Proposed merger: TopMed and Bepmeds 27 October 2010 This document was compiled by Momentum Group Health Actuarial (MGHA) and completed in the best interests of the clients, TopMed Medical Scheme and The Built Environment Professional Associations Medical Scheme (Bepmeds). MGHA assisted with the proposed amalgamation analysis to determine the long term financial impact on both schemes.
Contents 1 INTRODUCTION AND EXECUTIVE SUMMARY... 4 1.1 OBJECTIVE... 4 2 MEDICAL SCHEME SUMMARY... 4 2.1 BACKGROUND INFORMATION OF SCHEMES... 4 2.2 OPERATIONAL COMPARISON... 8 2.3 DETAILS REGARDING THE COMBINED SCHEME... 9 2.3.1 Administrative... 9 2.3.2 Related parties and service providers... 11 2.3.3 Membership and rules... 12 2.3.4 Mission and objective... 12 2.3.5 Benefit options... 13 2.3.6 Bepmeds and its employees... 14 3 STRATEGY AND IMPLEMENTATION... 14 3.1 SWOT ANALYSIS OF THE COMBINED SCHEME... 14 3.1.1 Strengths and opportunities... 14 3.1.2 Weaknesses and threats... 15 3.2 IMPACT OF BENEFIT DIFFERENCES ON BEPMEDS MEMBERS... 16 4 MARKET ANALYSIS... 16 4.1 MEMBERSHIP MOVEMENT... 16 4.1.1 Communication strategy... 18 4.1.2 Geographical distribution... 20 5 CONTRIBUTIONS... 20 5.1 CONTRIBUTION TABLES... 20 5.1.1 2010 contribution tables... 20 5.1.2 2011 contribution tables... 21 5.2 CONTRIBUTION COMPARISON... 22 5.2.1 Pro Basic... 22 5.2.2 Pro Core... 23 5.2.3 Pro Elite... 23 5.2.4 Scheme... 23 6 BENEFIT STRUCTURES... 23 6.1 BENEFIT COMPARISON... 23 7 NON-HEALTH EXPENDITURE... 25 8 SENSITIVITIES... 25 9 RISK MANAGEMENT... 26 10 FINANCIAL PLAN... 27 2
10.1 SOLVENCY RATIO COMPARISONS... 27 10.2 CONSOLIDATED INCOME STATEMENT: COMBINED SCHEME... 28 10.3 CONSOLIDATED YEAR TO DATE INCOME STATEMENT: COMBINED SCHEME... 31 11 CONCLUSION... 32 ANNEXURE: HIGH-LEVEL FINANCIAL RESULTS FOR DIFFERENT SCENARIOS... 33 3
1 Introduction and Executive Summary This document outlines a proposal to transfer the assets and liabilities of The Built Environment Professional Associations Medical Scheme ( Bepmeds ) to TopMed Medical Scheme ( TopMed ) and to support the Registrar in his decision to approve such a transfer. 1.1 Objective The open scheme market has seen very little growth since 2003. In this stagnant market the biggest open scheme has increased its market share and dominance from ±36% in 2003 to ±41% in 2009 no other scheme has managed to achieve this. The market / industry can clearly be described as a non-growing, mature industry dominated by one player. These market dynamics leave other players with only a few strategies to be successful. These include: Consolidation to ensure sensible volumes and scale to optimise buying power, and persistently driving costs down. This can be achieved by process efficiencies, adding more and alternative distribution channels into market segments where there is still movement/growth in the overall mature market; Pursuing a focused strategy by identifying, creating and capitalising the growth segments within the industry, i.e. focusing on those market segments where the industry is seeing change, growth and development. In the case of the open medical scheme market it predominantly includes new entrants to the labour market and low income earners previously uncovered; Challenger schemes need to build a competitive advantage of their own; Quality improvement and product innovation in the growth segments. In short to be a successful player in the current market dynamics necessitates: A scheme that has a large volume of members; Product innovation and distribution focus on the two market segments where organic growth is deemed possible, namely new first time buyers (predominantly individuals), and low income compulsory group business; Growth through amalgamations and transfers where possible; A brand awareness with both existing and potential customers. 2 Medical Scheme Summary 2.1 Background information of schemes TopMed is an open medical scheme which was first registered in 1972. It is a member focussed medical scheme providing a full range of affordable and transparent options. With 5 options ranging from Traditional, New Generation to a basic Network option, TopMed offers flexibility of choice and the ability to provide a healthcare solution to suite both the corporate and individual markets. TopMed currently has around 11 250 members. 4
Bepmeds is a restricted scheme in terms of the Medical Schemes Act, which was created for members of the supporting Professional Associations, ASAQS, SAACE (now CESA), SAIA and their employees and registered in 2002. Bepmeds rules define participating professional associations as the following: The Association of South African Quantity Surveyors ( ASAQS ) Consulting Engineers South Africa ( CESA ) The South African Institute of Architects ( SAIA ) The Association of Construction Project Managers ( ACPM ) The Institute of Landscape Architects ( ILA ) Economic conditions over the past two years hit the built environment industry particularly hard, which rendered Bepmeds unable to grow its membership to a size which would ensure long-term stability. Bepmeds membership numbers are very stable and have been hovering around the 2 000 member level for the past 2 years. The Council for Medical Schemes ( Council ) has expressed concern with respect to the future sustainability of Bepmeds, given their small membership size and low solvency level. The Council has therefore directed Bepmeds that they need to find an amalgamation partner or liquidate. The following shows the current administrators, Managed Healthcare service providers, related parties and primary healthcare and other service providers of both schemes: TopMed Bepmeds Administrator MMSA MMSA Managed Healthcare: capitated service providers Managed Healthcare: management service providers CareCross PPN ER24 CareCross Aid for Aids Netcare 911 MMSA MMSA Reinsurers N/A Centriq/Santam TopMed offers five benefit options to the open market. Demographic information per benefit option as at 1 September 2010 is provided below: 5
