Since its establishment in 1968, Medshield has been providing affordable, high-quality health insurance to South Africans for nearly 50 years. Currently the Scheme offers a range of seven benefit options to cater to different lifestyle and budget requirements, thus making Medshield one of the best medical aid schemes in the country.


AMedical Scheme is essentially a financial institution, we collect contributions to defray healthcare costs but, most importantly, we hold members’ funds in trust. Medshield is a R2.7-billion entity and according to Rob Bennett, CFO, the Scheme’s solvency position is viewed to be very strong, with the statutory solvency margin recorded at 52% in FY16 (FY15: 53%).

“As one of the highest reserves observed across the industry, this represents a key credit strength and the Scheme’s management has highlighted plans to utilise excess reserves to alleviate affordability pressures faced by members. In addition, the Scheme has a sizeable and diverse membership, which is also viewed as a key strength. This has been recognised by our ability to maintain our credit rating of AA- for 10 consecutive years,” says Bennett.

In terms of financial management trends, the healthcare industry has experienced high healthcare costs over the past financial year, and it is Bennett’s opinion that risk and cash flow management will be paramount going forward.

“Medical schemes need to ensure that they have the required liquidity to pay claims as their obligations arise. Affordability is the most significant issue facing the consumer at present.

“We have seen that the majority of medical schemes in South Africa have levied double-digit contribution increases for 2017. This is not sustainable going forward. We have already seen that the growth in new membership in the industry has effectively stalled, and I would not be surprised if (when the statistics for 2016 are released by CMS) the industry, in fact shrunk in 2016,” he explains.

Another threat, which might emerge in the next three to five years is access. South Africa is experiencing a shortage of trained healthcare professionals and the average age of doctors is increasing, which indicates that we are not training or retaining a sufficient number of healthcare professionals.

Bennett believes solvency is a key challenge facing medical schemes, which have had to levy significant contribution increases on their members due to soaring healthcare costs.

“Managing healthcare costs and fraud within healthcare expenditure is critical. We estimate that between 5-15% of claims are fraudulent, so managing this risk is critical to long-term sustainability,” says Bennett.

Additionally, medical malpractice suits are also having a negative impact on healthcare costs, with the increase in medical malpractice litigation driving the higher costs of medical care. Doctors are having to revert to defensive medical practices which are increasing healthcare spend, for example, the doctor sees a patient and then orders a whole battery of tests to ensure that he has covered everything, just to be safe. This is very similar to the United States.

Medshield’s key deliverable is to ensure they are able to pay claims on time, and Bennett explains the main challenge they face is collecting contributions timeously, and understanding the cash flow cycle in the Scheme so that they have sufficient cash on hand to pay claims—as well as non-healthcare expenditure—timeously.

“We currently pay claims three times a week and, to date, we have not missed a claims run due to cash flow issues. This is a non-negotiable deliverable within Medshield Medical Scheme. Secondly, the accounts receivable function is critical to ensuring that we collect what we invoice,” he elaborates.

Medshield has implemented a cash flow model to understand the cash cycle of the Scheme. Based on the model, they know what their short-term cash commitments are and ensure they have the requisite cash on hand to meet those obligations as they fall due.

Bennett says surplus cash is invested in call and money market accounts where they maximise their returns on short-term cash and have access to that cash as and when it is required.

In terms of protecting the company and its members from financial risks, Bennett explains there’s a balancing act that takes place. The basic principle of the Scheme is to collect contributions from members and pay healthcare costs on their behalf whilst running the Scheme.

“So, in a perfect world, a scheme would raise sufficient contributions to pay claims and non-healthcare costs and generate a surplus sufficient enough to meet the statutory solvency ratio of 25%. On the one hand, a key risk is not raising sufficient contributions to balance the equation, however, on the other hand, the contribution rate should not be increased to such a level that it becomes unaffordable for members. So, in effect, one has to balance out those two key risks,” he explains.

”A secondary risk is that they need to maintain access to healthcare for their members. This risk also needs to be balanced, as you can reduce access to healthcare in order to manage healthcare costs—through mechanisms such as networks—but if you restrict access too much, members would be unsatisfied because they are denied access to healthcare.

”Lastly, another risk is the regulatory environment and the eventual roll-out of National Health Insurance (NHI), which, by the way, is supported as long as it achieves universal healthcare and recognises skills in the private sector. The Competition Commission of South Africa has been probing the private healthcare industry but, to date, there is no certainty of the outcome,” Bennett adds.

With regard to the foreign exchange challenges faced, Bennett says the issue is around the impact of the rand/dollar exchange rate on medical inflation and how to manage foreign exchange risk.

“A significant driver of medical inflation is inputs into the local healthcare industry that are sourced from overseas, such as medical equipment and medication. Secondly, due to the shortage of healthcare workers, particularly nurses, wages are normally higher than CPI to retain such workers,” he says.

The impact is that medical inflation is around CPI + 3-4% and has to be offset by a combination of contribution increases and returns of investments. The challenge with investments is that Regulation 30 restricts the amount that schemes can invest in foreign instruments to 2.5% of the value of the total portfolio of the scheme. Thus, one currently can’t hedge this risk effectively.

In the coming years, Medshield’s strategy is to utilise their reserves to minimise their contribution increases so that it remains affordable to their current and potential members, whilst guarding the financial sustainability of the Scheme. Bennett says ensuring the generation of sufficient surpluses to maintain their statutory solvency ratio is crucial.

Rising healthcare costs are the single biggest issue facing the Scheme (and the industry), and Bennett says Medshield’s Clinical Risk function manages this very effectively.

Medshield has a long, successful history within the healthcare industry and Bennett believes the fact that they are celebrating their 50th anniversary next year is a proud achievement in itself.

“We have a healthcare funding heritage, which is a testament to the expertise, experience and the ability of the Scheme to withstand industry and economic challenges, thus providing our members with consistent access to quality health cover. To have the trust of South Africans for so many years is a major accolade,” he says.

Rob Bennett is a qualified chartered accountant (CA(SA)) with an Honours in Finance and has 20 years’ commercial experience. He has worked in the healthcare, ICT, retail, clothing and textile manufacturing sectors for both listed and private companies.

“Experience has taught me how important cash flow is and equally, how important it is to manage it effectively. Managing cash flow properly can lead to an increase in confidence in an organisation as viewed by its stakeholders/members, service providers, regulators and financial institutions, not to mention the staff.

“Conversely, mismanagement can lead to a loss of confidence which can have devastating consequences. I managed cash flow through the 2007-8 financial crisis and the lessons learnt during those times have served me well since.

“The second lesson I learnt is effective financial planning. Budgeting and forecasting for both the short term and medium term—around 1-3 years—is fundamental in assisting management in making the correct decisions for the organisation.

“Cash flow management and financial planning (and monitoring) are fundamental in running an organisation successfully,” he says.

As a leader, Bennett stresses the importance of leading with credibility and integrity in order to set the right example.

“With integrity comes honesty and transparency, then the organisation can believe in the leadership and you can take them along with you on the journey to success. I have always tried to lead with integrity and maintain my credibility, and it has served me well. I believe these qualities enable me to build strong relationships and, as mentioned above, I was able to raise cash during the financial crisis because our bankers believed in me and the organisation,” he concludes.

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