Demarcating the demarcation debate

Insurance is a complex discipline, as are most issues of health funding. It is important, in complex matters, to isolate the issues so that each of these can be addressed and once this is done, holistic solutions can be found. The issues need to be demarcated. Unfortunately this does not happen often.

This is a problem in the so-called healthcare regulatory demarcation debate. Essentially the issue, which is confusing and confounded, is where to draw the line between medical schemes and health insurance. The confusion is not helpful. This article attempts to isolate the issues, and so to speak, demarcate the demarcation issues.

The debate is not new to South Africa. It has been going on for decades without any clear end in sight. The latest development is the attempt to resolve the matter by setting out the demarcation in regulation. The matter was brought to a head with the call for public comments on the Second Draft of the Regulations on 30 April 2014.

The issues at hand

The issues can be set out as two interrelated questions:

1. Should medical schemes be community rated?
2. If so, what role can risk rating insurers play?

Community rating is a concept usually associated with pricing health schemes which requires health scheme providers to offer health cover within a given territory at the same price to all persons without medical underwriting, regardless of risk factors such as health status, age, gender, etc.

The demarcation debate is encapsulated in question two. Unfortunately, many contributing to the debate are debating question one only or question one and two together, or question two alone not understanding how it relates with one. Question one was settled when the Medical Schemes Act 131 of 1998 was passed. Question two is now relevant to the debate. Re-opening the debate on question one is to debate for the repeal of the 1998 Act. To contribute to the second question, the issue of the co-existence of community rating and risk rating systems needs to be considered.

Can community and risk rating systems co-exist?

Sixty years ago JF Follmann Jr published an article on the co-existence of community rating (in South African medical schemes) and risk rating (conventional insurers). He makes a number of points, two of which are important for this debate.

Firstly, he mentions that community ratings can only work if it is a monopoly and that it is only attainable through legislation. Accordingly, whenever a community rating is implemented, it is accompanied by legislation outlawing competition from any risk rating system.

It seems that conventional insures and community rating cannot co-exist, and by creating monopolies a number of other disadvantages are created. If community rating and risk rating systems attempt to operate in the same space, community rating systems are driven out of the space.

More correctly, community rated schemes are forced to become risk rated. This conclusion was based on studies of the US, which were drawn primarily from experience and then reinforced by theory. Medical health plans were community rated in the early 1920’s. These stemmed from Blue Cross-Blue Shield plans which would provided hospital care in a community to subscribing members.

With the introduction of risk rated medical insurance during the 1950 to 1960 decade, this slowly became the predominant form of funding. It began to displace the community rated system and this was understandably a matter of grave concern for the historical Blue Cross community rating administrators. As a result of this, the idea that community ratings can only exist if a statutory monopoly is granted excluding risk rated systems, became accepted.

Game changer

Oddly, the community rating and risk rating issue took place unnoticed in South Africa with the formation of the South African Special Risks Insurance Association (SASRIA). As is known, SASRIA was formed in 1979 by the short-term insurance industry forming a risk pool to cover damage caused by politically motivated persons.

SASRIA did not risk rate, and cover was provided on a non-cancellable basis. It was thus flat rated. In the medical schemes terminology, it was basically community rated. Initially other insurers could compete with SASRIA and indeed did so. The competing insurers would, more likely than not, have been foreign insurers. Risk rating foreign insurers could could undercut SASRIA in good times.

However, in bad times these insurers could cancel their policies if the political situation deteriorated, leaving SASRIA to pay for the claims. In that way, competing insurers could collect premiums but when the risk appeared to be deteriorating, they could cancel the cover and retain the earned premiums. It was not clear that SASRIA could survive under these circumstances. Thus as the theory predicts in 1984, not long after the formation of SASRIA, legislation was passed giving SASRIA the monopoly over this class of business.

Non-competing compartments

The second general point made by Follmann in 1962, which has not attracted much attention, was that once one looks for or attempts to define the “community” it becomes unclear if such a community actually exists or can be found. This matter however, will not be pursued any further in this article.

Thus, the issue for debate at this point in time is one of demarcation. The question is; what is it that the conventional insurer can do which is not what medical schemes are doing? One answer to this is that medical insurance can provides cover where medical schemes do not. Therefore, if medical schemes have a limit to cover, insurers could operate above that cover. Medical insurers cover the expense gap – gap cover - which fills the gap between what the medical scheme has paid for and what medical professionals have charged.

High Court test case

Since the two schemes cannot both operate in the same space, the question is how can these two different systems be put into two separate non-competing compartments? After many years of wrestling with this question, the Registrar of Medical Schemes decided to cut the Gordian knot and approached the High Court for an order against GuardRisk Insurance Company (more as a test case than individual case). The sought after order essentially requested that the court declare health insurance policies illegal being outlawed in terms of the Medical Schemes Act. The court obliged to this, ruling in favor of the Registrar of Medical Schemes.

The Supreme Court of Appeal viewed things differently and overturned the decision on Guardrisk, forcing the matter down the regulation demarcation route.

In the first round of deliberations on the demarcation debate, over 300 public submissions were received, most of which strenuously argued for the retention of gap cover few pointing out why the existence of gap cover does not threaten medical schemes. The least helpful argues at this stage is that insurance is a better system than community rating. That is a valid point for debate but not within the context of demarcation. With demarcation the continued existence of community rated medical schemes is accepted.