The Council for Medical Schemes’ CMS News News...CMS News Issue 2 • November 2017 The Council...

CMS NewsIssue 2 • November 2017

The Council for Medical Schemes’

NATIONAL HEALTH INSURANCE:Risk pooling in healthcare financing

Overview: Industry performance 2016/17

• Medical Schemes utilisation trends in 2016 • Implementation of the Demarcation Regulations• Financial performance of medical schemes in 2016• Farewell message from Chairperson & Deputy

CONTRIBUTION INCREASES & THE CPI

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CMS News • www.medicalschemes.com • 3

In this special edition of the CMS News we provide our readers with a summary of some of the key features on the industry performance for the 2016/17 financial year.

The article on medical schemes utili-sation trends in 2016 sheds some light on how and where the health-care rand was spent in respect of health services accessed by mem-bers. The article also shares some observations on demand and supply patterns for health services across the provinces.

We also provide a synopsis on the financial performance of medical schemes in 2016, including total con-tributions collected from members by the industry, expenditure trends, as well as accumulated funds and solvency trends.

A contribution increase rate higher than the projected headline infla-tion rate points out to a need for some level of intervention to ensure that medical schemes contributions remain affordable for the ordinary member. We take a closer look at the issue of contribution increases and the consumer price index (CPI).

An article by the CMS NHI Advisory Committee ‘Risk pooling in health-care financing’, gives some insights

on the CMS’ views on how risk pool-ing can serve as one of the key tools to finance the country’s healthcare system, towards the realisation of the Universal Health Coverage (UHC) goals. We also bring you an update on the latest developments in the implementation of the Demarcation Regulations.

A recent ruling by the Appeal Board against a blanket appointment of every public hospital in the coun-try as a Designated Service Provider (DSP) for the treatment of prescribed minimum benefit (PMB) conditions, without a proper agreement in place, is good news for the affected medi-cal scheme members. As pointed out by the judge in this matter, it will be unfair to members who pay premiums to access quality health-care, efficiently and without delay, if they are compelled to compete with the majority of the population for the scarce public resources at a time when they need medical care. We provide more details on the matter.

After serving in the Council (Board) of the CMS for many years, the outgoing Chairperson and Deputy Chairperson bid their farewell to the CMS. Their messages are shared in this edition. - Editor

EDITORIAL

05 Contribution increases and the CPI Fundamental principles of the CMS on medical schemes cost increase assumptions

09 Medical schemes utilisation trends in 2016 Trends on the utilisation of health services for the 2016/17 financial year.

11 Financial performance of medical schemes in 2016 Contribution income and healthcare expenditure for 2016/17

13 Risk pooling in healthcare financing CMS’ views on risk pooling in pursuit of Universal Health Coverage

18 Implementation of Demarcation Progress on ensuring compliance with the Demarcation Regulations since 1 April 2017.

20 Farewell message from outgoing Chairperson & Deputy Chairperson of Council Farewell to the CMS after many years with the regulator

22 Appeal Board decision on selection of DSPs The Appeal Board’s verdict in favour of the CMS on the selection of DSPs

CONTENTS

CMS AddressBlock A Eco Glades 2 Office Park420 Witch-Hazel AvenueEco ParkCenturion 0157

CopyrightCMS News is published by the Council for Medical Schemes (CMS). All material is copyrighted and cannot be used without the written permission from the publisher. The views expressed by external stake-holders do not necessarily reflect the views of the CMS. All material is correct at the time of going to print.

Editorial CommitteeDr Elsabé ConradieDr Sipho KabaneDr Anton de VilliersParesh PremaThembekile PhaswaneNondumiso KhumaloHannelie CorneliusPulane MolefeSilindubuhle Mnqeta

EditorPulane Molefe

ContributorsDr Anton de VilliersTebogo MaziyaStephen MmatliMpho SehlohoMashilo LebohoSilindubuhle MnqetaCMS NHI Committee members


MASHILO LEBOHO

AND MPHO SEHLOHO,

SENIOR ANALYSTS: BMU

The average industry risk contribution increase for the 2017 benefit year was 11.3%. The contribution increase rate was higher than the projected average headline inflation rate of 6.0% as measured by the Consumer Price Index (CPI). Contribution increases are generally scheme dependent, and are a function of solvency ratio, risk profile, claims ratio, and utilisation.

CONTRIBUTION INCREASES AND THE CPI

6 • CMS News • www.medicalschemes.com

THE CMS GUIDANCE ON MEDICAL SCHEMES COST INCREASE ASSUMPTIONS

Every year the Council for medical schemes (CMS) publishes an industry guidance note on contribution increases and benefit changes for the following year. The purpose of the notice is to provide medical schemes with guidance on the assumptions upon which the determination of any proposed contribution increases for the following year, should be based. This is in line with the CMS’ mandate in terms of the Medical Schemes Act, No. 131 of 1998 (the Act), to protect the interests of members by facilitating access to affordable quality healthcare; as well as promoting the long term sustainability of the industry on the one hand.

During the period under review the CMS published Circular 48 of 2016, in terms of which medical schemes were advised to limit contribution increases for the 2017 benefit year to 6.0% in line with the CPI. Similarly, Circular 45 of 2017 provided the industry with guide-lines for contributions and benefits changes for the ensuing 2018 benefit year. The CMS furthermore rec-ommended that cost increase assumptions for items such as hospital fees, pharmaceutical products and therapeutic appliances should also be limited to the CPI projections. Schemes were also advised to ensure that assumed increases for non-healthcare expenditure i.e. administration and managed care fees, should not be greater than the CPI projections.

The CMS’ Benefits Management Unit (BMU), considers application from medical schemes and makes assess-ment looking at the parity between the required con-tribution change and benefit entitlement; and if the scheme’s rules comply with policy, consideration is given to the fairness in the implementation of the pre-scribed minimum benefits (PMBs), CDLs, benefit limits, thresholds, co-payments, as well as the preferred pro-vider and managed care arrangements (drug formular-ies, treatment protocols etc.).

