How waiting periods work

Published Sep 1, 2015

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This article was first published in the second-quarter 2015 edition of Personal Finance magazine.

The freedom to make an informed choice about which financial product is best for you, and to move from one product to another that is more suitable, is generally encouraged across the financial services industry. So you may wonder why the medical schemes industry seems to operate differently, imposing waiting periods and late-joiner penalties that make it difficult for you to move between schemes.

If you are unhappy with the cover your scheme provides, or the hurdles your scheme’s administrator makes you jump before a claim is approved, you may feel that waiting periods are a huge obstacle to switching schemes. But understanding how waiting periods work – particularly if you are a long-standing scheme member – can help you to navigate your way around them.

Unlike other financial products, medical schemes are not-for-profit entities that are regulated to ensure they fulfil a social solidarity role (in other words, everyone benefits from the dependence individuals have on each other) and ensure you have health care when you need it without the huge bills that come with high levels of care. This means that the contributions of younger, healthier members subsidise your costs when you are old and sick.

To meet the standard of social solidarity, the Medical Schemes Act ensures that:

* Everyone who applies to an open scheme must be admitted, and every member of the group for which a restricted scheme is set up must be able to join that scheme. This is known as open enrolment.

* Everyone pays the same contributions for a particular level of benefits, regardless of their state of health, or their age or gender. This is known as community rating.

* Certain minimum benefits – the prescribed minimum benefits (PMBs) – must be provided to all members.

But one key social solidarity principle is missing: the one that compels everyone to belong to a scheme. When both healthy and sick members belong to schemes, the costs of treating the sick are spread across a bigger pool, and the cost per person is lower than it would be if only sicker, older people were members. Despite the importance of this principle, policymakers have been reluctant to introduce it because of the high cost of medical scheme membership.

So, open enrolment and community rating ensure that you can join a scheme whenever you need treatment, whatever the cost, and your costs will be covered in return for your monthly contribution.

Without compulsory membership, people can wait until they are old and/or sick before joining a medical scheme – which, in the industry, is known as anti-selection or adverse selection. This results in low-risk individuals either failing to join medical schemes, or dropping out, leaving a high proportion of higher-risk members in schemes and potentially making them unsustainable.

According to a submission by Discovery Health to the Competition Commission’s inquiry into the private healthcare sector, anti-selection is particularly acute in open medical schemes. Restricted schemes (those set up for employer or other groups) tend to be less exposed to anti-selection, because those who belong to the group are typically obliged to join the scheme by virtue of their employment or membership of the group.

Waiting periods and late-joiner penalties are designed to fix the problems caused by anti-selection, by deterring people from staying out of schemes until they need cover.

Waiting periods are periods during which benefits are denied or restricted, and late-joiner penalties are a loading on contributions for those who join medical schemes late in life without having been a member for a specified period previously. Waiting periods and late-joiner penalties are prescribed by law. Schemes are prevented from applying any other measures under which benefits are denied or restricted.

Permitted waiting periods

Waiting periods target particularly people who join a scheme without having belonged to a scheme at all, or after a break in membership for a certain period. In such cases, schemes can impose:

* A three-month general waiting period (either on all benefits or on all benefits except the PMBs); and

* A 12-month condition-specific waiting period (on benefits related to a specific condition).

During the year-long, condition-specific waiting period, you and your dependants are not entitled to claim benefits for a condition for which medical advice, diagnosis, care or treatment was recommended or received within the 12 months preceding the date of application for membership.

The general waiting period lasts three months, and during that period, you or your dependants are not entitled to claim any benefits, except, in some circumstances, benefits that are among the PMBs.

If a waiting period is imposed and you move schemes before the waiting period has ended, the scheme to which you move can impose whichever waiting periods apply, in addition to the remaining portion of the waiting period your previous scheme imposed.

However, the Medical Schemes Act stipulates that waiting periods cannot be imposed if you apply for membership, or registration as a dependant, within 90 days of terminating cover with another medical scheme and the change is involuntary, due to a change in employment, your employer moving its employees to a new scheme, or your employer terminating a restricted scheme.

If you change schemes voluntarily, the good news is that, if you have been a member of a medical scheme, or a dependant of a member, for at least two years and you leave one scheme and join another within three months, your new scheme may impose only a three-month general waiting period that does not apply to the PMBs. This means that, for example, if you have a medical emergency or need PMB

chronic medication, your new scheme must provide these benefits as soon as you join. If, however, you need an elective procedure, such as a hip replacement, you will have to wait three months.

If you are switching between schemes without any employer involvement, or you are joining a scheme for the first time without having been a member of a scheme for the past three months, your scheme may impose the following:

* A three-month general waiting period (applied to all benefits, including the PMBs); and

* A 12-month condition-specific waiting period (if applicable).

