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Consider health costs as our financial wildcard. How healthcare will unfold in South Africa is currently particularly uncertain. If we continue on our current trajectory, individuals and their families may well wish to consider a savings programme that could cushion potential future blows. But we also argue that there’s much that we can do collectively to control spiralling healthcare costs. This chapter explores both of these levers on our future financial well-being.
Healthcare is a long-term savings challenge that is often overlooked. When we consider the savings that an individual needs to accumulate by the time they retire, we don’t usually consider the unique healthcare expenses that they might be confronted with in their retirement. On the one hand, individuals and their families are confronted with increases in costs year on year that will usually outpace general inflation levels. That means that as we grow older, health costs will constitute an increasing percentage of our income allocations, not just because our health may be failing with age, but because the costs are growing at a faster rate than other costs in our consumption basket. On the other hand, people can mitigate increasing health costs to some extent by taking pro-active measures to improve their health earlier on in their lives. This is at a cost as well, but a potentially significantly lower one over time.
Throughout a person’s life, expenses on healthcare-related items fit into three main components.
We can see how each component varies throughout an individual’s life, in order to advise on optimal healthcare spend.
When we consider the savings that an individual needs to accumulate by the time they retire, we don’t usually consider the unique healthcare expenses that they might be confronted with in their retirement.
The table indicates the increasing costs of healthcare over time taking account of changing family demographics. Once in retirement years, we expect that our health requirements will be greater. As such we would want to be on a high benefit option in these years, but because of affordability, members often buy a more cost-effective option.
The question we'd like to answer is: How can you make sure that your employees can afford the most appropriate healthcare benefits in their retirement?
We’ve considered two ways to manage post-retirement healthcare costs:
Healthcare trends suggest that the need for medical scheme benefits increases as one ages. It may therefore be expected that a high level of medical aid cover is required during retirement.
We’ve estimated the expected costs of medical scheme membership and out-of-pocket expenses after retirement for a married male, currently aged 25, who wants to save for a high level of cover during retirement, at age 65, for himself and his spouse.
The table below shows the estimated monthly contributions to a savings or investment vehicle that this member would need to make for the next 40 years. We have assumed that his savings contributions increase in line with Consumer Price Index (CPI) inflation and that annual investment returns average 4% above CPI.
However, if the member was to live a healthy lifestyle, it’s likely that his health requirements in his retirement would be less. Therefore, he might not need to obtain a high level of cover during retirement.
The table below indicates the estimated monthly contributions to a savings or investment vehicle that the member would need to make for the next 40 years to afford a medium or low level of cover. We have assumed that his savings contributions increase in line with CPI inflation and that annual investment returns average 4% above CPI.
Saving from a younger age means the member can save a significantly lower amount every month thanks to the effect of compound interest that’s lost by only investing at a later age.
In general, the higher the level of cover required, the more money an individual needs to put aside to provide for cover. It’s interesting to note that the total cost for a medium-cover option is estimated to be lower than that of a low-cover option. This is because higher contributions for medium cover are offset by lower out-of-pocket expenses. Those who need a high level of cover in retirement will need to set aside significantly more for their healthcare needs – particularly smokers or heavy drinkers, and those who consume unhealthy foods and don’t exercise.
Those who need a high level of cover in retirement will need to set aside significantly more for their healthcare needs – particularly smokers or heavy drinkers, and those who consume unhealthy foods and don’t exercise.
The World Health Organization (WHO) notes that the prevalence of non-communicable diseases (NCDs) is increasing worldwide. NCDs are defined as “non-infectious diseases of long duration, generally slow progression and they are the major cause of adult mortality and morbidity worldwide”1.
The following four diseases are considered to be most prevalent and account for over 60% of all deaths in the modern world:
Non-communicable diseases affect everyone: the economy, employers, medical schemes, their members and those suffering from the NCD.
The World Bank’s latest statistics reflect health expenditure in South Africa as 8.93% of gross domestic product (GDP) in 2013. It’s estimated that the accumulated losses to South Africa’s GDP between 2006 and 2015 from diabetes, stroke and coronary heart disease alone cost the country US$1.88 billion2.
As the funders of private healthcare costs in South Africa, medical schemes are spending a greater percentage of contributions on the treatment of NCDs.
Our largest medical scheme, Discovery Health Medical Scheme (DHMS), reported that in 20123, one in three families had a member with an NCD. The average age of chronic members was 45.96 years and 70% of all chronic members were below the age of 60. Between 2008 and 2012 NCD-related health costs increased by 83%.
Cardiovascular disease accounted for nearly half of all expenditure on chronic conditions in 2012. Mental illness is becoming more and more widespread and represented close to R1 billion of expenditure in 2012. In total, approximately R5.4 billion was spent on treating NCDs in 2012. However, with ancillary costs such as doctors’ consultations and hospital admissions, this amounts to R14.2 billion.
