Discovery has a massive medical scheme problem

Discovery Health Medical Scheme (DHMS) has a massive looming problem, one which will negatively impact medical inflation in the coming years.

Not only has scheme membership been broadly flat for nearly a decade (in fact, the number of lives covered by DHMS has declined by 73 000 over the last five years), but Discovery Health’s only growth over the decade has come from taking on the administration of restricted schemes such as Bankmed (in 2016) and Sasolmed (in 2024), and from non-scheme products such as gap cover.

The problem with this lack of growth – which is largely structural in nature given the broader economy that is barely growing – is that the average age of lives covered by the scheme has jumped significantly over the last decade and a half. In 2008, the average age of lives covered by DHMS was 32.3 years. Today, that number is 37.6 years.

It is simply not attracting lower-risk younger members to the scheme in sufficient numbers.

Last year, it launched the Discovery Health Active Smart Plan, with a contribution of just R1 350 per month, specifically to target this cohort.

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It needs an influx of these members to drive down the risk profile of the overall scheme and to prevent the average age from rising further. (Discovery does highlight that 61% of market share for 20-to-39-year-olds is held by its Smart plans.) 

This is not only a problem being faced by DHMS – it is common across all schemes – but because it has 58% market share, it feels the biggest impact.

The “sustained aging of the scheme” is the first issue.

The second is “increased chronicity” across age groups, in other words, the percentage of members with chronic conditions. In 2008, this was 15.7%. Today it is 31.8% – more than double.

The two factors are, of course, linked. 

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Medical inflation

Discovery says there are three main drivers of medical inflation: tariffs, technology (supply-side utilisation), and demographic aspects (demand-side utilisation).

For the second of these, new technologies and treatments such as high-cost drugs, increase costs. Demographic aspects, specifically increased ageing and chronicity, lead to “adverse selection”.

Still, with the impact of Vitality and efficiencies given its scale, it is managing to drive down inflation across DHMS. This equates to about one percentage point. Across seven schemes, DHMS had the lowest weighted average contribution increase this year (9.3%). The highest across these schemes, according to its comparison, was 12.8%. 

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Longitudinal impact of medical inflation (relative growth rates over last 10 years (indexed to 2014)

Discovery says the single biggest driver of medical inflation – nearly half (46%) – is adverse selection. It notes that this is accelerating, and the gap is widening. Its base of members is likely to just continue getting older and older. 

The tariff increases, to keep up with CPI, only comprise 37% of the increase in medical inflation over the last decade. Technology, or supply-side utilisation, is the smallest contributor at only 17%. 

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Mitigating increases

The group is looking to all three vectors as opportunities to mitigate price increases. There’s not much it can do with regard to tariffs, though. On the supply side, it’s using networks of hospitals for various plans in an effort to reduce the increase in costs. And on the demand side, it is pushing hard on hyper-personalisation and growing the effect of Vitality to make an impact. 

It is no accident that it launched personal health pathways in the Discovery Health app this year in an effort to incentivise and reward customers for completing certain actions. This has outsized benefits for members with chronic conditions. If it can improve adherence across these members, there is a demonstrable saving for the “health funder” (the scheme). 

For members with diabetes or hypertension, for example, if 25% of members complete their ‘next best action’ under personal health pathways, there is a potential saving of more than 50% for the “health funder”. 

There are 2.08 million eligible lives under the personal health pathways programme. It says nearly two-thirds of “activated lives [those who have opted in] are in the chronic, disease prevention or emerging risk cohort”. Around 350 000 next best actions have been completed by members in the last two months. 

This article was republished from Moneyweb. Read the original here.