Charlene Clayton

Low-income earners are a vast largely untapped market for the medical schemes industry. At the recent Discovery Health / Personal Finance Health Wise seminars, Penny Tlhabi, the managing director of the Board of Healthcare Funders, discussed the challenges schemes will have to overcome if they want to attract low-income members. The Department of Public Service and Administration's initiative to start a single medical scheme for all public servants is expected to be a catalyst for extending private healthcare to low-income groups. The proposed government scheme will be able to contract with a number of administrators, and is expected to use its large membership to negotiate a viable low-cost option. There is talk that this low-cost option could later be opened to all low-income earners - not just those in the public sector. The key issues driving the need to develop low-cost options for low-income earners are: the government's desire to redress past imbalances and ensure that all South Africans have access to quality healthcare; the move towards employment equity in the workplace; trade unions' demands for equal treatment for all employees; and, the deterioration of public health facilities, which is stimulating the demand for private healthcare. In addition, low-income options present the only real opportunity for growth in the medical schemes industry, as the higher-income market is already saturated. Despite the need for access to medical schemes, there has been little growth in new membership. The number of people who belong to medical schemes has remained more or less the same: there were about seven million members during 2001 - an increase of only 0.23 percent on 2000. These seven million members represent only 16 percent of the South African population. The medical schemes industry is highly competitive, with a substantial number of members moving between schemes. Research conducted by the Board of Healthcare Funders (BHF) last year showed that only three out of the 10 largest schemes surveyed increased their membership base. Despite medical scheme industry estimates that another seven million people could join low-cost medical scheme options, the uptake has been very slow, with only about 150 000 people currently in such options. Also, a significant portion of these new members consisted of people moving from one scheme to another, cheaper scheme, or from a high- to a low-cost option within their scheme. Reasons why people are not joining schemes include: shrinking employment in the formal sector of the economy; the unaffordability of membership; and, falling disposable incomes. Obstacles facing schemes The main objective of the Medical Schemes Act is to ensure that vulnerable groups, such as the elderly and people with chronic conditions, have healthcare cover. The Act made open enrolment and community rating compulsory for medical schemes. Open enrolment means you cannot be turned away by an open medical scheme that you want to join. Community rating means that schemes cannot make you pay a higher contribution because of your health or age. A scheme may only differentiate its contribution rates on the basis of your income and number of dependants. The Act also introduced a basket of essential benefits that all schemes have to provide, known as prescribed minimum benefits. However, while the medical schemes industry supports the objectives of the Act, the implementation of the legislation has had some unintended consequences, because membership of medical schemes is voluntary. One of these unintended consequences is that prescribed minimum benefits have made low-cost schemes unaffordable for low-income earners. In terms of the latest regulations under the Medical Schemes Act, the prescribed minimum benefits will be extended from January 2004 to included 25 common chronic conditions. In the past schemes have structured their benefits in such a way that many members who are in poor health are forced to join the more expensive options if, for example, they want to access chronic medicine benefits. This has forced members who cannot afford to pay the higher rates to buy down into the lower-cost options. As a result, the low-cost options have a lot less healthy members and their claims soar. The ultimate consequence of this is that the contributions on these options increase, making them less affordable. The Act requires that, by the end of 2004, schemes keep 25 percent of their gross contributions in reserve. Schemes have had to increase contributions to meet the reserve requirements, and these requirements do not take into account the real level of financial risk that schemes face. This is a highly significant driver of costs and it does not encourage growth in scheme membership. Other challenges facing medical schemes include: a growing burden of diseases such as tuberculosis, HIV/AIDS and malaria; a shortage of medical specialists in South Africa; and, a lack of competition among healthcare providers. The growing concentration of power among providers has made it difficult for schemes to enter into contracts with specialists and private hospitals. There is also a lack of hospital networks that are willing and able to manage the risks faced by medical schemes and, ultimately, members. This prevents low-cost options from lowering their costs by, for example, entering into a contract with a hospital in terms of which the hospital will treat its members for a fixed fee per day or per operation, and in this way share the risk between the scheme and the service provider. Costs in the private aging healthcare sector are increasing dramatically - between 1982 and 1997, the increase in real terms was 517 percent. These increases are being driven by the cost of new technology and drugs, the population and the fee-for-service system. (In the fee-for-service system, members pay a fee, set by the healthcare provider, for services they receive. Schemes and members have little control over the fee and there is a tendency by the service providers to overservice.) There are no real incentives, such as tax breaks, for low-income earners to belong to a medical scheme rather than rely on public healthcare.What is needed for low-cost schemes to succeed? A new business model must be developed for low-cost medical schemes so they can become viable. The model will require schemes to forge strategic partnerships with carefully selected healthcare providers on the basis of a shared vision, the ability to practise cost-effective medicine and integrity. The most important issue is the quality of the providers in the network. Another critical issue is information systems and how information is used to develop incentives for providers to practise cost-effective care.Measuring the quality of healthcare is also very important because, if used inappropriately, risk-sharing models may affect the quality of care of members. For example, if a doctor is paid a fixed fee per month to service all the members of a particular medical scheme, he or she may be incentivised to underservice his patients in an effort to maximise his profits. Incentives for administrators, consumers, schemes, and providers should be aligned through risk-sharing so that each one assumes a portion of the risk. It was also necessary for low-cost schemes to provide innovative, pro-active and well-managed HIV/AIDS benefits, and innovative benefits based on clinical best practice rather than crude financial limits, and for there to be incentives, including tax subsidies, for employers and employees to obtain and retain medical scheme cover. The use of co-payments and deductibles (where members pay a portion of the account) - where appropriate - for elective procedures, is important to expose consumers to the costs of healthcare and encourage them to act prudently. Furthermore, education programmes for members that enable them to make informed choices are critical to the success of these products, In conclusion there is definitely is a business opportunity for low-cost schemes, but it requires innovation and a can-do attitude. (Source: Personal Finance, 16 August 2003).

