How-do-medical-schemes-determine-the-increase-for-the-next-year How do medical schemes determine the increase for the next year?

To have a better understanding of how medical schemes determine an increase for the next year, it is crucial to delve into the concept of medical inflation and the factors influencing it, as well as the distinctions between the Consumer Price Index (CPI) and medical inflation.

The CPI represents, in prescribed proportions, the items that a typical household spends its income on. The CPI basket is made up of 12 main expenditure groups, each with its own subcategories. It includes different elements such as housing and utilities, food and non-alcoholic beverages, transport, etc. Those items together already account for about 60% of the basket. The health category in the CPI basket is made up of two subcategories:

• Medical products; and
• Medical services.

Healthcare expenditure in this basket only accounts for 1.5%. This is a very small proportion of what a household typically spends its income on. One of the reasons for this is that medical scheme contributions are not included in the healthcare proportion of the CPI basket. Medical scheme contributions typically fall within the category of "Miscellaneous Goods and Services". This category encompasses various expenses related to healthcare services, including medical scheme contributions, insurance premiums, and other healthcare-related costs.

CPI is not a good measure of healthcare expenditure because the components that typically drive increased costs in the economy, and hence also an increase in the CPI basket, are very different from the components that drive an increase in healthcare costs. Helanya Fourie (Senior Economist – Econex) unpacked this topic during an interview with Mark Peach (Hospital Association of SA), noting that healthcare costs, for instance, would be influenced by volatility in the exchange rate due to imported equipment or pharmaceutical products. Whereas the components that drive other elements in the basket, perhaps the fuel price, would not necessarily have such a big impact on healthcare/medical inflation. She mentioned that globally, the rule of thumb is that healthcare inflation is two or three percentage points above headline inflation and confirmed that this has also been the case in South Africa over the long term.

The factors that influence medical inflation include:

1. Tariff inflation, which is the increase in the cost of healthcare services linked to the CPI, based on agreements with healthcare providers.
2. Supply-side utilisation costs occur due to a greater supply of healthcare services, driven by new hospitals in oversupplied regions and advances in medicine, medical procedures and medical technology. New medical technology in healthcare typically comes at a much higher cost than the technology it replaces.
3. Risk management interventions reduce supply-side inflation. These interventions include fraud waste and abuse management, tariff negotiations and value-based contracting, amongst others.
4. Demand-side utilisation is driven by an increasing burden of chronic illness, plan-specific trends, adverse selection, as well as embedded COVID-19 cost.

The demand-side utilisation is impacted by the following unique factors experienced in 2023:

• ­Increased levels of adverse selection as a result of the challenging economic climate that members are facing. Typically, during periods of high inflation and high interest rates, medical schemes experience a higher level of adverse selection, with new lives claiming more on average and withdrawing lives claiming less than average, when compared to other periods.
• ­The ongoing cost of COVID-19, related to the testing, treatment and hospitalisation for COVID-19, is expected to continue and needs to be accounted for in the anticipated medical inflation for 2024. In 2019, medical schemes did not have any COVID-19 claims. 2023 is the first year since the pandemic began that medical schemes are able to estimate what to budget for the expected ongoing cost of COVID-19. Once these COVID-19 costs are included in the budget, the future costs are expected to increase with medical inflation, similarly to all other healthcare services paid by medical schemes
• ­Wellness programmes and initiatives can assist to reduce demand-side inflation. These programmes can support schemes in attracting and retaining younger members and encourages all members to live healthier lives. This may reduce the healthcare claims for members who engage in these programmes.
• Managing non-healthcare expenses, for example, administration expenses, managed care expenses, and other operating expenses, etc. may result in a reduction in overall medical scheme costs.

Closing remark

Simeka Health continuously monitors various risk factors related to medical schemes, such as average age, reserve levels, underwriting results, and non-healthcare expenses, as financial strength and stability are crucial to provide peace of mind to our members.

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