The analysis is concluded in line with the requirements of the Act, Section 24(2) (e) which states “…that the medical scheme does not or will not unfairly discrimi-nate directly or indirectly against any person on one or more arbitrary grounds…” and Section 31(3) (a) “…will not be unfair to members or will not render the rules of the medical scheme inconsistent with this Act…”. This includes the provisions of Section 29(1)(n), which states “…the determination of contributions on the basis of income or the number of dependents or both the income and the number of dependents, and shall not provide for any other grounds…”

UNDERLYING PRINCIPLES

The CMS’ recommendations for contribution increase assumptions takes into consideration both the domes-tic and global macro-economic indicators that have a bearing on the healthcare sector. These key eco-nomic indicators include among others, the real Gross Domestic Product (GDP) growth, household consump-tion, the exchange rate, the level of interest rate, and employment statistics. The recommendations also take into account the historical CPI data as published by Statistics South Africa (StatsSA) as well as inflationary expectations according to the forecast by the South African Reserve Bank (SARB) and the National Treasury. Consideration is also given to the requirements of the of the Advisory Practice Note (APN) published by the Actuarial Society of South Africa (ASSA), and specifically APN303 – Advice to South African Medical Schemes on Adequacy of Contributions (replaces PGN303).

The CMS’ recommendations are also critically linked to affordability constraints and expected member salary increases in the economy. The CMS’ proposition is that contribution rate increases in excess of the CPI, contrib-ute to an increase of the financial burden on members of medical schemes. The high cost of private healthcare serves as a barrier to potential new entrants to the mar-ket, thus denying access to healthcare by the majority of the country’s citizens. Limited growth within the medi-cal schemes industry further threatens the long term sustainability of the sector.

HEADLINE INFLATIONARY EXPECTATIONS

Figure 1 depicts the year-on-year inflation data as pub-lished by StatsSA compared to the SARB inflation target, as published in the CMS Circular 45 of 2017. According to the inflation forecast of the SARB Monetary Policy Committee (MPC), as contained in its May 2017 policy statement, headline inflation is projected to average 5.7% in 2017, before easing further to 5.3% in 2018. Further, according to the National Treasury inflation is projected to be at 6.4% in 2017, before moderating to 5.7% in 2018. The CMS accordingly recommended that industry cost increase assumptions for the 2018 benefit year must be limited to 5.7% for each individual cost driver, in line with the CPI.

HISTORICAL CONTRIBUTION RATE INCREASES RELATIVE TO CONSUMER INFLATION

Fgure 2 illustrates historical divergence between con-tribution rate increases as approved by the CMS from 2009 to 2017, and consumer inflation as reported by StatsSA.


It is evident from the graph that overall medical scheme contri-bution rate increases have con-sistently outpaced the CPI. The difference between the CPI and contributions increase rate was on average 4.4% since 2009. This trend continued during the peri-od under review, with 2017 con-tribution rising by 4.9% above the projected CPI. Notwithstanding other industry specific cost-push factors, the current trend where annual contribution increases consistently outpace the CPI, remain a major concern for the CMS, as it threatens the long term viability of the industry.

THE CMS’ REVIEW OF CONTRIBUTION INCREASE ASSUMPTIONS

In March 2017 the CMS pub-lished Circular 23 of 2017, which evaluated the industry cost increase assumptions submit-ted by medical schemes for the 2017 financial year. The assump-tions were evaluated against the industry guidelines as con-tained in Circular 48 of 2016. The results showed that the tar-iff increase assumed by many

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medical schemes was closer to the CMS’ recommendation of 6%. However, an additional 3.96% was assumed for changes in utilisation, which resulted in the total cost increase assumptions of 11.31% for the 2017 benefit year. Incidentally, the average industry risk contribution rate increase for 2017 was 11.3%. While medical schemes contribution increases are generally scheme dependent and are a function of solvency ratio, risk profile, claims ratio and utilisation, increases above the CPI remain a concern to the CMS.

The CMS is also aware of other factors that have con-tributed to the increasing costs of private healthcare, including the absence of proper tariff determination mechanism and lack of provider regulations. However, the CMS is concerned that utilisation estimates submit-ted by some medical schemes do not correlate with worsening or improving demographic and disease pro-

files. It is evident that the healthcare sector remains plagued by some deeply rooted market failures. Medical schemes seems to be generally price takers in the mar-ket, with even large medical schemes and administra-tors failing to demonstrate tangible benefits for their members from their economies of scale.

THE CPI AS A PROXY MEASURE FOR THE AFFORDABILITY OF MEDICAL SCHEMES CONTRIBUTIONS

The Council for medical schemes uses the CPI as a proxy measure for the affordability of medical schemes con-tributions. This is primarily based on the fact that most sectors within the economy experience CPI-linked salary

Above: Figure 1 - Year on year inflation data compared to SARB inflation targetBelow: Figure 2 - Divergence between contribution rate increases


increases, if any. The current high rate of contribution increases relative to the CPI and general salary growth trends, raises serious concerns due to the fact that this is clearly unaffordable.

The findings of the healthcare consumer survey con-ducted by the Health Market Inquiry (HMI) in 2016 are telling on this matter. These shows that about 65% of individuals interviewed highlighted affordability and job losses as reasons for leaving the medical schemes environment, while 5.6% complained about value for money (HMI, 2016).

Whilst the Council for Medical Schemes is aware of the impact of other unique industry specific cost-push fac-tors, the impact of other market inefficiencies driving up costs in the industry cannot be ignored.

Above inflationary contribution increases place an undue financial burden on members of medical schemes and their beneficiaries. It also leads to limited financial protection for the members, particularly considering the fact that young and healthy members tend to be more sensitive to excessive contribution increases. The result is likely to lead to possible member downgrades from comprehensive options to lower options, as well as the risk of a surge in dropout rates.

The current unstable conditions in the labor market which is characterised by rising unemployment, coupled with the economy’s swaying between periods of techni-cal recession and tepid growth, means that consumers in general remain vulnerable.

The threat of possible further downgrade of South Africa’s rand-denominated bonds to sub-investment, implies that the threat of more job cuts in the formal sector still looms large. Under such adverse economic conditions, employers and trade unions are forced to make tradeoffs with employees, and may sometimes be forced to forgo annual salary increases in order to pre-serve employment. It is therefore unrealistic for mem-bers of medical schemes’ Board of Trustees to continue to saddle their members with above CPI contribution increases, irrespective of the economic climate.