If you apply to a medical scheme within three months of having been a member of another scheme, or the dependant of a member, but have not been a member, or dependant, of any scheme for a continuous period of two years or more, the scheme you want to join may apply the following:

* A 12-month condition-specific waiting period (if applicable and if the condition is not a PMB); and

* The balance of any unexpired general or condition-specific waiting period imposed by a previous scheme.

Waiting periods are applied to beneficiaries (the member and dependants) individually.

But there are some cases where the rules differ slightly – for example, where schemes have a cut-off age at which children can no longer be dependants. Say your son, who has been a dependant on your medical scheme for less than two years, reaches an age at which the scheme no longer regards him as a dependant. He will then be compelled to join either your scheme or a different scheme as a member in his own right. In this case, it is likely that the scheme will acknowledge that the change was forced on your son, and will apply only the three-month general waiting period, not the 12-month condition-specific waiting period, and it will not apply to the PMBs.

When two members marry and one spouse moves onto the other spouse’s scheme without having two years’ membership, the scheme to which the spouse moves could impose both the general waiting period and the condition-specific waiting period. However, many schemes state in their rules that they will not impose these waiting periods if the spouse moves to the scheme within a certain period of the marriage.

You cannot buy out of any waiting period, and you cannot remain a member of one scheme and join another at the same time to ensure that you have cover while the waiting periods on the new scheme apply. The Medical Schemes Act specifically prohibits this.

A medical scheme can require you to submit a medical report when you apply to join the scheme, for the purpose of establishing what, if any, condition-specific waiting periods should be applied. However, the regulations under the Medical Schemes Act state that the scheme must pay the costs of any medical tests or examinations that may be required.

Your scheme cannot cancel or suspend your membership, or that of any dependant, unless you:

* Fail to pay your contributions within the time allowed in the scheme’s rules;

* Fail to repay any debt you owe the scheme;

* Submit a fraudulent claim;

* Commit any fraudulent act;

* Fail to disclose what is regarded as material information when you apply.

Loadings on your contributions

Late-joiner penalties – loadings on your monthly contributions – apply under certain conditions to people over the age of 35 and may be imposed for as long as you remain a member of a scheme. The penalties are intended to protect medical schemes from people who anti-select by waiting until they are older – and are likely to have more chronic illnesses and other ailments – to join a scheme. Even if you are accepted by a scheme without a late-joiner penalty, it is possible that a new scheme will impose one if you move.

These penalties were introduced from April 1, 2001, after a moratorium during which people over the age of 35 were encouraged to join a scheme. They now apply to anyone who is 35 years of age or older and has had more than a three-month break in membership or dependant cover since March 31, 2001, and who does not have enough years of what is known as “creditable” medical scheme cover as a member and/or dependant to avoid the imposition of the penalty.

The regulations under the Medical Schemes Act provide a formula that schemes must use to determine the late-joiner penalty to be applied. The formula is A = B – (35 + C), where:

* “A” is the number of years that determine the appropriate penalty band in the table – link at the end of this article;

* “B” is the age of the late-joining member when he or she applies for membership, or admission as a dependant; and

* “C” is the number of years of creditable coverage you can prove. The regulations define “creditable coverage” as any period that you were a member of a scheme or a dependant of a member of a scheme; a uniformed employee of the South African National Defence Force, or a dependant of such an employee; or a member or a dependant of the Permanent Force Continuation Fund.

Once you have used the formula to determine the number of years, the maximum penalty to be applied is determined according to the following table:

1 to 4 years: contribution x 0.05

5 to 14 years: contribution x 0.25

15 to 24 years: contribution x 0.50

25 or more years: contribution x 0.75

The regulations state that the late-joiner penalty can be applied only “to the portion of the contribution related to the member or any adult dependant who qualifies for late-joiner penalties”.

Although the definition of a late-joiner in the regulations gives the qualifying age as 35 or older, the formula and the table ensure that only people aged 36 and older are subject to a penalty, because the calculation for 35-year-olds results in a nil penalty.

Creditable coverage does not include any period when you had health cover under an insurance policy, or any cover enjoyed as a dependant under the age of 21. It also does not take into account any periods when you were out of the country and covered by a health plan or policy in another country. This is the source of many complaints from people who leave the country to work overseas and return after the age of 35.

Some schemes apply the penalties strictly in all cases, saying they believe they have a duty to other members of the scheme to do so and arguing that applying them arbitrarily would amount to discrimination against members on whom penalties were imposed. The Medical Schemes Act expressly prohibits discrimination against members.

Schemes also argue that people who have been out of the country have not been contributing to the reserves of any local schemes, and if they were allowed to join late in life without any penalties, other members would have to pick up the cost of funding their benefits. They also say it is very difficult for a scheme to verify that a member had healthcare cover in a foreign country, or to verify a member’s state of health with a doctor in a foreign country.

