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How much profit do medical schemes actually make?

Medical Aid

How much profit do medical schemes actually make?

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The short answer is 0. The long answer is a little more complicated than that. Medical schemes are, by law, non-profit making entities. Unlike companies, they do not have shareholders. If you are wondering why some medical schemes appear to be listed on the JSE then you are not alone, just hang on, we’ll get to that shortly.

Ownership

Medical schemes are owned by their members so basically anyone who has contributed to the medical scheme is a member and has the right to vote for trustees. Any ‘profits’ obtained by the schemes have to be given back to members in the form of increased healthcare benefits or lower contributions. Trustees have the same role that directors would have in a company and are ultimately responsible for the survival of the scheme. Trustees hire a Principal Officer who has the same role as a CEO in a normal company and is responsible for the day to day running of the medical scheme.

Principal officer

The Principal Officer is assisted by a full staff complement who look after the investment of the scheme’s money. This includes the collection of member contributions, payment of claims, communication and other day-to-day functions. However, running a medical scheme can get complex very quickly and many schemes choose to appoint external companies to take care of most day to day operations – this is where administrators come in.

Administrators

Administrators are profit-making companies that are paid a fee by medical schemes with the promise that they would carry out some of the scheme’s activities at a lower cost than the scheme could on its own and still make a profit. Some of these companies have the same name as the medical scheme due to historical reasons. This is what confuses most people into thinking that schemes are profit-making companies. In other words, medical schemes cannot be listed on the JSE but their administrators can.

Some smaller schemes choose to carry out their day to day operations by themselves – these are known as self-administered schemes. However, when a scheme becomes large, the day to day operations become increasingly complex and most schemes appoint an administrator to handle the load. Some administrators employ thousands of employees to handle call centres, disease management, claim payments, premium collection, formulation of scheme rules, and negotiation of prices with providers among other activities.

Schemes that self-administer have the advantage of having pure administration expense whereas schemes that appoint external administrators would have to pay a fee that would cover the costs that the administrator incurs as well as any profit requirement that the administrator may have. Does this mean then that schemes that self-administer have lower administrative expenses than those that appoint external administrators? A look at regulatory filings showed that schemes that self-administer tend to spend 9.9% of total contributions on administration expenses whereas those that appoint an external administrator tend to spend 9.4%. In simpler terms, schemes that appoint external administrators have lower average administration costs than those that do themselves.

Coming back to the original question – medical schemes cannot make ‘profits’ in the usual sense of the word and most schemes aim to pay-out claims that almost equal the total amount collected from member contributions. Any excess amounts collected are channelled into the scheme reserves (money set aside for a rainy day).

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Thando

Thando is currently the Group Actuary at Clinix Health Group, having previously served as Actuary in Discovery Limited's R&D Lab. Thando loves tech, design, reading and is very passionate about the development of the African continent. Thando also runs Litmail, a tech startup in the e-communication space. All views expressed are Thando's own and neither reflect nor are influenced by the views of affiliated companies.

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