Sep 2010 Tradition al Incentive Savings Incentive Comprehensive Network Hospital Plan Number of members 1 233 3 377 2 247 3 108 1 289 Number of beneficiaries Average beneficiary age 1 975 8 496 4 821 6 037 2 704 61.74 35.58 46.54 31.60 39.20 Pensioner ratio (65+) 53.3% 8.5% 22.4% 4.6% 14.3% Chronic ratio 62% 19% 47% 12% 17% Family size 1.6 2.5 2.1 1.9 2.1 The Network option is salary banded, with the following distribution: Number of Salary Band members Percentage of members Network <R7500 1 652 53.1% Network R7501 R13000 877 28.2% Network > R13000 582 18.7% An additional income band will be introduced in 2011 for members earning below R3500 per month. Bepmeds offers three options to its members, demographic information per benefit option as at 1 September 2010 is shown below: Sep 2010 Pro Basic Pro Core Pro Elite Number of members 198 979 792 Number of beneficiaries 339 2 234 1 968 Average beneficiary age 28.62 31.86 40.11 Pensioner ratio (65+) 1.5% 4.9% 10.5% Chronic ratio 5% 14% 33% Family size 1.7 2.3 2.5 Detailed benefit descriptions of each option are given in a separate document. The following table sets out the main financial information of both schemes for the financial year 2009: 6
TopMed Bepmeds TopMed Bepmeds TopMed Bepmeds R'000 R'000 %GC 1 %GC R pmpm 2 R pmpm Gross contributions 296 631 54 918 100.00% 100.00% 1 981 2 191 Savings (21 264) (8 468) 7.48% 15.41% (148) (337) contributions Net contribution 275 007 46 451 92.52% 84.59% 1 833 1 853 income Relevant healthcare (244 698) (38 354) 82.32% 69.85% (1 631) (1 530) expenditure Gross healthcare 30 308 8 150 10.20% 14.84% 202 325 result Managed Healthcare: (7 891) (1 027) 2.65% 1.87% (52) (41) management services Administration (32 968) (2 868) 11.09% 5.22% (220) (114) expenditure Net recovery / - 380 0.69% 15 (expense) on commercial reinsurance Acquisition, (6 629) (1 244) 2.23% 2.27% (44) (50) marketing and servicing costs Net impairment (66) 5 0.02% 0.01% (0) 0 losses on healthcare receivables Net healthcare result (17 245) 3 396 5.80% 6.18% (115) 135 Investment income 12 251 485 4.12% 0.88% 82 19 Net surplus/(deficit) (4 994) 3 881 1.68% 6.16% (33) 155 for the year Fair value 2 390-0.8% 16 adjustment Total comprehensive (2 604) 3 381 0.88% 6.16% (17) 155 surplus/(deficit) Solvency ratio 37.0% 10.08% As at 31 December 2009 TopMed had reserves of R112m, or R8 962 per member. This equates to a statutory solvency ratio of 37.0%. Bepmeds had reserves of R5.5m, or R2 675 per member, equating to a statutory solvency ratio of 10.1%. 1 %GC = Percentage of gross contributions 2 Rand per member per month 7
The following table shows the same features for the year to date ended 31 August 2010, according to the latest available figures: TopMed Bepmeds TopMed Bepmeds TopMed Bepmeds R'000 R'000 %GC 3 %GC R pmpm 4 R pmpm Gross contributions 197 944 40 875 100.00% 100.00% 2 162 2 521 Savings (16 387) (6 314) 8.28% 15.45% (179) (393) contributions Net contribution 181 557 34 561 91.72% 84.55% 1 983 2 149 income Relevant healthcare (166 296) (29 613) 84.01% 72.45% (1 816) (1 841) expenditure Gross healthcare 15 261 4 948 7.71% 12.11% 167 308 result Managed Healthcare: (4 035) (76) 2.04% 0.19% (44) (5) management services Administration (16 024) (1 886) 8.10% 4.61% (175) (117) expenditure Net recovery / - (48) 0.12% (3) (expense) on commercial reinsurance Acquisition, (7 812) (877) 3.95% 2.15% (85) (55) marketing and servicing costs Net impairment (394) (8) 0.2% 0.02% (4) (0) losses on healthcare receivables Net healthcare result (13 003) 2 052 6.57% 5.02% (142) 128 Investment income 8 442 365 4.26% 0.89% 92 23 Net surplus/(deficit) (4 562) 2 418 2.30% 5.92% (50) 150 for the year Solvency ratio 35.1% 12.97% As at 31 August 2010 TopMed had reserves of R109m, or R9 610 per member. This equates to a statutory solvency ratio of 35.1%. For Bepmeds the reserve level is R8.0m with a statutory solvency ratio of 12.97%. The September management accounts show an improvement in the solvency ratio to 13.78%. 2.2 Operational comparison Below is a comparison of the schemes current suppliers as well as the proposed suppliers for the combined scheme: 3 %GC = Percentage of gross contributions 4 Rand per member per month 8
TopMed Bepmeds Combined scheme Administrator MMSA MMSA MMSA Managed Healthcare: capitated service providers CareCross PPN ER24 CareCross Aid for Aids Netcare 911 CareCross PPN ER24 Managed Healthcare: MMSA MMSA MMSA management service providers Actuarial services MMSA MMSA MMSA Distribution channels Investment management Corporate brokers TopMed Distribution* MedQuote (internet) Medscheme Asset Management Profhealth Benefit Consulting NMG Beverley Tarpey Alexander Forbes Medscheme Asset Management Auditors Deloitte & Touche Deloitte & Touche Corporate brokers TopMed Distribution MedQuote (internet) Medscheme Asset Management Deloitte & Touche *The contract with TopMed Distribution will cease at the end of March 2011 and will aid in reducing the non-healthcare costs of the combined scheme going forward. 2.3 Details regarding the combined scheme 2.3.1 Administrative It is suggested that the five TopMed benefit options be retained and Bepmeds members be accommodated within the TopMed benefit range. All five TopMed option names will remain the same. The combined scheme will continue to operate under the name TopMed as at the proposed transfer date of 1 January 2011. The addresses of the combined scheme s registered office are given below: Physical address: 1-3 Canegate Road La Lucia Ridge KwaZulu-Natal 4019 Postal address: P O Box 2338 Durban KwaZulu-Natal 4000 The foremost operational advantage is that both schemes use the same administrator, MMSA, and the combined scheme will continue to do so. This will be helpful in operational matters such as data transfer, IT compatibility, membership number retention, member communication and call centre operation. 9
