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This article was first published in the 3rd quarter 2018 edition of Personal Finance magazine.

If you are reading this, it is probably safe to assume you have medical scheme membership and that the cost has come to seem as inevitable as death (deferred if possible) and taxes. At least it’s not insurance, that most grudging of grudge purchases, judging by a series of annual surveys showing that too few people have short-term insurance in proportion to their needs. Medical schemes are not-for-profit, regulated and designed for the greater good, right?

Yet medical schemes are imposing annual tariff increases of as much as 11 percent a year and restricting the cover they provide in increasingly creative ways: paying out at rates that fall far short of the rates charged by medical practitioners, imposing co-payments (the equivalent of the excess you pay on car insurance) on some things and sub-limits (rand ceilings) on others, and even getting involved in the management of some conditions.

Now that there is this a yawning payment gap, guess who has stepped in to fill it? The insurance companies, and they are doing so at rates that are particularly favourable to families. Of course medical schemes have obligations – to be inclusive of all ages and health conditions and to provide cover for all their members for 270 hospital-based and 25 chronic medical conditions (the prescribed minimum benefits, or PMBs), regardless of the medical scheme option they are paying for. Insurance has no such public health responsibilities. In keeping with regulation, they are at pains to point out that they are not competing with medical schemes, but supplementing their benefits; you have to belong to a medical scheme to qualify for gap cover.

When you do your homework on gap cover, I warn you, there will be no lightbulb moment when it all becomes clear. This stuff is complicated. You expect medical schemes to have intricate rules and numerous ifs and buts, but a little policy to top-up your cover in the event of some major health setback? Surely that could be made simple … a lump sum here and there, perhaps.

Well, no such luck: gap cover has all the opaque terminology and obscure product differentiation that medical schemes rejoice in, and on top of that, a tricky relationship with the terms of your medical scheme option. Gap cover focuses chiefly, but not exclusively, on hospital benefits, since many medical aid plans are hospital plans. As a top-up policy, it operates on the principle that it goes only where your medical scheme goes; it does not pay out for anything that is excluded on your medical scheme option.

Until last year, there was no limit on gap cover, but the so-called demarcation regulations introduced last year, and fully effective since January, have reined in the sector by imposing a limit of R150 000 per insured person per year. Without that, it was inevitable that gap insurance would gradually creep into the medical scheme space, thus reducing the size of the membership pool and making medical schemes unsustainable. So, for example, if your medical scheme does not pay for dentistry, nor will your gap cover do so. Where your medical scheme does pay (including from your savings account), but not in full, gap cover may step in to relieve you of part or all of the shortfall. The critical factor then, is that there must be a shortfall due from your pocket before gap cover comes into play. For that reason, gap cover payouts go to you, not to healthcare providers.

Having said all that, of course it’s not quite that simple; there are exceptions and grey areas, thanks to the ingenuity of the insurance industry. Bear with me. With the help of the websites, brochures and representatives of seven gap cover providers, the experience of long-time specialist healthcare broker Rossouw van Zyl of Rossouw van Zyl Brokers in Parklands, Cape Town, and the dizzying industry knowledge of Jill Larkan, head of Healthcare Consulting at financial services company GTC (formerly Grant Thornton) and her first-ever GTC Gap Cover Survey, I have come up with the following headline findings.

Start with your medical scheme

Since gap cover is inextricably linked to medical aid cover, you need to understand your medical scheme option thoroughly … or have a broker who does. Larkan says she is astounded by how little people know about their own medical schemes.

What in-hospital benefits are you entitled to? And what percentage of the scheme’s medical aid rate applies to those benefits? For example, 150% of medical aid rate means that the scheme will pay out 1.5 times its own rate for that service or procedure, regardless of the actual charge. Medical professionals regularly charge much more than medical aid rates (as much as five or six times more in some cases), and the shortfall, for which you are responsible, is the “gap” that spawned “gap cover”.

What co-payments does your scheme apply to in-hospital procedures? You may have a hospital plan, but you’ll find co-payments are common – for example, most schemes impose them on back surgery and joint replacements, diagnostic procedures such as colonoscopy and gastroscopy and minimally invasive surgeries carried out laparoscopically … in fact, if there is an “oscopy” in your care, beware. Your medical scheme can also discourage the use of certain hospitals by applying co-payments.

Check for sub-limits. These are caps on what the scheme will pay for certain services and materials – for example, sub-limits are common on internal prostheses, such as replacement joints; take-home medication when you leave hospital; therapies carried out in hospital, such as physiotherapy; rehabilitative care and the cost of step-down facilities; and MRI, CT and PET scans. Where there is an overall rand limit on cancer treatment, for example, there may be sub-limits on certain treatments.

Consider the oncology benefits in your plan. According to the Cancer Association of South Africa, one in six men and one in seven women in this country get cancer at some time in their lives, so it is a major concern for many medical scheme members, especially those with a family history of the disease.

