A victory of the medical schemes regulator
A couple of years ago the Council for Medical Schemes (CMS) tackled one of South Africa’s leading diversified financial services groups in an attempt to dissuade it from offering so-called “top up” or “gap” insurance products. In its simplest form “gap” c
Not one to give up easily the Registrar set about tackling the problem from a different angle. Because the Court decision hinged on the definition of “business of a medical scheme” as contained in the Medical Schemes Act, the CMS set about altering this definition. But their plan fell flat when a 2008 draft amendment to the Medical Schemes Act was withdrawn to allow government and the Department of Health (DoH) to focus on the groundwork for National Health Insurance (NHI) instead. There’s a great English idiom that goes: “If at first you don’t succeed – try and try again!” And the CMS certainly deserves praise for its bulldog determination to safeguard the medical schemes environment. Their next “salvo” focused on a provision in the Insurance Laws Amendment Act, 2008, that allows the Minister of Finance to indicate what category of health insurance product may be sold to the public, despite such product constituting the “business of a medical scheme” as defined in the Medical Schemes Act.
Another draft regulation
Thus the latest CMS effort to prevent insurers from stepping into the medical schemes space masquerades as the 2 March 2012 National Treasury release titled: Draft Regulations on the Demarcation between Health Insurance Policies and Medical Schemes. The Regulations are the outcome of a joint process between Treasury, the DoH, the Financial Services Board (FSB) and the CMS. The Association of Savings and Investments South Africa (ASISA) and the South African Insurance Association (SAIA) represented the long and short-term industry respectively. The draft document has been released for public comment which can be forwarded to Dr Reshma Sheoraj, Director: Insurance at the National Treasury before 23 April 2012.
The CMS claims that the draft regulations “seek to find a better balance between medical schemes and health insurance products”. However, they quickly return to their initial argument against certain “gap” and hospital insurance policies. “The Regulation also seeks to address the risk of possible harm caused by health insurance products drawing younger and healthier members away from medical aid schemes to health insurance products,” they said. Journalist Laura du Preez encapsulated these concerns in an article published on iol.co.za, 20 February 2011: “The registrar’s office is of the view that health insurance products undermine medical scheme cover, because they can be offered at cheaper rates, typically to healthier people, who then buy into cheaper medical scheme options. As a result, it costs medical schemes more to provide cover to the sicker members, who remain on more comprehensive options.”
The Regulator expands on this concept in their press release (Press Release 3 of 2012) announcing the Demarcation Regulations. They believe the additional regulation will “strengthen and preserve the social solidarity principle that underpins medical schemes”. Medical schemes rely on the cross subsidization of sicker scheme members by healthier ones to keep costs down. Because insurance companies are not regulated by the Medical Schemes Act they can bypass this solidarity requirement. Health insurance products typically “select” policyholders based on age, income and health status as well as incorporating various exclusion clauses.
How will the regulations affect insurers?
Once the Demarcation Regulation is in force the confusion over the type of health policies that short and long-term insurance companies can sell will be settled, once and for all. And then the difficult administrative task begins – because the country’s insurers will have to bring their “in force” health policies in line with the new regulations, revise existing product offerings to comply and implement strict marketing conditions to boot.
The CMS provides a Frequently Asked Questions document to clarify which products will be allowed to be sold in terms of the Regulations. “To protect the risk pooling achieved through medical schemes, the Regulations provide that a health insurance policy must not be directly linked to the cost of the medical care and must not cause harm to the medical schemes environment,” they write. The idea is to “outlaw” products that offer policy benefits relating to actual medical expenses associated with a health event... A comprehensive table of allowable policies (including benefits and policy conditions) appears in the Government Gazette notice of the proposed amendments.
Short-term “accident and health” policies must be in one of the following seven categories (subject to conditions): Lump sum or income replacement policy benefits payable on a health event, Motor: Third Party Liability, Property: Third Party Liability, HIV and Aids, International Travel Insurance, Domestic Travel Insurance and Emergency Evacuation or Transport. It seems the “gap” covers mentioned in the opening paragraph are doomed! Under the Demarcation Regulation a lump sum or income replacement policy “may not provide policy benefits relating to medical expenses associated with a health event!” Any confusion in this regard is quickly dispelled by the specific criteria for this category of short-term policy: “The policy may not provide benefits that fully or partially indemnify the policyholder against medical expenses”.
Editor’s thoughts: After a lengthy legal battle (beginning 2008) it seems the Council for Medical Schemes (CMS) has finally got the jump on insurers selling so-called “gap” cover policies. If the regulation goes through “as is” then your clients will have to rely on income replacement type policies to cover the expenses their medical schemes fail to pay. There are concerns the change will result in lower income earners being unable to purchase adequate cover. Has the CMS used the Insurance Laws Amendment Act to consolidate their position in the medical schemes space? Add your comment below, or send it to [email protected]
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