Rethink medical funds’ solvency of 25%
By Patrick Masobe, 14 September 2016, bdlive.
The measure of a medical scheme’s liquidity depends on a constellation of factors, the combination of which is unique to each scheme. How often does the industry remember this, and has the time come to review the status quo?
As time passes, the ground tends to shift beneath the industry’s feet, with implications for the measures that truly constitute financial solvency. When the Medical Schemes Act (131 of 1998) was being drafted, the Department of Health had the delicate task of establishing the guidelines that would underpin the health-care funding industry in a young constitutional democracy. At this time, the financial soundness of the medical schemes industry was in a perilous state.
Now, almost 20 years later, the country and the health-care environment have altered significantly, yet medical schemes are still labouring under the weight of the 25% solvency requirement, which I consider to be a relic reflecting the uncertainty of those early days. Observers trying to make sense of trends affecting this industry often erroneously gauge medical schemes against this golden 25% solvency yardstick, taking this as a one-size-fits-all barometer of the financial health of a scheme, generally without due consideration of the complex interrelated factors that inform liquidity and sustainability.
We need a framework that evaluates the nuances of different risk management philosophies, membership profiles and pertinent factors affecting the liquidity position, and management thereof, for each medical scheme. Such a risk-based capital approach, which the Council for Medical Schemes explored in a discussion document in 2015, qualitatively weighs a number of factors influencing individual schemes’ capacity to meet their liabilities. The accumulated assets necessary to comfortably meet a scheme’s obligations to members are contemplated in light of the sum risks particular to the profile of each scheme.
The careful and judicious management of a scheme’s core liquidity would need to be at the heart of this solvency paradigm. The most practical approach would involve each scheme’s board of trustees developing its own liquidity-management strategy, informed by the scheme’s inherent risks and the liquid assets required to fulfil its obligations.
This plan could be periodically approved by the council, in much the same manner as it currently approves business plans for medical schemes that are under financial monitoring. Trustees’ estimates of the necessary liquidity level could be presented to the council for moderation, allowing for adjustments to ensure sufficient protection to cushion against unforeseen risks.
The merits of such a solvency framework are numerous. It reinforces a medical scheme’s governance responsibilities with respect to its claims’s contingencies, focuses supervision on inherent risks within a scheme, and leaves sufficient scope for the regulator to respond to uncertainties that may arise in the estimations. While such a framework could be critiqued on the basis that assessment measures for the different players in the industry would not be consistent, I would argue that this is where the strength of this proposal lies. This is because the membership profiles, inherent risks and approach to medical scheme management are not uniform, and should not be assessed using a single, rigid standardised measure.
While a risk-based capital framework would introduce certain complexities to the measurement of liquidity and solvency, it would also present a more accurate picture of schemes’ distinct circumstances, reflecting the stage of maturity our industry has reached. If we are all striving for accessibility and affordability in the years preceding the final implementation of the National Health Insurance plan, then it is imperative that we rethink our current reserve policy.
• Masobe is CEO of Agility Health. He led the government task team that drafted the Medical Schemes Act and was the founding CEO of the Council for Medical Schemes.