DHMS data shows the following top three chronic diseases per age group, how widespread the disease is within each age group, the average cost to the scheme per claimant per month, and the average out-of-pocket expenditure for members to treat the disease:
A total of 3.8% of people on the scheme between the ages of 31 and 40 have developed high blood pressure. It costs the scheme an average of R179 per claimant every month to fund the treatment of the disease. Because some members don’t comply with treatment or scheme rules (for example, not using prescribed medicine lists) it costs these members about R41 per month in out-of-pocket expenses (which is roughly 16% of the cost).
By the age of 70, we see that the percentage of members in the age category has increased to 58%, it’s costing the scheme an average of R217 per claimant every month, and members are funding an average of R59 per month in out-of-pocket expenses (21% of the cost).
The Council for Medical Schemes report for 2014–2015 indicates that contribution increases between 2001 and 2014 were in the region of 3–4% above CPI inflation. Salary increases and company subsidies, where applicable, are generally linked to inflation. This places a higher cost burden on the employee as medical scheme contributions account for a great percentage of their salaries, which may result in disgruntled employees.
As a result of escalating contributions, medical scheme members are buying more cost-effective and less benefit-rich options, often exposing themselves to higher out-of-pocket expenses.
Changes in out-of-pocket expenditure are fairly volatile over an individual’s life and depend on various factors:
Depending on each of these factors and how they interact, out-of-pocket expenditure can increase at a rate far beyond medical scheme contribution inflation, or can be closely controlled and not feature heavily in their budgeting.
According to the latest PwC4 report on medical cost trends, where members don’t have adequate cover, they tend to sacrifice valuable medical attention, including early diagnoses and management of chronic conditions. Worsening health conditions can affect employers in the form of higher absenteeism or presenteeism, where employees are physically present but not productive.
The South African Medical Journal5 notes that because NCDs are a leading cause of death in our working-age population, employers can face additional costs in the form of high staff turnover. They also note that obese workers cost their employers 49% more in paid time off than their non-obese colleagues.
Employees are experiencing an ever-increasing cost in their healthcare expenditure. This includes higher medical scheme costs and greater levels of out-of-pocket expenditure. As a result, many employees buy less benefit-rich options and often don’t include all their dependants on their medical scheme plan in an effort to reduce costs. This can result in health complications, greater stress levels and a worsening of their physical and mental well-being.
The WHO reports that the following lifestyle risk factors can lead to NCDs:
The good news is that many NCDs can be prevented or managed through behavioural change.
The South African National Department of Health has promulgated mandatory salt regulations, beginning in 2016, to reduce the intake of salt. The World Health Organization recommends a daily intake of salt of not more than 5g (about a teaspoon), but studies show that some South Africans are taking as much as 40 g of salt a day, increasing the risk of hypertension. This new legislation is expected to save a total of 6 400 lives from stroke, and 4 300 from non-fatal stroke, and cut hospitalisation costs by R300 million every year.
Similarly, the newly announced tax on sugary drinks is expected to cut the number of obese people by 220 000 in three years. The Priceless Unit at the Wits Centre of Public Health concludes that ‘liquid sugar’ carries the biggest risk for diabetes. Drinking a sugary soft drink is equivalent to having at least eight teaspoons of sugar. They note that a can a day increases the risk of diabetes by 26% and being overweight by 27%. Children who drink a can a day have a 55% higher chance of being overweight.
Medical schemes typically encourage members to undergo screening tests to detect diseases early, resulting in better health outcomes and lowering the cost of treatment.
Many medical schemes in South Africa have aligned themselves with wellness and loyalty partners. They provide members with financial assistance to access providers who can help them lead healthier lifestyles, by offering discounted gym memberships as well as smoking cessation and weight-loss programmes. Members are rewarded for their commitment to healthy lifestyles.
Healthier members simply claim less than unhealthy members. Discovery Health Medical Scheme (DHMS) statistics reveal that members who engage with their wellness programmes save the scheme approximately R1 billion a year. Schemes also focus on disease management through targeted disease management programmes to assist members and providers to manage the treatment and associated risks of specific conditions.
Discovery Health Medical Scheme (DHMS) statistics reveal that members who engage with their wellness programmes save the scheme approximately R1 billion a year.
Employers who promote wellness within their employee base can benefit from a healthier workforce, increased productivity, reduced absenteeism and presenteeism. Healthier lifestyles reduce depression rates and healthier medical scheme members can benefit from lower medical inflation. This could allow for more affordable cover for many employees and yield workforces with greater access to healthcare services. This, in turn, may benefit employee engagement in the workplace.
Employees who engage in healthy lifestyles reap all the benefits. They are in better positions to buy less benefit-rich options, freeing their budgets for other needs. They may be able to cover all their dependants on their medical scheme and are likely to experience an improved quality of life, and live a longer life.
Healthcare expenses for preventative measures will likely vary across different economic groups, and will depend on how much responsibility an individual is prepared to take for their own state of health. A person who considers their medical scheme responsible for future medical expenses is not likely to allocate current resources to improving future health, while someone who sees healthcare expenses as their own responsibility is more likely to take preventative action to ensure that future healthcare costs are as low as possible.