The Medical Schemes Act Amendment Bill will drive up the costs of belonging to a medical scheme and deny you the opportunity of buying health insurance to supplement your medical cover, the insurance industry says. Both the long-term and the short-term insurance industries this week spelt out a number of serious repercussions for consumers if the latest round of medical legislation is implemented. Gerhard Joubert, the executive director of the Life Offices Association (LOA), says the cost of healthcare is increasing at an alarming rate for South African consumers. He says there is no doubt that the Medical Schemes Act and its regulations are the main culprits. Costs to members will continue to increase if schemes cannot prevent opportunistic scheme-hopping, impose exclusions for known pre-existing illnesses, and charge more if people join schemes only when they are already sick. If costs continue to increase, healthy people are going to opt out of medical schemes because they will not be getting value for money. The insurance industry's chief concern is that health insurance could be outlawed if the amendments are accepted. Caroline da Silva, an executive of the South African Insurance Association - which represents the short-term insurance industry - says medical schemes cannot provide for all the financial losses that you could face as a result of sickness or injury. Yet the proposed amendments stipulate that you may not buy additional cover for medical costs via health insurance. The need to keep membership affordable has resulted in many schemes cutting their benefits to retain their members. This has meant that comprehensive benefits - for example, the loss of income after an accident - are only available through supplementary cover. Da Silva says the hospital cover of millions of policyholders would become illegal if the Medical Schemes Act Amendment Bill was signed into law, as would travel insurance policies, which provide for emergency healthcare and ambulance services to travellers outside South Africa. Hospital policyholders include many old people and people who will never be medical scheme members because of their low income levels. The net effect is that the best schemes would cost more, because they offer the best benefits. These schemes would be the most attractive to members, who would inevitably claim more than they pay. To counter this, schemes would either have to increase premiums or decrease benefits, which is exactly the opposite of what the legislation sets out to achieve. (Source: Personal Finance, 4 August 2001)

The Medical Schemes Act and its regulations are not the cost drivers of medical schemes, even though the legislation has been made the scapegoat, Patrick Masobe, the chief executive of the Council for Medical Schemes and the Medical Schemes Registrar, says. Escalating costs: The Medical Schemes Act of 1998 came into effect after a 10-year period of deregulation. During this period contribution levels escalated and dubious practices - such as basing contributions on members' risks - became rife. To single out the Act as the driver behind the high costs is to take a narrow view, Masobe says, as it conveniently chooses to ignore the cumulative years of a deregulated environment and its effects on the present scenario. Prior to the Act, schemes were never given an incentive to contain medical costs or to manage the health of their members. They were run more to benefit particular entities, and the interests of members were not paramount. Health insurance: Masobe says the council's position on the different roles of the medical scheme business and that of health insurance, as agreed with the Financial Services Board, remains unchanged. The council believes that the published amendment is consistent with that agreement. Reinsurance: The council is determined to stick to its guns on the need to examine medical schemes' reinsurance contracts. Reinsurance contracts have been abused to the detriment of many medical schemes and their members. It is also important to highlight that the council is not against reinsurance and will allow it in many cases. (Source: Personal Finance, 4 August 2001)