Illustration: Colin Daniel

The broader financial services industry has come out against government’s plans to ban certain health insurance products that cover gaps in or top up your medical scheme cover.

Many roleplayers say the National Treasury, Department of Health and Council for Medical Schemes have wrongly diagnosed health insurance products as the ill that is causing schemes to be unaffordable.

Financial advisers, insurers and medical schemes say proposed regulations released for comment by Treasury in March that seek to outlaw or limit a number of healthcare policies will probably have minimal impact on schemes, but a huge impact on consumers.

They say the government should instead be treating schemes’ major ailment: the unregulated costs of healthcare services, which has resulted in particularly to high hospital and specialist costs.

Gap cover policies pay the difference between the actual costs a specialist charges you for mostly in-hospital services and what your medical scheme pays, while top-up cover enhances your medical scheme benefits by, for example, paying out an additional amount on diagnosis of cancer.

Short-term insurers, who face having to close down or radically restructure some of their policies, say the proposed regulations will severely limit your healthcare funding choices and may even be unconstitutional.

The South African Insurance Association (SAIA), which represents 59 short-term insurers, says initial indications are that some 887 000 policies affecting approximately 1 870 000 beneficiaries may be compromised if the regulations are implemented as proposed.

Suzette Strydom, SAIA’s general manager for technical matters, says that, over the past year, these beneficiaries received claim payments totalling about R262 million from SAIA member companies. If the regulations are implemented as proposed, she says, this protection will be lost to policyholders and the economy in the future.

The Financial Planning Institute (FPI), which represents financial advisers, says it estimates that there are 300 000 gap cover policyholders in a population of 3.6 million medical scheme principal members.

This represents a coverage rate of approximately 8.5 percent, and therefore the impact of gap cover insurance products on medical schemes is very small.

However, if these products are withdrawn from the market, the impact on the average gap cover insurance policy holder will be significant, the FPI says.

In their submissions, the FPI, the Board of Healthcare Funders (representing medical schemes and their administrators), the Association of Savings & Investment South Africa (Asisa) and the Actuarial Society of South Africa say the root cause of the unaffordability of medical schemes is not the existence of health insurance products.

The FPI says the real problem is that healthcare providers are able to charge rates substantially more than medical scheme rates.

“This practice leaves consumers or members of medical schemes vulnerable to financial ruin.”

The FPI says the proposed regulations should be postponed until the promulgation of regulations that prevent exploitation of members of medical schemes by a minority of healthcare providers.

The Department of Health says it intends setting up a healthcare price setting forum, and says it is in negotiations with the Competition Commission on the mechanism.

In its comments to Treasury, the BHF says medical schemes are the most appropriate vehicles to fund health care. However, until the incentives for those who supply healthcare services are brought into line with those in the medical scheme industry, members will need supplementary products, which allow them to mitigate their unfunded medical costs (see “Medical scheme issues that need to be fixed”, below).

Asisa says it is dangerous to have a medical scheme industry that offers open enrolment (guaranteed acceptance for all who apply) and community rating (contributions that are the same for all and not based on health or age), in the absence of compulsory membership and risk equalisation (equalising the cost of providing prescribed minimum benefits across schemes).

Asisa’s Peter Dempsey and Anna Rosenberg say it is important that the regulations identify the correct health insurance contracts, if any, which should be “disallowed”.

The Actuarial Society in its submission says it is most likely that the lack of mandatory cover and risk equalisation are undermining the medical scheme industry much more than insurance products.

The Actuarial Society believes it is unlikely that the draft demarcation regulations will address the primary causes of the unaffordability of medical scheme cover, Wim Els, the director of operations for the society, says.

The need for gap cover policies has arisen as a result of providers, especially scarce specialists, charging more than medical scheme rates.

Medical scheme rates were previously based on the National Health Reference Price List (NHRPL), but in 2010 healthcare providers succeeded in having this tariff list struck down by a court. Schemes now set their own rates by adjusting earlier tariff lists for inflation.

