Victoria Barr, a health economist and consultant to the Health Department for the NHI.
There are four things economists and actuaries – and whose appointments in the NHI the Health Department gave the go-ahead last year – will consider when deciding how much members should contribute to a medical scheme’s pool of funds.
1. How much should a package of health services cost?
Annually, number crunchers at medical schemes estimate how many claims they expect to get for a specific service – say, chemotherapy treatment for cancer or surgery for joint replacement – from their member pool. This gives them an idea of how much money they’ll need to have available to cover these services for members.
They therefore track usage patterns to see whether the demand for a service might go up or down, or stays steady over time. So, if the number of claims for specialist services, like a cardiologist, remains steady over time but claims for GP visits increase, then the scheme needs to plan for these when calculating how much money they’ll need in the fund to cover these payments.
But since a court ruling in 2010 said that the rates set out in the now-defunct National Health Reference Price List (a list of set rates which capped how much a service provider was allowed to charge a patient) were “unreasonably low”, healthcare service costs in South Africa aren’t regulated. This means providers and hospitals can charge whatever they like for the service they provide.
To keep costs manageable, schemes therefore set their own tariffs for services, with an upper limit for how much they will pay for a service depending on how the benefit package is made up. If someone chooses to see a health professional who charges more than the set price, they have to pay the difference between the medical aid’s contribution and the actual fee out of pocket.
2. Should costs for health services increase?
Scheme administrators also have to consider whether the cost of equipment, consumables (protective masks, gloves, swabs and so on) and running a practice will increase next year because of inflation, for example, and by how much.
Every July, the CMS recommends what a reasonable increase in a scheme’s premiums would be for the next year.
For 2024, they’ve said tariff increase assumptions should be limited to 5% plus what is reasonable for services’ use, which they “cautiously anticipate” to be around 3%, says Mondi Govuzela, senior manager of benefits at the CMS. This means premiums should ideally not go up by more than 8% next year.
Schemes can ask for a higher increase to be approved if they can show the CMS this would be justified. These requests have to be submitted by October each year, with the council then announcing their decisions in November for new prices to come into effect, usually from January.
3. How many people get sick each year?
Private healthcare services can be expensive. On average it costs around R600 000 for a year’s renal dialysis in the private health sector for treating a single patient with kidney disease, said Deon Kotze, chief product officer at Discovery Health, at a media workshop in July. If a member pays, say, R1 900 to their medical scheme monthly, it would take around 27 years’ of their contributions to cover the cost.
Medical schemes make it easier to afford treatment by relying on cross-subsidisation, meaning the contributions from people who are young and healthy, who generally don’t get sick often and aren’t expected to have big medical expenses, can go towards helping cover treatment costs for older people or those with more chance of falling ill.
In turn, this group of young, healthy people benefit in the same way when they get older, when a new group of younger members subsidise their expenses.
However, every member of a medical aid qualifies for a set package of basic services, which schemes must pay in full – prescribed minimum benefits. They cover treatment medical emergency, 26 chronic diseases and 271 other conditions, including diabetes and different cancers.
This means all members of the scheme gets treatment for these, regardless of the package they’re on or if their annual benefits have run out.
Administrators estimate that, over a year, only a small proportion of their member pool needs more money to pay their doctors’ bills than the amount they pay monthly.
An analysis by Discovery Health showed that roughly eight out of 10 healthy members of medical schemes contribute more money into the pool than what they claim. In this way people with higher health costs can get lifesaving treatment at an affordable price when they need it, while paying the same monthly premium as everyone else, says Kotze.
The NHI hopes to do the same thing: make treatment available to people who would otherwise not be able to afford it.
In South Africa, as much money is spent on the public health sector as on the private sector. But the state system has to service about three-quarters of the population, meaning there’s an unequal supply of resources and providers.
While the NHI’s funding model has not been finalised, it will probably be funded by tax allocations and contributions (payroll taxes) from every citizen, based on income brackets. So, people who can’t afford to contribute will still be able to see a doctor through other people’s contributions.
4. What do trends in illnesses and treatment look like?
Health economists and actuaries have a good idea of the trends for illnesses and treatments in a year. For example, every year more than 10m South Africans are expected to get flu, so a scheme can plan fairly well how much money they’d need for medicines, GP visits or vaccinations.
But trends also change. For instance, as a population ages, the need for healthcare increases and the cost for services would rise.
South Africa’s population is getting older. Between 2012 and 2022, the number of people over 60 increased by 1.5m people, making up close to 10% of the total population. Having an older population means the chance of chronic conditions like hypertension, diabetes and cancer increases.
Schemes look at these patterns to plan how much money is needed in the pool to cover all members for the next year.
“We have to look at what the cost per claim is likely to increase by, as well as whether the number of claims per person is likely to change because our population is getting older and sicker,” says Roseanne Harris, health policy actuary at Discovery Health. Trends can also change suddenly. In such cases premiums might rise – or even drop.
If more people get sick in a year because of a disease outbreak or environmental change, costs can go up. Conversely, if more people choose to see a nurse instead of a GP for a minor illness or a routine vaccination, costs could go down.
Take the Covid-19 pandemic and lockdown in 2021. During this time fewer people used services like emergency rooms, out-of-hospital GP visits and non-essential surgeries.
Instead they spoke to doctors virtually or on the telephone, which was cheaper and allowed medical schemes to grow a reserve of funds in the pool that weren’t being spent and so reduce the increase of premiums for 2022.
See more from MedicalBrief archives:
Business plea to keep medical aids under NHI
Income tax hike and payroll tax proposed for NHI funding
Discovery cushions blow of 2022 premium increases for its members
CMS caps medical aids price hikes at 5.7% for 2023