Medical Scheme Competitor Financial Analysis

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Key Financial Metrics: Bonitas Medical Scheme

Bonitas

Discovery Health

Average contribution increase 2010

15.9%

9.8%

2008 Operating deficit

R 217 million

R 293 million

2008 Operating deficit

-R 217 million

R 293 million

2008 Net surplus

R 65 million

R 997 million

2008 Reserves

R 2.5 billion

R 5.3 billion

Latest estimate of scheme reserves

R 2.3 billion*

R 6.1 billion

2008 Solvency

47.5%

25.4%

2009 Projected solvency

34.8%

25.5%

2009 Projected solvency

34.8%

25.5%

Global Credit Rating

AA- (Rating watch)

AA+ (Upgraded)

Active members

258 910**

910 000

Active lives

608 485**

2 006 000

* Global Credit Rating Report 31 May 2009 ** Year end 2008

(4)

Observation 1: Bonitas has experienced continued operating losses. This

trend is set to continue in 2009.

20% R 0

R 400

The scheme has consistently experienced substantial operating

losses, which are forecast to more than double in 2009

Historically these losses have been supported by investment

income. Less favourable investment returns have placed

pressure on the scheme’s financial performance.

-R 909 -R 438 -R 879 17% 12% _11% 10% 10% 12% 14% 16% 18% R 1 000 -R 800 -R 600 -R 400 -R 200 R 101 R 355 R 255 R 269 _{R 243} R 0 R 100 R 200 R 300 -R 1 649 0% 2% 4% 6% 8% -R 1 800 -R 1 600 -R 1 400 -R 1 200 -R 1 000 -R 192 -R 101 -R 217 -R 440 -R 400 -R 300 -R 200 -R 100 2006 2007 2008 2009 projected

Operating result per average member

Investment income as percentage of average reserves -R 500

2006 2007 2008 2009 projected

Operating result R'm Investment income R'm

Note:

Operating results are an indication of the extent to which the premiums received are sufficient to pay for the claims and expenses incurred by the scheme. A negative operating result implies that the scheme is

under-pricing benefits.

• Per member operating losses have increased substantially

year-on-year

• Investment returns as a percentage of scheme reserves have

declined in recent years.

(5)

Observation 2: Financial performance has deteriorated significantly in 2009,

placing strain on the sustainability of the scheme

Drivers of financial under-performance

1. Worse than expected claim experience accompanied by buy-downs to lower cost options

“The claims experience is however worse than year to date and full

R 150 R 200

Actual vs budgeted financial performance

Period ending 31 May 2009 (R’m)

The claims experience is, however, worse than year to date and full year forecasts, with the scheme posting a loss ratio of 98%. This follows a higher than anticipated incidence of claims within the major claims categories, including general practitioners, medical

specialists, medicines and private hospitals, as well as a shift in members towards lower contribution options.”

R 144 R 92 R 100 -R 50 R 0 R 50 R 100 R 150

Global Credit Rating report

2. Further affected by the adverse impact of GEMS membership losses “The change in the claiming profile of members (due to the lower proportion of government members) has adversely affected the

-R 283 -R 308 -R 139 -R 215 -R 300 -R 250 -R 200 -R 150 -R 100

proportion of government members) has adversely affected the scheme’s operating performance in recent years.”

Global Credit Rating report

3. Significantly lower than expected investment returns

-R 350

Budget to May Actual to May

Operating result Investment and other income Net result

N t lt R76 2 illi l th t d i th fi t fi

• Poor performance necessitated a revision of the financial forecasts for 2009, which were incorporated into the scheme’s Global Credit Rating report

• Net result was R76.2 million less than expected in the first five months as a result of worse than expected claims experience and lower than expected investment returns

(6)

Observation 2: Financial performance has deteriorated significantly in 2009,

placing strain on the sustainability of the scheme

Based on Bonitas’ 2008 claims experience, 42.5% of the scheme’s claims were incurred by May 2009. In our opinion it is more accurate to forecast the 2009 claims experience ass ming a similar emergence of claims o er the ear as that

2009 Discovery

Bonitas revised financial forecasts for 2009

We are of the opinion that Bonitas’ forecasts are not sufficiently prudent and have adjusted them where appropriate

Adjustments made to financial forecasts

assuming a similar emergence of claims over the year as that experienced in 2008.