While some providers charge these scheme rates, others two, three or more times these rates.

Humphrey Zokufa, the managing director of the BHF, says approximately 90 percent of anaesthetists charge 300 to 450 percent of the former NHRPL.

The FPI says the annual report of the Council for Medical Schemes for 2010 - 2011, shows that only one percent of, or 45 848, members on open medical schemes can afford options that reimburse providers at a rate of 300 percent of the medical scheme rate, and these members, who are paying the highest contributions rates, are still exposed to out-of-pocket medical expenses.

The FPI says the council’s annual report shows that 23 percent of open medical scheme members belong to a scheme that only has options that reimburse medical claims at 100 percent of the scheme rate.

The FPI says if these members want additional cover and are denied gap cover insurance, they will need to change medical schemes.

Some 66.5 percent of members on open medical schemes belong to a medical scheme option that reimburses medical expenses at 100 percent of the medical scheme rate and could upgrade to a higher option if they want better cover but at a cost (see “Schemes can’t afford top-paying options”, below).

A number of the submissions on the draft gap cover regulations point out that since even the most comprehensive medical scheme options can leave members with a shortfall, members may suffer severe financial hardship if not permitted to insure against this risk.

The BHF says if medical scheme members are forced to join high-cost comprehensive options, they may opt out of schemes altogether.

If gap cover is outlawed, schemes may increase their hospital benefits but may decrease their out-of-hospital benefits, Zokufa says. This would go against national health policy, which encourages benefits for primary and preventative care, he says.

Schemes can’t afford top-paying options

Many medical schemes are currently unable to provide their members with cover at higher rates of reimbursement and to keep the options self-sustaining as required by law, a leading corporate healthcare advisory company says.

Alexander Forbes Health points out that only 70, or 22 percent, of the 316 medical scheme options available at the end of 2010 provided cover for medical costs at more than 100 percent of the scheme rate.

It says of these 70 options only 26 (or 37 percent) made an operating profit at the end of 2010.

“The reality is that medical schemes themselves cannot afford to offer in-hospital benefit coverage in excess of 100 percent on all benefit options. Comprehensive benefit options have to be subsidised by other options because of affordability. At the same time, lower-end options are also subsidised because the contributions are deliberately set at a level deemed affordable to low income earners.”

Alexander Forbes did an actuarial pricing exercise on a restricted medical scheme covering 3 000 principal members on one benefit option. This showed the scheme would need significant contribution increases to provide benefits that are currently being provided by gap cover. To cover reimbursement rates for providers of between 150 and 300 percent, the contribution increases (over above normal inflationary increases) would range from 27 to 109 percent.

Alexander Forbes also says it found in a restricted scheme of 7 000 members that there was a significant difference between the risk claims per member on two of the three options. The main difference between the options was the reimbursement rate for in-hospital claims.

However, Alexander Forbes’s analysis found that the risk claims per member on the more comprehensive option were 2.5 times higher than those of the option with the lower reimbursement rate.

Unable to set the contribution rates 2.5 times higher, the scheme had set them only 1.2 times higher and was using surpluses achieved on other options to fund the deficit.

Alexander Forbes also compared the costs for members on a scheme option offering cover at 100 percent of the scheme rate of upgrading to a higher option and purchasing gap cover. The contribution increase to upgrade ranged from 16.4 percent to 18.4 percent, depending on the number of dependants the member has, while the increase to pay for gap cover for the family – offering higher rates of reimbursement – ranged from 5.3 to 11.4 percent.

‘No evidence that ban will benefit schemes’

The government should provide evidence that certain health insurance products are undermining medical schemes, a number of stakeholders say in their comments on the draft regulations that proposed to ban some of these products.

The South African Insurance Association (SAIA) says in its submission to National Treasury that no evidence has been produced to demonstrate that medical insurance policies, and specifically gap policies, result in younger and healthier members limiting or reducing their medical scheme cover.

