Rising medical costs are increasingly becoming a key issue in retirement planning. The issue was dealt with at recent national Personal Finance/TMA Investment Products Services Truth about Retirement seminars by Adrian Gore, chief executive of Momentum Health.
Ignore health planning for retirement at your peril, Adrian Gore, chief executive of Momentum Health, told the recent national Personal Finance/TMA Investment Products Services Truth about Retirement seminars.
This will particularly be the case if the government goes ahead with its plans to force the private sector to provide cover for all employees on the same conditions using the traditional medical aid-type structures.
Rampant medical inflation is creating conditions in which employers will have to consider increasing contributions.
Employers are also under pressure from younger, healthier members to restructure medical schemes to substantially limit their subsidisation of older, less healthy members.
Traditional schemes also place limits on claims, which are more likely to hit you as your health deteriorates with age.
Gore said you have to start saving early to ensure you have sufficient money to meet your health costs at retirement. If you do not you will need to buy top-up cover when you retire.
As a percentage of salaries, medical cover contributions are reaching unsustainable levels, Gore said.
THE PROBLEMS
Medical aids have run into trouble because of unsound financial practices and benefit structures that abounded with "perverse incentives", Gore told the seminars
Unsound financial practices include:
* No accurate risk rating as premiums are based on such things as family size and members' income rather than on the possibility of claims;
* Reliance on dwindling subsidies as younger people are opting out of traditional schemes, reducing funds for paying claims;
* Administration fees as perverse incentives encourage administrators to increase contributions (rather than contain them) as their income is expressed as a percentage of contributions;
* The temptation for doctors to over service, providing needless treatment;
* Minimal use of re-insurance to cover major costs like hospitalisation;
* Reserves have not been built up as future liabilities (future claims) have been assessed by "feel";
* Pay-as-u-go financing which means there are no reserves to cover future liabilities as current contributions are balanced to meet current claims. This means that as medical inflation continues to soar so must contributions.
Unsound benefit structures include:
* First rand coverage which encourages abuse. If your claims are paid out from the first rand you spend on medical cover there is no reason why you should not get medical treatment for the flimsiest of reasons;
* The "use-it-or-lose-it" structure under which you get poor value for money because if you don't use your benefits, you lose your contributions. This encourages many people to use medical aid cover to the fullest extent;
* Structures which leave those who make few claims feeling they got poor value for money;
* Structures which give those who make moderate claims a perception of good value for money but high claimers a perception of inadequate benefits as they go over the limits.
HOW IT GOES WRONG
Did you know that most medical aids allow you to have an MRI Scan about once a year?
An MRI scan is non-harmful diagnostic tool, unlike X-rays, which uses sound waves to check your body for such things as tumours.
The problem is that an MRI scan costs R2 600. If every medical aid member took advantage of an annual MRI scan it would cost the schemes R17 billion a year - more than half of the total medical aid claims a year.
SOLUTIONS
The solution to the looming health crisis, which could leave many retired people with insufficient health-care cover, lies in reforming financial controls and benefit structures, Gore said.
He said reform was the only way to keep health cover affordable.
Traditional medical aids have to move away from existing structures to provide tighter financial controls, including provision for future claims and an improved contribution system.
Regarding benefits, there has to be managed care for uncontrolable areas while members should have the freedom to select packages providing incentives to keep costs down.
Gore said the ideal benefits structure was for members to pay for ordinary day-to-day health cover through a medical savings account and to have health insurance for major calamities, such as hospitalisation.
Medical savings accounts would provide the freedom to choose the doctor you want to consult; whatever you don't spend in a particular year you save for future years; it is tax efficient and you decide on your own medical inflation by the way in which you control your costs.
Already medical savings account schemes run by Momentum Health are showing evidence of slowing medical inflation. Under traditional medical schemes medical inflation is running at 20 percent.
Gore said Momentum Health was showing the following average increases in medical inflation:
1992 to 1993
15 percent
1993 to 1994
13 percent
1994 to 1995
13 percent
1995 to 1996
12.8 percent
1996 to 1997
11.5 percent
Improved controls and incentives meant Momentum Health's schemes were more sustainable, provided better value for money and more comprehensive protection for the sick.
Because the system was "pre-funded" there was little chance of you facing future unaffordable hikes, particularly in retirement years.
Contributions remain tax deductible, growth in the capital in savings accounts is close to being tax free and benefit payments are tax neutral.
A COMPARISON
If we took a male aged 40, who is married with one child, his contribution to a typical medical aid scheme would be R980 a month. If he contributed to a medical savings account-type scheme, he would pay R375 a month and his contribution to an insurance scheme would be R605 a month
WHAT YOU DO NOW?
If you are now 40 years old and a member of a traditional medical aid and fear you will not have enough money to fund health care in your retirement there are a number of steps you can take. Gore said these include:
* Consider moving to another scheme with a more sustainable structure;
* Start prefunding by joining a private scheme now.
If you are retiring today and fear you will not have enough money to fund health care in your retirement, you have already left it too late. You can only fund your health care out of income.