Last year open medical scheme Health Squared found itself at the point of no return when its reserves fell to just above 2% (well below the statutory requirement of 25%), and its Board of Trustees had to apply for voluntary liquidation.
This left Health Squared members in a lurch, having to find alternative medical scheme cover amidst tremendous uncertainty, a situation most of us indeed want to avoid.
Whereas the failure of medical schemes luckily does not occur every day, we can learn from situations like the above – especially how vital it is that medical schemes keep their financial house in order, from both a short- and long-term perspective.
With this in mind, we talked to Jeremy Yatt, Fedhealth Principal Officer about the health of Fedhealth Medical Scheme’s finances, in particular its reserves and Global Credit Rating (GCR).
Intermedia: Jeremy, what are the so-called reserves we hear about in medical scheme terms?
Jeremy Yatt (JY): Reserves are the minimum accumulated funds that must be kept by a medical scheme as mandated by the Medical Schemes Act (131 of 1998). The Act prescribes that reserves must always be maintained at a minimum level of 25% of annualised gross contributions, except for new medical schemes where phase-in solvency ratios apply.
Intermedia: What is the purpose of having these reserves in place?
JY: They are there to protect members’ interests by guaranteeing the continued operation of a scheme. Reserves ensure that the scheme is able to pay for members’ claims as they arise, and act as a buffer against unforeseen developments, whether from claims, expenses or adverse market conditions. When these reserves fall below the prescribed solvency ratio, it could indicate a medical scheme’s potential inability to meet its obligations in the long term.
Intermedia: Which brings us to an interesting question, how does Fedhealth’s reserves compare?
JY: We are proud to share that Fedhealth has a very healthy solvency ratio of 42.7%, which is 17.7% higher than what is required by the Council for Medical Schemes. This is the result of the prudent management of members’ reserves.
For example, in 2022, our investments earned a return of 10.2%:
- 2022 inflation: 6.9% (real return of about 3.3%)
- S&P 500 Price Index returned 19.64% in 2022
- Allan Gray Stable Fund returned 9.2%
Intermedia: Fedhealth has an AA- Global Credit Rating, what does this mean?
JY: Our AA- GCR, which we have retained for 15 consecutive years I might add, means that we have ‘very strong financial security.’ It puts us on par with GEMS, which is the largest restricted medical scheme in South Africa; Bonitas, the country’s 2nd largest open scheme; Momentum, the 3rd largest open scheme in SA, as well as Profmed, Medshield and MediHelp. As you can see, we find ourselves in very esteemed company!
Intermedia: Please explain Fedhealth’s risk contribution to risk claim ratio?
JY: Of all the risk contributions made for the year 2021, 90% were used to pay claims from risk. This means that Fedhealth options are priced so accurately, that the contributions paid by our members are closely linked to the money we pay back to them. We are able to do this while holding a solvency ratio well above regulatory requirements.
Intermedia: If Fedhealth’s finances are in such good standing, couldn’t the Scheme afford to give something back to its members?
JY: Yes, and that is exactly what we did in the 2022 benefit year. Thanks to our strong financial position and excellent fiscal management, we were able to give R107 million back to our members through delayed contribution increases and other interventions. We realised members were facing a tough period, just coming out of the COVID-19 pandemic and the resultant economic blowback. As such, the Board made the unanimous decision to afford members a contribution increase holiday from January 2023 to April 2023.
Interesting to note: Had Fedhealth not delayed our contribution increase in 2022, we would have recorded a net surplus of 1% of contributions.
Intermedia: What are some of the measures Fedhealth use to save members money?
JY: A very important measure we use to keep costs down for members is managed care interventions, for example, provider networks, as well as predictive modelling to intervene in emerging risk and high risk beneficiaries. These interventions help us to ensure that members get the appropriate care they need, while keeping costs down. Without managed care, the Scheme would need to increase contributions by 6% in order to maintain the same benefits.
The proof is in the numbers and Fedhealth’s are looking particularly healthy at this point in time.
