Concerned Medical Schemes Group
Submission to the Portfolio Committee on Health White Paper for the Transformation of the Health System in South Africa

March 16, 1998

Introduction
The medical schemes represented in this submission (Concerned Medical Schemes Group (COMS) and other schemes - most of whom are members of RAMS) represent in excess of 2.6 million medical scheme beneficiaries. This represents almost half of the entire private sector. (See Attachment 1). The COMS group in particular was formed in response to the proposed re-regulation of medical schemes to constructively engage with government. The aim of these schemes is to ensure that medical schemes play the appropriate role in the financing and delivery of healthcare in the private sector and provide the important safety valve for the public sector.

Medical schemes play an important role in the national healthcare environment. A medical schemes industry that can cover more people, be more affordable and solvent will assist government in meeting its broad policy objectives.

Our activities are in the private sector and therefore our submission is focused on those aspects that relate to the private sector. The White Paper does not deal in detail with the private sector but laws down certain principles as a foundation for re-regulation. Our response addresses these principles.

The Case For Re-Regulation Of Medical Schemes
The White Paper makes the case for re-regulation

"The following set of regulatory mechanisms are required to reverse the recent deregulation of the private health insurance market, which has resulted in serious instability, increasing costs and reduced coverage

We disagree with this view. The success of a private health insurance system must be measured by:

an increase in the number of people covered, and
a reduction in the inflation rate of the cost of cover, and
an increase in the financial stability of schemes.

The deregulation referred to effectively occurred in 1994 and hence too little time has emerged to properly ascertain its effects as the Registrar's latest statistics are up to 31 December 1995. However, these statistics illustrate positive trends emerging:

Source: Annual Reports - Registrar of Medical Schemes 1986 - 1996

These trends are encouraging. Regulation should support these trends and create a framework to enable medical schemes to meet the real challenges that lie These include increasing access to medical scheme cover, protecting the elderly so that they are not dumped onto the public sector, and positioning medical schemes to broaden coverage to sectors of the population that were previously denied access.

Principles Underlying Re-Regulation.
The basis for re-regulation of medical schemes is:

3.10.4 (iii) (a) medical schemes may not exclude an individual on the basis of health risk Contribution rates for the full package of benefits will be set according to income and number of dependants.

It is our view that if implemented simplistically and literally, the resulting environment would achieve exactly the opposite of what is intended - the number of people covered would decrease, the cost of cover would increase and medical schemes would suffer a solvency crisis. A number of models have been developed to illustrate this, but nothing is so convincing as seeing the impact of the principles in practice. The Australian model illustrates this:

FUND MEMBERSHIP HAS FALLEN
[Graph not included]

... PREMIUMS HAVE RISEN
[Graph not included]

... AND AFFORDABILITY HAS DECLINED
[Graph not included]

Why Are Premiums Rising So Fast?
The rapid growth in premiums has been interpreted by some as showing that the private system is either increasingly inefficient or anti-competitive, or both. The facts are inconvenient to such an interpretation.

The degree of competitive pressure on funds is greater than the relatively high level of concentration within state markets would suggest and has been increasing:

· There are no effective regulatory barriers, of a discriminatory kind, to the entry of new firms (or to the interstate expansion of existing ones). There are however, major regulatory constraints on all players - notably through community rating - which make the industry unattractive to enter and limit choice within the market.

Source: Paper by Commission of Enquiry of Australian Government to Investigate Impact of Recent Reforms

We argue that the current proposals would jeopardise the old and sick and increase the burden on the State. Importantly, it would hamper the ability of medical schemes to cover sectors of the population that were previously denied access to cover. (This is outlined in more detail in Attachment 2).

Why An Open Enrolment Flat Community Rated Environment Prejudices That Sector Of The Population That Was Previously Denied Access To Cover.
On the surface it would appear that creating open enrolment and flat community rating would make it easier for the previously uncovered population to gain access to medical schemes.

The reality is the opposite. Medical scheme coverage is voluntary and therefore the ability to cover more people will rely on schemes' ability to create coverage that provides value for money to those presently uncovered.

Approximately 80% of the covered population is white. The majority of the uninsured population is African. The table below clearly illustrates the difference in age between these two population groupings and translates into a substantial difference in ages between the covered and uncovered population.

