Health insurance is ‘needed for the poor’

COUNCIL ACTION

Short-term insurance health products could be structured to make them affordable for low-income earners, researchers said at a recent workshop.

They said the regulators should permit the sale of affordable health insurance products, because this is the only realistic way for low- income households to access private health care. Medical schemes cannot offer affordable options to low- income earners, and it will take years for the National Health Insurance (NHI) system to be fully implemented.

The Council for Medical Schemes has estimated that between five and six million low-income earners could be interested in buying a product that provides cover mainly for primary health care.

The regulators are wary of health insurance, because risk-rated products allegedly undermine medical schemes (see “Council action”). They fear that the young and healthy, whose riskrating enables them to buy health insurance relatively cheaply, opt out of medical schemes, with the result that their contributions no longer subsidise the medical expenses of older and sicker members.

The healthcare industry is awaiting the release of final regulations that will spell out which health insurance products will be permitted under the Long Term and Short-Term Insurance Acts.

Health insurance products include gap cover, cash- back plans, hospital plans, and policies that cover primary health care, as well as various levels of cover for in- hospital treatment ( see “Short-term products”). Unlike medical schemes, these products can risk-rate policyholders, although not all do.

At the workshop, Shivani Ranchod and Daniël Erasmus of Insight Actuaries and Consultants presented the results of their research into how healthcare-financing products could be made more affordable for low-income earners. The research was commissioned by the Centre for Financial Inclusion and Regulation (Cenfri), on behalf of FinMark Trust.

Ranchod said most South African households earn less than R5 000 a month and cannot afford medical scheme membership.

Ranchod and Erasmus said a number of initiatives aimed at extending medical scheme cover to low-income earners had not got off the ground. These included the Lower Income Medical Schemes initiative (launched by the Council for Medical Schemes in 2005 and shelved in 2008) and a low-cost benefit option model (proposed by the Council for Medical Schemes in September 2015, but not developed further).

The researchers investigated what proportion of a household’s monthly income could be spent on different health In 2008, the Council for Medical Schemes asked the Supreme Court of Appeal to ban a health insurance product on the grounds that it was “doing the business of a medical scheme”.

The council lost its case against Guardrisk Insurance Company, and, as a result, insurers could continue to sell health insurance products.

The Medical Schemes Act was subsequently amended to widen the scope of products that would be regarded as doing the business of a medical scheme, but this amendment has not been put into effect. It will only become effective once the final regulations that spell out which health insurance products will be permitted have been implemented.

The final regulations were scheduled to be released at the end of 2014, but the deadline was changed to the second quarter of 2015. That deadline was not met, and a new deadline has not been announced. insurance products or on low-cost medical scheme options. They considered how the affordability of these products would be affected if policyholders benefited from a group discount, and if either insurance premiums or medical scheme contributions benefited from an employer subsidy.

A feature of health insurance products is that, unlike medical scheme membership, the premiums can be discounted significantly if a policy is sold on a group basis. It is common for insurers to offer discounts of up to 50 percent to large groups, Erasmus said.

In the case of the medical scheme option, the researchers considered the impact of a medical tax credit (not currently permitted for health insurance policies) for individuals who earn enough to pay income tax.

The research assumed that the household earned more than R6 250 a month, because this is the income level at which an individual qualifies to pay income tax and, as a result, can claim the medical tax credit if he or she belongs to a medical scheme.

Based on the average retail price of health insurance, a hospital plan would consume 10 percent of disposable income, day-to-day cover would consume 11 percent, day-to-day cover and limited hospital cover would consume 14 percent, and day-to-day cover plus hospital cover would consume 21 percent.

By comparison, the cheapest restricted (closed) medical scheme cover would consume 16 percent of disposable household income, and the cheapest open scheme cover would consume 21 percent, Ersamus said.

“However, if the insurance contributions are re-calculated to take a group discount of 40 percent into account, the contributions decrease to six percent (hospital plan), seven percent (day-to-day cover), eight percent (day-to-day cover and limited hospital cover) and 13 percent ( day- to- day cover plus hospital cover)” (see graph 2).

The contributions were recalculated after factoring in an employer subsidy of 50 percent for both medical scheme contributions and health insurance premiums. (The health insurance premiums would also attract a group discount of 40 percent.) Based on these assumptions, the percentage of household income spent on premiums fell to three percent (hospital plan), three percent (day-today cover), four percent ( day- to- day cover and limited hospital cover) and six percent ( day- to- day cover plus hospital cover). Medical scheme cover would consume between eight (closed scheme) and 10 percent (open scheme) of household income.

These percentages would be very affordable for all products, and a rational person would opt to purchase a medical scheme under this scenario given the similar costs and higher benefits of medical scheme options, Erasmus said (see graph 3).

As a rule of thumb, medical cover should not exceed 10 percent of a household’s disposable income, he said.

Erasmus said one of the main challenges facing both regulators and researchers is that neither the regulators nor the industry bodies have a detailed view of the health insurance sector. Regulators should be working together to assist all, but the current regulatory framework is “broken and fragmented”, he said.