What out-of-hospital benefits do you have? And if you have a savings account, what is paid from risk benefits and what is paid from savings? What if you have significant out-of-hospital expenses when your savings have run out? You might encounter sub-limits on MRI and CT scans, medical appliances, such as crutches and wheelchairs, mental health consultations and physiotherapy, for example. Some medical schemes provide for a very limited number of GP/specialist consultations and basic dentistry.

Does your medical scheme option require you to use designated service providers (DSPs) and does it have managed care programmes for certain diseases and conditions? Medical schemes are increasingly trying to control the cost of healthcare by negotiating prices with certain hospital groups and practitioners, restricting the range of medications to a list (or “formulary”) of cost-effective ones, and requiring people with particular conditions, such as diabetes, HIV/Aids and even cancer, to be treated in accordance with managed care protocols designed to provide value for money.

If you are looking for the whole package of medical scheme and gap cover, Van Zyl says you shouldn’t dismiss lower-end medical plans. “The bottom line is unlimited access to private hospitals, the unlimited cover for PMBs you are entitled to – even if you have to use DSPs – and a savings account. Gap cover comes in to fill the holes.”

Van Zyl mentions savings accounts because they are an asset when it comes to gap cover. Since they pay for a range of out-of-hospital expenses not covered by plain hospital plans, they cost more and enlarge the gap when they run out - as they often do six months into the year. This provides opportunities for gap cover benefits.

Go for the gap?

Having got to know your medical plan and recognised gaps that could leave you severely out of pocket, you have two choices: upgrade to a more comprehensive medical aid plan, or take out gap cover. Van Zyl and Larkan are unequivocal: it is far more economical to buy gap cover. Moving up from a middle-of-the-road medical scheme option can cost thousands of rand: for example, the mid-range Bonitas Bonsave plan (a hospital plan with savings) starts at R2 304 pm, while Boncomprehensive, with maximum benefits, costs R5 774; FedHealth’s equivalent, Maxima Basis, costs R2 407, compared to the top-level Maxima Plus starting at R7 535 pm.

For much less, gap cover tops up your healthcare benefits by R150 000 per person per year – the overall annual limit (OAL) imposed by the demarcation regulations to protect medical scheme membership. If that doesn’t sound a lot in the era of biologic drugs (which commonly cost between R110 000 and R160 000 for a 12-month course), Larkan and Van Zyl assure me that it is proving to be enough … so far. According to Larkan, most claims come in comfortably below that, with gap providers reporting maximum claims of R120 000 and R130 000. Van Zyl says gap cover would probably not be sustainable without the limit, as take-up increases and costs to insurers rise. With around eight million medical scheme members in South Africa and well under a million gap cover policy holders, there is a long way to go.

So, how much would you have to pay to give your healthcare plan this boost? One quick answer is at the bottom of the table (see page xx) comparing seven comprehensive gap cover options picked randomly. The cheapest premium is R314 pm for a single member under the age of 65 (Ultimate Gap Cover from Sirago) and the most expensive is R575 for two people, at least one of whom is aged 65 or over. (Stratum Elite).

However, the real value of gap cover lies in the fact that most providers will cover, on one policy and at no extra cost, the principal member and all family members/dependants on his or her medical scheme. They also allow couples who are on different medical schemes at different workplaces to be on one gap policy. So, for example, Turnberry will cover you, your spouse and your dependants for R462.01 a month on its Premier option, provided no one is aged 65 or older, and Agility Ultra provides its top-level cover to families for R383.33 a month, regardless of age.

Age is an issue

We are used to medical schemes being unable to discriminate according to age, but, as short-term insurers, gap cover providers have no such constraints. The outcome is that by far the majority of providers have two prices for their policies, with under-65s paying one price and people aged 65 and older paying more. Where a policy covers a family, just one older member is enough to put the policy in the higher bracket. But there are exceptions, even among the seven plans selected for our table: Agility has no age differentiation and African Unity Health (AUH) offers its plans at one price up to age 70 and has a separate, dedicated seniors range of products for ages 71+.

The differences in price based on age are not enormous – in the region of R50 - R70 per plan in our table – but Jill Larkan believes the costs of cover for the older age group will mount dramatically from here. Consequently, she emphasises the importance of taking out gap cover sooner rather than later, since you remain in the bracket you were in when you joined, enjoying the benefits of a younger, healthier pool of policyholders.

That said, there is no limit on the age you can be when you apply for cover and no age limit on having gap cover or on the core benefits. Some policies do place age restrictions on their insurance “extras”, such as a lump-sum benefit on a first-time cancer diagnosis and a waiver on premiums when a policyholder suffers accident-related death or disability.

Age has no bearing on waiting periods, which are vary from provider to provider, but may include three months on new policies (except in the case of an accident), 10 months for pre-existing conditions and pregnancy/childbirth, and 12 months on cancer-related pre-existing conditions. Larkin points out that “the longest period you can be without gap cover is 12 months, even if you are already sick.”