A NEED FOR MEMBER ACTIVISM IN THE SCHEME’S PRICING DECISIONS

Section 57 of the Act prescribe that 50% of the mem-bers of the Board of Trustees must be elected from members of the scheme. In the light of the persistent above inflationary contribution rate increases over the past years, it is clear that members continue to bear the financial burden for some of the market failures in the

sector. It is crucial that members must use their proxy on the boards of medical schemes to influence amongst other things, their annual contribution increase.

A medical scheme is run on behalf of its members and it is therefore within the members’ rights to insist that their scheme rules must make provision for mandatory presentation and interrogation of the annual contribu-tion increases at the Annual General Meeting (AGM).

The scheme rule can also prescribe that contribution increase rate above a certain threshold, must be sub-ject to the concurrence and approval by members at an AGM. This process will allow members an opportunity to further scrutinise the scheme’s overall pricing deci-sion, including executive remuneration and increase in non-health expenditure.

CONCLUSION

The CMS remains concerned about the adverse effect of the uncontrolled costs within the private healthcare sec-tor. The current trend of annual contribution increase rate consistently outpacing the CPI is not sustainable.

Coupled with the high unemployment rate in the coun-try, and the persistent threat of further job losses in the formal sector, all these factors pose a threat to the long term sustainability of the medical schemes industry. Market failures within the sector continue to hinder the majority of the South African population from accessing healthcare due to affordability constraints.

Contribution rate increases in excess of the CPI also contribute to stoking up general price inflation in the economy, since medical scheme contribution forms part of the StatsSA CPI health basket. Once the rate of general price increase in the economy exceed the SARB target, the central bank has no option but to hike inter-est rates. This becomes a twofold blow for members of medical schemes who must then contend with high medical scheme premiums, and the rising costs of ser-vicing their debts.

This scenario clearly shows that it is in the interest of everybody that contribution increase rates must be kept in line with the CPI; and that the inflation expectations must be anchored in line with SARB inflation target. Accordingly, it is imperative that Trustees, Principal Officers and other Stakeholders must review their cur-rent business models and find efficient, innovative and affordable ways of providing healthcare.


NUMBER OF MEDICAL SCHEMES AND BENEFICIARIES

Overall, the industry experienced a year-on-year increase of 0.78 % in the total number of medical scheme beneficiaries, from 8.809 million in December 2015 to 8.878 million beneficiaries in December 2016. The total number of beneficiaries of restricted schemes increased by 1.39% compared to a 0.30% increase in the beneficiaries of open schemes.

The number of medical schemes registered with the CMS as at 31 December 2016 was 82, down from 83, as a result of the amalgamation of LMS Medical Fund and Bonitas Medical Scheme on 1 October 2016. This included a total of 22 open schemes and 60 restricted schemes.

HEALTHCARE BENEFITS PAID

Expenditure on healthcare benefits increased (in nomi-nal terms) by 8.87% from R138.89 billion in 2015 to R151.21 billion in 2016. Total hospital expenditure by medical schemes amounted to R56.61 billion or 37.44% of the R151.21 billion that medical schemes paid to all healthcare providers in 2016. Expenditure on private hospitals increased by 9.80% to R56.32 billion, up from R51.29 billion in 2015.

The amount paid to supplementary and allied health professionals in 2016 increased by 8.01% from R10.15 billion in 2015 to R10.97 billion in 2016. This category accounted for 7.25% of all benefits paid by schemes in 2016.

Payments to all specialists (anaesthetists, medical spe-cialists, pathology services, radiology services and surgi-cal specialists) amounted to R36.32 billion or 24.02% of total healthcare benefits paid in 2016. This amount increased by 9.92% from R33.04 billion paid in 2015.

Payments to medical specialists amounted to R10.24 billion or 6.78% of total healthcare benefits paid in 2016. About 51.33% of the R10.16 billion paid to medi-cal specialists in 2016 was paid to those operating in hospitals.

Expenditure on pathology services amounted to R8.16 billion or 5.40% of healthcare benefits paid while expen-diture on surgical specialists and radiology services amounted to R8.04 billion and R6.69 billion respectively.

OTHER HEALTHCARE EXPENDITURE

Expenditure on general practitioners (GPs) amounted to R8.96 billion or 5.93% of healthcare benefits paid, representing an increase of 3.25% on the 2015 figure of R8.68 billion. Only 9.92% of the R8.96 billion paid to GPs in 2016 was paid to those operating in hospitals.

Medicines and other consumables dispensed by phar-macists and providers other than hospitals amounted to R23.95 billion or 15.84% of the total healthcare benefits paid. This represents an increase of 4.65% compared to R22.89 billion spent in 2015.

The amount spent on specialists increased in real terms from R3769.11 per average beneficiary per annum (pabpa) in 2015 to R4 121.31 pabpa in 2016. This con-stituted an annual increase of R9.34%.

PRESCRIBED MINIMUM BENEFITS

Expenditure on prescribed minimum benefits (PMBs) by medical schemes amounted to R73.1 billion in 2016. The total risk benefits paid in 2016 was R136 billion. The expenditure on PMB-related healthcare benefits constituted 54% of the total risk benefits paid. This figure was 51% in 2015.

MEDICAL SCHEMES UTILISATION TRENDS IN 2016Against the backdrop of a constantly changing health policy environment, the CMS continued to provide regulatory supervision to the 82 medical schemes registered in the country during the 2016/17 period, enforcing compliance with statutory provisions; with the key objective of ensuring that medical schemes members’ interests are protected.


The expenditure on PMBs is mainly driven by a combi-nation of the factors outlined below:• Beneficiary profile which is based on the level of

cross subsidisation between the young and the old; the sick and the healthy.

• Prevalence of chronic conditions and disease bur-den.

• Expenditure on treatment, which is strongly linked to contracting between schemes and providers.