The auditors of the combined scheme will be Deloitte & Touche and their physical address is: Deloitte Place No 2 Pencarrow Crescent Pencarrow Park La Lucia Ridge Office Estate Durban 4051 The Principal Officer of the combined scheme will be the current Principal Officer of TopMed, Mr LM Deacon. His address is as follows: PO Box 1383 Sanlamhof 7532 TopMed is controlled and managed by a Board, which is made up of 6 members. The members of the Board are elected by Members from amongst Members of which not more than one third of the Board (2 members) may be elected from a single employer group. The Board may at its discretion co-opt up to 3 additional Board members. An interim Board of Trustees (BoT) of the combined scheme is proposed to consist of the TopMed BoT, as well as the current chairman of Bepmeds Mr Roelof van Tonder, and the Principal Officer of Bepmeds Mr John Rollason. The following people will therefore serve on the interim board: NAME PHYSICAL ADDRESS POSTAL ADDRESS Jerry van Vuuren (Chairman) 818 Richmond Street Wingatepark PRETORIA Posbus 286 WINGATE PARK 0153 Callie du Plessis Jan Burger Colesberg 1Stop N1 Bypass Colesberg Schonberg Trust (1 st Floor) 120 Edward Street Bellville 7530 10
Cobus Fourie Lodewyk la Grange Hennie van Riel Roelof J P van Tonder 2 Strand Road Bellville 7530 2 Strand Road Bellville 7530 77 Mauritius Crescent STELLENBERG 7550 No 7 1 st Street Menlo Park PRETORIA 0081 P.O Box 1 Sanlamhof 7532 P.O Box 1 Sanlamhof 7532 P.O. Box 3219 Tygervalley 7536 PO Box 68482 Bryanston Johannesburg 2021 John David Rollason 58 Ethel Avenue Cnr Robin Road NORTHCLIFF Extension 12 2195 P O Box 35523 NORTHCLIFF 2115 The two Bepmeds co-opted trustees are to remain on the Board until the 2012 TopMed Annual General Meeting (AGM), irrespective of the results of trustee elections at the 2011 AGM. 2.3.2 Related parties and service providers The Managed Healthcare provider will be MMSA and their physical address is: 1-3 Canegate Road La Lucia Ridge KwaZulu-Natal 4019 11
Details of all other related parties and service providers to the combined scheme are tabled below: Administrator MMSA Managed Healthcare: capitated service provider MMSA CareCross PPN ER24 Managed Healthcare: management service MMSA providers Actuarial Services MMSA Distribution channels Corporate brokers TopMed Distribution MedQuote (internet) Combined Scheme Investment managers Medscheme Asset Management Auditors Deloitte & Touche 2.3.3 Membership and rules The projected membership profile of each scheme and the combined scheme as at 31 December 2010 are as follows: Dec 2010 Bepmeds TopMed Combined Scheme Number of members 1 970 11 157 13 127 Number of Beneficiaries 4 543 23 767 28 310 Average beneficiary age 35.4 38.7 38.2 Pensioner ratio (65+) 7.2% 13.9% 12.8% Chronic ratio 21.2% 26.3% 25.5% Family size 2.31 2.13 2.16 The registered rules of the combined scheme will remain the same as the proposed rules of TopMed for 2011, subject to Council approval. 2.3.4 Mission and objective The Vision, Mission and Strategic objective of the combined scheme will be to: Remain relevant by means of sound governance principles and maintaining solvency levels above the statutory minimum of 25%; Ensuring excellent levels of service to its customers by partnering with various organizations, including MMSA, CareCross, ER24 and Clicks Direct Medicines; Actively seek to grow its membership base by pursing further viable mergers and acquisitions with suitable schemes; 12
Offering an excellent value proposition to its current and future members through a comprehensive range of options. 2.3.5 Benefit options Bepmeds members will be given the opportunity to select from a more comprehensive range of benefit options which, in most cases at a reduced contribution level. If a member does not choose a specific benefit option by the effective date of the transfer they will be defaulted to the most appropriate option as shown below: Members of the Bepmeds Pro Basic option to the TopMed Network option; Members of the Bepmeds Pro Core option to the TopMed Hospital Plan; Members of the Bepmeds Pro Elite option to the TopMed Incentive Comprehensive option. The following mapping of Bepmeds members to the TopMed options is assumed and will also be used for all financial projections: Members of the Bepmeds Pro Basic option to the TopMed Network option; 60% of members of the Bepmeds Pro Core option to the TopMed Hospital Plan, with the remaining 40% of members being mapped to the TopMed Incentive Savings option; The top 10% highest claiming members of the Bepmeds Pro Elite option to the TopMed Traditional option, the middle 80% of members to the TopMed Incentive Comprehensive option and the 10% lowest claiming members to the TopMed Incentive Savings option. The results for Bepmeds members are as follows: Option mapping Impact upon amalgamation on: Bepmeds TopMed Number of members affected Gross average pbpm contribution Pro Basic Network 191 43% Pro Core Hospital Plan (60%) Incentive Savings (40%) 590 393 (11%) 21% Traditional (10%) 80 19% Pro Elite Incentive Comprehensive (80%) 637 (21%) Incentive Savings (10%) 80 (56%) 13
TopMed and Bepmeds rules differ with regard to contributions in that Bepmeds allows for students to remain as child dependents on a parent contract up to the age of 25, as well as only charging premiums for a maximum of 3 child dependants on a contract. The table above assumed the TopMed structure, which charges adult dependant rates from age 21 as well as a separate contribution for each child dependant on a contract. Bepmeds contracts affected by the change will experience additional increases in contributions (see section 3.1.2 for further information). 2.3.6 Bepmeds and its employees Bepmeds sole employee is the Principal Officer. A decision has been made by the existing TopMed BoT that he be co-opted into the TopMed Board of Trustees at the effective date of the amalgamation. The present Bepmeds BoT, including the members of the Audit Committee, the External Auditors (Deloitte) and Bepmeds Principal Officer, will remain legally accountable for the scheme and its members for the period prior to the effective date of the transfer. 