The Medical Schemes Amendment Act – timing is everything

Willem Claasen (pictured), Senior Actuary: Medscheme Health Risk Solutions believes there are potential pitfalls regarding the implementation of the Medical Schemes Amendment Act which, if not handled correctly, could result in some unintended negative consequences.

However he stresses that it will not be necessary to go back to the drawing board. “These pitfalls can be addressed by tweaking a few clauses within the Act and simply implementing the relevant clauses at the right time,” he says.

Claasen believes that essentially the proposed legislation is sound.

“The Medical Schemes Amendment Act contains many of the components necessary to ensure the introduction of a stable National Health Insurance system in South Africa."

"It addresses many of the perceived historical inequities and, if implemented correctly will ensure that in future, schemes will compete in areas that really make a difference such as client service and quality care – not member risk profiles,” he says.

Key measures proposed in the Act include a Basic Benefits Package (BBP) and the introduction of the Risk Equalisation Fund (REF) which is designed to ensure that schemes no longer compete on the basis of their members’ risk profiles. The BBP as defined in the Act will comprise the current PMBs along with all other in-hospital treatments.

Claasen cautions that the order in which these measures are introduced will have a significant impact on how the industry responds and the Act as it is currently worded does not specify this.

“Timing is everything,” he says. “If the BBP is introduced ahead of the REF, the result will be increased rather than decreased risk selection in the medical schemes environment.”

Currently, given the silo-like nature of medical scheme options and the variations in benefits packaging, it is very difficult to make meaningful benefit comparisons on the basis of cost. This is further complicated by the fact that different options within schemes have differing risk profiles.

“Those options with good risk profiles can help a scheme remain competitive - even if the scheme is also carrying several options with poor risk profiles,” explains Claasen.

However the BBP will introduce greater standardisation of benefits across medical schemes. This will make it much easier to compare schemes’ offerings from a price perspective and clients will inevitably favour the less expensive options.” cheaper schemes.

Because pricing is highly dependent on risk profile, medical schemes with a preponderance of older, sicker members (who by definition cost the schemes more) will be unable to compete unless the REF is in place to compensate for the differences in risk.

Claasen cautions that while medical schemes currently compete on an option-by option basis once the BBP is in place they will compete on the basis of their overall profile. “Those with unfavourable risk profiles will probably not survive.”

To avoid this situation, Claasen believes that REF should be introduced ahead of the BBP. However, it has been indicated that, for practical reasons, the REF may only be introduced in 2011 and may require phasing in over an extended period of time.

“The prior introduction of the REF will certainly make the process smoother, but it does not solve all the issues,” he adds.

“It should be borne in mind that the REF does not level the playing field in respect of the entire BBP but only in terms of the current PMBs. This means that the additional in-hospital benefits proposed as part of the BBP could still skew the picture for individual schemes. How big an issue this is likely to be will depend on the size of that component relative to the PMBs.”

Medscheme Health Risk Solutions undertook a study to assess this based on their experience with the medical schemes administered by the company. In 2007, the PMBs accounted for 72% of these schemes’ BBP costs. “This meant that 28% of the BBP still remained unequalised.

To assess the impact and given that age has the greatest effect on risk, Medscheme Health Risk Solutions calculated the average BBP for all the schemes and then adjusted the average for each scheme to take into account the varying age profiles.

“In our theoretical model, even with the REF in place, there was still a 34% variation between the cheapest and most expensive schemes. This means that either the definition of Basic Benefits needs to change, or an additional mechanism will still be needed to address the issue. The REF will only soften the advent of the BBP,” he points out.

Claasen also feels that additional measures are necessary to make medical scheme membership more attractive to lower-income earners and the young and healthy.

“If there are no incentives for medical scheme members to remain within the system, we could potentially see a situation where the cross-subsidisation on which the entire system depends is lost.

“This measure too should precede the introduction of the REF. It is possible to introduce these measures as part of the greater National Health Insurance framework,” he concludes.