QUALITY OF CARE

The CMS embarked on an industry-wide consultative process to establish the best standard of care that is clinically and cost effective in medical schemes. The process identified appropriate process and outcome indicators for the management of CDL conditions. A total of 14 CDL conditions have gone through the pro-cess.

With coverage ratios as high as 75%, HIV is the best managed CDL condition. The coverage ratios for other chronic conditions were found to be disappointing. Hypertension is the most prevalent chronic condition across medical scheme beneficiaries. About 71% of hypertensive patients receive hypertension treatment.

Considering the data alone, it appears that the registra-tion of hypertensive patients on the CDL management program is presently aimed at giving patients access to drugs rather than at managing the conditions.

OBSERVATIONS ON DEMAND AND SUPPLY

There is a consistent pattern in the levels of healthcare demand (visits per 10 000 beneficiaries), relative to the supply of healthcare providers.

Compared to other provinces, the level of demand is notably higher in Gauteng. Some provinces though, may have higher levels of healthcare providers, yet lower utilisation demand. These are KwaZulu-Natal, Free State and Western Cape provinces. Mpumalanga, Northern Cape and North West provinces have rela-tively lower utilisation levels.

In some provinces, these trends may be more associ-ated with the size of beneficiaries per province, than the demand for healthcare services.

At a national level, the level of physician density ratio is relatively lower compared to the global level, which is 12 physicians per 10 000 beneficiaries.

Above: Figure 3 - Scatter Plot Diagram of Patient Visits & Medical Specialists per 10 000 benefi ciaries by Province (2016)


CONTRIBUTIONS AND CLAIMS

The medical schemes industry experienced an increase of 8.1% in gross contributions as at end of December 2016. Gross contribu-tions went up from R151.6 billion in December 2015, to R163.9 bil-lion in December 2016. Risk con-tributions (excluding medical sav-ings accounts contributions) on the other hand, increased by 8.1% to R147.8 billion up from R136.7 billion in 2015. Gross contribu-tions per average life covered i.e. per average beneficiary per month (pabpm) increased by 7.2% to R1 543.2 from R1 439.8 in 2015.

Gross relevant healthcare expendi-ture i.e. claims incurred, increased by 8.9% to R151.2 billion from R138.9 billion in 2015. The total gross relevant healthcare expendi-ture incurred per average life cov-ered increased by 7.9% to R1 423.6 from R1 319.1 in 2015.Risk claims increased by 8.9 % to R 136.0 billion from R 124.9 billion in 2015.

The relationship between contribu-tions and claims is referred to as the claims ratio, which was report-ed at 92.1% (2015: 91.4%) for the whole industry. In essence, for every healthcare rand spent, 92.1 cents went towards the payment of claims.

NON-HEALTHCARE EXPENDITURE

Non-healthcare expenditure is

loosely defined as any expenditure that is not related to relevant health-care services. It consists mainly of administration expenditure, com-missions and service fees paid to brokers, other distribution costs and impaired receivables.

The total expenditure on non-healthcare expenditure for all medi-cal schemes at the end of 2016 was reported at R14.1 billion. This constitutes an increase of 8.5%, up from R13.0 billion in 2015. As a function of the notional health-care rand, non-healthcare expendi-ture constituted 9.6 cents. The cost per average life for non-healthcare expenditure increased marginally by 1.2% to R1 594.7 in 2016, up from R1 575.6 in 2015.

Gross Administration expenditure (GAE), which includes expenses such as administration fees, mar-

keting and advertising, Principal Officer and Board of Trustees fees and other operational costs, con-stituted the largest component of non-healthcare expenditure for all medical schemes, this grew by 8.1% to R11.9 billion between December 2015, when it was reported at R11.0 billion, and December 2016.

Affordability of medical schemes has increasingly become an impor-tant consideration in the private healthcare sector. When medical schemes determine premiums, fac-tors such as the claims experience of the scheme, operational costs and level of reserving required are taken into consideration. It is therefore essential to ensure that monies col-lected from members are directed at the appropriate interventions and expenditure, and that non-health-care expenditure is managed judi-ciously.

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OVERVIEW OF THE FINANCIAL PERFORMANCE OF MEDICAL SCHEMES IN 2016

Above: Figure 4 - Performance of medical schemes: 2016NHC= Net healthcare results


The rate of increase in non-health-care expenditure has decreased sub-stantially between 2000 and 2016, more so in recent years; particu-larly given that this expenditure was increasing at rates that exceeded the rate of increase in contributions in the earlier years. Non-healthcare expenditure has in fact reduced in real terms over the period.

There are, however, still individual schemes and non-healthcare items – such as advertising and market-ing, consulting and legal fees, and trustee remuneration – that con-tinue to show upward trends and thus require attention. In recent years, the remuneration of Trustees and Principal Officers of medi-cal schemes, has come under the spotlight, with increases being sig-nificantly higher than inflation, as well as the expenditure on Annual General Meeting (AGM) costs. In the interests of member protection, it is important that such expenditure is associated with a discernible value proposition.

NET HEALTHCARE RESULTS AND IMPACT ON RESERVES

After paying for relevant healthcare services and operational expenses, medical schemes incurred a deficit (net healthcare result) of R2.4 bil-lion before investment income. The deterioration in this regard is mainly due to the worsening claims ratios experienced by all schemes from 91.4% in 2015 to 92.1% in 2016.

After investment income and con-solidation adjustments, a surplus of R2.0 billion was incurred, indi-cating the reliance on investment and other income. In other words, R2.0 billion from the operations of medical schemes in the 2016 finan-cial year was contributed to general reserves (also known as accumu-lated funds) of the industry.

The reserves serve to protect mem-bers’ interests and to guarantee the continued operation of schemes. They are also a buffer against unfore-

seen and adverse performance of the medical scheme. Accumulated funds, when expressed as a percent-age of gross annual contributions translate into the solvency ratio.

Regulation 29 of the Medical Schemes Act requires all medical schemes to maintain accumulated funds of at least 25% of gross annual contributions. For the year ended 31 December 2016, the net assets of all medical schemes amounted to R54.1 billion (2015: R52.1 billion).

