Reform failures are killing off medical scheme options for low-income earners

Medical scheme options aimed at lowincome earners have been the victim of the failure to complete the reform of the regulation of medical schemes, the Board of Healthcare Funders (BHF) conference heard this week.

Christoff Raath, an actuary and chief executive of the Health Monitor Company, says it is very difficult to create low-cost options for open medical schemes (schemes that admit anyone) that have a footprint across the country. For such options to be viable, they must be taken up only by healthy young people, he says. If older, unhealthy people move on to these low-cost options in large numbers, the options’ risk profiles change and they become unsustainable.

This “extremely undesirable” situation is in part a result of government’s failure to amend a section of the Medical Schemes Act that obliges schemes to set contributions at levels that ensure that each option is self-sustaining, Raath says.

UNHEALTHY POOLING

In 2006, the Council for Medical Schemes put out a discussion document proposing that the Medical Schemes Act be amended so that schemes can price their common benefits across all their options.

Currently, if, for example, a set of private hospital benefits is common to all options within a scheme, the contributions for those benefits may vary depending on the expected claims and hence the health of all the members of those options. This means these benefits will cost more for members of, for example, the most comprehensive option, which attracts unhealthy members, than it will for members of a middle-of-therange option. A necessary crosssubsidy from healthy to unhealthy is being lost in the process.

Raath says that in this way medical schemes inevitably end up with sick people in one risk pool and healthy people in another.

The proposal in the 2006 discussion document was incorporated in an amendment bill that was tabled in Parliament in 2008. But the amendment bill was withdrawn when it became clear that government would implement National Health Insurance.

The proposal to allow medical schemes to price common benefits across all their options does not appear to be part of the latest Medical Schemes Amendment Bill, which is awaiting approval by the Department of Health.

Partly as a consequence of the failure to implement this reform, and partly because other reforms to ensure the sustainability of medical schemes have not been implemented, schemes often have loss-making comprehensive options and loss-making low-income options, whereas only their middle-ofthe-range options have a surplus, Raath says.

It does not make sense to join “an expensive inter-galactic comprehensive-plus-plus option” when you are entitled to the prescribed minimum benefits (PMBs), regardless of the option to which you belong, and you can change options each year, which means you can change to a higher-cost option if you become seriously ill, Raath says.

The health of medical schemes hangs precariously on members who are uninformed about what they are entitled to under the PMBs and the ability to move between options, and who join options with more cover than they need – what the industry refers to as the “worried wealthy” or “worried healthy”, he says.

CONCERN ABOUT SCHEMES

Concerns about the financial wellbeing of medical schemes may be justified, even though the latest annual report from the Council for Medical Schemes shows that schemes made an overall operating surplus of R1 billion in 2011.

Raath says there is a concern that the overall surplus in 2011 – which schemes are likely to have repeated in 2012 – is symptomatic merely of high contribution increases and benefit reductions and does not deserve to be commended as a significant achievement.

The industry’s operating surplus in 2011 was its first since 2004, and the Council for Medical Schemes said it was a sign that the regulation of schemes has had a positive effect on their financial wellbeing.

Raath says the reduction of benefits is affecting out-of-hospital services in particular. Many in-hospital procedures are for PMB conditions, and these benefits cannot be reduced.

The medical scheme market is dominated by Discovery Health Medical Scheme and the Government Employees Medical Scheme (Gems).

Discovery Health and Gems both need to make operating surpluses so they can top up their reserves, which are below the minimum required by law, Raath says.

Schemes are obliged to hold reserves equal to 25 percent of their contributions to cushion them against exceptionally high claims.

Apart from Discovery Health and Gems, the rest of the medical scheme industry is breaking even after many loss-making years, Raath says.