Based on this we believe that Bonitas has underestimated their forecast for 2009 claims incurred by approximately R140 million. The Discovery forecast allows for this adjustment.

2009 Bonitas forecast R’m

2009 Discovery forecast for Bonitas

R’m

Contributions (excl. MSA) R 6,096 R 6,096 Claims incurred -R 5,665 -R 5,806

A similar adjustment has been made to the estimated investment income earned over the year. This assumes that investment income will be earned at the same rate as it was earned in the first 5 months of the year.

Underwriting result R 431 R 290

Delivery costs -R 871 -R 871

Operating result -R 440 -R 581

Total investment income R 243 R 223

Discovery’s revised estimates for surplus and reserves are We believe that this is a more reasonable assumption based on the current investment climate and the fact that Bonitas is not building member reserves.

Total investment income R 243 R 223

Other income -R 5 -R 5

Net result -R 201 -R 362

R161 million lower than those published by Bonitas. We forecast Bonitas’ solvency to be in the region of 34.2% at the end of 2009, as apposed to the 36.8% published in the Global Credit Rating report.

Loss ratio (before

investment income) 107% 110%

Reserves R 2,268 R 2,107

(7)

Observation 3: Without significant remedial action Bonitas faces a dramatic

drop in solvency in 2010

2010 Projected financial performance

Based on the forecasted results for 2009 it is possible to project the financial performance of

Bonitas over 2010 R 3 000 49 0% _{48 2%} 50%

Bonitas’ solvency is expected to fall by 8% in 2010, in the

absence of any benefit reductions or membership growth

Bonitas over 2010. Assumptions:

• Membership growth: 0%

• Premiums increase: 15.9% (published) R 2 124

R 2 300 R 2 484 49.0% _48.2% 47.5% 34.2% 30% 35% 40% 45% R 2 000 R 2 500 (p ) • Investment yield: 7%

• No change in benefit structures in 2010 • No allowance for the adverse impact that

buy-downs will have on the scheme’s claim experience R 2 107 R 1 807 25.9% 10% 15% 20% 25% 30% R 500 R 1 000 R 1 500 experience 0% 5% 10% R 0 R 500 2006 2007 2008 2009 2010

(8)

Observation 3: Without significant remedial action Bonitas faces a dramatic

drop in solvency in 2010

Membership growth and the risk of selective withdrawals expose the scheme to

an even greater reduction in solvency in 2010

30% _{Member growth} -1% Selective withdrawals_-1.7% Increase = • Projected solvency 14.8% if Bonitas increases contributions in 2011 15% 20% 25% Solvency: 25.9% 1.7% Solvency 23.3% Solvency 18.2% Increase Increase medical inflation + 5% • Increase in excess of CPI+5% would be necessary if the scheme aimed to b ild l t 5% 10% 15% Solvency 14.8% = medical inflation rebuild solvency to 25% in a three year period. This would result in a solvency level of 18.2% at the end of 2011 Impact of membership Impact of selective withdrawals Solvency could possibly be as 0% 2010 2010 2010 2010 2011 Projected end of 2011. membership growth at 3% over the year withdrawals increasing claims by

2% over the year

possibly be as low as 23% by the end of 2010

(9)

Implications for members and intermediaries

• Member affordability severely impacted through a 15.9% contribution increase

• Contribution increase is significantly above medical inflation of 10%

U

t i t

d b

fit h

f

2010

• Uncertainty around benefit changes for 2010

• Initial scheduled launch dates were postponed. No final launch dates or benefit material has been

released as at 22 October 2010.

