The Council for Medical Schemes (CMS) is unhappy with recent insurance innovations that if feels push into the medical schemes space. Discussions between the Regulator, the Department of Health, the Financial Services Board (FSB) and National Treasury – p
The draft regulations seek to find a better balance between medical schemes and health insurance products. “The regulation also seeks to address the risk of possible harm caused by [these products] by drawing younger and healthier members away from medical aid schemes to health insurance products,” notes the CMS. But their proposals could signal the end of Top-up and Gap cover as well as Hospital Cash Plans (HCPs). Among the criticisms of the proposals is that consumer interactions with the various products were not considered. How, for example, do low-income South Africans (defined as LSM 6 or lower or earning less than R6000 per month) use HPCs to fund their hospitalisation-related expenses? A research report recently published by FinMark Trust is a welcome first step in this investigation.
A broad overview of healthcare funding
The report begins with a description of South Africa’s complex healthcare funding environment. In a nutshell: Private medical schemes operate as not-for-profit trusts, pooling members’ funds to purchase private healthcare goods and services. These schemes are governed by the Medical Schemes Act (MSA) and regulated by the CMS. Most medical schemes offer various benefit options to cater to a wide range of consumers. Although medical schemes offer reasonable protection to members they are expensive and only cater for approximately 16% of the population.
Another problem is that entry level options typically pay-out benefits at 100% of the scheme rate. This payment arrangement has major implications for low- and middle-income members, because many doctors, medical specialists and hospitals charge well in excess of this fee, leaving consumers with massive payment gaps. One workaround has been for medical schemes to establish provider networks and designated service provider (DSP) agreements that facilitate payment in full as long as the member makes use of the network.
The second component in domestic healthcare funding is health insurance products offered by insurers. These insurers are governed by the Long and Short-Term Insurance Acts and regulated by the FSB. Demarcation – as described in the opening paragraphs – was debated as early as 2004 when the CMA, FSB and the then Life Offices’ Association (LOA) agreed what constituted the business of a medical scheme. “The aim of the demarcation agreement was to protect medical schemes and ensure that the core principles of solidarity and community rating in the medical schemes environment were not undermined by the risk-rated approach of health insurance products,” notes FinMark. The CMS believes that two of today’s insurer-backed funding solutions overstep this agreement.
Two areas of concern
Number one on the list is Gap cover – the short-term insurers’ response to the increasing prices charged by specialists for in-hospital services. The Gap cover insurance policy provides for shortfalls between medical schemes benefits and the rates charged by providers. An important distinction between Gap cover and other healthcare insurance products is that policyholders MUST belong to a medical scheme in order to purchase it. FinMark concludes that Gap cover has limited impact among low income earners. What is the CMS’s beef with this cover?
The report observes: The CMS interpreted the fact that Gap cover products offered benefits that were directly related to the cost of treatment to mean that insurers offering these products were conducting the business of a medical scheme. They say the product encourages buy-down behaviour by enticing younger and healthier members to select cheaper medical scheme options and then to top up with insurance products. Because the option is not available to all medical scheme members (due to the risk rating and underwriting policies applied to these products) the CMS felt that it could lead to a de-stabilisation of the medical schemes industry by reducing the cross-subsidies from younger to older members, or from healthier to sicker members.
The second insurance product in the CMS’ crosshairs is the HCP offered by both long- and short-term insurer. “HCPs are mainly aimed at that part of the market that does not belong to medical schemes and are dependent on public health care services,” says FinMark. It adds that public healthcare services are billed according to a means test and that tariffs for each income category are set out in the Uniform Patient Fee Schedule (UPFS). Bottom line: The impact of the UPFS is significant on lower income earners.
Helping the poor to deal with medical costs
“HCPs generally provide cover of between R250 and R5000 per day for premiums of as little as R100 per month,” says FinMark. Top-end HCPs can cost up to R850 per month and often include add-ons like disability insurance, cash-back and the like. Among the problems with this category of insurance is that the pay-out is unrelated to the cost of care and insurers are unable to confirm how these pay-outs are spent.
The market for HCP is estimated to be between one and 1.5 million policies covering an estimated 2.4 million people. A typical HCP policyholder is in the LSM 4 to 7 brackets and between the ages of 20 and 40 years. There are between 30 and 40 insurers providing HCPs, versus 99 medical schemes and between 15 and 20 Gap cover providers. While the benefits of a HCP are not comparable to those of a medical scheme, low-income South Africans would likely have no alternative product which they could access due to affordability constraints. FinMark’s research set out to analyse the effectiveness of HCPs in meeting the cost of healthcare for low income-earners.
These plans succeed and fail on a single measure: affordability. On the plus side HCPs are cheaper than the cheapest open income-rated medical schemes for most ages and cover levels. On the minus side they have significantly lower benefit levels. “HCPs also apply relatively light underwriting conditions, this due to the relative expense of underwriting at such low premium levels,” notes FinMark. Their conclusion is that HCPs offer some form of protection against both direct and indirect hospitalisation costs to low income earners even at benefit levels as low as R500 or R1000 per day. The relative benefit increases the nearer the insured is to the R6000 means test cut-off.
Will Hospital Cash Pans survive?
The March 2012 demarcation proposals will have consequences. It demands that the benefits of health insurance products cannot be related to the cost of treatment and that daily HCP benefits are capped at 70% of daily income (net of tax) of the policyholder! It also provides for underwriting for health insurance products. “While the majority of HCPs provide benefits that are unrelated to the cost of care and thus would not be significantly impacted by the first requirement, Gap cover products certainly would be,” notes FinMark. But low income earners will be negatively affected if the cap on daily HCP cash benefits is capped.
If the proposal is adopted unaltered then policyholders would be limited to as little as R105 per day (for those earning R3000/month) and R210 (at R6000/month). It is unlikely this will offset the indirect medical expenses for hospitalisation at state facilities. HCPs are intended for low- to mid-income earners. The CMS proposals, if adopted, could signal the end for this category of healthcare funding as it would only provide sufficient benefits to the wealthy, already covered elsewhere.
Editor’s thoughts: Gap cover and Hospital Cash Plans will come under threat if the demarcation proposals become law. National Health Insurance (NHI) will also have an impact, though it is too early to say how an NHI implementation will affect the demand for healthcare insurance among lower income earners. Should the CMS push ahead with demarcation legislation before a comprehensive study of healthcare insurance consumers’ needs is completed? Please add your comment or send it to gareth@fanews.co.za
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Added by Brett Red, 23 Oct 2012