Financial Health of Medical Schemes in South Africa

Abstract

This paper undertakes a comprehensive examination of the financial health of medical schemes in South Africa using annual financial data on 82 schemes from 2011 to 2018. The paper constructs a financial health index from return on assets, return on equity, medical loss and administrative loss ratios using the principal component analysis. The results indicate an average of 92% and 10% of members contribution are expended on healthcare and administrative costs respectively and average returns of 5.7% and 6.9% on assets and equity respectively. The paper also documents evidence that open schemes are characterized by higher administrative costs while restricted schemes are associated with higher healthcare expenditure. Overall, restricted schemes generate higher returns on assets and equity, culminating in a healthier financial state compared with open schemes. Using a battery of panel data estimation techniques, the paper finds evidence of a diminishing effect of medical scheme size and market concentration on financial health while liquidity and technical reserves are found to improve financial health of medical schemes in South Africa. The findings lend support to regulatory actions that seek to reduce market concentration and improve competitive pressures to enhance financial health of the market.