3 Strategy and implementation 3.1 SWOT analysis of the combined scheme 3.1.1 Strengths and opportunities A larger medical scheme provides opportunities for economies of scale and better risk pooling; Bepmeds members will have a greater range of benefit options to select from as TopMed offers 5 options ranging from Traditional to a capitated product; The mapping of Bepmeds members will be relatively easy, given that TopMed offers three very similar options, and both Schemes utilise the same Network Service Provider; The majority of Bepmeds members will experience a reduction in contributions. Where there is an increase in contributions this will be offset by TopMed providing additional benefits; TopMed will offer greater stability for the Bepmeds members, as they will be participating in a larger risk pool. In addition, there will no longer be the requirements for a reinsurance contract as TopMed s reserves are sufficient to cover high costing claims; TopMed will benefit from an improved membership profile (lower age, pensioner ratio and chronic ratio); TopMed, will experience membership growth, together with a contribution to reserves in of of R8 million (as at 31 August 2010) while maintaining its solvency level comfortably above 25%; The schemes have the same administrator, allowing for ease of a merger as well as providing synergies; There will also be greater efficiencies from combining other functions such as Managed Healthcare and customer service; 14
Marketing initiatives can now be focussed on the single scheme rather than being split; Provider negotiation power will increase; TopMed gains access to a new potential market, namely membership of the supporting professional associations as listed above; For Bepmeds members the alternative to a merger is liquidation of the scheme. A merger will ensure a seamless transfer onto a new scheme without the hassles of looking for a new scheme and possibly facing periods without medical cover. 3.1.2 Weaknesses and threats Some Bepmeds members, especially those on the Pro Basic option, may choose to exit the Scheme rather than to join TopMed as a result of an expected 23% contribution increase upon joining the Network option. However, the actual average increase may be lower depending on the salary bands into which these members will fall; Lower savings level on the Incentive Comprehensive option compared to the Pro Elite option will result in a self-payment gap before threshold is reached, which Pro Elite members are not exposed to currently. However, this will be alleviated to a certain degree by a reduction in contributions for the Bepmeds members, which can then be used to finance day-to-day benefits whilst in the self-payment gap; Bepmeds currently allows for full time students to remain as child dependents up to the age of 25, whereas TopMed does not offer such a concession. Around 90 contracts in total will be affected by this, with the majority of them (60) on the high end Pro Elite option. Student members will be given the opportunity to move to a lower option (such as the TopMed Network option) as a principal member on their own contract; Bepmeds charges for a maximum of three child dependants on the Pro Core and Pro Elite options. However only 4 contracts are affected on the Pro Elite option and 14 on the Pro Core option. Two contracts on the Pro Core option will experience an increase of 16% if they join the Hospital Plan, with the remaining affected contracts experiencing increases of only 4%. On Pro Elite, one contract will experience a contribution increase of 8%, whereas the other three will still experience decreases in contributions; Reduced contributions payable by Bepmeds members as a result of reduced or more limited benefits on TopMed; The combined scheme could experience lapses as a result of the amalgamation which will have an impact on the combined scheme s financial results. There is a risk of groups leaving no specific allowance has been made for this in the projections; The combined scheme is projected to have a lower solvency ratio than TopMed on its own, although the benefit differences and resulting claims experience may offset this in part. TopMed s contributions are paid in advance, while Bepmeds members pay contributions in arrears. This problem will be overcome by providing Bepmeds members with a 30 day term. Member statements will simply reflect this as being a month in arrears so there will be no double-billing of members in respect of December 2010/ January 2011. 15
3.2 Impact of benefit differences on Bepmeds members With regard to members who may be receiving treatment that TopMed does not cover - TopMed are currently reviewing all the disease management authorisations to ensure that members are not prejudiced in any way. Given the low volume of members who are registered for such conditions as Oncology / HIV TopMed s respective case managers will be contacting these members directly to assist them with the transition - particularly the members who are registered with Aid for Aids (AfA). The one area where there will be a difference is the way TopMed manages the PMB CDLs as members have to utilise medicines on the formulary and obtain their medication from a Designated Service Provider (DSP) which will be Clicks - Direct Medicines from 1 January 2011. MMSA are currently running reports to review the impact and will be sending a specialized communication to these members. In addition, with the transition to Clicks - Direct Medicines these members will also be communicated to directly from the DSP side as well. Being quite a significant change, TopMed will allow a 2 month window period where members will not be penalised. 4 Market analysis 4.1 Membership movement The membership of the separate schemes as well as the combined scheme is shown below based on projected membership figures as at 31 December 2010 and the expected option selection as discussed in section 2.3.5: Before transfer Bepmeds Number of members Number of beneficiaries Average Beneficiary Age Pensioner ratio Chronic ratio Family Size Pro Basic 191 329 29.8 1% 2% 1.7 Pro Core 983 2 238 32.0 5% 14% 2.3 Pro Elite 796 1 976 40.2 11% 33% 2.5 Total 1 970 4 543 35.4 7% 21% 2.3 16