Age Profile by Race 1995

Source: South African Survey 1996/97 (South African Institute of Race Relations)

In addition experience of schemes illustrates that consumption of healthcare is correlated to income levels. Based on this it is likely that that those currently not covered by medical schemes would consume less than those covered. This is simply because they are younger and consume less healthcare than those presently covered. A flat community rated system, as proposed in the White Paper would effectively force the previously uncovered population to subsidise today's covered population. This would penalise today's uncovered and incentivise them not to join.

Open enrolment increases costs by incentivising the healthy to delay joining and therefore accentuates the penalty on those currently uncovered.

So How Are the Aims to be Achieved?
The fact is that for a robust medical schemes environment to emerge, schemes must protect the old and sick and provide value for money to the young and healthy. The young and healthy provide schemes with the money to cover the old and sick. This requirement cannot be argued with - the challenge is how?

Government can achieve its aims of a robust medical schemes environment providing guaranteed access and ensuring affordability by moving from open enrolment and flat community rating toward guaranteed access and flexible community rating. This would provide a basis for regulation that would enable medical schemes to fulfil their role in broader government health policy.

Outlined in Attachment 2 is a possible solution based on guaranteed access by the industry and flexible community rating. Such a system regulated protection for today's old, tomorrow's sick and prohibits adjusting the cost of cover based on an individual's health status after joining and during his/her membership.

This is achieved through industry subsidisation of high risk members (who previously would have been refused cover) and flexible community rating that allows for some (regulated) flexibility to encourage people to join when young and healthy and thereby sustain the system.

Such an approach would achieve the desired result:

· guaranteed access to medical scheme coverage,
· protection for today's old to prevent dumping onto the state,
· ensuring that individuals covered by medical schemes are not prejudiced based on their health status, and
· flexibility and incentives to attract and retain the healthy so that there is sufficient money to cover the sick

It is not the only alternative, but illustrates the need for a more flexible framework than that specified in the White Paper.

It is our view that an environment outlined above would position medical schemes to commence attracting members from those sectors of the population that were previously uncovered.

Conclusion
We refute the claim in the White Paper that the recent deregulation has led to instability, increase in cost and a reduction of coverage. Emerging government statistics reveal the opposite. Furthermore, it is out view that the framework for re-regulation is too restrictive to achieve Government's broader health objectives. We support an environment based on guaranteed access as opposed to open enrolment and general community rating rather than flat community rating. Importantly, targeted regulation should focus on protecting today's old and tomorrow's sick.

Such an environment will enable medical schemes to fulfil their promise of lifetime affordable coverage and extend cover to more people.

Attachment 1
Organisations Represented in this Submission
AngloVaal
Aumed
Allcare
Chamber of Mines
Compcare & Status
D&E/Norwich Health
Edgars
Fedsure
Gencor
Liberty
Metlife
Momentum Health
Northern Medical Aid
Old Mutual
Sanlam Health
Southern Health Care
Visimed
Wooltru
TOTAL number of members: 2 643 851.00

Attachment 2

Three important questions:
1) Is it possible to support only one of open enrolment or flat community rating and not the other?
The answer simply is no. The two are inextricably linked. Open enrolment without flat community rating will allow schemes to price high risk members out of the market place, thereby nullifying open enrolment. On the other hand, flat community rating without open enrolment will allow schemes to decline any member that does not meet the profile of what the flat rates dictate. This results in cherry picking.

2) Are these issues as relevant for closed schemes as for open schemes?
Yes they are. Issues such as open enrolment and value for money are just as relevant for a closed scheme as an open scheme. Even if in the short term closed schemes can avoid certain aspects of the regulation, the spill over effect of reducing the number of covered lives and increasing the cost of cover will rapidly affect the solvency of closed schemes.

3) Do waiting periods and equalisation funds provide solutions?
Not entirely. Waiting periods are a very weak protection against adverse selection and will not provide powerful incentives for people to join when healthy. Equalisation funds do nothing to incentivise the young and healthy to join. In addition, they can only work with all schemes having the same benefit structure - not possible or desirable in such a diverse market.