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Outlawing gap cover won’t aid medical schemes or members, says Old Mutual

25 April 2012 Ken Schumann, Consulting Actuary at Old Mutual Corporate

Draft legislation released recently by National Treasury will, if implemented, outlaw gap cover and mostly likely lead to a simple loss of benefits for members, without helping medical schemes.

This is according to Ken Schumann, Consulting Actuary at Old Mutual Corporate. Schumann explains that the legislation to ban gap cover is intended to promote cross-subsidisation among members of medical schemes by forcing healthier members who want better medical cover to join more comprehensive options instead of taking out gap cover.

“Gap cover is sold by short-term insurance companies, and generally pays out the difference between what doctors and specialists charge and what a medical scheme reimburses for treatment in hospital. It is usually only the top medical scheme options which pay providers at cost, and gap cover is considerably cheaper than changing to one of the top options.

“Therefore, although gap cover does not discourage people from joining medical schemes - you need to belong to a medical scheme before you can buy gap cover - it does allow members to obtain part of their medical cover outside of their scheme by choosing a low cost option and purchasing gap cover, rather than joining a more comprehensive benefit option,” he says.

Schumann says Government’s thinking is that, if it is mainly the healthier members who partially opt out of their scheme in this way, then this potentially reduces the cross-subsidisation of unhealthy lives by healthy lives who belong to medical schemes, ultimately pushing up medical scheme contributions.

However, Schumann warns that outlawing gap cover may have the opposite of the desired effect. “Healthy people on low-cost options who can no longer purchase gap cover may find even less of a reason to remain on their scheme. If healthy people decide to exit their schemes, this will drive up the contributions for those who remain,” he says.

Furthermore, Schumann says that it is not necessarily true that mainly healthy people buy gap cover.

“Higher risk members are also choosing to buy gap cover. If gap cover is banned, it is likely that scheme members who currently have a gap policy may not be able to afford to “buy-up” to a more expensive medical scheme option. In this case, the government’s proposal will not improve the cross-subsidy on schemes, but will, in fact, leave current gap cover policy holders exposed,” he says.

According to Schumann, if the legislation is passed, and you cannot afford to join a top option on your medical scheme, then, unless your scheme can find a way to offer the missing gap cover at affordable rates, you will not be able to insure yourself against the risk that you or a family member requires expensive treatment in hospital.

“While Prescribed Minimum Benefits (PMBs) must be reimbursed in full by medical schemes, typically half of hospital costs are not PMBs, and this will therefore result in considerable out-of-pocket costs for scheme members,” he says.

Schumann believes that the real problems causing lack of affordability for medical schemes are open enrolment and community-rating without compulsory membership and risk equalisation. “It is likely that these factors are driving up medical scheme contributions much more than the existence of gap cover and other health insurance policies,” he says.

According to Schumann, gap cover allows for full cross-subsidy between healthy and unhealthy members. “This keeps contributions low and ensures that even healthy people, who are not expecting to claim, do not mind paying the relatively low gap cover premiums. On the other hand, medical schemes are not permitted to have cross-subsidies between different options. As the top medical scheme options are usually dominated by the relatively unhealthy or older members, the top options are usually relatively expensive,” he says.

Furthermore, while medical providers will often invoice medical schemes directly, individuals are responsible for submitting claims on their gap cover policies, which further reduces costs. “Our research shows that many people simply forget to or do not bother to claim both from their medical scheme and again on their gap cover policy,” says Schumann.

Even if gap cover is not banned, Schumann says medical schemes may benefit from offering a hospital plan that provides full cover for hospital benefits without the generous out-of-hospital and chronic medicine benefits that attract less healthy members and thus drive up the contribution rates of comprehensive options.

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