Identify the core benefits

In the GTC Gap Cover Survey, Jill Larkan defines the core benefits as cover for:

  • shortfalls (when your medical scheme pays only a proportion of the costs of consultation or treatment);
  • co-payments (when a rand excess is due from the patient and the balance of the cost is carried by the insurer);
  • sub-limits (when cover is limited to a certain amount by the insurer and the patient pays the rest); and
  • cancer treatment.

Ideally, all of these should offer unlimited benefits, subject to the OAL of R150 000. The GTC Gap Survey has done the work for you of listing the gap cover plans that deliver the maximum in each of these areas; those that deliver in more than one of the core areas; and, crucially, those that deliver in all of them.

Once you have that list, look at the shortfall cover you need based on the rates your medical scheme pays for specialist consultations and treatment in hospital. For some reason, medical schemes talk about paying 100%’ or 200% … which does not mean 100% or 200% of the cost, but 100% or 200% of the medical scheme’s rate. If the amount charged for a consultation, for example, is 400% of the medical aid rate and your medical aid pays only 100%, you would need your gap cover to add 300%. Gap cover is available from 200%, if you have excellent medical aid cover or need to keep your gap premium to a minimum, but 500% is the level to strive for and the one offered on most of the top gap plans. Take care to understand whether the percentage of cover offered is “over and above” or “in addition to” the medical scheme rate (100% + 500% = 600%), or whether it covers “up to” the promised rate (100% +400% = 500%)

Consider the extras

Once you have grasped the core benefits, you can consider the rest of the deal in the context of price. You don’t have to have 500% shortfall cover if R300 to R500 pm is beyond your budget; 200% cover over and above your medical scheme rate will be enough in many circumstances and help enormously overall. And all the other benefits are nice to have, but not essential, says Van Zyl.

For example, most plans offer one accident emergency casualty benefit per policy per year, a benefit for dental implants after an accident, enhanced cancer cover structured in various ways, temporary accidental death and disability waivers on your premiums for medical scheme and gap cover, trauma counselling cover, and so on. Some add limited cover for step-down facilities and rehabilitation, additional cover for in- and out-of-hospital scans, pregnancy and childbirth benefits, travel insurance, roadside and rescue services and many other things.

And here’s where the deviations from the rules come in. If gap cover can only top up medical scheme benefits, rather than expand on them, and if the overall limit is R150 000 a year per person, how is it that some gap cover providers list extras as “health insurance benefits” that do not fall under the OAL?

Larkan explains: “Gap cover may include certain ‘insured’ elements, such as dread disease (cancer) cover, funeral benefits, cover for body repatriation, and these insured elements (which may fall outside of the gap policy “core”), do allow additional cover to be paid out over and above the R150 000 maximum benefit allowed each year. It depends on the structure of the gap policy.

“Our financial services industry is so innovative that we always seem to find a way to offer the benefits which the clients need. Look at cancer cover for example. Gap insurers may be limited to the R150 000 per person per year, but there is nothing in the demarcation regulations that prohibits them from combining two products together to enhance this benefit.

“Let’s say they add an element of dread disease cover to enhance the first-time cancer diagnosis benefit. At the moment the highest limit is R50 000. What if this additional policy provided R200 000 extra upon diagnosis of cancer? This would be outside of the realm of a gap cover, and above the R150 000 maximum allowed by demarcation regulation ... but the benefit would not payable from the core gap benefit. Without the client knowing, he or she would then be purchasing two policies, one for dread disease (or cancer cover, as it was sold to them) and one for gap or in-hospital expenses.

“Gap insurers may therefore find that they can offer certain additional short/long-term insurance products in conjunction with their gap product. These would obviously all have to adhere to the Short Term and Long Term Insurance Acts and licencing, etc, but it can be done, and some already have the facility and ability to do so. Given that cancer, specifically, is becoming such a huge risk for everyone, I wouldn’t be too surprised to see products such as this emerging in the very near future.”

Clearly, there are more benefits and more complications – to come!

GTC Survey

The GTC Gap Cover Survey provides an invaluable list of 20 providers and a breakdown of the principal elements of gap cover, how the providers implement age ratings and waiting periods, 18 categories of cover based on the core benefits and, finally, it identifies which products provide the core benefits most generously and at the best premiums. Find the survey on the GTC website, www.gtc.co.za.


WHAT SEVEN GAP COVER PRODUCTS OFFER

This table compares the top offerings of seven gap providers (chosen randomly) using information from their brochures, websites and contact centre personnel. Rough though it is, it will give you an idea of what to look for in the brochures, what the most comprehensive products have in common, where they differ and what you need to pay. (Note: Benefits are offered per insured, per policy (‘pp’), per event and per annum (‘pa’)


PERSONAL FINANCE