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Health insurance
Friday, February 1, 2002
Churning not the issue

On a purely analytical basis, it was impossible for brokers to be responsible for churning or switching memberships between medical aids to the extent alleged by the Registrar of Medical Schemes says Mark Arnold, Managing Director of Glenrand MIB Health Risk Management Consultants.

He was referring to recent comments from the Registrar of Medical Schemes, Patrick Masobe, who said that while brokers added value to the medical aid system, there was evidence of an unnecessary level of switching of members to different schemes in the pursuit of brokers’ commissions.
He said the figures showed that in the first nine months of 2000, for example, some 269 230 members (representing 877 400 beneficiaries in all) had joined schemes; and yet there was a net increase of only 57 000 new members over the previous year. This meant the rest (over 210 000) must have been members who were switched between schemes at “significant and unnecessary cost”. He said some schemes were experiencing churn rates of between 25% and 30% of their members.
Medical scheme brokers could earn a maximum of 3% commission for the first year after introducing a client to a medical scheme.
However, Mr Arnold says, “The Registrar’s assertion that brokers seek to encourage churning purely for the sake of commissions is incorrect.” With average national labour turnover of 10% one would expect a similar churn of the medical scheme population since most schemes are tied to specific employers. There are an average 7 million people registered on medical schemes.
“So some 700 000 of the 877 400 beneficiaries quoted by Dr Masobe, would likely have transferred schemes due purely to changes in employment. Moreover, Dr Masobe’s assertion that churning is commission driven is also flawed.
“The fact is, the Medical Schemes Act and regulations differentiate between new business commission and on-going service commission. For the properly accredited, usually full-time healthcare broker, commission is extremely important as it generates income for providing a client/member with after sales service year-after-year.
“On the other hand, for the part time healthcare broker, the resources required to transfer an individual or small group of people from one medical scheme to another are considerable and the broker does not generate sufficient income to warrant the additional time, petrol and administration expenses.
“Similarly, the resources required to transfer an employer group from one scheme to another are phenomenal. The re-broking, implementation and follow up required to ensure client compatibility and at the very least satisfaction with an alternative scheme, are immense.
“In all these instances therefore, churning is not broker income driven and is even unviable for full-time healthcare brokers. Admittedly the costs involved for brokers and administrators in churning are ‘unnecessary’ as Dr Masobe quite rightly says, but brokers can hardly be held responsible for all these issues. Moreover, an individual or employer cannot be forced to move to an alternative scheme and all a broker can do is provide the information upon which a decision is made.
“In our opinion most of the reasons for churn should be sought elsewhere and include effective marketing campaigns by schemes, market perceptions, member/employer dissatisfaction, emergence of new products, and interim premium increase by some schemes.” He also notes a considerable decline in service levels, in particular, of certain large administrators during the time period quoted by Dr Masobe. These saw large numbers of members leaving.
“We estimate that the average portfolio of full time brokers numbers about 2 000 members. The ability of individual brokers to influence the overall churn rate is therefore distinctly limited. Where a broker is seen to be churning business for financial gain, the Broker Code of Conduct can be enforced to remove accreditation status by the Council for Medical Schemes and the Department of Health or a similar procedure known as the ‘S’ (suspension) rating process utilised by the Life Officers’ Association,” he points out.
The Financial Planners Institute’s (FPI) special arm for Healthcare matters has in fact discussed these issues at great length and the consensus is that regulatory enforcement is vital, but they should be determined by one Act and one set of regulations, which is not the case at present.
The advice given by brokers is, by-and-large, financial in nature. So the healthcare broker should be made accountable in terms of the Financial Advisors’ and Intermediary Services (FAIS) Bill which is expected to become law shortly.
“Presently commissions are payable for medical scheme advice only if the advisor is accredited,” explains Mr Arnold. “That means anyone may offer advice without accreditation as long they are not being paid or compensated for such work. A broker may also provide information or advice on additional aspects of health risk benefits, such as pre-funding and funeral cover, which require FAIS accreditation but they are actually only accredited with the Council of Medical Schemes.”
A single regulatory body would be better placed to deal with both the part-time and full-time broker who is offering both general financial advice and healthcare services.
For further information please call Mark Arnold, on Tel 011 293 2650

Copyright © Insurance Times and Investments® Vol:15.1 1st February, 2002
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