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Medical schemes haemorrhaging money in 'risk transfer’ agreements

Some of South Africa’s best-known medical schemes are losing money hand over fist in opaque “risk transfer” arrangements, in which they pay service providers millions of rand to manage claims that critics say they could easily handle in-house. Business Day reports that the deals mean there is less money available for their own members and raises questions about the oversight role being played by the sector’s watchdog, the Council for Medical Schemes (CMS). Despite noting the phenomenon in every annual report it has published for the past five years, the regulator appears to have left schemes to continue with these arrangements unfettered. In all, R1.179bn flowed out of schemes in this manner between 2013 and 2017, according to an analysis of data published by the CMS in its annual reports.

The report says Bonitas, South Africa’s second biggest medical open scheme, appears to have consistently lost money on these arrangements on a scale unparalleled in the industry. It lost a total of R692m on its risk transfer contracts between 2013 and 2017, more than half the industry total, and almost three times more than the next biggest loser, Momentum Health, which lost R238.7m over the period. Third in line was Sizwe, which lost R117.7m.

Under a risk transfer arrangement, the report says, a scheme pays a service provider a monthly fee to cover a specific number of beneficiaries for conditions such as diabetes, dentistry or optical needs. If members’ claims turn out to be less than these capitation fees, the service provider profits and the scheme loses out. If members’ claims are greater than the fees, the converse is true.

University of the Witwatersrand professor Alex van den Heever argues such deals are irrational, because they transfer a risk that medical schemes are large enough to carry themselves. Medical schemes are non-profit organisations that pool members’ risks and funds to cover future medical expenses. “I see no commercial logic in the interests of the scheme for these agreements, as they predictably lose money on an annual basis. The payment of dental benefits is not complex and should not be contracted for via a risk-transfer agreement. It’s like buying petrol through an insurance scheme,” he says.

The report says Bonitas has 720,000 members and is administered by Medscheme, which is owned by JSE-listed Afrocentric Group. Its annual reports show it has entered into several risk transfer arrangements with service providers, with the biggest losses accruing to the dental benefit management company Denis, which is owned by EOH.

Bonitas lost R353m on these contracts between 2014 and 2017, according to its annual reports, constituting 65% of its losses on its risk transfer arrangements over this four-year period. Other companies it lost money to include optical benefits company Iso Leso, diabetes management company CDE and emergency services provider ER24.

Bonitas principal officer Gerhard van Emmenis is quoted in the report as saying it is misleading to simply consider the total amount of money lost by the scheme on its risk transfer arrangements, as this fails to take account of the size of its membership base, and a more appropriate measure is the net loss per beneficiary. But even by this metric, Bonitas had the third-biggest average losses per beneficiary between 2013 and 2017, at R200 per beneficiary per year. It was the biggest loser using this lens in 2013 at R231 per beneficiary, and in the top five for every year after that. Momentum was in the top five for 2014, 2015 and 2017. In 2017 Bonitas lost R211 per beneficiary, the most recent year for which data is available, while Momentum lost R196 per beneficiary.

The report says van Emmenis also took issue with the word “loss”, saying the fees paid to third parties in risk party arrangements less the claims incurred was classed as an “expense” on its books. “Viewed in context, and once the term ‘loss’ is properly qualified as an ‘expense’, the scheme did not make any losses on Iso Leso or any other risk transfer arrangement,” says van Emmenis.

The report says none of the other schemes approached took this view, and the CMS itself consistently uses the phrase “schemes with highest risk transfer arrangement losses” in tables in its annual reports that list the 10 schemes that report the biggest net outflows on these arrangements.

“Naming the loss an ‘expense’ is an obfuscation,” says van den Heever. The report says he argues the losses such as those incurred by Bonitas on its contract with Denis are part of the schemes’ underwriting surplus, which have been predictably lost to a third party, since the risks can be calculated and known in advance. “This would under normal circumstances attract the attention of a regulator as the contract appears to be prejudicial to members. The failure of the regulator to intervene raises serious questions about the conduct of the CMS,” he says.

