Figure 1: Timeline of key events shaping the Medical Schemes debate
History of key events shaping the Medical Schemes debate:
Figure 1 above provides a timeline of key regulatory events impacting upon the market for hospital cash plans. There has been a long history of regulation associated with medical schemes in South Africa, but the conflict between HCPs and medical schemes emerged as an issue for the Council of Medical Schemes (CMS) in the late 1990s/ early 2000s. At the heart of this conflict is the inability of the medical schemes industry to extend cover to the lower income portion of the market.
HCPs were initially sold as a bundled product by life companies and as such regulated as long term insurance products. As time progressed, the market become more competitive and short term insurers entered, introducing products that more closely matched the cost of medical treatments. At the same time, so-called "Gap Cover" emerged that covers the difference between the payouts of medical aids and actual costs, for example where specialists charge above the official medical aid rates. The fear from the medical scheme perspective was that these health insurance products would cannibalize the market.
In 2004 the CMS, FSB and the Life Offices' Association (LOA), the then industry representative body for long-term insurers, released a demarcation document to provide clarity to the definition of the "business of a medical scheme" as defined in the Medical Schemes Act (MSA). In the demarcation process it was generally accepted that the Medical Schemes Act would be interpreted to mean that all products aimed at meeting the cost of health care would fall within the business of a medical scheme.
This document included a demarcation guideline for long-term insurers illustrating the types of products that could be written within the confines of what is deemed to be outside the role of medical schemes. Most notably, the guidelines include that insurance benefits cannot be set on the basis of lists of procedures or services.
As such the CMS considered Gap Cover products to be non-compliant with the demarcation and in 2006 challenged the validity of these products in court. This gained widespread attention in South Africa based on court rulings in 2006 and 2008, which created space for interpretation of the regulations which has led to a wide variety of product offerings.
Release of the 2012 draft demarcation regulations:
In March 2012, National Treasury released draft regulations for public comment on the proposed revised demarcation between medical schemes and health insurance products. The implications of the new legislation were:
- Gap cover products would not be able to function in their current form under this proposed revised structure
- HCP products would become more expensive and would offer lower benefits.
Lighthouse on behalf of FinMark Trust engaged the CMS, National Treasury and FSB during the review of the proposed demarcation document via targeted meetings and presentations. The aim of these sessions was to highlight the potential value of HCPs and present the result of the 2012 research to the key decision makers on the demarcation commission. The interactions revealed two insights:
- Those drafting the legislation did not initially consider HCPs as a viable stop-gap for those that could not afford medical scheme membership. Rather, they viewed the main use of these products as income replacement products in the event that the insured would become unable to work.
- The aim of the demarcation was to provide protection to Medical Scheme risk pools from insurance products that could potentially lure the young and healthy away to cheap offerings. The intention was not to limit/impede products that offer value to those that could not afford medical scheme cover.
It is agreed both by insurers and legislators that HCPs are not the ideal vehicle to fund the healthcare needs of those than cannot afford a medical scheme. However, in the absence of any alternative low cost schemes, HCPs currently offer an effective interim solution.
Going Forward – revised demarcation regulations:
The view that HCPs currently offer an effective interim solution was reaffirmed in a press release by National Treasury on 15 October 2013. The press release provided an updated plan of the revised regulations and confirmed that the two key proposals that generated the most public response were the restrictions on Gap Cover and HCPs. As such it included that the revised regulations would allow for the continued sale of Gap Cover and HCPs, but defined regulatory product parameters will be set within which they must operate.
One of the main unanswered questions relating to the market for HCP products relates to the reason for policyholders to purchase the products and what the benefits are used for. FinMark Trust has recently initiated a second phase for this project aimed at identifying typical HCP policyholders, their reasons for buying HCPs and the uses to which the pay-outs are put. This analysis was conducted via focus group discussions with current and potential policyholders. It is expected that the results from this research will be an important next step in understanding the market and potential benefits of HCPs. The results are expected by early December 2013.