TopMed Number of members Number of beneficiaries Average Beneficiary Age Pensioner ratio Chronic ratio Family Size Traditional 1 205 1 930 60.0 50% 61% 1.6 Incentive Savings Incentive Comprehensive 3 394 8 496 35.2 8% 19% 2.5 2 225 4 770 45.8 21% 47% 2.1 Network 3 023 5 841 30.9 4% 12% 1.9 Hospital Plan 1 310 2 729 38.8 14% 18% 2.1 Total 11 157 23 767 38.7 14% 26% 2.1 After transfer Number of members Number of beneficiaries Average Beneficiary Age Pensioner ratio Chronic ratio Family Size Traditional 1 285 2 127 58.2 47% 59% 1.7 Incentive Savings Incentive Comprehensive 3 866 9 589 35.0 8% 19% 2.5 2 862 6 351 44.4 19% 44% 2.2 Network 3 214 6 170 30.9 4% 12% 1.9 Hospital Plan 1 900 4 072 36.6 11% 16% 2.1 Total 13 127 28 310 38.2 13% 25% 2.2 The benefits under the network options of both schemes are similar. Specifically, the preferred provider for both schemes is CareCross. However, the Bepmeds Pro Basic option has an overall annual limit of R600 000 per member and R1.2 million per family whereas no overall annual limits exist on the TopMed Network option. The average gross contribution per beneficiary per month (pbpm) for the TopMed Network option in 2010 (R645) is approximately 43% higher than that of the Bepmeds Pro Basic option (R523). However, due to salary bands on the Network option, the impact of this may be greater or lesser depending on the incomes of Pro Basic members. We assumed a 10%, 30%, 40% and 17
20% distribution of Bepmeds members across the TopMed Network income bands on the basis that the lower income band (<=R3 500) of TopMed existed in 2010. The Bepmeds Pro Core option provides hospitalisation benefits up to 200% of scheme rates and day-to-day cover is provided through an optional Health Saver product. The chronic benefit covers the 26 PMB chronic conditions only. TopMed s Hospital Plan provides hospitalisation benefits up to 150% of scheme rates, no day-to-day cover and chronic cover for the 26 PMB conditions. TopMed s Incentive Savings option offers hospitalisation benefits at 100% of scheme rate, the 26 PMB chronic conditions, dental benefits subject to a 25% co-payment as well as a 15% savings account to fund other day-to-day healthcare expenditure. As both the Bepmeds Pro Elite and TopMed Incentive Comprehensive options are threshold options, the Incentive Comprehensive option seemed to be the most suitable match for Bepmeds Pro Elite members. However, the savings level on the Bepmeds Pro Elite is 23% compared to 15% on Incentive Comprehensive. This implies a larger self-payment gap for Pro Elite members. The mapping to the Incentive Comprehensive option will result in a gross monthly contribution saving of 21% for the 80% Pro Elite beneficiaries mapped to this option. The funds saved by these means could be used to fund day-to-day benefits while in the self-payment gap. The 10% Pro Elite beneficiaries mapped to the Traditional option will experience a 19% increase in gross contributions, whereas the remaining 10% mapped to the Incentive Savings option will experience a 56% decrease in gross contributions. However, it should be noted that hospitalisation cover will reduce from 300% on the Pro Elite option to the current 100% of scheme rate on the TopMed options. Also a number of copayments are may be applicable on the TopMed options. 4.1.1 Communication strategy The Trustees of both schemes recognise the importance of member communication in terms of ensuring a successful amalgamation of the two schemes. To this end, the schemes will be undertaking the following communication exercises over the remainder of 2010: Newspaper articles will be published at the same time as members are sent summarised exposition documents and ballot forms; Both schemes make use of brokers in terms of ongoing communication and education of members. Therefore, the schemes will communicate with all contracted brokers to provide information in this regard; MMSA will be utilising Account Executives and possibly TopMed Distribution to assist with presentations to employer groups; Bepmeds will also use its supporting professional associations as communication channels to their members. Members of Bepmeds will receive a detailed communication about the transfer, including a summarised version of this document as well as access to the full combined business plan at the offices of the Registrar and at the office of the respective Schemes. The member communication 18
will include an explanation of the proposed default TopMed benefit options for Bepmeds members, showing comparison to their current benefit options. In addition, they will have normal access to their scheme s member call centre agents will have undergone training by this time on the potential questions that members might have regarding the transfer s impact. Ballot forms will be sent to both sets of members. TopMed members will also be sent a communiqué with details of the proposed merger, including high-level financial results and potential benefits to TopMed members. A summary of the target dates for the processes that will be followed is reflected below: Process requirement Target Date Submission of required documents to Council 26 October 2010 Merger document and ballot forms to be sent to members 2 November 2010 Merger documents lie open for inspection/casting of votes by members 4 25 November 2010 Closure of ballot period 25 November 2010 Results of each Scheme s ballot determined 30 November 2010 Closure of period for members to send in objections/comments 17 December 2010 Amalgamation, subject to approval by members and Council 1 January 2011 19
4.1.2 Geographical distribution The geographical distribution of the two schemes, separately and together, is shown below: Number of members Percentage of members Province TopMed Bepmeds Amalg Scheme TopMed Bepmeds Amalg Scheme Eastern Cape 816 121 937 7% 6% 7% Free State 121 75 425 3% 4% 3% Gauteng 3 184 1 028 4 252 28% 51% 32% KwaZulu- Natal 1 005 236 1 241 9% 12% 9% Limpopo 158 53 211 1% 3% 2% Mpuma-langa 456 56 512 4% 3% 4% North West 419 36 455 4% 2% 3% Northern Cape 125 15 140 1% 1% 1% Western Cape 4 319 330 4 649 38% 17% 35% Unknown 416 24 440 4% 1% 4% Total 11 248 1 974 13 222 100% 100% 100% 5 Contributions 5.1 Contribution tables The 2011 contributions of the combined scheme would be mainly the same as the existing contributions of TopMed, subject to Council approval. 5.1.1 2010 contribution tables The mapping exercise was based on the 2010 contribution as a result of the 2011 contributions not being approved at the time of writing. The table below contains the total contributions for each TopMed option for 2010: 20
