Make sure you don't lose your healthcare umbrella just when it starts to rain, Anthon Swart, the chief executive of Momentum's Health Initiative, says. Swart was one of the speakers at the recent Personal Finance / First National Bank Successful Retirement Seminars, which were held around the country.
You are likely to face your highest healthcare costs during your retirement years, because this is the stage in your life when your health deteriorates the most.
Thus, you want to be certain you will be able to access appropriate treatment after you retire. You do not want to discover that, once you enter retirement, you can no longer afford the healthcare cover offered to you by your medical scheme.
This was a lot easier in the past, because, to a large extent, employers provided for the healthcare needs of their former employees in retirement. Traditionally, employers offered medical scheme subsidies that continued when you went on pension.
But, Anthon Swart warns, this is changing rapidly. As a result of more stringent accounting standards, companies have been forced to take stock of the cost of providing "perks" such as post-retirement healthcare. As a result, most employees are currently taken on without any post-retirement healthcare benefits.
Swart says a large number of employees are also being hired by their employers on a cost-to-company basis. In terms of this arrangement, the employee is hired on the condition that the company will pay a fixed amount as his or her remuneration. From that amount, the employee must make contributions to a retirement fund and pay for healthcare cover. Each year the employer increases the total package by an amount equal to salary inflation, but if healthcare cover increases by more than salary inflation, the employee has less money in his or her pocket.
In addition, Swart says, companies are approaching their former employees whose healthcare cover they are subsidising and offering them a cash lump sum in return for future healthcare subsidies. The idea behind this is that the pensioner can invest the money and use it to fund future medical scheme contributions. However, the problem with this arrangement, Swart says, is that the interest the pensioner earns on the lump sum may be less than medical inflation, which is fuelling the increases in medical scheme contributions.
The result of all these trends is that the burden of paying for healthcare cover is being shifted from the employer to you, the employee or the pensioner, Swart says.
How much you need to save
You will have to provide for your healthcare cover in the same way you provide for other expenses that you will incur in your retirement - for example, food, a home and transport.
There are, however, three important differences when it comes to healthcare, Swart says.
The first is that medical care differs from other commodities we buy in that we are ignorant about what we are buying - doctors decide for us what we need.
Secondly, we are influenced by our emotions - we want what ever it will take to make us healthy.
The third important difference between healthcare and other commodities is that medical inflation is much higher than inflation as measured by the consumer price index.
Swart says there are many reasons for this, including the advancement of technology, the devaluation of the rand, medical scheme fraud, over-servicing by medical practitioners and over-utilisation by members.
Choosing appropriate cover
In order to ensure that you choose the right cover, Swart says you should understand the legal principles that govern medical schemes. For example, open medical schemes must admit anyone as a member, and neither an open or a closed scheme may make you pay more to join the scheme than someone who is healthier or younger than you.
However, in order to preserve the cross-subsidisation of the old and sick by the young and healthy, schemes are allowed to impose late-joiner penalties, Swart says.
These penalties are intended to discourage you from waiting until you are older and sicker before you join a medical scheme.
Depending on how long after the age of 35 you join a medical scheme for the first time, you will pay an additional percentage of the contributions as a penalty.
Schemes are also allowed to impose waiting periods, either general waiting periods or ones that relate to a condition you have when you join the scheme, Swart says. This is to protect schemes from members who hop from one scheme to another after they exhaust their benefits on one scheme.
Medical schemes are also allowed to terminate your membership if you are not honest and do not disclose everything about your medical history when you join.
Swart says when you choose a medical scheme, you should look for:
- Good value for money - which does not necessarily mean that cheaper is better.
- Sustainability - will the scheme you join implement market-related contribution increases?
- Flexibility - is the scheme flexible enough to accommodate your changing needs? For example, can you opt for greater cover as your healthcare needs increase?
- Impeccable administration.
Determining your needs
Swart says the next step in deciding what healthcare cover you need is to determine what your needs are.
You need to decide what you need in terms of hospital cover, day-to-day cover and chronic medication cover.
Hospital cover
Swart says a common mistake people make when deciding which medical scheme to join is to look for a scheme that is similar to the one to which they already belong, without actually knowing whether they are appropriately covered for what they need.
When you consider what hospital cover you need, Swart says, you need to establish:
- Whether you need limited or unlimited cover in hospital.
- What rate of cover you need. What was formerly termed medical scheme rates is now known as National Reference Price List rates, and these rates are lower than the rates charged by private practitioners and private hospitals.
- How willing you are to make co-payments for certain elective procedures (operations you can choose whether or not to have - for example, some hip or knee replacements).
- Whether you want the freedom to choose the hospital to which you will be admitted or, for a lower contribution rate, to only use hospitals specified by your scheme.
Day-to-day cover
This is the cover you need for all your medical needs excluding being admitted to hospital, such as visits to your general practitioner, your dentist and your optometrist, and so on.
In establishing your day-to-day needs, Swart says you must consider:
- The amount you will need for your day-to-day medical needs for the whole year. You need to take into account what you have spent in the past and make some estimates, based on medical inflation and your family's needs, as to what you will need in the future.
Many medical schemes expect you to fund all your family's day-to-day needs from a medical savings account. You need to ensure you will have enough in that savings account to fund all your needs, or you will have to pay out of your pocket.
In schemes which do not have medical savings accounts covering day-to-day needs there are almost always sub-limits for all medical services you will need - for example, a R500 limit on visits to a general practitioner.
- Whether you want cover over-and-above that provided for in your medical savings account.
Many medical schemes offer you cover for day-to-day benefits that can be used when your savings account is depleted. However, this cover costs more, and frequently only comes into effect when you have depleted your medical savings account on essential healthcare and not just on any medical services.
- Self-funding gap. You can reduce your contributions if you can afford to pay the difference between what you are covered for and what you may spend out of your own pocket. If you are not prepared to take the risk of having to pay some of your expenses yourself, you will have to pay more for comprehensive cover.
- Whether you want freedom of choice when it comes to which doctors, pharmacies and other healthcare service providers you will use. Cheaper medical schemes often offer unlimited cover for the most widely used day-to-day medical services, but restrict you to a particular doctor, clinic or pharmacy group.
Chronic medicine benefits
Chronic medicine benefits cover you for the medication you need to take regularly for certain chronic conditions. Chronic conditions include asthma, high blood pressure, diabetes and Parkinson's disease.
In terms of the Medical Schemes Act, all schemes must cover you for the diagnosis, treatment and care of 25 common chronic conditions.
Swart says in determining your chronic medication needs, you need to consider:
- Whether you suffer from any chronic conditions;
- What your condition is and how much medication you need;
- Whether you can use a generic equivalent of any patented medicines you are using; and
- Whether you want the freedom to consult any doctor and obtain that medication from any pharmacy or whether you are prepared to use certain service providers.
Healthy lifestyle
Swart says your estimate of what you will need for healthcare cover in retirement is affected by four factors:
- Your life expectancy;
- Your contributions;
- Medical inflation; and
- The expected rate of return you will get on your savings.
You have little control over the last two factors, but you can, to some extent, influence the first two by leading a healthy life, Swart says.
If you lead a healthy life, you can raise your standard of living, because you will spend less money on medical scheme contributions and medical treatment, he says.
The best approach, Swart says, is to ensure that you have appropriate and sustainable healthcare cover that suits your needs, and that you have made provision for maintaining this cover throughout your retirement.
Most importantly, Swart says, you should invest in a healthy lifestyle, because it will out-perform any other investment by far.