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When regulators clash...

25 July 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

It is not necessary to lecture financial services intermediaries on the impact of regulation on their businesses. They understand all too well the burden that compliance places on their practices in terms of administration and added cost. If we take a ste

A layperson might observe that these changes are rooted in the regulatory environment. The Solvency Assessment and Management (SAM) and soon to be introduced Treating Customers Fairly (TCF) regimes are examples of such regulation. The Draft Demarcation Regulations, published in March 2012, is another. The new regulation sets out to establish clear legislative “boundaries” between the business of a medical scheme and that of a healthcare provider. It was deemed necessary due to a perceived blurring of lines between medical schemes and products designed that provided cover for in-hospital expenses.

Getting to grips with the respective “insurance” landscapes

An informed opinion on the demarcation issue demands greater knowledge of the affected industries. Jacqui Liebenberg, Business Development Actuary at RGA SA, set the stage with a broad overview of the medical schemes and insurance sectors at the group’s 19 July 2012 Client Seminar. She observed that the 100 medical schemes operating in South Africa (per the CMS 2010/11 Annual Report) are regulated in terms of the Medical Schemes Act and overseen by the Council for Medical Schemes (CMS).

Medical schemes are non-profit organisations managed on behalf of – and indeed “owned” by – their members. A medical schemes’ raison d’être is the indemnification of medical expenses incurred by its members. Local schemes must satisfy a number of social solidarity principles and operate on an open enrolment (non-discrimination on grounds of age or health) basis. A further requirement is that they offer community-rated contributions. “Against this backdrop it is very important for medical schemes that they continue to attract young and healthy members,” says Liebenberg.

Insurance providers are regulated in terms of the Long and Short-term Insurance Acts and are overseen by the Financial Services Board. Companies in this space are managed to maximise long term value for shareholders… Insurance product is designed in-house by company management and product development teams. The need for demarcation arose due to both long-term (Hospital Cash Plans) and short-term (Hospital Cash Plans and Gap Cover) insurers offering products that could impact the medical schemes environment.

A “what’s mine is mine” approach to regulation

The Draft Demarcation Regulations seek to narrowly define what types of healthcare insurance can be offered by stakeholders in each environment. It defines the business of a medical scheme as “assistance in defraying expenditure incurred in connection with the rendering of a health service. And it holds that health insurance policies payable upon the occurrence of an event relating to the “health of the mind or body of a person or an unborn” may only be sold under the Long Term Insurance Act if they fall within a designated list (comprising four categories).

It seems, however, that in the tussle between the CMS and FSB for tighter control over healthcare products, the consumer (or medical scheme member if you prefer) has been left high and dry. In its present form the regulation will put many medical schemes members and healthcare insurance policyholders in a net worse financial position. A quick look at the “for and against” arguments offered under the Gap Cover and Hospital Cash Policy headings – and summarised by Liebenberg – proves telling. (RGA did not take sides in the debate, but offered “for and against” arguments to further it).

Finding solutions to unaffordable healthcare

The CMS claims that Gap Cover undermines medical schemes by attracting younger lives away from higher benefit options, with the result existing member pay higher premiums. In addition it says the risk ratings applied on these products “go against social solidarity principles” and offer poor value for money. In the pro-Gap corner, commentators observe that Gap Cover has nothing to do with escalating healthcare costs! Instead, the regulator should be targeting unregulated healthcare services costs and the excessive inflation pressures in providing prescribed minimum benefits in full.

But their most compelling argument – setting aside the fact that 10% of principal medical schemes members have purchased Gap Cover – is that the cover is a supportive product! “Membership of a medical scheme is a pre-requisite for purchasing gap products, which attract a broad spectrum of lives, not just the young and healthy as claimed,” concludes Liebenberg.

Pros and cons of Hospital Cash Plans

A similar to-and-fro takes place in the Hospital Cash Plan space. The regulators are concerned that such products could be seen as regulatory arbitrage and might encourage members to downgrade their benefit options. A member might enter a medical scheme on the lowest option and “top up” using the cash plan, for example. Other concerns include onerous benefit rules (typical in all insurance contracts), the possibility of anti-selection against medical schemes and artificially low initial premiums.

On the plus side, individuals who purchase Hospital Cash Plans can afford a higher level of cover than if they had only joined a medical scheme or taken no risk mitigation measures at all. There is also evidence that the payout from such policies is often used as wage replacement rather than to offset medical expenses. Liebenberg notes: “Banning the sale of Hospital Cash Plans will not necessarily translate into members buying up to more expensive medical scheme options.”

Editor’s thoughts: National Treasury has received unprecedented industry response in the wake of the Draft Demarcation Regulations. While both regulator and insurers have made valid points there is a concern that banning or restricting Hospital Cash Plans and Gap Cover products would do more harm than good. Would you agree that innovative health insurance products are a consequence of spiralling healthcare costs rather than a contributing factor? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Skollie, 25 Jul 2012
I have been a member of a medical aid all my working life (40yrs) I had a knee replacement last year and had to pay in +- R 15 000 for the excess charges to the Drs etc which the medical aid did not cover. I will need to do the other knee in the next yr or so and have taken Gap cover for the excess costs which I know will again arrise from the opperation. In addition to these costs I know that that they will limit me to the claim on the new knee as well so the Gap cover is my best option. I also looked at changing my option which would still leave an excess on top of the higher premiums the medical aid would have charged.
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Added by Paul, 25 Jul 2012
"The CMS claims that Gap Cover undermines medical schemes by attracting younger lives away from higher benefit options, with the result existing member pay higher premiums." And yet they want the exclusion on pregnant new entrants to be lifted! Are these people from planet Earth? This is typical of the general problem in the industry where regulators have no idea of what they are regulating, but proceed with great gusto, ending up doing more harm to consumers than helping them.
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Added by Denise, 25 Jul 2012
I agree with Paul! This problem originated from Medical aids being forced to take any sub-standard lives on with a maximum one year waiting period and no exclusions. This I belive to also be the root cause for the poor benefits Medical aids offer. I have paid medical aid premiums for 25+years of my life because I had to in fear of permanent exclusions in event of a change in health without claiming a fraction of what I paid in? Why would any young person do this today? They can now get cover for absolutely any health issue after one year, and often a lot sooner with PMB's coming into the fray... The only way to get young lives to cross subsidise the pool again is to make it expensive to join later and to apply longer waiting periods and exclusions again? Banning gap cover only punishes the people who are already paying medical aid premiums and who will subsidise NHI AND who are taking the burden off the health system by having GAP cover?????
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