Option Income Band Savings % Member Adult Child Traditional All N/A R2 744 R2 312 R750 Incentive Savings All 15% R1 154 R728 R339 Incentive Comp All 15% R1 893 R1 404 R559 Network 0 7 500 N/A R694 R694 R315 Network 7 501 13 000 N/A R771 R771 R350 Network > 13 000 N/A R964 R964 R438 Hospital Plan All N/A R780 R556 R306 The following table gives the Bepmeds total contributions for 2010: Option Income Band Savings % Principal Adult Child Pro Basic All 0% R652 R534 R234 Pro Core All 0% R841 R644 R354 Pro Elite All 23% R2 244 R1 931 R718 5.1.2 2011 contribution tables The table below gives the proposed contributions on the TopMed options for 2011. The only major change to the options is the addition of an income band for members earning below R3 500 on the Network option. Note that these proposed contributions are still subject to Council approval: Option Income Band Savings % Member Adult Child Traditional All N/A R3 073 R2 636 R863 Incentive Savings All 15% R1 246 R808 R376 Incentive Comprehensive All 15% R2 101 R1 586 R642 Network 0 3 500 N/A R498 R498 R199 Network 3 501 7 500 N/A R763 R763 R356 Network 7 501 13 000 N/A R856 R856 R396 Network > 13 000 N/A R1 109 R1 109 R508 Hospital Plan All N/A R850 R628 R346 Bepmeds proposed increases of 12% on the Pro Basic and Pro Core options, and 13% on the Pro Elite option. The following table shows the proposed 2011 contributions, which are also subject to Council approval: 21
Option Income Band Savings % Principal Adult Child Pro Basic All 0% R730 R598 R262 Pro Core All 0% R942 R721 R396 Pro Elite All 23% R2 536 R2 182 R812 5.2 Contribution comparison The table below shows the difference between the proposed 2011 contributions payable by Bepmeds members before and after the transfer. The contributions for each option are averages per beneficiary per month (pbpm): Option Contributions pbpm Bepmeds TopMed Current New % Increase Number of beneficiaries % of beneficiaries Average increase per option Pro Basic Network R586 R419 (28%) 7 0.2% Pro Basic Network R586 R655 12% 43 0.9% Pro Basic Network R586 R734 25% 95 2.1% 43% Pro Basic Network R586 R950 62% 184 4.0% Pro Core Incentive Savings R720 R870 21% 895 19.7% Pro Core Hospital Plan R720 R641 (11%) 1 343 29.6% 2% Pro Elite Traditional R1 953 R2 331 19% 198 4.4% Pro Elite Incentive Comp R1 953 R1 537 (21%) 1 581 34.8% (21%) Pro Elite Incentive Savings R1 953 R867 (56%) 198 4.4% TOTAL R1 247 R1 096 (12%) 4 543 100% (12%) 5.2.1 Pro Basic These members will experience the largest increase of around 43%. This is due to the TopMed Network option being designed to encourage members with higher salaries to rather buy up to one of the more expensive options. However, as salary data for only half the members on this option was available, and given that there are less than 200 members on this option, the actual increase may be less than the 43% indicated above. According to available salaries at the time of writing, the bulk of these members have salaries exceeding R13 000 per month and can clearly afford a more expensive option. Some even had salaries exceeding R50 000 per month. 22
5.2.2 Pro Core Members of the Pro Core option who choose to join the Incentive Savings option will experience an increase in contributions of 21%. However, as there is a 15% savings component to the total contribution, the risk contribution increase will only be 2.7%. The default mapped option is the TopMed Hospital Plan. Defaulted members will experience an 11% reduction in contributions. 5.2.3 Pro Elite The bulk of these members (80%) are assumed to join the default Incentive Comprehensive option. Total contributions will decrease by 21%, however the reduction in the savings contribution from 23% to 15% means that the risk contribution will decline by a smaller 13%. The 10% of members who choose to join either of the Traditional option and the Incentive Comprehensive will experience a contribution increase of 19% and a decrease of 56%, respectively. 5.2.4 Scheme Overall the average contribution per beneficiary is assumed to reduce by 12% from R1 247 to R1 096, based on the mapping assumptions explained earlier. 6 Benefit structures As was explained before the TopMed options will remain as is, with the Bepmeds members being incorporated into these options according to their choice, with a default option should they not indicate their preference. 6.1 Benefit comparison The table below sets out the main benefits for each Bepmeds option: Plan Hospital benefit Hospital reimbursement rate Chronic cover Outpatient benefits Pro Basic R600 000 per beneficiary, R1.2 million per family 100% Bepmeds Scheme Tariff PMB only (DSP) Available through CareCross network Pro Core Unlimited 200% Bepmeds Scheme Tariff PMB only None Pro Elite Unlimited 300% Bepmeds Scheme Tariff PMBs + 26 additional conditions Savings (23%) and threshold 23
A summary of the TopMed options are given below: Plan Hospital benefit Hospital reimbursement rate Chronic cover Outpatient benefits Traditional Unlimited 100% TopMed Tariff PMB + 26 additional conditions 80% of TopMed tariff Incentive Savings Unlimited 100% TopMed Tariff PMB only Savings (15%) Incentive Comprehensive Unlimited 100% TopMed Tariff PMB + 26 additional conditions Savings (15%) and threshold Network Unlimited 100% TopMed Tariff PMB only (DSP) Available through CareCross network Hospital Plan Unlimited 150% TopMed Tariff PMB only None A detailed comparison between the different options will be provided in a separate document. 24
