Demarcation Regulations: doom or gloom?

National Treasury promulgated the Demarcation Regulations (DRs) governing medical gap cover, primary healthcare policies and hospital cash plans in January for implementation on 1 April 2017.

These regulations in their very form will create a level playing field and will help to clearly distinguish between the products offered by health insurers and medical schemes.

According to Elsabe Conradie, General Manager Stakeholder Relations at the Council for Medical Schemes (CMS), the regulations are aimed at clearly demarcating the responsibility in terms of regulatory supervision of medical schemes and health insurance products. “This is in order to ensure that the provision of health insurance products does not undermine the social solidarity principles inherent in the medical scheme environment (open enrolment, community rating, and PMBs), thus ensuring better protection for consumers.”

Ridding the system of problems

Treasury’s Head of Tax and Financial Sector Policy, Ismail Momoniat, said the aim of the regulations was to rid the system of the worst problems. He added that the demarcation regulations were ‘not a perfect solution’, but that Treasury and the National Department of Health hope it will stop the ‘abuses that are happening currently’.

When asked if the financial sector has favor over medical schemes, Joanne Gloag, Executive at Guardrisk Admed said in previous years this may have been the case, however more recently, gap providers have found it increasingly difficult to remain economically sustainable.

“As medical schemes have come under increased pressure, we have seen a reduction in cover offered by them, as well as an increase in the number of co-payments applied to medical treatments. Furthermore, the scarcity of medical specialists has led to increasing medical inflation, which in turn has resulted in members experiencing an ever-increasing shortfall in their coverage. This shortfall in turn, is passed onto insurers, who carry an increasingly larger portion of the member’s overall medical costs,” said Gloag.

Three categories of relevance

Business Day reported last year that three categories of health-insurance products were of particular relevance to the demarcation exercise. These were:

• Medical expense shortfall policies, or gap cover plans;
• Non-medical expense cover as a result of hospitalisation policies, or so-called hospital cash plans; and
• Primary healthcare insurance policies.

Under the new regulations, gap cover will be limited to R150 000 for each insured person for a year, and hospital cash plan payouts will be limited to R3 000 a day, but with a cap of R20 000 a year, irrespective of the number of days in hospital.

Insurers were given a two-year transition period to phase out the existing primary healthcare insurance policies they will now be prohibited from providing.

“It is important to emphasise that after 1 April 2017 insurers are obliged, in terms of the Demarcation Regulations, to submit information on new health product lines to both the CMS and Financial Services Board (FSB),” said Conradie.

Agreeing to disagree

Whilst Gloag is in agreement with what Government wants to achieve through the DR, she says it is important to be cognisant of the main reason for which individuals opt for insurance instead of medical scheme coverage, namely, affordability.

“There are a huge number of South Africans that cannot afford even a basic medical scheme option, yet they are currently able to receive medical treatment through the financial assistance that they receive either from their insurance cover or through primary healthcare programmes provided by their employers. It is therefore important to find the balance between ensuring the sustainability of medical schemes and still being able to offer basic healthcare to those individuals that cannot afford medical scheme membership,” said Gloag.

When asked what these regulations mean for them, Deon Kotze, Head of Research & Development at Discovery Health said the demarcation regulations will not have any impact on the benefits of the Scheme, or the cover that these benefits provide members of the Scheme.

“The regulations will only impact members of the Scheme that have opted to purchase gap cover in addition to their membership of the Scheme, and the impact will be limited to the benefits provided by their gap cover policy,” he said.

Is this a win win situation?

Gloag says from a gap cover perspective, the regulations are a significant step forward for insurers, brokers, consumers and even medical schemes. “This paves the way for insurers and medical schemes to co-create holistic, need-based healthcare solutions for consumers, which ensure long term sustainability for both the medical scheme and health insurance industries. From a primary healthcare perspective, however, the impact of the regulations depends heavily on the successful establishment of a Low-Cost-Benefit-Option framework within the next two years.”

Conradie highlights that regulations have put a cap on health policy commissions. “This effectively places commission earned on selling medical scheme products on par with commissions earned on selling insurance products. Thus, this incentive on its own is mitigated.”

“The Regulations are well considered and work in the best interest of insurers, brokers and consumers. The transition from the FSB regulatory framework into a CMS regulatory framework takes into account already existing products sold to consumers. This poses challenges, however the CMS believes these will be managed successfully,” continued Conradie.

Instead of dwelling on the negatives, let us focus on the positives. As Conradie highlighted, the regulations are in the best interest of insurers, brokers and consumers.