Medical scheme or insurance
Wikipedia.org defines insurance as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. This broad definition holds for any category of insurance including life, short-term (personal lines and commercial) and
The size of the shortfall (loss incurred less payout) varies wildly across insurance category and sub-category. In the short-term insurance space various excesses are communicated to the policyholder at policy inception. Your client will know, for example, that there is a 5% basic excess in the event an insured motor vehicle is stolen. In contrast, medical scheme members only become aware of the magnitude of the shortfall at claims stage. Financial services businesses wasted no time in offering gap insurance policies to plug these shortfalls. These products are extremely popular in the medical schemes environment. Alexander Forbes Health (AFH), a leading South African corporate healthcare consultancy, reports that 24% of the 185000 individual members it consults to have voluntarily purchased gap cover products. And the group estimates that 10% of all principal members hold such policies.
A blurring of lines...
The Council for Medical Schemes (CMS) is concerned that some of these ‘hospital insurance’ products encroach on the medical schemes environment. Instead of addressing the shortcomings in the medical schemes businesses that make gap cover necessary, the regulator proposed amendments to the regulations to the Short-Term Insurance Act. They believe these changes facilitate a clear demarcation between what constitutes health insurance business and what constitutes the business of a medical scheme.
Among the key proposals is that 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. Under the regulations a lump sum or income replacement policy “may not provide policy benefits relating to medical expenses associated with a health event.” These conditions would render the bulk of existing gap cover policies obsolete!
To find out what the industry makes of the proposed amendments we turn to a 23 April 2012 ‘response’ issued by Technical and Actuarial Consulting Solutions (TACS), a division of AFH. The group believes that health insurance gap cover products are needed and should be recognised and appropriately catered for within the regulations. “We support the need for a clear demarcation between accident and health insurance policies and medical schemes in order to protect the principles of community ratings, open enrolment and cross-subsidisation entrenched in the Medical Schemes Act,” they said. “And we acknowledge that in the absence of such a demarcation consumers may mistakenly believe that accident and health policies offer the same level of protection as a medical scheme or are in fact medical schemes or substitutes thereof.”
TACS makes a strong case to National Treasury for the inclusion of gap cover in the regulations, discussing the matter under five headings.
Five demarcation points to ponder
One: The regulators must consider the cost of providing equivalent gap cover benefits within a medical scheme versus a standalone product. Comprehensive cover via medical schemes is not economically viable, as evidenced in the CMS Annual Report 2010/11. The report confirms that only 22% of the 316 benefit options offered by 100 registered medical schemes provide in-hospital cover in excess of 100% of the relevant medical scheme tariff. “These top-end options are generally loss-making due to a worse-than-average claims profile and they rely on the cross-subsidy from mid-range options to remain viable,” observed TACS.
Two: Regulators must understand that gap cover addresses issues of affordability. Affordability is a critical factor among medical schemes members, with 93.2% of 125000 members surveyed opting to stick with the same benefit options from one year to next. TACS notes that while Prescribed Minimum Benefits (PMBs) have helped, “the average member still faces the very real possibility of large unexpected shortfalls in the cover of in-hospital expenses caused by the ever-widening gap between the scheme reimbursement level and the cost of professional fees.” It is cheaper to ‘insure’ against this shortfall with gap cover rather than increase medical scheme benefit options.
Three: Gap insurance products support rather than compete with medical schemes. The argument (offered by National Treasury and the Department of Health) that health insurance products cause hardship to the medical schemes environment by attracting younger and healthier members is moot, because membership of a medical scheme is a prerequisite for gap cover. Gap cover is a supportive product and not a replacement product for medical schemes!
Four: Gap cover policyholders will be compromised if these products are withdrawn. “The draft regulations do not make appropriate provision for gap cover products,” said TACS.
“The amendments would require that gap products be restructured into lump sum or income replacement policies. In this form the cost of gap cover products is likely to increase significantly since a value would need to be assigned to each procedure or event and a benefit would be paid irrespective of whether a shortfall in reimbursement tariff occurs.
“The withdrawal or fundamental restructuring of gap cover products would have a significant impact on policyholders, especially those who cannot afford to purchase a more comprehensive medical scheme benefit option!” The group concludes that the impact of gap cover products on medical schemes environment is small, whilst the impact on the average gap cover policyholder would be significant.
Five: Gap products exist as a direct response to systemic shortcomings in the medical schemes regulatory environment. In the 2008 Supreme Court Ruling (in the matter between Guardrisk Insurance Company Limited and the Registrar of Medical Schemes) the following was stated: “Practical reality has shown that there exists a need for this type of insurance and there seems to be no reason why it should not be permitted”. TACS believes that issues such as mandatory membership and risk equalisation, together with regulated provider tariffs, should be addressed before gap cover products are removed.
An appeal to the regulators
Alexander Forbes Health concluded: “We urge the regulators to make appropriate, reasonable and rational space in the demarcation regulations for gap cover products. A middle ground can be found where the interests of both medical schemes and individual members, seeking to limit their out-of-pocket exposure in a cost effective manner, are recognised and protected.”
Editor’s thoughts: Gap insurance resulted from the need of medical schemes members to address cost overruns on hospitalisation. The difference between medical scheme reimbursement rates and professional fees often leave the member with medical bills totalling thousands of rand. Would you agree that lump sum or income replacement policies would cost more than gap insurance products? Add your comment below, or send it to [email protected]
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