• Bonitas placed on rating watch by Global Credit Rating

• FAIS implications for intermediaries

S

p ca o s o

e

ed a es

• Given the concerns raised around the financial position of the Bonitas Medical Scheme, intermediaries

should demonstrate caution when advising their members as to the appropriateness of Bonitas as a

scheme of choice for medical cover

.

(10)

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Key Financial Metrics: Fedhealth Medical Scheme

Fedhealth

Discovery Health

Average contribution increase 2010

15.9%

9.8%

2008 Operating result

-R 37 million

R 293 million

2008 Net surplus

R 77 million

R 997 million

2008 Reserves

R 554 million

R 5.3 billion

Latest estimate of scheme reserves

R 591 million*

R 6.1 billion**

2008 Solvency

28.2%

25.4%

2009 Projected solvency

26.1%*

25.3%**

Global Credit Rating

AA-

AA+ (Industry Ceiling)

Active members end 2008

84 873

910 000**

Active members end 2008

84 873

910 000

(12)

Fedhealth Medical Scheme: Key benefit changes for 2010

• Reimbursement rates on Ultimax, Ultima 300 and Maxima Plus will remain at 300% of

NHRPL

• Reimbursement rate on all other options will reduce to 200% of NHRPL

Reduction in

reimbursement rates

Co-payments and

deductibles

• A 20% co-payment has been introduced on Maxima Standard, Basis and Core

options for members who have reached Safety Net

• Existing co-payments on all Maxima options have increased from R1 150 to R1500.

• Existing co-payments for joint replacements and hiatus hernia surgery on Maxima

deductibles

Existing co payments for joint replacements and hiatus hernia surgery on Maxima

Core have been extended to Maxima Standard and Maxima Basis – co-payment

will be R1 500 in 2010

• A R1 500 co-payment has been introduced for upper gastro-intestinal endoscopies

on all Maxima options

The existing co payment for the removal of wisdom teeth in hospital has been

Other benefit changes

• The value of the scheme’s day-to-day benefits, including the Out-of-Hospital

_{Expenses Benefit and medical savings, remain unchanged for 2010}

• The existing co-payment for the removal of wisdom teeth in-hospital has been

increased from R1 150 to R2 500 on all options

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Impact of the reduction in in-hospital related account reimbursement rates

92% of Fedhealth’s members will be affected by the

drop in in-hospital reimbursement rates

Ultima 200

Not

Plans affected by reduction in reimbursement rates

Plan Reduction in reimbursement

Maxima Standard Reduced from 300% to 200%

_{Ultima 200}

+ OHEB

+2.7%

_{Ultima 200}

+2.9%

Maxima

Basis

+2.7%

Not

affected

Maxima Standard Reduced from 300% to 200%

Maxima Basis Reduced from 300% to 200%

Ultima 200 + OHEB Reduced from 300% to 200%

Ultima 200 Reduced from 300% to 200%

Discovery Health’s approach

• In 2007 Discovery Health reduced reimbursement rates on certain

Ultima 200 Reduced from 300% to 200%

Maxima Core Reduced from 300% to 200%

Maxima

Standard

+2 7%

Maxima

Core

+2.9%

In 2007 Discovery Health reduced reimbursement rates on certain plan options. However, this was accompanied by the introduction of the Direct Payment Arrangements, guaranteeing members full cover when visiting participating specialists.

• Currently over 85% of specialists visits are covered in full through these arrangements.

+2.7%

Equates to an effective benefit reduction of 2.5% of

member premiums

these arrangements.

• No other administrator in the market has been able to replicate this arrangement.