7 Non-health expenditure An analysis of the non-health expenditure in total and per member per month is provided below as taken from the two schemes 2009 Annual Financial Statements: Total nonhealthcare TopMed Bepmeds TopMed Bepmeds costs R 000 PMPM R 000 PMPM % GCI % GCI Average members 12 504 12 504 2 089 2 089 Gross contribution income 296 631 1 981 54 918 2 191 100% 100% Administration expenses (32 968) (220) (2 868) (114) 11.1% 5.2% Net recovery/(expense) on commercial - - 380 15-0.7% reinsurance Managed Healthcare: management (7 891) (53) (1 027) (41) 2.7% 1.9% services Acquisition, marketing and (6 629) (44) (1 244) (50) 2.2% 2.3% servicing cost Net impairment losses (66) (0) (5) (0) 0% 0% Total (47 554) (317) (4 764) (190) 16.0% 8.7% The above non-healthcare services are provided by MMSA and include costs of general administration of the schemes, including provider contracting, Managed Healthcare, claims processing, call centres and member billing. They also include broker support, marketing, brand awareness and distribution services. In the financial projections it was assumed that the PMPM non-healthcare costs of the combined scheme will be equal to those of TopMed going forward. Bepmeds currently enjoys a concession from MMSA in respect of its administration and managed healthcare services. At this point no negotiations have been entered into in respect of keeping these fees for Bepmeds members on their lower levels, however MMSA has indicated its ability and willingness to accommodate the Bepmeds members in this regard. 8 Sensitivities The following table shows how sensitive the reserves of the combined scheme are to different assumptions: 25
Scenario Assumption variable Base value Adjusted value 2011 Solvency 2012 Solvency 2013 Solvency 1 Base variables 33.7% 28.8% 27.2% 2 Bepmeds departure 3 Admin & MHC fees 0% 10% 34.1% 29.0% 27.4% TopMed Bepmeds 34.1% 29.4% 28.1% 4 New business As before 50% higher 33.0% 28.1% 27.5% 5 Mapping As before To defaults 32.9% 27.1% 24.6% 6 Scenario 3 and 5 combined 33.4% 27.9% 25.6% 7 Claims As before 1% higher 32.9% 27.4% 25.2% The only instance where the solvency ratio of the combined scheme reduces to below 25% at the end of 2013 is when the mapping occurs according to the defaults explained earlier, and there is no concession with respect to the administration and managed healthcare fees. High-level financial results of the different scenarios are given in an annexure. 9 Risk management A detailed breakdown of the risk exposure and risk management tools is tabled below: Risk description Increasing cost of healthcare Distribution Member average age increasing compared to industry Debt management and collection Membership distribution on scheme (i.e. benefits) Mitigating steps Participation in industry initiatives Designated Service Providers Re-evaluation of benefit design Involve various new distribution channels Provide more assistance to distribution channels Continuous management by BoT Define long-term strategy including marketing and membership growth through sales and viable amalgamations Continuous monitoring Restrict debt creation ability Distribution channel training in combined schemes benefit design 26
Risk description Inefficient membership for negotiating power Regulation changes (cost of PMB and REF) National Health Insurance Competitors in industry and dominance Global economic downturn Mitigating steps Define long-term strategy including marketing and membership growth Participating in industry initiatives Continuous relationship with Council and new regulations Participation in forums Continuous relationship with Council and new regulations Proactive strategy Continuous analyses of current environment Draft an appropriate strategy including the impact on membership, financials and solvency levels 10 Financial Plan This section gives financial projections for the combined scheme. assumptions used is given in an annexure to this document. A summary of the 10.1 Solvency ratio comparisons The graph below compares the solvency level of the combined scheme with TopMed in isolation, based on the base scenario: 27
10.2 Consolidated income statement: Combined scheme Combined scheme 2011 (R 000) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Gross contribution income 31 516 31 477 31 438 31 400 31 362 31 325 31 289 31 252 31 216 31 181 31 146 31 112 Savings contributions (2 663) (2 663) (2 664) (2 664) (2 664) (2 664) (2 664) (2 664) (2 665) (2 664) (2 664) (2 665) Net contribution income Relevant healthcare expenditure 28 853 28 813 28 775 28 736 28 699 28 661 28 625 28 588 28 552 28 517 28 482 28 447 (28237) (28246) (28256) (28266) (28276) (28286) (28297) (28307) (28319) (28330) (28342) (28354) Net claims incurred (24 304) (24 316) (24 329) (24 341) (24 354) (24 367) (24 381) (24 394) (24 408) (24 422) (24 436) (24 451) Capitation fees (1 270) (1 267) (1 264) (1 261) (1 258) (1 255) (1 252) (1 249) (1 246) (1 244) (1 241) (1 239) Gross healthcare result 3 134 3 087 3 039 2 992 2 945 2 898 2 851 2 804 2 758 3 134 3 087 3 039 Managed Healthcare ( 556) ( 556) ( 556) ( 555) ( 555) ( 555) ( 554) ( 554) ( 554) ( 556) ( 556) ( 556) Broker service fees (1 171) (1 170) (1 169) (1 169) (1 168) (1 167) (1 167) (1 166) (1 165) (1 171) (1 170) (1 169) Administration expenses Other non-healthcare costs (1 943) (1 942) (1 941) (1 940) (1 939) (1 938) (1 937) (1 936) (1 935) (1 943) (1 942) (1 941) ( 405) ( 405) ( 405) ( 405) ( 404) ( 404) ( 404) ( 404) ( 404) ( 405) ( 405) ( 405) Net healthcare result ( 804) ( 850) ( 895) ( 941) ( 986) (1 031) (1 076) (1 122) (1 166) (1 211) (1 256) (1 301) Investment income 941 936 931 926 920 914 908 901 895 887 880 873 Net surplus / (deficit) 137 87 36 ( 15) ( 66) ( 117) ( 169) ( 220) ( 272) ( 324) ( 376) ( 428) Principal Members 13121 13115 13109 13103 13098 13092 13087 13081 13076 13071 13066 13061 Avg beneficiary age 38.25 38.31 38.37 38.42 38.48 38.54 38.59 38.65 38.71 38.76 38.82 38.88 28