The industry average solvency ratio decreased to 31.6 % in 2016 from 32.6 % in 2015. The solvency ratio of open schemes decreased by (2.1) % to 28.6 % in 2016 (2015: 29.2 %). Restricted schemes experienced a decrease of (4.5) % in their solvency ratio, 35.8 % from 37.5 % in 2015.

The full Annual Report along with Excel and Pdf Annexures which con-tain detailed information on medical schemes performance for 2016/17 can be accessed on the CMS web-site: www.medicalschemes.com.

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Above: Figure 5 - Industry solvency for all medical schemes: 2016

http://www.medicalschemes.com


Risk pooling is traditionally viewed as an insurance function, where financial risk associated with health interventions for which the need is uncertain, is equi-tably shared within the covered population. The World Health Organisation (WHO) defines pooling as “...accu-mulation and management of revenues in such a way as to ensure that the risk of having to pay for healthcare is borne by all members within the pool, not by each contributor individually...” (WHO, 2000).

Within health insurance systems, large risk pools tend to take advantage of the economies of scale where the law of large numbers often leads to substantial cross-subsidies from low-risk to high-risk individuals. This form of pooling within a community rated environment leads to equalisation risk and contributions amongst members of the pool. Those with high income and low expected healthcare expenditure often cross-subsidise the old and sick and premiums are not proportional to risk, demonstrating the impact of risk pooling within a community-rated environment.

Large risk pools are also not only promi-nent within single fund universal health coverage systems, but also exist within multiple fund Social Health Insurance (SHI) systems. Countries such as Hungary, Iran, Norway and Korea are examples of single fund National Health Insurance (NHI) systems where large pools enable an increase in resource availability for healthcare services, and progressively offer better financial protection. Countries with multiple funds such as Turkey, Brazil, Thailand and Peru have also adopted a health financing policy to expand the size of their risk pools (Atun et al., 2013, Maeda et al,2014).

Figure 6 also illustrates that progress towards Universal Health Care (UHC) can be promoted through meaningful actions in improving pooling, purchasing, efficiency, equity in the distribution of

resources, transparency and accountability. The overall benefits of such policy considerations being to ensure that healthcare utilisation will be relative to the need and quality, thus ensuring financial protection of the covered population.

INTERNATIONAL EXPERIENCE - FROM FRAGMENTATION TO INTEGRATED POOLS

The level of the fragmentation or integration of risk pools within any national health system will have an impact on the following factors: the extent of finan-cial protection provided, the richness of benefits, the extent to which the fund is able to strategically purchase healthcare services, use of alternative reimbursement methods, the reduction in administration costs, the impact on financial reserves and contribution payment. Risk pool fragmentation also limits the scope for redis-tribution from a given level of prepaid funds, and affects

RISK POOLING IN HEALTHCARE FINANCING

CMS’ views on meaningful risk pooling in pursuit of Universal Health Coverage

Above: Figure 6 - Pathway and goals towards attainment of Universal Healthcare Source: Kutzin J, 2013


the extent to which health insurance entities can effi-ciently coordinate healthcare services for the covered population.

Unless addressed effectively through market reform or regulation, risk pool fragmentation can become a bar-rier towards progressive achievement of the key objec-tives of universal coverage. It is against this background that the World Health Organisation recommends that health financing reforms should not only focus on increasing the level of prepayment funding for the risk pools, but also consider policy options to encourage risk pool consolidation, otherwise, implementing such mea-sures (increasing the level of prepayment funding) with-out paying proper attention to changes in risk pooling can result in increased fragmentation and compromised equity and efficiency goals (WHO 2010).

International experience also reveals that the con-solidation of multiple small risk pools into fewer large pools or single funds is not something new nor unique for the medical schemes industry in South Africa (SA). Countries such as Iran, Argentina, Turkey, South Korea, Brazil, Thailand, Ghana, Peru, Estonia, Lithuania and Indonesia are just a few examples of how the national health systems have evolved to consolidate risk pooling to improve the level of financial protection for the pop-ulation (Mohammad B et al, 2016, Atun et al., 2013).

BRIEF OVERVIEW OF RISK POOLING WITHIN THE SA MEDICAL SCHEMES MARKET

In 1997, the private health financing policy document published by the National Department of Health (NDoH) outlined the following problems with regards to risk pooling in the South African medical schemes environ-ment:

“…medical schemes had risk pools that were too small…the benefits of economies of scale were lost. This trend posed challenges in spreading the risk of illness across larger risk pools…”“…many medical schemes offered differentiated set of benefits ….”“... limited information available for members with regards to comparing different benefit options...”“…inadequate funding and oversight over many benefit options.”“..the tension between proliferation of benefit options and minimising cream skimming..”

It will also be noted in the 1997 policy document that, the legislative review and policy debates at that time acknowledged that multiple benefit options within

medical schemes created challenges associated with risk selection, adverse selection and inadequate funding of certain (small) risk pools. In order to address these challenges, the following recommendations were made:• All options will include prescribed minimum ben-

efits (PMBs).• Each benefit option was expected to be self-fund-

ing. No cross-subsidisation will be allowed between benefit options.

• Each benefit option was expected to maintain a minimum membership requirement of 2500. In addition, the Registrar was given legislative power to call for sufficient financial guarantees for each option.

• Options that medical schemes created for the sole purpose of hosting defined groups on an exclusive basis may not be registered.

• Movement between options will only be affected with the express permission of the Registrar.

Some of the above-mentioned recommendations trans-lated into different regulatory provisions within the Medical Schemes Act, No. 131 of 1998 (the Act) such as: Section 7, Section 8 (f), Section 24 (2) (b) (c) (d) (e), Section 27 (1), Section 29 (n), Section 33, Section 35, Regulation 2 (3), Regulation 4 (4) and Regulation 29. It is clear from these regulatory provisions that the Act envisaged a regulatory environment in which access to healthcare would be enhanced by the pooling of health risks within a community-rated environment.

Over the years, the CMS has observed that consolida-tion of the risk pools leading to sufficient cross-subsi-dies has however moved at a snail pace. Figure 7 shows the extent of growth in beneficiary and dependants numbers within restricted and open schemes, while Figure 8 shows the number of dependants per member. What will be noticed is that to a large extent, restricted schemes have experienced relatively higher growth in beneficiary and dependants numbers between 2006 until 2012 compared to the open schemes.

