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This article was first published in the 2nd quarter 2017 edition of Personal Finance magazine.

After four years of consultation, the government has proceeded with its plan to define exactly what kinds of health insurance may be offered in terms of the Long Term and Short Term Insurance Acts and to create a clear divide between insurance on one hand and medical scheme products, which fall under the Medical Schemes Act, on the other.

The new demarcation regulations are designed to “ensure that health insurance products do not undermine the social solidarity principles inherent in medical schemes, resulting in better protection of consumers,” according to a statement by National Treasury. 

In terms of the regulations, insurers are permitted to sell five types of health insurance policies, including medical expense shortfall policies (gap cover), hospital cash plans, testing and treatment policies for HIV/ Aids, tuberculosis (TB) and malaria, international travel insurance and medical emergency policies, subject to certain conditions. 

The regulations specify which types of health insurance products are classified as “health policies” under the Long Term Insurance Act (LTIA) and which are “accident and health policies” under the Short Term Insurance Act (STIA). 

Gap cover plans (which provide cover for medical costs that are not met by medical scheme benefits) and hospital cash plans (which offer a cash benefit for every day spent in hospital) are constrained by new underwriting and marketing rules, including maximum payout limits.

Gap cover may not exceed R150 000 a year per policyholder, while hospital cash plans are limited to R3 000 a day, or a total lump sum payout of R20 000 a year.  

In discouraging competition between medical schemes and commercial insurance health policies, the new regulations uphold two of the principles on which the Medical Schemes Act was founded to ensure fairness: community rating (which means that everyone in the same risk-group pays the same premium) and open access (no applicant may be denied the right to be a member). The affordability of medical schemes based on these principles depends on as many people as possible belonging to schemes, so that young and healthy members subsidise older and sicker members.

However, the new regulations permit providers of gap cover, hospital cash plans and HIV/Aids, TB and malaria testing and treatment policies to differentiate between policyholders of different ages, as long as all policyholders in a particular age band pay the same premium. 

The rules permit insurers to vary the premiums payable for different types of contracts, but not as a consequence of the health or claims experience of the individual policyholder. 

New rules on waiting periods will ensure that waiting periods will be consistent between all commercial insurers and similar to those applicable to medical schemes. 

Insurers that sell gap cover polices, for example, will be entitled to apply a waiting period of three months for “general conditions” and a waiting period of up to 12 months for “condition-specific” illnesses. As with medical schemes, insurers will be obliged to waive these waiting periods when a policyholder moves from one insurer to another, as long as the move takes place within a period of 90 days.

The regulations also introduce new rules on cancelling or non-renewal of policies, which broadly mirror the rules that apply to medical schemes. 

The new terms apply to all new policies written by the long-term or life assurers and short-term insurers after April 1 this year. Existing health policies under the LTIA must be brought into line with the new regulations at such time as they are altered or renewed after April 1 this year. Existing accident and health policies under the STIA must comply with the regulations from January 1, 2018.  

Another high-profile dimension of the new regulations is the phasing out of primary healthcare policies, which the regulators believe discourage people from joining medical schemes. Thus far, medical schemes have not offered a comparable low-cost option focused exclusively on day-to-day healthcare costs, such as general practitioner visits, optometry and basic dentistry. As of April 1, primary healthcare policies are on borrowed time: they may continue for two years while the Department of Health develops a Low Cost Benefit Option (LCBO) to be offered by the medical schemes. When the time comes, primary-care policies will become LCBOs.  

The demarcation regulations also introduce a new category of health insurance. If they wish, both long- and short-term insurers may offer policies to cover the testing and treatment of HIV/Aids, tuberculosis and malaria. 

Finally, the rules cap the commissions payable to brokers for selling long-term and short-term insurance policies.

Intentions and criticisms
The new demarcation rules have been designed specifically to prevent exploitation by the insurance industry of the growing gap between the actual cost of medical treatment and what medical schemes pay for. 

However, one of the criticisms of the new regulations is that they don’t address what many see as the Achilles heel of the Medical Schemes Act: that the prescribed minimum benefits (PMBs – the package of benefits medical schemes are required to provide across all healthcare packages, to make sure everyone gets a minimum level of care) has priced the schemes out of the reach of low-income earners. 