Once employees reach retirement, with many employers doing away with post-retirement medical scheme subsidies, leading a healthy life during working years means they can choose more affordable cover for an extended period of time, while at the same time limiting out-of-pocket expenses.
Healthy members may also delay or limit the need for frailcare or homecare in their old age. Typically medical schemes don’t cover long-term frailcare needs. The cost of these facilities differs based on region, facility and quality of care, but generally ranges between R13 000 and R25 000 a month. Many people who can’t afford these facilities spend as much as R16 000 on home-based care as they need multiple carers.
Reducing and managing NCDs is beneficial to all stakeholders and to a healthy South African economy. The greater the focus on wellness, the more productive we can be as a nation, the more affordable our healthcare can be and the greater the access to health cover for all.
This leads to an important question: How do we motivate individuals to take responsibility for their own state of health? This is particularly relevant in the current environment where lifestyle diseases such as diabetes, cholesterol and high blood pressure are so common.
Typically medical schemes don’t cover long-term frailcare needs. The cost of these facilities differs based on region, facility and quality of care, but generally ranges between R13 000 and R25 000 a month. Many people who can’t afford these facilities spend as much as R16 000 on home-based care as they need multiple carers.
There are two dimensions to the question of managing employee health. The first is the cost of maintaining employees’ and their families’ health over their lifetimes. The second is how employee health costs impact on the employer. Over the past few years, employers have increasingly recognised how relevant managing health-related issues such as absenteeism and employee disability claims can be to containing costs and increasing productivity. Our research highlights a few areas where employers may be making unwarranted assumptions about what contributes to these costs. The question we address here is whether maintaining older employees actually increases the likelihood of health-related costs to employers or not.
For many employers, the combined pressures of global competition and low South African growth have meant that cost controls, productivity and efficiencies are top of mind. As such, more companies have started examining how absenteeism management might be an important way to address efficiency and costs. By managing employees’ attendance effectively, companies could control the largest expense item and the source of productivity. The importance of these cost controls are such that JSE-listed companies are now required to report on sickness absenteeism as part of the integrated annual report requirements.
Psychosocial workload factors like increased job demands, fewer employees and low support have been associated with diminished health and increased absenteeism. Family-related factors like marital status and having children at home, and combining the demands at work and family life possibly resulting in work–family conflict, are also related to ill-health and sickness absenteeism. But the most obvious place to look for signs of deteriorating health is in the simple reality of an ageing workforce.
At some point the physical limits of being human lead us to lower productivity. Company-imposed retirement ages were introduced as an equitable way of dealing with this without specific reference to individual circumstances. But there are also other agendas for when employees should be required to retire that may or may not be linked to real economic or cost considerations.
To some extent, the earlier retirement age argument is driven by the belief that retiring employees open up the opportunity to replace these positions with younger, less expensive employees – an important consideration for a country that has effectively been brought to its knees by youth unemployment. Recent research by René Böheim on the effect of early retirement schemes on youth employment has highlighted the fact that the exact opposite may well be true. In certain business segments, maintaining experienced employees actually increases the likelihood of greater productivity and greater job creation. Our discussion here considers the other commonly cited consideration for low retirement age costs: the perception that older age employees demonstrate increased healthrelated absenteeism and lower productivity.
In one of the international studies in the British Medical Journal, Donders and others found that the determinants of sick absenteeism vary between different age groups. For example, the presence of chronic disease is associated with increased sickness absenteeism and is more prevalent in older people. Work–family balance is experienced differently between age groups and can be associated with sickness absenteeism, especially for younger employees.
Findings from the Alexander Forbes Health sickness absenteeism database correlated with the cross-sectional study of Donders and others.
We compare the age groups of 35–45 years and 55–64 years to determine the correlation of age and sickness absenteeism behaviour.
The results of sickness absenteeism data over a year for a population larger than 63 000 employees are shown on the next page.
The main findings include:
The Alexander Forbes Health findings correlate with the results of Donders and others that sick leave in the older age groups can partly be attributed to the presence of chronic diseases, supporting other reports that chronic diseases are a major cause of long-term sickness absenteeism.
Donders and others found that compared with the under 36 age group, the over 55 age group had almost two times less chance of frequent sick leave, but 1.6 times more chance of prolonged sick leave. These findings support the results from earlier studies that older people are absent less frequently, although their absence is often more prolonged compared with younger workers. Younger workers seem to stay out of work as a result of minor health complaints more often, while the health problems that older workers are confronted with (not necessarily chronic conditions) often take more time to recover from.
We’ve mapped out some strategies employers could consider to manage the impact of absenteeism and optimise productivity:
We strongly believe the solution is to be found in member education and communication. If individuals know that their future medical costs (and in turn retirement benefits) depend on how much time and effort they invest in their health now, they might start making some healthier choices for themselves and their families.
1 WHO, 2005
2 Alexander Forbes Research & Product Development and Rethink Africa, 2016
3 Discovery Health, 2016
4 PWC Health Research Institute, 2016
5 Hofman, 2014
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