Whilst the open schemes market experienced contrac-tion in dependants numbers between 2007–2011 and an increase between 2013 and 2015. At the same time the restricted schemes experienced a drop in depen-dency numbers. This contraction in growth numbers is not ideal within a social solidarity space especially when one considers the number of beneficiaries within small, medium and large benefit options (see figure 7, 8 & 9). This trend necessitates a review and consideration of different policy options to reduce fragmentation and improve financial protection within the current commu-nity rated environment, within the existing provisions of the Act.


Figure 9 depicts the total number of beneficiaries within the benefit options. As will be observed, whilst some of these pools are relatively big, the immediate con-cern for the CMS is the risk pools with less than 2500 members at a benefit option level, as well as the medi-cal schemes with risk pools that have less than 6000 members at a scheme level. Within such pools, the CMS has observed extreme cases where some pools have less than 50 or even 30 beneficiaries. In such benefit options, one incident of a catastrophic medical event such as Gaucher disease can cripple the financial posi-tion of a benefit option especially those options with low beneficiary numbers.

A CASE FOR CONSOLIDATION OF BENEFIT OPTIONS

The CMS is currently developing a framework for ben-efit option classification and standardisation. It is our view that this framework will enable better risk pooling and cross subsidisation. Once benefit options have been properly classified and standardised, consumers will be empowered to make informed choices when purchas-ing medical scheme cover. Fewer benefit options will also enable members to compare benefit entitlements, limitations and penalties against premiums charged

-10%

-5%

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Beneficiary growth (in percentages)

Member growth (open) Dependant growth (open) Member growth (restricted) Dependant growth (restricted)

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Number of dependants per member

All schemes Open Restricted

1.57 - 1.23

Above: Figure 7 - Growth in beneficiaries and dependants (2016)Below: Figure 8 - Total number of dependants per member (2016)


per option. It is also envisaged that instances where there are duplications in benefit designs within the schemes, medical schemes will have an opportunity to consolidate those benefit options in pursuit of bigger and sustainable risk pools that are compliant with the provisions of the Medical Schemes Act.

Figures 10 and 11 provide an outline of differences in average between restricted and open schemes across different benefit option sizes. Small and medium sized options have the highest average whilst large and very large benefit options have relatively lower aver-ages. To a large extent, the same observations exist for the pensioner ratio and the claims experience within option sizes. These observations necessitate the need to consolidate benefit options for small to medium sized

options in order to enable economies of scale which will provide better financial protection for the covered population.

CONCLUDING REMARKS

The CMS believes that the absence of product com-plexity will enable vulnerable risk groups to enjoy better protection. In such an environment, medical schemes will compete on efficiency as opposed to risk selection.

The CMS also believes that partial regulation of mul-tiple risk pools will continue to entrench the following inefficiencies within the current environment:

Above: Figure 9 - Number of beneficiaries within benefit optionsBelow: Figure 10 - Open schemes (2016)


• Smaller risk pools with unfavourable profiles will continue to be passive purchasers of healthcare services with limited ability to influence provider behaviour and entering into value based contract-ing.

• Fragmentation of the risk pools will continue to create an opportunity to unfairly deny access to prescribed minimum benefits or to shift these expenses into self-insurance pools.

• Some medical schemes manipulate beneficiary entitlements through shifting claims that should be insured as part of risk benefits, into the self-insured pools (i.e. medical savings account and equivalent benefits as well as out-of-pocket payments). For example, between 2014 and 2015 about 23 medi-cal schemes contravened Regulation 10 (6). The average number of benefit options within these schemes was 4.3 with a range between 1 to 15 benefit options per scheme. Small risk pools within these schemes had on average 1 922 beneficiaries with a range between 326 to 5765 members.

• Fragmented risk pools will also continue to attract adverse selection behaviour by some members who will buy less cover when they are healthy, and more cover when they are sick and/or register and deregister their dependants as and when they require healthcare.

• Some medical schemes will continue to avoid poor risks and attract only good risks, in part to avoid adverse selection, but also to compete on price, with other schemes for equivalent levels of cover.

• Since the Act stipulates that community rating should only exists within the benefit options in the schemes, a degree of risk rating for essential benefits will continue to exist within certain medi-cal schemes. This occurs because different option designs deliberately attract different risk groups.

• Members usually do not always have full under-stating of the various benefit options offered by the medical schemes; and sometimes members have difficulty engaging with their scheme’s rules due to language barrier.

Against this background, the CMS believes that partial regulation of the risk pools is not a viable option, as it is not aligned to the provisions of the Act.

Above: Figure 11 - Restricted schemes (2016)


Significant progress has been made to ensure compli-ance with the Demarcation Regulations, since 1 April 2017 when the regulations came into effect. The CMS issued a Demarcation Exemption framework which serves as a guideline for insurers and financial service providers to submit exemption applications for doing the business of a medical scheme. The Exemption framework outlines the required documentation that should be submitted for Phase 1 and Phase 2 exemption applications.

THE RATIONALE

Members of the public are often unaware about the dif-ference between medical scheme products and health insurance products. As a result, most people who have signed up for health insurance products assume that they have the same coverage as that of members on medical aid, to take care of their healthcare needs, only to find that they are not adequately covered during a health event.

The principles of medical schemes which are in line with the provisions of the Medical Schemes Act, No. 131 of 1998, are outlined below:• Open enrolment: Members can join any open

(unrestricted) medical scheme.• Community rating: Members pay the same con-

tributions which are only based on the options selected, and the number of dependants.

The principle of community rating allows for risk pool-ing, and in this manner the risk is equally spread among the members, irrespective of age or health status, to cover for the provision of healthcare services.

Contributions to health insurance products are based on risk rated contributions i.e. the member’s age, health status, etc. is used to determine the risk of the applicant. Older or sickly members will pay higher con-tributions than the young and healthy members. This is contrary to the principle of cross subsidisation applied by medical schemes, where the risk is equally carried by all members.

