You cannot lump gap cover with other healthcare insurance products
Over the past few weeks FAnews Online has featured a number of articles and newsletters dealing with National Treasury’s draft Demarcation Regulations. The proposed changes have the industry in uproar, as evidenced by the dozen official responses from ind
“Although we are in agreement with the broad positioning of the Draft Regulations as they pertain to certain health insurance products, we feel that bundling gap cover insurance with other health insurance products is fundamentally flawed,” said John Cranke, Regional Manager of PSG Konsult Corporate (PSGKC). A good starting point for the debate is to revisit why National Treasury released the draft Demarcation Regulations in the first place. In broad brushstrokes the regulations will distinguish between the business of a medical scheme and a healthcare insurer.
Reasons for regulatory intervention
Among Treasury’s main concerns is that health insurance products harm medical schemes by drawing away younger and healthier members. This concern – which does not stand up to close scrutiny – is largely informed by the Council for Medical Schemes (CMS). “In determining whether health insurance products will or will not be allowed to be sold to the public, regard was [only] given to the objectives of the Medical Schemes Act and the current or potential harm that a health insurance policy may cause to the medical schemes environment,” noted Cranke.
The draft regulations were formulated without considering major differences between gap products and other healthcare insurance offerings. PSGKC outlined the obvious omissions:
· Gap products can only be sold to medical schemes members and not as stand-alone cover. They are sold to complement medical scheme cover and never to replace it.
· Gap products are widely used by medical scheme members. A recent survey conducted by the group showed 72.9% of medical scheme members subscribed to a gap cover solution. Members purchase gap cover to compensate for shortfalls on their existing benefit option and not as a safety net to move to a lower (cheaper) benefit option.
· Gap products are priced across the risk pool at either employer or product specific level. Although they are sometimes loaded with an age-based premium they uphold the social solidarity principles of cross-subsidisation.
Ironically, Treasury’s objections to gap cover also apply to accepted medical schemes’ practices. If downgrades impact the cross-subsidisation principle – asks PSGKC – then why are schemes allowed to have options?
Hands off gap cover
Gap cover does not exhibit the negative consequences set out in the draft regulation. As evidence, PSGKC considered a number of medical schemes’ activities including how members select their benefit options and what informed member decisions to upgrade or downgrade said benefits.
“In our experience, very few medical scheme members select cover based purely on need, and often the most important consideration is affordability (as stated by the CMS in their annual report of 2011/2012),” said Cranke. Among the first question asked by medical schemes consultants when providing assistance to potential members is how much they have available in their budgets for scheme contributions. In addition, members are more concerned with their schemes’ ability to cover day-to-day and chronic illness benefits rather than in-hospital benefits. It is only after a suitable scheme and option is selected that consideration is given to whether the member can afford gap cover to protect against likely shortfalls for in-hospital events.
Experience shows that members are more likely to upgrade than downgrade benefit options. Upgrades take place when younger members on entry level options move to richer options as their incomes increase. The PSGKC survey showed that other reasons for changing options include job or lifestyle changes, increased family size or the employer-selected medical scheme changing. On the flipside, members – particularly older members – downgrade their benefit options due to affordability issues. Gap cover does not feature as a reason for downgrading; but the fact that medical schemes contribution increases outstrip inflation does!
Limited impact of benefit option downgrades
PMBs (of which there are in excess of 270 relating to the in-hospital treatment of life threatening/ emergency conditions) have to be covered in full by all options on all medical schemes. Thus the downgrading from one benefit option to another affects the day-to-day and chronic illness benefits rather than in-hospital benefits. “There is a significant difference on all schemes in the day-to-day benefits and chronic illness benefits – with the richer options in almost all medical schemes covering members for a number of non-PMB chronic illnesses and offering members access to broader medication formularies,” noted Cranke. It makes little sense to downgrade a benefit option and attempt to replace the lost cover with gap insurance, because this product only covers in-hospital shortfalls.
Many schemes don’t offer cover for in-hospital service providers at anything above 100% of the “scheme rate”. This means that members – even those on top-of-the-range options – always face shortfalls. And these shortfalls can be significant! The PSGKC survey revealed that 40% of members with gap cover had claimed from their policies, with 32% of these claims in the R2500 to R5000 range. Without gap cover products these members would lose the ability to cover themselves for in-hospital shortfalls and face financial hardship as a result.
A final consideration is that gap cover arose due to the absence of tariff setting agreements. Medical schemes have been forced to introduce a variety of benefit changes and reductions to remain viable. Reimbursement rates have decreased and deductibles and co-payments introduced for elective procedures, for example. This has severely compromised members’ abilities to provide affordable comprehensive cover!
Will the regulators back down?
PSGKC concludes: “We are in agreement that there are health insurance products that may be considered as substitutes for medical scheme cover (we have no problem with these being addressed via the Draft Regulations), but we disagree with the premises on which the proposed exclusion of gap cover is based.”
Editor’s thoughts: Another day – and another objection to the contents of National Treasury’s draft Demarcation Regulations. The arguments for the inclusion of gap cover in regulation are mounting. Do you think the regulators will stand down and recognise gap cover in the final regulation? Add your comment below, or send it to [email protected]
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