Govt squeezing the life out of medical insurance

Jasson Urbach says SA consumers' options are being progressively limited through regulation

How forcing medical schemes to cover 271 Prescribed Minimum Benefits raises the price of healthcare

Drip by toxic drip, the South African government is slowly and systematically poisoning the private medical scheme and insurance industries in South Africa. With each new pronouncement by government, SA consumers’ options are increasingly being limited, which is bad news for anyone who, in future, becomes seriously ill.

The latest dose is Treasury’s budget announcement to reduce medical scheme tax credits, presumably with a view to eventually phasing them out completely. The slow and steady removal of medical scheme tax credits will inevitably lead to a reduction in the number of people covered by private medical schemes as premiums rise and become less affordable. This will increase the burden on already over-stretched, state-run hospitals and clinics, and will have the predictable consequence of worsening healthcare outcomes in SA.

This latest move follows the demarcation regulations introduced in April last year that purportedly draw a line between medical schemes and health insurance policies such as gap cover, hospital cash back plans and other primary health insurance products. Again, this has the effect of raising the cost of cover since health insurance products will now be regulated under the more onerous and costly provisions contained in the Medical Schemes Act (MSA).

Consider, for example, the case of a young man diagnosed in early 2018 with a potentially fatal, inoperable cancer. His only hope of survival is a course of new age cancer drugs. However, these drugs are very expensive, but his medical scheme will only cover half of the total cost of nearly R1 million. This leaves him with a shortfall of about R500,000 that he needs to cover out-of-pocket. He could claim the shortfall from his gap cover policy, but, whereas previously gap cover benefits were unlimited, under the new regulations, they are now limited to R150,000 per annum per beneficiary. On these rare occasions when highly specialised, expensive treatments are required, medical schemes cannot cover the full cost of the treatment as they run the risk of bankrupting the entire scheme and having to deny cover to all beneficiaries enrolled on that option.

Gap cover products were designed so that consumers can avail themselves of additional cover for catastrophic shortfalls. But the new legislation denies patients the right to insure themselves comprehensively against such catastrophes, and thus denies them their right to access healthcare. The market, historically, recognised the need and developed products to overcome such shortfalls, but now government is preventing insurers from meeting the real needs of consumers. Why would a government be so intent on interfering with mutually beneficial contracts and denying people the right to cover themselves when catastrophe strikes? Especially when it would lessen the pressure on the government-run provision of services to have more people covered by private insurance.

The fundamental problem yet to be openly identified, let alone resolved, is the principle of so-called “social solidarity” contained in the Medical Schemes Act. The Treasury states, “[Health insurance products] must operate within a framework whereby they complement medical schemes and support the social solidarity principle embodied in medical schemes”.

Four changes contained in the MSA that drastically increased the cost of providing medical scheme coverage were: open enrolment, community rating, statutory solvency requirements and the introduction of a comprehensive package of hospital and outpatient services that all schemes are compelled to provide — referred to as prescribed minimum benefits (PMBs).

For beneficiaries at the low end of the market, typically the young and healthy, PMBs are neither necessary nor appropriate. Instead, policies that predominantly cover accidental risks tend to appeal to younger people. Policies covering mainly chronic conditions tend to appeal to older people. However, the government’s list of PMBs applies to all individuals regardless of age, sex or health status and whether or not they actually need the cover. Like any kind of insurance, for medical schemes to provide extra cover, they must charge higher premiums, and therefore, not surprisingly, these PMBs raise the predicted costs of every option. Indeed, the average cost of providing PMBs alone amounts to R680 per beneficiary per month and necessarily precludes low-income earners from joining medical schemes.

The situation the demarcation regulations seek to remedy would never have arisen if “social solidarity” had not been adopted. They effectively stopped medical scheme actuaries from devising policies to suit low-income earners. The only real solution would be to eradicate the cause; to deregulate and scrap the dubious principle of social solidarity that applies to private medical scheme arrangements. At the very least, government should exempt certain schemes at the low end of the market from PMBs to enable actuaries to devise options that cater for low income individuals.

Most wealthy people will continue their medical scheme membership and will be able to comply with the new regulations. But poor and middle-income South Africans will not be able to afford this form of social engineering and will increasingly be denied their constitutional rights of freedom of association, access to quality healthcare and the protection of their private property.

Government officials and their aides seem incapable or unwilling to appreciate the role of the private health insurance market in financing healthcare. Future healthcare reforms must recognise the positive role played by the private sector. Private healthcare financing increases access to high-quality care, improves consumer choice and leads to greater health system responsiveness.

Jasson Urbach is a director of the Free Market Foundation.