At the same time, the critics point out that the Medical Schemes Act specifically outlawed “competing” health insurance products in an attempt to set up medical schemes as the “all or nothing” option for those who want to avoid being dependent on free public-sector health services. Given that medical scheme membership is not an option for the low-income market, insurers reject the claim that commercial primary health insurance policies compete with medical schemes.  

Attorney Patrick Bracher, a director of law firm Norton Rose Fulbright, goes so far as to question the constitutionality of aspects of the new regulations.

“Most glaring is the decision to do away with primary health insurance policies and severely limit the benefits of hospital cash plans,” he says. “Up to two million people rely on these entry-level health insurance products to fund their medical costs.

“Second, the new regulations have specifically introduced a new category of cover designed to protect and insure against the costs associated with the testing and treatment of HIV/Aids, TB and malaria. But why stop there? What about hypertension and diabetes? Inexplicably, you can take out a policy to cover you for frail care and be paid out generously for the costs of assistance with daily living at home, but you can’t take out cover for the medical care that might prevent you from needing frail care.

“Third, the proposed cover must be provided on a group basis. But what about those people who don’t fall within a distinctive group and cannot afford medical aid?  

“Fourth, the new demarcation regulations unreasonably require short-term insurers to scrap prohibited forms of cover by January 1, 2018, but long-term insurers selling similar products can let their policies run till expiry if they don’t renew or amend them.  

“And last, the rights of medical scheme members are now limited,” Bracher says. 

“Gap cover is allowed if your medical scheme does not pay enough, but you can only insure for R150 000 per year for the additional costs of treating a serious illness. If, say, you have cancer treatment and you exhaust that amount in month one and then have a relapse or another major disease in month six, the insurers cannot cover you.”

Bracher said the rationale was that people should not be encouraged to “buy down” (choose a lower-cost medical scheme option) and make up the shortfall in medical scheme coverage by taking out cheaper insurance gap cover.  

Insurers approached by Personal Finance magazine took a more conciliatory approach. Sven Laurencik, the chairman of the health portfolio committee of the South African Insurance Association (SAIA), says SAIA has decided to work with regulators, rather than against them.

“It is true that there are points in the new rules that could probably be successfully challenged,” he says. “But after fighting for so long, we have decided to change tack and work with the regulators for a more favourable outcome. If we find that the regulators are not reasonable and our clients are suffering as a result of unfair legislation, we will obviously reserve the right to go to court.” 

He says SAIA presented a “dialogue paper” to National Treasury in 2015 on behalf of the short-term insurance industry, commenting on the effect of the proposed regulations. Using figures from Statistics South Africa and the Council for Medical Schemes, SAIA estimated that while 4.3 million employed people were members of medical schemes, a further 11.3 million employed people were not.

“These numbers make a clear case for a wide range of commercial health insurance policies with benefits and prices tailored to the pockets and choices of employed South Africans,” he says.  

Chris McCallum, a director at gap cover provider Zestlife, says he believes the regulations will have little effect on his clients, negative or otherwise; in fact, they bring much-needed clarity to his sales team and clients. And Peter Hyman of Complimed agrees. He says the regulations signify acceptance of a legitimate role for gap cover products, which is “an important shift in thinking and recognises the limitations of medical schemes”.

However, he says the regulations have been badly drafted.

“In some parts, the intentions of the regulators are not clear, while in others, there are concerns with the wording of some of the definitions,” he says. “For example, the gap cover regulations state that policy benefits, which may be one or more sums of money, may not in aggregate exceed R150 000 per insured person per annum. This rule fails to spell out whether or not an individual policy holder may have multiple policies, each with the maximum payout of R150 000 per year. You could have a policy designed to pay out in the event of a premature baby, a second one that would pay out in the event of an injury due to a dangerous sport, and so on,” he says. He hopes that these and other issues will be resolved quickly.

Mike Settas, the director of healthcare insurer KaeloXelus, a provider of both gap cover and primary-care cover, says another confusing aspect of the new regulations is the stipulation that all short-term health policies (except for international travel insurance and medical emergency policies) must be underwritten on a group basis. 

“On the face of it, this means that those people who don’t fall within a distinctive group would have to be excluded from taking out gap cover policies, hospital cash plans and HIV/Aids/TB/Malaria testing and treating policies,” Settas says.