IMPLEMENTATION OF THE DEMARCATION REGULATIONS

STEPHEN MMATLI

GENERAL MANAGER: COMPLIANCE AND INVESTIGATIONS


In line with the demarcation regulations, entities pro-viding indemnity products such as primary healthcare and hospital indemnity cover as at 1 April 2017, are classified as doing the business of a medical scheme. These are now subject to regulation under the Medical Schemes Act. Provision has been made to grant a two year exemption in terms of Section 8(h) of the Medical Schemes Act, to current providers of primary healthcare insurance products who successfully apply to the CMS to be granted exemption to continue offering the prod-ucts as an interim measure, while further research is being led by the National Department of Health (NDoH) into development of a Low Cost Benefit Option (LCBO) guideline.

The definition of a “business of a medical scheme in sec-tion 1 of the Medical Schemes Act has been amended in terms of section 264 of the Act, and the schedule to the Financial Service Laws General Amendment Act, 2013. In terms of the amendment:A “business of a medical scheme” means the business of undertaking, in return for a premium or contribution, the liability associated with one or more of the following activities:• Providing for the obtaining of any relevant health

service.• Granting assistance in defraying expenditure

incurred in connection with the rendering of any relevant health service; or

• Rendering a relevant health service, either by the medical scheme itself, or by any supplier or group of suppliers of a relevant health service or by any per-son, in association with or in terms of an agreement with a medical scheme.

PRODUCTS AFFECTED BY THE DEMARCATION REGULATIONS

PRODUCTS UNDER REGULATION BY THE CMS

• Primary Healthcare Insurance Policies Primary Healthcare Insurance Policies provide lim-ited medical service benefits. Healthcare services coverage in this regard include GP visits, acute & chronic medication, emergency medical care, as well as dentistry and optometry benefits.

• Hospital indemnity PoliciesHospital indemnity products are designed to pay the costs of medical care directly to the hospital. Hospital indemnity plans do not cover the hospital bill entirely, but will contribute a percentage of the cost, or up to a set limit.

Currently the two products provide very limited, or no

prescribed minimum benefit cover.

PRODUCTS UNDER REGULATION BY THE FSB

• Medical Expense Shortfall Policies (GAP cover plans) Gap cover plans cover the shortfall between medi-cal scheme benefits and the rates charged by pri-vate medical service providers.

• Non-medical expenses cover as a result of hospi-talisation Policies (Hospital cash plans) Hospital cash plans pay out a stated (pre-deter-mined) benefit during the hospitalisation of a mem-ber. Benefits are usually paid per day spent in hospital. The benefits are not related to the actual cost of any medical service, but according to the cover signed for by a member. The aim of hospital cash plans is to cover incidental costs such as loss of income while a member is in hospital.

THE DEMARCATION EXEMPTION PROCESS

Phase 1: basic application (information submission)

The deadline for the submission of the applications for the Phase 1 evaluations was 31 March 2017, and a total number of 38 applications were received. A total of 35 applications have been granted Phase 1 exemption, sub-ject to the submission of further detailed information as part of phase two evaluation. Altogether the CMS evaluated a total number of 171 insurance products.

Phase 2 Submissions

The due date for submission of the exemption applica-tions for Phase 2 evaluations was 30 June 2017. For this phase of evaluations, entities were requested to submit detailed applications which included details of directors, audited financial information, the number of indemnity products offered, information on the member age, etc. A total number of 35 applications were received for evaluation. Detailed information on the outcome of the exemption process will be included in the next edition of the CMS News.

Co-regulatory responsibilities

As part of managing the demarcation process, a Memorandum of Understanding (MOU) between the CMS and the Financial Services Board (FSB) is being finalised. The MOU sets the tone for co-regulatory responsibilities including supervision and reporting, between the CMS and the FSB.


Now that some of us serving in the Council have come to the end of our term of office, it may be appropriate to reflect on a few issues which we encountered as members of Council of the Council for Medical Schemes (CMS). The CMS is essentially a regulatory authority which has the responsibility for overseeing the Medical Schemes industry by enforcing the Medical Schemes Act, No. 131 of 1998 (the Act). Fundamental to the Act, is the role of protecting the interests of the beneficiaries of the medical schemes at all times. As members of Council, we have cher-ished and kept in the forefront, this role in all our deliberations. It is however important to emphasize that the role of acting in the best interests of the beneficiaries of medical schemes is a shared responsibility between the CMS and the medical schemes.

What has been happening is that some schemes will resort to court action in con-tradiction to this principle. This is evident from some of the court challenges against the requirements of prescribed minimum benefits, as well as separating benefit sav-ings from the schemes’ general funds. To put the matter into perspective, it is anomalous that members’ funds are utilized towards court actions which compromises the same members’ interests.

The question does arise whether we as Council, have been successful in protecting the members’ interests at all times. Our approach in the first instance has been to evaluate and assess whether the scheme and its administrative or managed care com-ponents were fit and proper to fulfill their statutory role. This was possible through the evaluation of various unit reports on the solvency status of medical schemes, compliance with the Act, proper and sound approach to governance, complaints by ben-eficiaries of schemes, and periodic investi-gations conducted by the Compliance and Investigations unit. Apart from the occa-sional scheme which had to be placed under

FAREWELL MESSAGEPROFESSOR YOSUF VERIAVA, OUTGOING CHAIRPERSON OF COUNCIL


curatorship or liquidated, the medical schemes indus-try as a whole functioned effectively in the funding of healthcare for its beneficiaries.

The mission of the CMS is to promote the provision of vibrant and affordable care for members. The rising cost of healthcare is a major concern facing the medical schemes industry. This has resulted in the rising and in many instances, unaffordable cost of medical scheme membership. The recent increase in membership fees which in percentage terms, had reached double digit levels, is evidence of this undesirable development. This is due to a number of factors contributing to such high costs, particularly those in relation to healthcare service providers. The CMS has embarked on a process of investigating the issue of non-healthcare costs in the industry. The long awaited report of the Competition Commission is expected to shed further light on this issue and possibly offer future solutions.

As in many industries, there are challenges. These may be internal within the regulatory authority, or within the industry itself. Notably in relation to the CMS, the post of the Registrar was only occupied for a very brief period over the past four years. Whilst the Chief Financial Officer (CFO) and the Senior Strategist have fulfilled this role very efficiently in an acting capac-ity, the need towards a formal appointment remains urgent.