Combined scheme 2012 (R 000) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Gross contribution income 34 807 34 769 34 732 34 695 34 658 34 440 34 405 34 371 34 336 34 302 34 269 34 236 Savings contributions (2 984) (2 984) (2 985) (2 985) (2 985) (2 957) (2 958) (2 958) (2 958) (2 958) (2 958) (2 958) Net contribution income 31 822 31 784 31 747 31 710 31 674 31 483 31 448 31 413 31 378 31 344 31 311 31 278 Relevant healthcare expenditure (27782) (27800) (27813) (27827) (27842) (27855) (27870) (27885) (27901) (27916) (27932) (27948) Net claims incurred (26 446) (26 466) (26 482) (26 499) (26 515) (26 532) (26 549) (26 567) (26 584) (26 602) (26 620) (26 639) Capitation fees (1 336) (1 334) (1 331) (1 329) (1 326) (1 323) (1 321) (1 318) (1 316) (1 314) (1 312) (1 310) Gross healthcare result 4 040 3 985 3 934 3 883 3 832 3 628 3 578 3 528 3 478 3 428 3 379 3 329 Managed Healthcare ( 582) ( 582) ( 581) ( 581) ( 581) ( 577) ( 577) ( 577) ( 576) ( 576) ( 576) ( 576) Broker service fees (1 224) (1 224) (1 223) (1 222) (1 222) (1 214) (1 214) (1 213) (1 213) (1 212) (1 212) (1 211) Administration expenses (2 033) (2 032) (2 031) (2 030) (2 029) (2 016) (2 015) (2 015) (2 014) (2 013) (2 012) (2 012) Other non-healthcare costs ( 424) ( 424) ( 424) ( 424) ( 424) ( 421) ( 420) ( 420) ( 420) ( 420) ( 420) ( 420) Net healthcare result ( 223) ( 276) ( 326) ( 375) ( 424) ( 600) ( 649) ( 697) ( 745) ( 793) ( 841) ( 889) Investment income 865 863 862 860 857 852 849 845 842 838 834 830 Net surplus / (deficit) 641 587 536 485 434 251 200 148 97 45 ( 8) ( 60) Principal Members 13 057 13 052 13 048 13 043 13 039 13 035 12 944 12 940 12 937 12 933 12 930 12 926 Avg beneficiary age 38.93 38.99 39.04 39.10 39.16 38.93 39.25 39.31 39.36 39.42 39.47 39.53 29
Combined scheme 2013 (R 000) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Gross contribution income 38 307 38 271 38 235 38 200 38 164 38 130 38 095 38 061 38 028 37 995 37 962 37 929 Savings contributions (3 313) (3 313) (3 313) (3 314) (3 314) (3 314) (3 314) (3 314) (3 314) (3 314) (3 314) (3 314) Net contribution income 34 994 34 958 34 922 34 886 34 851 34 816 34 782 34 748 34 714 34 681 34 648 34 615 Relevant healthcare expenditure (30509) (30597) (30616) (30634) (30654) (30673) (30693) (30713) (30733) (30754) (30774) (30795) Net claims incurred (29 082) (29 172) (29 193) (29 214) (29 235) (29 257) (29 278) (29 300) (29 322) (29 345) (29 367) (29 390) Capitation fees (1 427) (1 425) (1 422) (1 420) (1 418) (1 416) (1 415) (1 413) (1 411) (1 409) (1 407) (1 406) Gross healthcare result 4 485 4 361 4 306 4 252 4 197 4 143 4 089 4 035 3 981 3 927 3 873 3 820 Managed Healthcare ( 611) ( 611) ( 610) ( 610) ( 610) ( 610) ( 610) ( 609) ( 609) ( 609) ( 609) ( 609) Broker service fees (1 285) (1 284) (1 284) (1 283) (1 283) (1 282) (1 282) (1 281) (1 281) (1 281) (1 280) (1 280) Administration expenses (2 134) (2 133) (2 132) (2 132) (2 131) (2 130) (2 130) (2 129) (2 128) (2 128) (2 127) (2 127) Other non-healthcare costs ( 446) ( 445) ( 445) ( 445) ( 445) ( 445) ( 445) ( 445) ( 445) ( 445) ( 445) ( 445) Net healthcare result 11 ( 112) ( 165) ( 219) ( 271) ( 324) ( 377) ( 430) ( 483) ( 535) ( 588) ( 640) Investment income 897 798 798 798 797 796 795 793 792 789 787 784 Net surplus / (deficit) 908 685 632 579 526 472 418 363 309 254 199 144 Principal Members 12 923 12 920 12 917 12 913 12 910 12 908 12 905 12 902 12 899 12 896 12 894 12 891 Avg beneficiary age 39.58 39.64 39.69 39.75 39.80 39.86 39.91 39.97 40.02 40.08 40.13 40.19 30
10.3 Consolidated year to date income statement: Combined scheme Combined scheme (R 000) Year-end 2010 Year-end 2011 Year-end 2012 Year-end 2013 Gross contribution income 355 818 375 715 414 020 457 377 Savings contributions (34 335) (31 968) (35 672) (39 795) Net contribution income 321 483 343 747 378 392 417 613 Relevant healthcare expenditure (285 191) (307 546) (334 372) (368 145) Net claims incurred (270 233) (292 502) (318 502) (351 156) Capitation fees (14 959) (15 045) (15 870) (16 989) Gross healthcare result 36 292 36 200 44 021 49 468 Managed Healthcare (6 739) (6 666) (6 942) (7 316) Broker service fees (13 512) (14 028) (14 603) (15 385) Administration expenses (22 305) (23 289) (24 253) (25 560) Other non-healthcare costs (5 949) (4 856) (5 062) (5 341) Net healthcare result (12 254) (12 639) (6 840) (4 134) Investment income 12 240 10 912 10 196 9 624 Net surplus / (deficit) (14) (1 727) 3 356 5 490 Principal Members year-end 13 127 13 061 12 926 12 891 Avg beneficiary age 38.20 38.88 39.53 40.19 Members funds 117 091 115 737 119 093 124 584 Solvency ratio 32.9% 30.8% 28.77% 27.24% 31
11 Conclusion It is proposed that Bepmeds will transfer to TopMed on 1 January 2011. All members of Bepmeds as at 31 December 2010 will become members of TopMed effective 1 January 2011. No additional underwriting will be imposed on transferring members and all such members shall be regarded as having been members of TopMed with effect from the date upon which they joined Bepmeds. TopMed shall take transfer of all assets belonging to or owned by Bepmeds, and TopMed shall accept responsibility for all Bepmeds liabilities, including the liability for all valid medical claims that were incurred prior to the transfer and which would have been paid in terms of Bepmeds rules for services rendered to members prior to the transfer. Details of the transfer will be communicated to members, service providers and creditors. Members, service providers and creditors will be informed that the exposition will lie open for inspection at the offices of the respective schemes and the office of the Registrar of Medical Schemes for a period of 21 days and that any representations concerning the proposed transaction that affect their interests may be lodged with the Registrar within this period and up to 21 days after completion of the inspection period. Any representations submitted to the registered offices of the schemes will be forwarded to the Registrar. Both the Boards of Trustees of TopMed and Bepmeds have agreed to the proposed transaction subject to the Registrar s approval and to any condition imposed by the Registrar. Signed on behalf of TopMed Chairman Trustee Principal Officer Date Date Date Signed on behalf of Bepmeds Chairman Trustee Principal Officer Date Date Date 32
Annexure: High-level financial results for different scenarios 33
Annexure: High-level financial results for different scenarios 34