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Increase and introduction of new deductibles: Fedhealth

Condition New / Existing Which plan affected Co-payment Incidence rate

Removal of wisdom teeth

in-hospital Existing All options

From R1 150 to

R2 500 1.3%

Hiatus hernia surgery New Maxima Basis and

Maxima Standard R1 500 0.2%

Joint replacement New Maxima Basis and

Maxima Standard R1 500 0.9%

• Existing members on

these options are now

exposed to forced

deductibles when

Upper gastro intestinal

endoscopies New All Maxima options R1 500 1.6%

Arthroscopies Existing All Maxima options From R1 150 to

R1 500 0.2%

From R1 150 to

undergoing these

procedures in 2010

• Effective benefit

Colonoscopies Existing All Maxima options From R1 150 to

R1 500 0.2%

Laparoscopies Existing All Maxima options From R1 150 to

R1 500 0.8%

f E i i All M i i From R1 150 to %

reduction equivalent

to 2% of member

premiums

Removal of gall bladder Existing All Maxima options From R1 150 to

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Discovery’s major advantages over Fedhealth

Financial security and value DHMS enjoys an AA+ rating for its claims paying ability, with over R6bn in reserves. Increases have been

consistently in line with medical inflation. Fedhealth’s increase for 2010 is 15.9%.

Wide spectrum of sustainable plans

A range of plans to cater for every individual need. All Discovery plans have a sustainable membership size. Three

out of the 9 Fedhealth plans have fewer than 5 000 members Fedhealth does not offer low income plan options

sustainable plans out of the 9 Fedhealth plans have fewer than 5 000 members. Fedhealth does not offer low income plan options.

Guaranteed full cover for medical specialists

Members guaranteed no out-of-pocket payments through participating specialists (>85% of visits). Fedhealth

cannot provide this certainty of cover and has reduced reimbursement rates for 2010 on certain options.

Access to latest treatments d i h b fi

Discovery members enjoy access to richer benefits in key areas in comparison to Fedhealth such as: Specialised di i d t h l t i l t l di l li ib d di i

and richer benefits medicine and technology, terminal care, external medical appliances, prescribed medicine.

Flexible chronic cover Full cover for approved medicines through a medicine list or monthly amount. Fedhealth imposes annual chronic

limits and members using non-formulary medicines are liable for a 40% co-payment.

Enhanced day to day cover Insured Network Benefit significantly enhances members day-to-day cover once their annual savings deposit is Enhanced day-to-day cover

depleted. Fedhealth members do not enjoy these benefits.

Unique value-added benefits Trauma Recovery Extender Benefit, Discovery 911, Overseas Treatment Benefit, Screening and Prevention

Benefit, Discovery Medicopters, corporate wellness and HIV programme and more.

Vitality provides tangible rewards to members for living a healthy lifestyle The Medical Savings Booster provides

Vitality Vitality provides tangible rewards to members for living a healthy lifestyle. The Medical Savings Booster provides

additional day-to-day cover to Vitality and Card members through the HealthyFood benefit.

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Fedhealth

D i ti Pl l ifi ti Members

Average

i K h f 2010 Comparable Discovery

Fedhealth plan overview and key changes for 2010

option Description Plan classification 2008 increase

2010

Key changes for 2010 p y

options (discount*)

Ultimax

New generation option with savings and threshold to cover day-to-day expenses.

Top end:

300% IH reimbursement PMB + non-PMB chronics (70) 7% MSA and OHEB

878 17.9%

MSA, Safety Net and OHEB levels remain unchanged for 2010

No increase in benefit limits

Executive (59%) Classic Comp (49%)

New generation option with Top end: MSA Safety Net and OHEB levels remain

Maxima Plus

p

1 411 16.9%

Executive

Classic Comp (72%)

Ultima 300

Top end:

3 523 17.9%

Executive (82%) Classic Comp (68%) 8% MSA and OHEB

Maxima Standard

Intermediate:

42 001 16.7%

IH reimbursement drop from 300% to 200%

20% co-payment introduced once member reaches threshold

Classic Comp (120%) Classic Priority (94%)

Maxima Basis

Traditional option, where all benefits are paid from risk and

Intermediate:

200% IH reimbursement

PMB + non PMB chronics (56) 13 966 16.4%

20% co-payment introduced once member Classic Priority (100%)

Classic Saver (82%) Basis

threshold, subject to sub-limits. PMB + non-PMB chronics (56)

OHEB reaches threshold

Classic Saver (82%)

Ultima 200 + OHEB

New generation option with savings to cover day-to-day expenses.

