CIRCULAR 24 OF 2018: EVALUATION OF COST INCREASE ...

1 CIRCULAR . Reference: EVALUATION of contribution INCREASE assumptions for 2018. Contact person: Carrie-Anne Cairncross Tel: 012 431 0412. Fax: 012 431 0642. E-mail: Date: 4 June 2018. CIRCULAR 24 OF 2018: EVALUATION OF COST INCREASE ASSUMPTIONS BY. MEDICAL SCHEMES FOR THE 2018 FINANCIAL YEAR. Purpose This CIRCULAR provides an EVALUATION of industry cost INCREASE assumptions submitted by medical schemes for the 2018. financial year as provided in the benefit review submissions. The purpose of providing this information is to INCREASE transparency of the schemes' pricing decisions. Since 2010 the Council for Medical Schemes (CMS) embarked on a process of stringent review of medical schemes'. contribution and cost increases in order to limit the transfer of inappropriate cost increases to beneficiaries.

2 Chairperson: Dr. C Mini Acting Chief Executive & Registrar: Dr. S Kabane Block A, Eco Glades 2 Office Park, 420 Witch Hazel Avenue, Eco Park, Centurion, 0157. Tel: 012 431 0500 Fax: 012 430 7644 Customer Care: 0861 123 267. Legislative requirement The Medical Schemes Act, 131 of 1998 (the Act) outlines legislative requirements regarding how the CMS conducts its business with regards to benefit content configuration, as well as pricing of options: Regulation 8 (1) of the Act requires that any benefit option that is offered by a medical scheme must pay in full, without co-payments or use of deductibles, the diagnosis, treatment and care costs of the prescribed minimum benefit conditions.. Section 24 (2) (e) states that medical scheme does not or will not unfairly discriminate directly or indirectly against any person on one or more arbitrary grounds including race, age, gender, marital status, ethnic or social origin, sexual orientation, pregnancy, disability and the state of health.

3 Section 29 (l) makes it mandatory for the scheme to communicate with their members on any change in contributions, membership fees, or subscription, benefits or any other condition affecting their membership. Section 29 (2) and Section 35 of the Act seeks to encourage financial soundness of Medical Schemes. Section 31 which seeks to ensure that the scheme rules registration promotes equity in rule amendments, discourage prejudice towards the member through unlawful exclusion/limitation of benefits, also promote public accountability and transparency. Section 33 (2) indicates that approval of benefit options will be subject to provision of prescribed benefits, self- supporting in-terms of membership and financial performance, financially sound, the option should not jeopardize the financial soundness of any existing options within the medical scheme.

4 Chairperson: Dr C. Mini Acting Chief Executive & Registrar: Dr S. Kabane Block A, Eco Glades 2 Office Park, 420 Witch Hazel Avenue, Eco Park, Centurion, 0157. Tel: 012 431 0500 Fax: 012 430 7644 Customer Care: 0861 123 267. Page 2. Overview The analysis provided in this CIRCULAR unpacks contribution INCREASE assumptions into standard cost items and utilisation stratified by scheme size, scheme type, facility type, professional services, medicine costs, non-healthcare costs, ex gratia payments and all other relevant cost variables. Trends in economic indicators The South African economy grew by per cent in 2017 and the projected economic growth has been revised to for 2018, up by percentage points (National Treasury Budget Speech 2018). Whilst the unemployment rate in quarter 1 of 2018 remained unchanged from quarter 1 2017 at (Quarterly Labour Force Survey: Q1, 2018).

5 According to the Quarterly Employment Statistics (QES) in quarter 4 of 2017, formal sector employment increased by year-on-year comparisons, but has seen a quarter on quarter decrease of The average earnings paid to employees increased by year-on-year (QES: December 2017). The CMS published CIRCULAR 45 of 2017 advising medical schemes that cost INCREASE assumptions for 2018 should be limited to for each individual cost item. The recommendation was mainly based on the 2018 projected headline inflation forecast of both the South African Reserve Bank (SARB) and the National Treasury. At the time of publishing the CIRCULAR , the latest available headline inflation was as at May 2017. The year-on year-year headline inflation as measured by consumer price index decreased to in March 2018 before increasing to in April 2018.

6 % (Figure 1). According to the latest inflation forecast of the SARB, CPI is now projected to average for 2018 (SARB MPC statement, May 2018). Figure 1: Consumer Price Index changes for 2017/2018. Chairperson: Dr C. Mini Acting Chief Executive & Registrar: Dr S. Kabane Block A, Eco Glades 2 Office Park, 420 Witch Hazel Avenue, Eco Park, Centurion, 0157. Tel: 012 431 0500 Fax: 012 430 7644 Customer Care: 0861 123 267. Page 3. The slight improvement in domestic economic growth outlook, characterised by weak employment growth and consumption expenditure coupled with increases in the VAT rate might have a negative impact on the financial performance of the medical schemes in general, and affect premium affordability for the members. In addition, this affordability barrier is likely going to have a negative impact on membership growth within the industry.

