What Is a Medical Aid Fund?
A medical aid fund may be defined as a fund to which
a large number of people contribute, to help with
unexpected medical expenses when needed.
Medical aid fund members collectively pool their risk against
the very real likelihood of incurring medical expenses that
would otherwise be difficult to pay out of their own pockets. The
premiums (money you contribute) for your medical aid fund
benefit option every month, is pooled together with all the other
member contribution premiums. Together this forms a cash pot
from which the medical aid fund pays out claims.
How Do Medical Aid Funds Determine Premiums?
How do medical aid funds know how much money is
needed to cover healthcare expenses?
Medical Aid Funds estimate the overall annual risk of their
members’ healthcare expenses. They do this by reviewing
historical claims and expected increases in the cost of medical
treatment (i.e. “medical inflation”).
Subsequently, the medical aid funds determine a finance
structure (your monthly premium) to ensure that sufficient
money is available to pay for the healthcare benefits which
they plan on selling to you. This means they analyze how much
their members claim, what they claim for, and the cost of the
healthcare treatment.
The medical aid funds then know what to charge members in
terms of premiums for coverage. The higher level of coverage
you require the more you pay. It is because if you want access
to a bigger part of the collected medical aid fund cash pot, your
contribution towards it needs to be bigger. If you want access to
a smaller part of the pot, your contribution needs to be smaller.
This is part of the reason why Medical Aid Funds do not allow
you to upgrade or downgrade your benefit option during the
year. Each year around the end of November the medical aid
funds release their premium increases for the next year.
The costs of healthcare expenditure such as doctor
consultations fees and hospitalisation fees to name but two, and
non-healthcare expenditure such as audit fees and marketing
costs paid during the current year will determine the increase in
the premiums of the following year.
The number of members that leave and join another Medical
Aid Fund during the year also influences the premium increases.
If medical aid funds are losing members, they either need to
reduce benefits or increase premiums.
What Does My Contribution Pay For?
What does my contribution to the medical aid fund pay?
A significant portion of the contribution premiums are used
to cover healthcare expenditure such as specialists’ consultation
fees and medicines to name but a few, because this is the purpose
of a medical aid fund. The premiums are also used to pay for the
following, amongst other expenditures:
Administration costs incurred for the administration of the
fund, i.e. receipt of premiums and settlement of claims;
w Managed care fees paid to medical professionals to
ensure members claims are approved for proper, cost effective
treatment;
w Professional fees to investment managers for investing
the fund’s unused cash and for managing these investments;
w Auditors, as medical aid funds are required by law to have
their financial statements audited; and
w Actuaries who assist the fund in determining its funding
requirements, amongst other consultation services.
Industry Spending Overview
Table 1 illustrates the proportion of contributions spend
on healthcare expenses and non-healthcare expenses, by the
medical aid fund industry during the period 2011 to 2015.
Table 1: Healthcare and non-healthcare costs as percentage
of total premiums, 2011 to 2015
Source: NAMFISA Annual Report data for Medical Aid Funds
for the financial years ended 31 December 2011 to 2015
What Happens to Surpluses?
The portion of the premiums remaining after settling
healthcare and non-healthcare expenditure is not shared among
the members of medical aid funds or to anyone. The law states
that no portion of any surplus realized by the fund in any financial
year may be distributed to its members or any other persons.
Instead, these surpluses are built up and serves as a safety net
for the medical aid funds during periods when claims are higher
than premiums.
These unused premiums built up over a period of time are also
referred to as the fund’s reserves and NAMFISA’s requirement
is that the reserves must at all times be maintained at 25% of
annual contributions, i.e. the reserves level.
conclusion
In conclusion, medical aid funds are funded through the
contributions paid by the members of medical aid funds. The
portion of contributions that remain after settling the expenses
are collected to serve as a safety net during periods when claims
are very high.