Limited day-to-day: 200% IH reimbursement PMB + non-PMB chronics (70) 9% MSA and OHEB

5 091 17.5% IH reimbursement drop from 300% to 200%

Classic Saver (76%) Classic Delta Saver (61%)

An entry-level new generation Hospital:

200% IH i b IH reimbursement drop from 300% to 200% Classic Core (79%)

Ultima 200

y g

option providing cover though minimal savings.

200% IH reimbursement PMB + non-PMB chronics (56) 2% MSA

6 252 17.8% IH reimbursement drop from 300% to 200%

( )

Classic Delta Core (63%)

Maxima Core

An entry-level new generation option providing cover though minimal savings and threshold.

Hospital:

200% IH reimbursement PMB + non-PMB chronics (56) 2% MSA

10 935 14.9%

20% co-payment introduced once member reaches threshold

Classic Core (66%) Classic Delta Core (53%)

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Key Financial Metrics: Momentum Health Medical Scheme

Momentum Health

Discovery Health

Average contribution increase 2010

11.%

9.8%

2008 Operating result

-R 47 million

R 293 million

2008 Net surplus

R 15 million

R 997 million

2008 Reserves

R 306 million

R 5.3 billion

Latest estimate of scheme reserves

R 316 million*

R 6.1 billion**

2008 Solvency

18.7%

25.4%

2009 Projected solvency

16.1%*

25.3%**

Global Credit Rating

A+ (Rating watch)

AA+ (Rating upgrade)

Active members end 2008

80 780

910 000**

Active members end 2008

80 780

910 000

Active lives end 2008

179 464

2 006 000**

Note : * 2009 Global Credit Rating Report ** Latest Discovery Health data

(19)

Momentum has experienced continued operating losses

R 60 R 80

o

ns

The scheme has consistently experienced substantial operating losses

R 38 _{R 33} R 62 R 40 R 0 R 20 R 40 R 60 Milli o -R 81 -R 76 -R 47 -R 31 -R 60 -R 40 -R 20 -R 100 -R 80 2006 2007 2008 2009 projected Operating Result Investment and other income

Note :

• Operating results are an indication of the extent to which the premiums received are sufficient to pay for the claims and

expenses incurred by the scheme

(20)

Without significant remedial action, Momentum faces a dramatic drop in

solvency in 2010

Momentum’s solvency levels have continued to fall during the last 4 years

(from 2006 to 2009). Solvency has dropped by 10.6% during this period

30%

• 15.8% solvency

projected for end

Medical inflation + 5%

26.7%

20.1%

18.7% 3.2%

20%

25%

projected for end

2011 if contribution

increases are in line

with medical inflation

M di

l i fl ti

increase required to build additional 3.2% solvency in line with business plan.

16.1% _15.7% _15.8% 10% 15%

• Medical inflation

+5% increase

required to build

towards 25%

l

i li

ith

0% 5% 2006 2007 2008 Projected 2009 (GCR) Projected 2010 Projected 2011

solvency in line with

business plan

Projected 2010 based on 11 6%

Note :

• According to Momentum’s Global Credit Rating report, the scheme’s business plan requires the scheme to build towards the statutory solvency level of 25% by 2013. This will require incremental increases in solvency each year

(GCR) based on 11.6% increase

(21)

Momentum Health Medical Scheme: Key benefit changes for 2010

• Reimbursement rate dropped from 300% to 200% (Extender and Incentive) and from

150% to 100% (Custom)

Reduction in

reimbursement rates

Increased self payment

gaps

• Thresholds on Extender plans have increased resulting in a substantial increase in

_{self payment gaps for the members on these plans}

g p

• Mental Health on the Access plan will now be covered up to a “rand” limit (and no

l

t

“d

” li it)

self payment gaps for the members on these plans

Oth

b

fit h

longer up to a “day” limit)