7 Industry cost assumption data This section provides an outline of the methodology followed in the analysis of cost assumptions data submitted by medical schemes for the 2018 benefit year. In the analysis, the CMS undertook a quantitative review of the 2015-2016 Annual Statutory Return data, medical schemes' cost assumptions data, review of actuarial reports and an analysis of medical schemes risk measurement data triangulated with contextual analysis of the medical schemes market. In December 2017, 80 medical schemes submitted cost assumptions data with the submission of benefit changes and contribution increases for 2018. The data submitted by the schemes was consolidated, verified and analysed. Data from 77. medical schemes, representing about 99% of all beneficiaries in the industry, was found to be of appropriate quality for inclusion in the analysis, as shown in Table 1 below.

8 The medical schemes' submissions that were found to be of appropriate quality were made up of 21 open and 56 restricted medical schemes with 4 933 944 (56%) and 3 875 676 (44%). beneficiaries, respectively (Table 1 below). The data from medical schemes' submissions that were found to be of adequate quality were weighted by medical scheme size (number of beneficiaries) in order to calculate weighted averages reported in this document. Chairperson: Dr C. Mini Acting Chief Executive & Registrar: Dr S. Kabane Block A, Eco Glades 2 Office Park, 420 Witch Hazel Avenue, Eco Park, Centurion, 0157. Tel: 012 431 0500 Fax: 012 430 7644 Customer Care: 0861 123 267. Page 4. Table 1: Medical Schemes size categories Type of Size of Number of Percentage of Beneficiaries scheme scheme* schemes beneficiaries Small 4 32 922 Medium 7 189 727 Open Large 7 959 310 Very Large 3 3 751 985 Total open 21 4 933 944 Small 26 201 268 Medium 22 653 363 Restricted Large 6 689 178 Very large 2 2 331 867 Total restricted 56 3 875 676 Small 30 234 190 Medium 29 843 090 All schemes Large 13 1 648 488 Very large 5 6 083 852 Total all schemes 77 8 809 620 *Small: < 15 000 beneficiaries; Medium: 15 000 but 65 000 beneficiaries; Large: > 65 000 but 220 000 beneficiaries; Very large > 220 000 beneficiaries Scheme tariff INCREASE assumptions for 2018.

9 The average INCREASE assumptions for different tariff items, excluding the effect of utilisation, demographic changes and reserve building, are summarised in Table 2. Having considered the year-on-year CPI inflation rate and other key economic indicators, the CMS advised in CIRCULAR 45 of 2017 that cost INCREASE assumptions for the 2018 benefit year should be limited to for each individual cost driver. Chairperson: Dr C. Mini Acting Chief Executive & Registrar: Dr S. Kabane Block A, Eco Glades 2 Office Park, 420 Witch Hazel Avenue, Eco Park, Centurion, 0157. Tel: 012 431 0500 Fax: 012 430 7644 Customer Care: 0861 123 267. Page 5. Table 2: Summary contribution INCREASE assumptions by cost item and scheme size attributed to tariff increases Weighted Very Weighted average Cost item average Small Medium Large Large Open Restricted General practitioners All Specialists Anaesthetists Pathology Radiology Medical Specialists Surgical Specialists Dentists Dental Specialists Supplementary and Allied Health Professionals Medical Technology Hospitals Private Hospitals ('B' - Status) (058) Private Hospitals ('A' - Status) (057) Approved U O T U / Day clinics (077) Mental Health Institutions (055) Sub-Acute Facilities (049) Private Rehab Hospital (Acute) (059) Provincial Hospitals (056) Drug & Alcohol Rehab (047) Hospices (079) Unattached operating theatres / Day clinics (76)

10 Other Medicines Dispensed Ex gratia payments Managed care (Out-of-hospital) Non-healthcare expenditure Accredited managed healthcare Overall weighted tariff assumption INCREASE The overall tariff INCREASE assumption for 2018 was for the industry and differed by percentage points between open and restricted schemes at and respectively. Compared to the overall tariff INCREASE of in the previous year. The tariff INCREASE assumption for hospitals was , whilst the median INCREASE was The tariff INCREASE assumption for public hospitals, private hospitals and mental health institutions was , with the median INCREASE of percentage points higher at Chairperson: Dr C. Mini Acting Chief Executive & Registrar: Dr S. Kabane Block A, Eco Glades 2 Office Park, 420 Witch Hazel Avenue, Eco Park, Centurion, 0157.