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Saturday, December 1, 2012
Minding the Gap

PSG Konsult Corporate recently facilitated a discussion around decision making in the health care industry. This addressed both the draft demarcation regulations and the potential impact of these on the future of health insurance products such as gap cover.
Participants included Tiago De Carvalho, the Managing Director of Ambledown Risk and Underwriting Managers, which specialises in health insurance underwriting, and John Cranke, the head of health care at PSG Konsult, and who was responsible for drafting the firm’s response to the draft demarcation regulations.
Anton Le Roux, Head of Business Development at PSG Konsult, who facilitated the discussion comments, “Decisions about health care provisions for employees can be daunting at the best of times; and doing so in a fast changing legislative environment can seem impossible. Despite there being no central repository of information in respect of health insurance products, we estimate that approximately 300 000 families currently have active gap cover policies in South Africa.”
According to De Carvalho, the draft Demarcation Regulations propose to introduce different categories of accident and health insurance policies including:
•     Lump sum or income replacement policy benefits payable on a health event;
•     Motor and property third party liability;
•     HIV and Aids;
•     International and domestic travel insurance; and,
•     Emergency evacuation and transport.

The proposal is to outlaw gap cover. De Carvalho says the effect of this is that policies, which fall outside the scope of the regulations, will be outlawed. Exempted policies, which were entered into by an insurer after 15th December 2008, will have to be brought in line with the Regulations. “It is important to remember that these Regulations are only in draft stage. They were introduced on the 2nd of March 2012 and were open for comment until 23rd April. There was an overwhelming response from both the industry and public, and the Department of Treasury is currently working through the submissions.
“It is not the first attempt by the Council for Medical Schemes to abolish health insurance products. A few years ago it targeted Guardrisk, by issuing an interdict to prohibit the marketing of gap insurance products. After a two year legal battle, the Supreme Court of Appeal found that gap cover products were lawful and in line with both the Short Term and Long Term Insurance Act.
The Court acknowledged that the definition of a medical scheme had been drafted deliberately to take into account the definition of ‘Accident and Health Policy’ in the Short Term Insurance Act and to allow both definitions to co-exist amicably. Over and above this, the judge stated that practically there was a need for this type of insurance. However, regulators are trying to change the definition of a medical scheme in order to get around the issue.”
Following the publication of the draft regulations, the Minister of Finance, Pravin Gordhan, stated that they seek to address the risk of possible harm caused by health insurance products drawing younger and healthier members away from medical aid schemes. However, many have denied this.
De Carvalho and Cranke agree that the lines mustn’t be blurred between medical aid schemes and gap cover. The latter should be complementary to the medical scheme product and it is a condition of cover that a person is also a medical scheme member. Other health insurance products, such as hospital cash plans are intended for those who cannot afford medical scheme cover. This is important as only 15% of South Africans belong to a medical aid scheme.
The argument that the draft regulations serve to strengthen and preserve the social solidarity principle, which underpins medical schemes, is also countered by De Carvalho and Cranke. They say that gap products are not priced on traditional pure insurance principals at individual level, but across a risk pool at either employer or product specific level — although it is accepted that in some cases there is premium differentiation based on age. It can therefore be argued that gap products also uphold the social solidarity principles of cross subsidisation.
The argument that members buy-down to a cheaper medical scheme option once they have a gap cover policy in place also does not sit well with Cranke. He says, “In our experience very few medical scheme members select cover based purely on need and, rightly or wrongly, often the most important consideration is affordability. Medical Schemes offer an annual opportunity to upgrade and most gap products are only considered after the option choice has already been made. The reason for this is that across all medical schemes there are very few (if any) options that can guarantee members no shortfalls in respect of in-hospital cover.”
He backs this up with statistics from a recent review of 11 medical schemes conducted by PSG Konsult. These represent approximately 90% of the open medical scheme market in terms of membership. It indicated that only 36% of the options in the 11 schemes provided cover in excess of the base medical scheme reimbursement tariff, and that four of the schemes do not provide any cover in excess of the base medical scheme reimbursement tariff.
Members will definitely be faced with shortfalls, says Cranke. Depending on their reason for being admitted to hospital, the shortfalls can run into several thousands of rands. So we are back to the affordability issue.
It makes more sense that buy-downs are driven by the consistently higher than inflation increases declared by the medical schemes. This is particularly relevant for pensioner members, who increasingly have no post-retirement medical aid subsidy on which to to rely, and struggle to keep up with a variety of demands (such as escalating electricity and transport costs) on incomes that are tied into very low interest rates.
Neither Cranke nor De Carvalho believes that health insurance cover impacts negatively on medical schemes. Carvalho says, “There have not been any studies or surveys undertaken to investigate the impact of gap cover products on medical schemes and it is actually one of the recommendations that we made in our submission to Treasury. It is difficult to find a qualitative or quantitative measurement. The health insurance industry would welcome a study of this nature.”
Cranke says that, without a study, it would be difficult to make any conclusive findings as to the impact of gap cover products on medical schemes. Added to this is the fact that medical schemes themselves have taken opposing views. "Not all schemes are opposed to gap cover; there are in fact schemes that support such products to the extent that they have their own gap covers in place!”
De Carvalho says that, “In in terms of Section 33 of the Constitution we (the public) are given the constitutional right to just administrative action. This gives us the right, as a society, to ensure that government is democratic, accountable, open and transparent. Unjustly denying the policyholder of gap cover is infringing on the individual’s right to choice. There is no evidence provided by the regulators that shows gap cover policies compromise the key principles of social welfare, solidarity and cross-subsidisation found in medical schemes. In this instance, administrative decision adversely affects the rights of South Africans by denying consumers their democratic right to provide properly for an unforeseen event that may lead to financial difficulty.
De Carvalho comments, “We are waiting for a response in the form of a second round of Draft Demarcations, hopefully before year end. As it stands now gap products are legal. The response from both industry stake holders, as well as members of the public, was overwhelming and the Treasury are considering all submissions. It met with stakeholders, such as the South African Insurance Institute and underwriting managers, such as ourselves, in August.
“One must remember that the effective implementation of the draft demarcation regulations, in their current form, requires that the definition of a medical scheme, as outlined in the Medical Schemes Act, be amended. This is being achieved via the General Law’s Amendment bill, which was tabled in parliament recently.”
Cranke says, “It certainly is not an ideal situation, but we are recommending that employers and members sit tight for the time being. Despite the current discussions, gap cover still has legal standing. We believe this cover has a place, given the current uncertainty regarding tariff negotiations between providers and medical schemes. As long as the products remain legal, keep your cover in place.”
De Carvalho adds that he remains positive that the regulators, after considering submissions, will realise that there exists a real need for these types of products and that removing them will place policy holders at risk. “At the very least, policy holders will have cover until 31st December 2012, after which the policy will either be renewed in its current form, cancelled or amended as required by the regulations. We remain hopeful that sanity will prevail.”

Copyright © Insurance Times and Investments® Vol:25.12 1st December, 2012
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