The Complaints Adjudicating unit is constantly being overburdened by the large number of complaints lev-elled against the schemes. These often relate to pay-ments, particularly in relation to prescribed minimum benefits. Arising out of these complaints is a perception among members that the involved scheme is deliber-ately attempting to avoid payment or payment in full. This perception is frequently due to misinformation or a lack of knowledge of what the complainant is entitled to.

The level of knowledge and understanding particularly in relation to the benefits available to members of med-ical schemes is a matter of serious concern. Notably, the poor level of understanding relating to benefits and the rules of the medical scheme is prevalent in the majority of members. Only a very small number of members attend the AGM of their medical scheme and consequently play an insignificant or no role in ensuring that the scheme is accountable to its membership.

Finally, we must acknowledge the commitment and dedication of the staff of the CMS for continuing to ensure that the medical schemes and related regulated entities are properly governed, responsive to the envi-ronment, and that the interests of the beneficiaries are protected.

It has been a wonderful journey working with the Council for Medical Schemes and getting to under-stand the dynamics of the industry affecting its various stakeholders. The members of the Council under the leadership of Professor Veriava, inspired me to pay attention to critical healthcare issues and assisted me in making the necessary oversight decisions. I commend the CMS staff members who during a difficult period of leadership insta-bility at the level of Registrar and CEO, displayed a high level of dedication to their work.

My involvement in areas such as the Human Resource Committee and the Appeals Committee, coupled with the interactions with the Ministry of Health on various matters, opened my eyes to some of the challenging issues relating to healthcare matters in our country. All these con-tributed to a heightened level of appreciation on the importance of paying attention to the issue of good governance principles in the industry.

I wish the CMS Council and staff, all the best in the regulatory oversight role; as well as in ensur-ing that the organisation continues to carry out its mandate in an effective manner.

DR LOYISO MPUNTSHA, OUTGOING DEPUTY

CHAIRPERSON OF COUNCIL


The Appeal Board recently made a decision in favour of the Council for Medical Schemes (CMS) in the matter involving the Genesis Medical Scheme, where it found that the Registrar of Medical Schemes was correct in refusing to accept the proposed rule amendments of the scheme concerning the appointment of all public hospital in the country as Designated Service Providers (DSPs).

The Appeal Board, which is appointed by the Minister of Health in terms of the Medical Schemes Act, No. 131 of 1998 (the Act), dismissed the scheme’s appeal and con-firmed the ruling of the Appeals Committee of the Council which stated that Genesis was not entitled to appoint the state as a DSP without having a suitable agreement in place.

The Registrar rejected the rule amendment on the basis that it would be unfair towards members of the Genesis Medical Scheme and inconsistent with the Act. The decision was also based on the written comments by the Supreme Court of Appeal (SCA) in the matter of the CMS and Joubert versus Genesis where the issue of the appointment of DSPs was also addressed.

The Appeal Board stated that even though the cause of action was different in this case the issue to be decided is basically the same, i.e. whether the scheme is entitled to provide in its rules that the full payment for prescribed minimum benefits (PMBs) will only be made when treat-ment is obtained from the public sector. The Appeal Board noted that the scheme wanted to achieve through the proposed rule amendment, essentially what was rejected in the SCA case; and that the appeal could be dismissed on this ground alone.

The Appeal Board decided to deal with the merits of the case as well as to provide clarity on this important issue. The SCA stated that the objective of the PMBs is to ease the demand on the public sector and to avoid incidents where members lose their medical scheme cover in the event of serious illness, and the consequent risk of unfunded utilisation of public hospitals. This is in line with Annexure A to the Regulations in terms of the Medical Schemes Act.

The judge pointed out that Section 7(a) of the Act places an obligation on the CMS to protect the interests of mem-bers when it is common cause that the public sector is constrained by lack of quality service in certain areas. It would be unfair to Genesis members who pay premiums to access quality healthcare, efficiently and without delay, if they were required to compete with the majority of the population for the scarce resources in the public sector, at

a time when they needed to access healthcare services.

It was also emphasised that even though the rules of the scheme are binding, Genesis cannot contract out of its statutory obligations, specifically the obligation to pay PMBs in full. The ruling stated that “Regulation 8 dictates that the medical scheme must pay in full for PMBs regard-less of where the service is provided, i.e. full settlement of the amount charged on the invoice.”

According to the Appeal Board, it would be unfair for members if the scheme could appoint all the public hospi-tals in the country as DSPs without evaluating their level of service, available resources, state of readiness to deal with private patients, etc. It is for this reason that the Registrar requires written agreements with DSPs to be in place. The scheme’s appeal was subsequently dismissed on this basis. This means that PMB claims by Genesis members must be funded in full in both the private and public sectors until such time that the DSPs are properly appointed by the scheme.

The significance of the Appeal Board’s decision in this mat-ter for the CMS, lies in the fact that the industry now has certainty about what is expected when the public sector is appointed as a DSP. Any legal agreement is based on consensus between the contracting parties. It is important that the rights and obligations of the scheme and the DSP are clearly set out, so that members are not prejudiced at a time when they need to obtain healthcare services. Regulation 8(3) to the Act deals with the voluntary and involuntary use of DSPs.

The CMS will continue to be vigilant in ensuring that the interests of members of medical schemes are protected at all times, and any non-compliance with the Act will be dealt with.

Appeal Board decision on selection of Designated Service Providers

• Identify a few schemes and request information on their benefits, contributions, limitations and exclusions.

• Find out what the scheme’s reserves are (solvency ratio), and non-healthcare expenditure, to ensure that the scheme is in good financial health.

• Read up about prescribed minimum benefits (PMBs) and Designated Service Providers (DSPs).

If you are already a member:

• Read all the material such as options to change benefit plans. • Understand how the benefit options work and select according to your needs and

affordability. • Remember that it is not compulsory to use a broker, but if you do, ensure that

they have been accredited by the CMS and that your selection of a scheme is based on informed consent.

How to choose a Medical Scheme

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