Consumer Watch: When honesty really is the healthiest policy
Told a little fib or failed to disclose information “only” you know, because the truth is likely to drive up your premium, or cause a claim to be repudiated?
If the answer is yes, you’re part of a growing problem that’s driving up medical aid premiums above inflation - and why insurers are more sceptical about their clients.
Clients might not view white lies as fraud, but when you’re profiting from untruths, you’re committing a crime.
Footing the bill
Last year, life insurers in South Africa detected 3708 fraudulent and dishonest claims, worth R1.06billion.
The Association for Savings and Investment South Africa (Asisa) statistics show the number of irregular claims was lower last year than in the previous year (5026), but the claims value was almost the same, at R1.13bn.
Donovan Herman, convenor of Asisa claims standing committee, says life insurers owe it to their honest policyholders to protect the integrity of the long-term insurance model by preventing fraud and dishonesty.
“If we allow fraudulent and dishonest claims, honest policyholders will ultimately end up footing the bill through higher premiums driven by untenable claims rates.”
He says while life insurers are often accused of trying to avoid paying claims, the numbers tell a different story: Last year, life insurers paid 99.3% of claims made against fully underwritten individual life policies, valued at a total of R15.1bn.
Insurers might battle with fraud but for medical schemes, it’s an enormous problem that affects members directly. Earlier this year, the Council for Medical Schemes said fraud and dishonesty cost the sector up to R28bn a year, which is around a quarter of all premiums paid by members.
The country’s biggest medical scheme, Discovery’s indispensable fraud department investigates about 3500 potential fraud cases a year - most of which turn out to be valid.
Discovery Health CEO, Dr Jonathan Broomberg, says: “We recover about R550million per annum through fraud investigations.”
Those caught out for fraud, have to repay the medical aids.
Broomberg says schemes are under particular pressure from high levels of anti-selection (or adverse selection), which is when clients have information about their risk that their insurers lack and use this information to their advantage. It also occurs when clients take out policies when they know that they are likely to claim, or when sicker people buy more health insurance or more comprehensive health plans while healthier people buy less coverage.
The term was coined by economist George Akerlof in his paper, “The Market for Lemons: Quality Uncertainty and the Market Mechanism” which examines how the quality of traded goods can degrade if there’s information asymmetry between buyers and sellers.
Akerlof, who later won a Nobel along with Joseph Stiglitz for their work on asymmetric information, used the example of high-quality cars (“peaches”) and “lemons” (poor-quality cars), saying sellers know the true value of their cars, but uninformed buyers don’t, which creates an anti-selection problem that drives up prices, forces quality cars out of the market because sellers of peaches can’t achieve above-average prices and causes a market collapse.
In 1975, the US enacted a federal “lemon law” known as the Magnuson-Moss Warranty Act, which gives consumers legal protection against cars and other goods that fail to meet certain quality and performance standards. It also obliges the warrantor to pay the legal fees of the winning party in a lemon law suit.
The Medical Schemes Act forces medical schemes to accept any applicant, but with a large section of the population not on medical aid, it’s often the case that once they receive a diagnosis, they join a scheme quickly, putting severe strain on the scheme.
Broomberg says: “The biggest conditions putting pressure on schemes are pregnancy, where claims dramatically exceed premiums; cancer and kidney failure. Dialysis costs the scheme R50000 a month, which is about 10 times more than the contributions on top-end plans.”
And an increasing number of people in the system are claiming far more than they’re putting in, he says.
“We need enough people who pay more than they claim because their surplus covers those on whom the scheme is making a loss. Adverse selection is one of the major reasons why premiums are increasing so much more than inflation - the schemes are disempowered.”
Broomberg says if clients disclose fully to their insurers, they are completely within their rights to be granted policies but it requires honesty.
“Medical aid really should be a life-long contract - you take it out in your youth and it takes care of you throughout your life. It’s essentially a social contract that lasts a lifetime.”
* Georgina Crouth is a consumer watchdog with serious bite. Write to her at [email protected], tweet her @georginacrouth and follow her on Facebook.
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