Health Watch
Published in FA NEWS - January 2009
Summit TV speaks to Bernie Clark from Alexander Forbes Health and Steven Harrison from the Council for Medical Schemes about operating losses made in 2008 and what members can expect in 2009
Jane van Renen: Welcome to Health Watch in 2009. 2008 was a tough year financially particularly with medical schemes recording operating losses amounting to billions of rands. What does 2009 have in store for us? Bernie Clark from Alexander Forbes Health and Steven Harrison from the Council for Medical Schemes are at Summit TV to look at this issue. Going back to the reporting of those operating losses for 2008 I’d like your opinions on what that was caused by. Bernie, can we start with you?
Bernie Harrison: It’s a combination of two things. One is the cost push from all the input costs the medical schemes feel - the medical schemes are very complex financing environments, and they need to balance those cost pressures. They have been under quite a lot of pressure. The second factor really is competitiveness - open medical schemes have to operate in a very competitive market, they all look at each other’s prices - and they have to balance their positioning on that basis. With that in mind I think some of them budget knowing they’re going to makes losses. Having said that I’m actually very bullish - I’ve been in the industry for 13 years as an actuary and I’m very bullish about the prospects for the industry. I believe the industry is in great shape, and despite the fact that there are financial losses the industry is looking forward to being in a better shape than it’s been in for a number of years.
Jane van Renen: Stephen, your opinion?
Stephen Clark: I don’t disagree with that. I think first of all the fact that there was an operating loss of about R900million last year is not a crisis. It’s not indicative of an industry on the verge of collapse. The net surplus was very much in the positive after investment income. I do think the causes last year were really in relation to the many schemes that were responding to cost pressures by managing down their reserve levels where in surplus to the statutory requirements. There were other schemes that were battling -but certainly the full operating loss that’s reflected there is as much a reflection of management of excess reserves as it is of any schemes in trouble. So overall the fact that there’s a net loss from an operating perspective - that’s not necessarily a problem. Where you have an excess of reserves it’s not necessarily irresponsible of medical schemes to be managing those to give the most competitive price available.
Jane van Renen: I was going to ask you is that not a sign of crisis management? I believe the reserves have to be 25%. The issue of reserves has been quite controversial for a long time many schemes feeling that the 25% quota is too high…
Stephen Clark: I don’t think it is too high at all. Schemes need that buffer for unforeseen changes in economic circumstances. Certainly overall reserve levels last year were significantly in excess of the statutory requirements - and many medical schemes had reserves significantly above that. Many medical schemes that incurred those operating losses were in fact those schemes that had very large reserves so that’s not necessarily a bad thing as long as they’ve got a plan going forward to ensure they don’t drop below the statutory ceiling.
Jane van Renen: Bernie, from your point of view in terms of the investment income that propped up medical schemes last year - with so much market volatility going on at the moment surely there’s a big risk involved in having to rely on investment income again?
Bernie Harrison: It is of concern. It’s of concern less because of market volatility - because most medical schemes are invested in money market and cash, with relatively few equity based investments held by medical schemes - but more because we do seem to be going into a downward turn in the interest rate cycle. To rely on those investment returns to support operating losses to maintain reserve levels for medical schemes is actually a problem. I think medical schemes need to start planning away from using investment reserves to support their solvency levels and rather plan to bill back their pricing levels to ensure operating losses don’t continue to incur. I do believe that it’s unacceptable in the long term - I think over a period of time to continually run operating losses at a scheme level is a mistake. At some point the board of trustees will need to turn the tide on that and they will have to play catch-up. Where it is a good use of reserves to give discounts back to members, at some point it becomes unsustainable. Scheme trustees making decisions around that have to get the balance right or they come with big increases that can destabilise an individual scheme.
Jane van Renen: It sounds like a very challenging scenario - why did you say you’re so positive about 2009 in terms of how they’re going to operate?
Bernie Harrison: The general sense that I have in the market is that there has been a lot of turbulence and there’s been a lot of challenges - but I think that a lot of the governance related issues that have dogged the medical schemes industry to a large extent have been flushed out. I think the quality of the benefit administration that exists now versus eight or 10 years ago is phenomenally different. The level at which these businesses themselves are operating is phenomenally high and the technology that exists in terms of trying to contain costs going forward - I think that technology is much better than it was say five years ago. I think that is absolutely essential ultimately to the industry going forward - that in order for members of the public to receive a quality medical aid that’s still affordable there have to be high tech ways in which benefits can continue to be delivered at an affordable price.
Stephen Clark: That’s true. In the long term of course the issues of cost escalation need to be addressed, and pricing needs to be addressed. Cost pressures are very real pressures and mechanisms need to be found to ensure that there’s really competitive pricing in the market and that there are efficiencies - particularly in the high cost drivers as far as health costs are concerned. Specialists and hospitals remain of concern. As far as non-health costs are concerned I don’t think there’s a systemic issue because we have seen overall real decreases over the last few years I non-health costs. But certainly there are pockets of concern in relation to non-health costs and those generally correlate with concerns around governance.
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