This is the motivation put forward by Treasury, the Department of Health and the Council for Medical Schemes for the proposed regulations. They say as long as insurance products are available, younger and healthier people will buy cheaper medical cover than they need or even opt out of medical scheme membership, and this undermines the cross-subsidisation of the old and sick by the young and healthy.

SAIA says there is also no evidence indicating that medical schemes are reducing their cover due to the existence of gap cover policies.

SAIA’s Suzette Strydom says SAIA believes that consumers select medical scheme benefit options based primarily on affordability, the scheme rules regarding the use of designated service providers, and rules for the prescribed minimum benefits, particularly for the medicines covered for on-going chronic conditions.

The Association for Savings & Investment South Africa (Asisa) has also called for evidence of the effect of health insurance products on medical schemes.

It says the Financial Services Board requested information from insurers on their health policies in the latter part of 2011, but Asisa did not know whether the results of this have been considered and if they will be made public.

“The regulations in their current form are very far reaching and may very well deprive the public of valuable and necessary benefits. As such we strongly submit that the ‘mischief’ needs to be properly identified before regulations are passed which may have unintended consequences,” Asisa says.

The Actuarial Society says in the absence of solid empirical evidence, it is not convinced of the argument that the products being outlawed by the draft regulations necessarily undermine the solidarity that is required to sustain the medical scheme industry.

The Financial Intermediaries Association (FIA) says its members have not found that young and healthy people are opting out of medical schemes in favour of health insurance products, as alleged in the motivation for the proposed regulations.

It says young and healthy people can often only afford the lowest medical scheme benefit option providing trauma cover and rarely opt for the further protection of gap cover.

FIA says scheme members who use gap cover have previously experienced shortfalls in their cover, and are typically young people in their child-bearing years; people with chronic illnesses and those with a family history of illness.

Medical scheme issues that need to be fixed

The Board of Healthcare Funders (BHF) has recommended to government that medical scheme members be entitled to continue to use supplementary products such as gap cover until there is sufficient reform of the private sector to ensure schemes are affordable and that the prescribed minimum benefits (PMBs) do not discriminate against certain members.

The BHF urged the Department of Health and National Treasury to introduce mandatory medical scheme cover, review the PMBs and introduce price regulation.

The BHF’s managing director, Dr Humphrey Zokufa, says schemes are facing widespread anti-selection that is pushing up costs, and they have to pay for hospi-centric, curative PMBs.

Medical schemes operate according to certain social solidarity principles that involve:

* Risk cross-subsidisation, through which the young and healthy cross-subsidise the elderly and the sick;

* Community rating, through which everyone pays the same for healthcare regardless of the risk their age or health poses to the scheme; and

* Guaranteed acceptance for all applicants.

However, Zokufa says, an essential component, mandatory membership, which would increase schemes’ risk pools and avoid anti-selection risks, is missing. This means the young and healthy can stay out of the system until they need healthcare.

Widespread anti-selection means critical risk pooling and the spreading of costs between young/healthy and elderly/sickly are not occurring satisfactorily within medical schemes at present, Zokufa says.

This has been a major contributing factor to the massive escalation in private healthcare costs since the late 1990s, he says.

In addition to anti-selection, schemes have had to manage the spiralling costs of the PMBs, which are largely provided in hospital or by specialists, are largely high-cost, and are of a curative rather than a preventative nature.

The PMBs are a set of benefits which every medical scheme must provide on all options, but they do not cover all conditions and “discriminate against members who have non-PMB conditions”, Zokufa says.

The Council for Medical Schemes annual report of 2009/10 states that private hospital costs have increased by 74.6 percent in the last 10 years, and in the same period specialists costs have increased by 58.5 percent (if the figures are adjusted for CPI inflation), Zokufa says.

The other problem with the PMBs, he says, is that schemes are obliged to pay the cost of providing these benefits in full unless the scheme has appointed a designated service provider that the members must use.

What providers may charge for PMBs is unregulated, and there are now also no guideline tariffs for medical services, Zokufa says.