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. You may be wondering why some medical schemes appear to be listed on the JSE. You are not alone, hang on, we’ll get to that shortly.
Medical schemes are owned by their members. 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. This is done in the form of increased healthcare benefits or lower contributions.
Trustees have the same role that directors would have in a company. They are responsible for the survival of the scheme. Trustees hire a Principal Officer who has the same role as a CEO in a normal company. The Principal Officer is responsible for the day to day running of the medical scheme.
Some of the major medical schemes in South Africa include:
Discovery Health Medical Scheme (DHMS),
Government Employees Medical Scheme (GEMS),
The Principal Officer is assisted by a full staff complement. Their duties include:
- The collection of member contributions,
- Payment of claims,
- Fraud detection,
- Contracting with providers and
- other day-to-day functions.
But, running a medical scheme can get very complex. Many schemes choose to appoint external companies to take care of most day to day operations. This is where administrators come in.
Administrators are profit-making companies that are paid a fee by medical schemes. They do this with the promise that they would carry out some of the scheme’s activities at a lower cost. Major examples of Administrators are Discovery Health (PTY) LTD and Medscheme.
Some of these companies have the same name as the medical scheme they administer 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. Administrators can also manage more than one scheme and this is usually the case.
Some smaller schemes choose to carry out their day to day operations by themselves. These are known as self-administered schemes. But, when a scheme becomes large, the day to day operations become increasingly complex. Most schemes then appoint an administrator to handle the load. Some administrators use 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.
Should schemes hire profit making administrators?
Schemes that self-administer have the advantage of having pure administration expense. But, schemes that appoint external administrators have to pay a fee that covers administrator’s costs. The fee also has to cover any profit need that the administrator may have. Does this mean then that schemes that self-administer have lower administrative expenses? A look at regulatory filings showed that:
Schemes that self-administer tend to spend 9.9% of their money on administration.
Those that appoint an external administrator spend 9.4%.
Schemes that appoint external administrators have lower administration costs.
Coming back to the original question:
Medical schemes cannot make ‘profits’ in the usual sense of the word. Most aim to pay-out claims that almost equal the total amount collected from member contributions.
Any excess amounts collected are channeled into the scheme reserves (money set aside for a rainy day).