South Africa’s second-biggest medical aid at risk of financial collapse

The Government Employees Medical Scheme’s (GEMS) plan to lower its contribution hike amid pressure from labour unions places it in a precarious financial position. 

GEMS has lowered its planned 9.8% contribution hike to 7.5% in recent weeks after coming under significant pressure from the Congress of South African Trade Unions (COSATU) and other unions. 

These unions argue that workers cannot keep absorbing steep medical aid increases amid low wage growth and a rising cost of living. 

GEMS is the largest closed medical aid scheme in South Africa, second only to Discovery Health, which is an open scheme. 

Formed in 2005 specifically for state employees, GEMS covers around two million beneficiaries, which equates to 20% of the entire market in South Africa. 

The plan to lower the contribution hike is estimated to result in a loss of annual contribution income for GEMS of R1.5 billion, raising concern at the Council for Medical Schemes (CMS). 

This will translate into a wider funding shortfall and a decline in its solvency ratio below the regulatory minimum of 25%. GEMS estimates the lower hike will see its solvency ratio fall to 21%. 

The CMS has instructed GEMS to produce a new financial sustainability plan showing a credible pathway to improving its solvency ratio and complying with regulations, Business Day reported. 

A natural solution would be to reinstitute the higher contribution increase. However, the opposition from unions has been fierce. 

COSATU Spokesperson Zanele Sabela noted that the CMS itself has previously encouraged GEMS to implement lower contribution hikes, with it proposing a 3.3% increase in 2025. 

“Now, GEMS wants to increase contributions by 9.8% this year, when workers are only expected to receive a 4% wage increase,” Sabela told 702. 

“Last year, GEMS put up contributions by 13.4%. So, over two years, GEMS is looking to increase contributions significantly when wages have not grown.” 

This results in lower disposable income for government employees, with their medical aid contributions taking up a larger chunk of their monthly pay cheque. 

Sabela said this is unsustainable, with workers being unable to foot a rising bill due to the scheme’s inability to run itself efficiently. 

Solvency ratio problems

The main issue the regulator has with GEMS is its failure to propose a plan to improve its solvency ratio, as it has fallen below the regulatory minimum of 25%. 

South African legislation mandates that all medical aid schemes must maintain financial reserves equal to at least 25% of their gross annual contributions. 

This is because local medical aid schemes are run as not-for-profit mutual funds owned by their members and not for-profit companies. 

As a result, they cannot easily raise external capital to bolster their funding. The 25% solvency ratio serves as a safety net to avoid schemes needing additional funding. 

This helps schemes absorb unexpected spikes in claims, guard against sharp premium hikes to raise capital, and ensure they can provide prescribed minimum benefits to all members. 

GEMS’ falling below the solvency ratio indicates the potential beginning of a downward spiral for the scheme, with it having to impose severe hikes to raise capital and reach the 25% minimum. 

These hikes, in turn, result in more opposition from unions, member defections, and members moving to less expensive plans.

This makes it harder for the scheme to reach the 25% minimum, pushing it to increase contributions further and risking an acceleration of the spiral. 

Sabela outlined COSATU’s solution to this problem, with the union calling on the state to step in, as GEMS is effectively run by the government. 

“We have sat down with the CMS and said that we understand there has to be a 25% solvency minimum, but GEMS is like no other scheme and should be treated differently,” Sabela said. 

“GEMS is like no other scheme. It is state-backed and is a closed scheme just for civil servants. In terms of that, we thought the CMS could allow GEMS to sit at a lower solvency ratio for a defined period.” 

Sabela said the CMS could, for example, allow GEMS to operate at a solvency ratio of 22% for three years, giving it time to improve its operations and get back on a sustainable footing. 

GEMS has argued that it can only improve its operations sustainably by cracking down on abuse of the system by civil servants. 

Sabela said COSATU rejects this and argued that the responsibility lies with GEMS to implement systems to prevent abuse.