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LCBO – A questionable framework

02 November 2015 Jeremy Yatt, Fedhealth

Medical schemes have become more expensive as a result of certain regulatory conditions such as PMBs, Open Enrolment and Community Rating. All of these requirements, laudable as they are, have led to a decrease in value for fitter and healthier people, who often then opt out of cover because there is no mandatory environment.

A mandatory environment would reduce some costs but it is arguable by how much. In any event, the unavoidable cost increases of medical schemes have excluded a large number of people, and the LCBO framework attempts to address this problem by providing medical scheme coverage at a significantly lower rate.

When the Council for Medical Schemes first sent out Circular 54, it set out basic minimum benefits that the LCBO should provide, as well as the manner in which schemes can apply for exemption from certain conditions. The package proposed in Circular 54 was however still deficient in benefits and priced at a cost the target market could not afford. The CMS subsequently decided, after criticisms from the South African Medical Association (Sama), that the proposed package required further analysis and the benefit package would therefore be withdrawn until further notice.

It is envisaged that a revised package will be published in due course after consultation with all relevant stakeholders.

Overhauling the system

We believe that it was prudent for the latest LCBO circular to be withdrawn by the Council for Medical Schemes (CMS).

It is clear that the current system can’t be tweaked. What CMS should rather consider is allowing entities to be registered as schemes in specific circumstances, in effect waiving Section 20 and Section 24 of the Medical Schemes Act. For as long as there are requirements of open enrolment, community rating and PMB’s, it will be impossible to provide genuinely affordable cover. These exempt schemes could work in conjunction with existing medical schemes to ensure a spread of cover for employers.

Addressing the issue

It is acknowledged that price increases have excluded a large number of people, and the LCBO framework attempts to address this problem. It is however, debateable, whether the envisioned contributions offer value for money.

Administration fees would have to be constrained, making it a probable loss leader for administrators. Brokers would also earn very little out of the deal and to counter this, employer groups would have to pay brokers an additional service fee to assist with the roll-out and training of staff members.

Fedhealth is currently conducting its own research to ascertain whether or not employer bodies are willing to cover the additional cost.

Employers, employees and benefits

It is unlikely that lower-income employees will contribute at all to the costs, which means employer bodies must be prepared to pay an additional R500 on average, assuming employees want to include family members, for the provision of this benefit.

Also, are these limited benefits acceptable to the lower income earners? They still may end up using state facilities. There is a reason hospital plans (medical scheme or insurance) are so successful – they give people the reassurance of cover for the more catastrophic events.

The question that remains is whether this proposal would have favour in the market. Assuming there is no opposition to a system that makes healthcare cover more widely available, it is important to note that it is risky to jeopardise existing membership bases and scheme reserves in an attempt to provide the cover.

Protection mechanisms

With any low cost option there is always the danger that it could attract the wrong profile – in this case pensioners who have limited income and a need for medical care. There have been many examples of lower cost options that have been severely over-utilised because they attracted the wrong risk profile.

The circular hints at allowing membership to be confined to employer groups, but it does not specify that only active employers are eligible for membership. Nor does it provide any other kind of protection against current medical aid members from joining the option. As a result, the option is more likely to attract people who are currently on a medical aid (and who have an expectation of claiming) than “virgin” members. Employers are also likely to encourage buy-down of existing staff on a non-LCBO option because it can save the employer some costs.

Systemic issues

Medical schemes have some historical and ideological faults, and these need to be addressed before a new dispensation is introduced. In the circumstances we will be taking a very cautious approach to the proposals. Fedhealth is not opposed to a system that makes healthcare cover more widely available, but it would not want to jeopardise its existing membership base and scheme reserves in attempting to provide the cover. We will be doing a lot of research on these issues and will watch other developments closely.

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