The Financial Intermediary Association (FIA) is extremely concerned by the Council for Medical Schemes (CMS) announcement that it plans to eliminate low-cost benefit options (LCBOs), without a suitable alternative yet being in place.
The Registrar of Medical Schemes notified the healthcare and insurance industries in December last year that LCBOs, exempted from the Medical Schemes Act, will not be allowed after March 2021.
During public briefings sessions – held 23-24 January this year – attended by insurance companies, medical schemes, intermediary organisations, and brokers, it became evident that the CMS is committed to enforcing a system in which any entity carrying out the business of a medical scheme must be registered as a medical scheme.
While media reports suggest that the CMS may reconsider its view, the council’s Circular 80 stipulates firmly and clearly the cancellation of LCBOs, with no scope for consultation or negotiation. A different stance from the registrar will be welcomed by the FIA, but that will require an amendment or a withdrawal of Circular 80.
According to the CMS' own estimates, more than 500 000 families rely on these products for cover against unforeseen illnesses, which means that half a million South African families will be left financially destitute should they fall ill without the cover. This goes against the right of low-income earners, the most vulnerable among the employed, to achieve financial risk protection in the private sector.
Health insurance products co-exist with medical schemes to strengthen the National Health Policy by ensuring that policyholders are not a drain on the public health system, and no tax rebate or allocation is received by policyholders.
If LCBOs were to be extended to the entire market of individuals who are employed but not insured, it is estimated that the current public funding per capita will increase by more than 20%. Moreover, contributions to health insurance products are voluntary and a key instrument to secure financial risk protection.
CMS statement: The CMS has empirical evidence that LCBOs offer poor value.
FIA reply: The research the CMS relies on is biased towards medical schemes. The research was based, as stated in Appendix A of Circular 82 of 2019 under the heading: “Financial statement analysis – review of product value” on the financial statements. The CMS confirmed in its public sessions that only seven financial statements were used. However, financial statements cannot be relied upon to draw any credible analysis of underlying product value.
CMS statement: Only people with a household income of above R 9 000 per month can afford to belong to LCBOs. Therefore, LCBOs are not efficient to cover low income earners.
FIA reply: This statement is incorrect for the following reasons:
- The CMS ignored the fact that most of these products are fully or partially subsidised by employers
- The CMS presented evidence in its public consultation sessions that most policyholders are single members. However, the figures presented by the CMS are for a family of three
- The CMS only showed the affordability for the most expensive product range and ignored other, more affordable products
If these changes are considered, the affordability curve will indicate that LCBOs are affordable to most employed people.
CMS statement: The claims ratio of medical schemes is higher than that of LCBOs. Therefore, medical schemes offer better value.
FIA reply: This is incorrect because if this is to be a criterion of value, a medical scheme that pays 120% of its income to benefits will offer the highest value. Such a medical scheme will not be sustainable. Furthermore, such a statement ignores the benefit set, how claims are assessed and managed, and what restrictions are placed on claims. Society consumes a wide range of consumer goods, from expensive to cheap. Consumers who can only afford cheaper benefits will not necessarily agree that the products they choose are inferior. A person who can only afford a pre-owned, entry level car may attach more value to that car, than an owner of a brand new, top of the range luxury car. The reason may be that for the entry level car owner this is his or her only means of safe transport, while the luxury car owner may own a few cars.
CMS statement: The percentage of non-healthcare expenses in health insurance products is considerably higher than in medical schemes.
FIA reply: In our assessment, confirmed by some of the commentators at the CMS information session, the actual rand amount should be assessed with the percentage of the premium. The CMS conceded that this should have been done. This analysis shows that the rand amounts to administer medical schemes and health insurance products are similar. There are also differences to the accounting practices of these products. Managed care expenses, to name one example, are treated as healthcare expenses by medical schemes. However, health insurance providers regard them as non-healthcare expenses. However, the FIA cannot condone exploitation of consumers in medical schemes. Health insurance products and regulatory intervention to protect consumers will always be supported.
CMS statement: The profit of medical schemes is higher than that of LCBO insurers. Medical schemes are not-for-profit entities, while health insurers are for-profit entities.
FIA reply: This is incorrect because if this is to be a criterion of value then a medical scheme that has a 2% operating deficit will offer the highest value. Such a medical scheme will not be sustainable.
While medical schemes are not-for-profit entities, their administrators and other service providers are entities that are established to make profit.The FIA considers proposing that the CMS desists from this approach and that health insurance products co-exist with medical schemes. However, the FIA proposes that steps be taken to strengthen the ability of medical schemes to offer LCBOs and compete with health insurers. The following are some of the proposals:
- Establish a new class of medical scheme option for low income earners. These options will form part of an existing medical scheme but buy-downs of pensioner members must be prevented. Only employees earning above a certain threshold and below a set threshold will be compelled to belong to this category of medical scheme
- Establish a different prescribed minimum benefit regime for low income medical scheme options
- Strengthen the role of brokers and employers to cover as many employees as possible and ensure that they are guided, educated and protected in terms of their rights
- Establishing a risk equalisation fund
The FIA will continue to constructively engage with the regulator and legislator to find sustainable solutions for the needs of millions of people on private medical schemes, primary care products and health insurance products. We see the devastating impact that ill health has on the economy and the members we serve. As such it is in our hands to jointly own the health crisis of South Africa and to constructively engage in finding sustainable solutions.