• New income bands introduced on the Base options, which is a low income plan

Other benefit changes

N

d

t d

li it f R15 000

b

fi i

i t d

d

th S

it

Momentum Summit

• New day-to-day limit of R15 000 per beneficiary per year introduced on the Summit

option, which is a top end plan

• Additional chronic conditions on Summit option limited to the new day-to-day limit

(previously unlimited)

(22)

Discovery’s major advantages over Momentum

Financial security and value DHMS enjoys an AA+ rating for its claims paying ability, with over R6bn in reserves. Increases have been in line

with inflation. Momentum’s solvency levels are projected to decline to 16.1% in 2009

Affordable contributions Discovery is competitively priced ensuring long term sustainability and value for money. Momentum uses “state”

facilities to reduce premiums effectively providing members with “no cover” facilities to reduce premiums effectively providing members with no cover

Access to latest treatments Access to latest treatments and richer benefits

Discovery members enjoy access to richer benefits in key areas in comparison to Momentum such as: Specialised medicine and technology, prescribed medicine, oncology, mental health and external medical appliances

Flexible chronic cover Full cover for approved medicines through a medicine list or monthly rand amount. Momentum imposes annual

chronic limits and members using non-formulary medicines are liable for an unknown co-payment chronic limits and members using non formulary medicines are liable for an unknown co payment

Enhanced day-to-day cover Insured Network Benefit significantly enhances members day-to-day cover once their annual savings deposit is

depleted. Momentum members do not enjoy these benefits

Unique value-added benefits Trauma Recovery Extender Benefit, Discovery 911, Overseas Treatment Benefit, Screening and Prevention

Benefit Discovery Medicopters corporate wellness and HIV programme and more Benefit, Discovery Medicopters, corporate wellness and HIV programme and more

Vitality Vitality provides tangible rewards to members for living a healthy lifestyle. The Medical Savings Booster provides

(23)

Momentum plan overview and key changes for 2010

Momentum

option Description Plan classification

Members 2008

Average increase 2010

Key changes for 2010

Comparable Discovery options (discount*)

A traditional option where Top end:

300% IH i li i b

New day-to-day limit of R15 000 pbpa

introduced _{Executive (87%)}

Summit

A traditional option, where all benefits are paid from risk subject to sub-limits

300% IH specialist reimbursement PMB + non-PMB chronics Day-to-day paid from Risk

2 346 16.0%

introduced

Additional chronic conditions accumulate to new R15 000 day to day limit (previously unlimited)

Executive (87%) Classic Comp

Extender

New generation option with savings and threshold to cover day to

Top end:

200% IH specialist reimbursement

PMB + non PMB chronics 13 179 13.1%

IH reimbursement drop from 300% to 200% Increase in self payment gaps going into

Classic Comp (91%) Classic Delta Comp threshold to cover

day-to-day expenses

PMB + non-PMB chronics Threshold and 25% MSA

p y g p g g

2010

p Classic Priority (71%)

Incentive

New generation option with savings to cover day-to-day expenses

Limited day-to-day:

200% IH specialist reimbursement PMB + non-PMB chronics 10% MSA

35 802 11.4% IH reimbursement reduction from 300% to

200%

Classic Core (88%) Classic Delta Core (78%)

Custom

New generation option with savings to cover day-to-day expenses

Limited day-to-day:

100% IH specialist reimbursement PMB chronics

7.5% MSA

22 859 12.0% IH reimbursement reduction from 150% to

100%

Essential Core (90%) Essential Delta Core (84%)

Access Low-income capitated

Low income: (network)

100% IH specialist reimb rsement 2 488 12 9% Mental Health will now be covered up to a Ke Care Pl s (71%)

Access p

option 100% IH specialist reimbursement

PMB chronics

2 488 12.9% p

“rand” limit and no longer a “day” limit KeyCare Plus (71%)

Base Low-income capitated

option

Low income: (network)

100% IH specialist reimbursement PMB chronics

4 106 8.8% New income bands introduced KeyCare Plus

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