Van Emmenis says Bonitas conducted an analysis of its contract with Denis in August 2016 and was satisfied that the 19% difference between the capitation fees paid and the claims incurred was within the parameters of the costs generally incurred on risk transfer arrangements.

The report says Denis CEO David Carolus declined to answer questions about the specific nature of the company’s contract with Bonitas, citing confidentiality agreements. He defended the merits of risk transfer arrangements in general, saying his company had the expertise to manage dental benefits better than medical schemes could themselves. “Denis has created unique systems, software, and managed care interventions to assist medical schemes in managing and predicting dental spend as well as maximising dental benefit value for members,” he said.

The report says CMS registrar Sipho Kabane did not respond to specific questions asking for his view on risk transfer arrangements, why the losses were allowed to continue, and whether it had ever intervened. The regulator’s communications manager Pulane Molefe says it is engaging with schemes about the value offered by risk transfer arrangements, which varied depending on the nature of the contracts entered into.

Momentum’s principal officer, Toni van den Bergh, says well-managed risk transfer arrangements reduced downstream costs such as hospital admissions. “Looking only at the risk transfer component obfuscates the overall value,” she said, arguing that Momentum’s administrator MMI could manage these benefits more cost-effectively than the scheme. “It is not in the interest of our beneficiaries to attempt managing these risks ourselves as the cost of procurement and infrastructure would be disproportionate. Without the scale of MMI, as the risk taker, the scheme’s providers’ costs would increase, but we cannot share that level of detail with the market as it would compromise many relationships,” she is quoted in the report as saying.

Sizwe Medical Fund says it has recently reviewed and exited some of its risk transfer arrangements because they were costing the scheme too much money. These contracts were entered into when the scheme was under curatorship in 2014, and several came to an end in December 2018. “We’ve had poor outcomes, and poor actuarial input previously,” it says in the report. Between 2013 and 2017 it lost R117m on these contracts, at an average rate of R190 per member per year. Throughout this period the regulator remained at arm’s length. All of Sizwe’s risk transfer arrangements were registered with the CMS, but it did not scrutinise any of these contracts, says Sizwe.

The report says its analysis shows that while 28 medical schemes reported losses on risk transfer arrangements in 2017, another 36 reported a net gain, including Discovery Health Medical Scheme (DHMS), Bankmed and Polmed. DHMS is administered by Discovery Health, a subsidiary of JSE-listed Discovery.

Discovery Health CEO Jonathan Broomberg argues that even large schemes may get better value for money from managed care organisations than if they tried to manage these risks themselves. “In our experience, this is particularly the case with dental care services and optometry.” Discovery Health negotiates three-year terms on its risk transfer contracts, but would renegotiate prices during the term if the managed care organisation was unduly benefiting, says Broomberg.

Nevertheless, the report says, 16 schemes, including the Government Employees Medical Scheme (GEMS), Spectramed and Genesis, do not enter into these kinds of arrangements at all. GEMS is the biggest restricted medical scheme in South Africa, with 1.8m beneficiaries, and is limited to civil servants and their dependants. Its principal officer Guni Goolab says the size and scale of the scheme means it simply has no need for risk transfer arrangements, as it can absorb the risks of members’ claims itself.

The report says in the absence of regulatory intervention, consumers may wonder if the Competition Commissions Health Market Inquiry, which has spent the past five years probing the private health-care sector, can shed any light on risk transfer arrangements. But it too appears to be stumped, noting in its interim report a striking lack of evidence of the benefits provided by alternatives to South Africa’s typical fee-for-service payment model, including risk transfer arrangements.

“We noted a lack of transparency with alternative reimbursement models. We can’t tell how beneficial they are,” the inquiry’s acting director Mapato Ramokgopa is quoted in the report as saying.

[link url=""]Business Day report[/link]

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