If you have lost your records of previous membership of a South African medical scheme, or a scheme to which you previously belonged has been liquidated, the Medical Schemes Act provides that you can sign a sworn affidavit stating when you were a member, and this can be used to negate all or a part of a late-joiner penalty. However, membership of a foreign health scheme is not taken into account, even if you have proof of such cover.

Are the measures working?

In recent submissions to the Competition Commission’s inquiry into private health care, there is some criticism of the waiting periods and late-joiner penalties. Discovery Health, the country’s largest medical scheme, says there is general consensus that the waiting periods are a weak deterrent to late joining (anti-selection).

The scheme’s administrator says a predictable consequence of this is that the average age of medical scheme members is older than that of the general population, because people join schemes later in life than they would if membership were compulsory.

Data collected by the Council for Medical Schemes confirms this trend – with membership between the ages of 20 and 29 falling short of the proportion of the general population that is between these ages. Discovery Health says it is at about age 29 that membership of schemes starts to increase, because people begin families or encounter health problems. It says there is also evidence of adverse selection when you consider the percentages of working people between the ages 25 and 64 who belong to medical schemes. In the 25-29 age band, only 44.9 percent of working people are medical scheme members. This increases to 72 percent in the 60-64 age band.

Discovery Health says the gender profile of medical schemes also shows substantial adverse selection, with the proportion of women on schemes showing a marked increase during child-bearing years. In terms of the PMBs, schemes are obliged to cover almost all maternity cases. As long as a woman joins a scheme before she falls pregnant, cover for her care must be paid for. Discovery Health says it has become common for women to join schemes during their child-bearing years and to leave again if the children are healthy. Only if you join a medical scheme for the first time when you are already pregnant can the scheme apply the 12-month waiting period and exclude maternity benefits.

Discovery Health estimates that if everyone in South Africa earning above the tax threshold were to join a medical scheme, the average cost of providing the PMBs to members would decrease by 9.5 percent. The Council for Medical Schemes’s data shows that the PMB package accounts for more than half of the average cost of your benefits.

Although the late-joiner penalties have had some affect on adverse selection, according to Discovery Health, data collected by the Council for Medical Schemes shows there is still a big difference between what it costs to provide the PMB package to members when membership of schemes is voluntary and what it would cost if all members earning above the tax threshold were obliged to join a scheme.

Another large medical scheme administrator, Medscheme, says in its submission to the competition commission that comparing group or employer membership of schemes – which is a form of compulsory membership – with individual membership shows the impact of anti-selection, because the individuals consistently claim more than members of a group. On average, says Medscheme, individual members’ claims are 25 percent higher than claims by group members of the same age, gender and other factors. Anti-selection is more evident among younger people and among men.

Furthermore, Discovery Health says there is extensive evidence that members of schemes anti-select against their schemes by moving to options with richer benefits when they know they will incur certain medical expenses and then buying down to options with lesser benefits after they have been treated. Currently, schemes are not able to apply any waiting periods or late-joiner penalties when you move between options.

Discovery Health says switching options occurs particularly when:

* Members need expensive discretionary treatment, such as dental treatment;

* Treatment can be planned in advance – for example, back surgery, a hysterectomy, or even minor surgery such as the insertion of grommets (typanostomy);

* Expensive equipment will be required – such as a prosthesis; or

* Treatment will take place over several years, such as treatment for chronic diseases or cancer.

Medscheme’s submission shows the impact of a recent decision to waive all waiting periods and late-joiner fees for six months in a bid to attract new members. During that period, 15 300 new members joined the scheme, but half of them left the scheme within three years and most left within the first year.

The scheme also experienced a much higher hospital-admission rate than it was used to, and maternity cases were especially high among the new members. The financial impact on the scheme was the equivalent of 10 percent of contributions over a three-year period.

Medscheme notes that 70 percent of the medical scheme market is group business, and anti-selection is worst in the other 30 percent.

Discovery Health recommends that adverse selection be addressed through the gradual introduction of mandatory medical scheme membership for those in formal employment.

In the absence of mandatory membership, Discovery suggests that more effective waiting periods be introduced, as follows:

* The general waiting period should be increased from three months to 12 months;

* The condition-specific waiting period should be increased from 12 months to 36 months;

* The PMBs should not be covered during the general waiting period;

* Late-joiner penalties for people joining schemes after the age of 60 should be increased to 105 percent;

* Option upgrades should be subject to the same waiting periods as new membership; and

* The provisions in the Medical Schemes Act that allow employer groups to join a scheme on January 1 each year without underwriting should be removed.

Discovery suggests that these proposed waiting periods and late-joiner penalties should be applied after a six-month amnesty. It estimates the saving to Discovery Health Medical Scheme at R434 million a year, and claims that similar results would be achieved by other schemes.

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