Insurers asked for clarification on this from the Financial Services Board (FSB), which was involved in the drafting of the regulations, he says.   

“We have been informed by a senior FSB official that the underwriting can be different for different sub-groups, as it can be in closed, employer-based medical schemes. By implication, a sub-group of individuals could be created as part of a de facto group.”  

Impact on premiums
Marco Fonto, the managing director of Stratum Benefits, one of the market leaders in gap cover, says many of his policyholders have asked him whether the claims cap of R150 000 on gap cover will result in premium reductions.  

“Unfortunately, the answer to this is no,” Fonto says. “We haven’t had many claims over R150 000, but anyway the premium is linked primarily to the risk-rating of the policyholder, which does not change.”

However, some insurers think prices might decrease in the short term due to increased competition. If this happens, Hyman believes that policy premiums will revert to current levels sooner or later.

“The margins on gap cover products are so tight and nobody can afford to lose money for long,” he says. 

McCallum agrees on both counts: that the new regulations will encourage new entrants into the market, but that the new players are not likely to have a significant effect on prices, because premiums are already very low. 

Feroza Joosub, the head of Sanlam Gap Cover, doesn’t expect prices to go down; instead, he says, competition will manifest itself in the way companies manage risk.

Price structure  
Gone are the days when gap cover products were designed simply to pay the difference between the fees paid to doctors (particularly specialists and anaesthetists) and the amount reimbursed to you in terms of the medical scheme rate payable by your particular medical scheme option. Most of the leading providers offer a core product with add-ons to suit policyholders’ needs. The core products are priced at between R150 and R200 per family per month.

Maximum cover, which would reimburse medical professionals up to five times the medical scheme rate and fund, among other things, co-payments and penalties for using hospitals not on a scheme’s list of designated service providers (DSPs), could cost between R310 and R350 per family. 

Is gap cover really necessary?

“Most definitely,” McCullum says. "In our experience, gap cover is needed for all medical scheme options. Specialists charge, on average, about 3.5 times the tariff, which means we are paying more than the scheme for specialist fees. If you are prepared to use specialists within networks set up by medical schemes, there is no need for gap cover, but this limits your choice of specialists,” he said. 

What constitutes good cover?  
McCallum says consumers should look for policies that cover: 
•  Shortfalls in medical scheme benefits for specialists, consulted both in and out of hospital;  
•  Co-payments; 
•  Exclusions for motor vehicle accident claims; 
•  The cost of using non-DSP service provider; and  
•  Claims that result from hazardous pursuits.

“Rather than comparing the benefits offered by gap cover providers, look at the exclusions to see what is not covered,” 
McCallum says.

Joosub says there is no simple answer to the question of whether gap-cover policyholders would be better off upgrading their medical scheme membership. He says every individual should do a needs analysis with an accredited financial adviser. And Deon Kotze, the head of research and development at Discovery Health, says the demarcation regulations are the cue for gap cover policyholders to review their cover.

“Financial advisers are best placed to advise members of the public on any additional cover required, based on an analysis of medical needs and medical scheme cover. The impact of the regulations will vary, based on each individual’s combination of medical scheme benefits and gap cover benefits,” he says.

A widening gap?  
Will the cap on gap cover leave policyholders with serious illnesses inadequately protected?

Joosub says the gap cover provided by Sanlam in respect of oncology co-payments, for example, will need to be reduced from R325 000 to the statutory maximum of R150 000.

On the other hand, McCallum says Zestlife has had only one claim for more than R150 000 in the past six years, during which 56 000 policies were active.

So the jury is out. As Joosub says, whether or not the new rules will leave any particular policyholder out of pocket would depend on, among other things, the medical procedure in question, the policyholder’s choice of specialist and hospital, the specialist’s tariff of charges, the medical scheme option the policyholder is on, and so on. 

Kotze reiterates that the intention of the regulations is to limit the potential for insurance to do the business of medical schemes. 

"By placing an absolute limit on the cover that can be provided by insurance products, the regulations limit the ability of these insurance products to replace benefits that should be provided by medical schemes,” he says.

“But remember that consumers have access to other insurance products that address, specifically, the financial needs associated with diagnosis of a severe illness,” Kotze says. “Such policies include dread disease or critical illness insurance. These policies provide lump-sum benefits if a policyholder is diagnosed with one of the specific illnesses on a predetermined list.”