Medical underwriting and risk adjustment practices: South Africa

Health insurance models vary from country to country. As highlighted in our first series of articles on international health markets, governments often dictate the role of private and public health insurance within any country. Milliman has produced a new series of blogs focused on the medical underwriting and risk adjustment practices of eight countries: Australia, Ghana, Ireland, New Zealand, Saudi Arabia, South Africa, Spain, and United Arab Emirates. This is the fifth article in our series.

South Africa’s health system consists of a large public sector and a smaller but fast-growing private sector—these two sectors are essentially disconnected and exist in parallel. There are also a few non-government not-for-profit organizations that are considered part of the system. These three sectors form the national health system under the stewardship of the Minister of Health.

The public health system is a tax-funded system that provides free primary healthcare to all citizens. At hospital level, payment for services is means tested—in 2011, anyone with an annual income over ZAR36,000 (about US$4,000) has to pay partly and those with annual incomes over ZAR72,000 (about US$8,000) must pay in full. The model is based on a referral basis for escalating a patient through the levels of care. The entry point is a community nurse who may seek guidance from a general practitioner.

The public health system is considered by many to be underfunded, understaffed, and overused. Most health resources are concentrated in the private sector, which provides for the health needs of roughly 20% of the population.

In 2011, South Africa spent 8.2% of GDP on healthcare, or US$459 per capita. Of that, approximately 40% (i.e., 3.3% of GDP) was government expenditure, delivering services either completely or partially to 84% of the population. Public health consumes around 11% of the government’s total budget. Allocation of resources and the standard of healthcare delivered vary between South Africa’s nine provinces.

Private medical expense insurance in South Africa is voluntary, but typically purchased by anyone who can afford it. This includes middle- and high-income earners, and foreigners looking for top-quality surgical procedures at relatively affordable prices. Those who purchase private medical expense insurance benefit from implicit tax subsidies. The private health sector is well developed, resource-intensive, and highly specialized.

In South Africa, the terms “medical scheme” and “health insurance” have very particular meanings.

Medical schemes are the dominant vehicles for providing risk-pooling for healthcare in the private sector; they are mutual funds usually managed by third-party administrators and managed care organizations. In return for a premium or contribution, medical schemes assist by indemnifying the policyholder against the cost of healthcare services.

Legislation requires that members of medical schemes be given the opportunity to move among the schemes at least once a year.

In addition to holding a risk fund to pay for medical treatment, many medical schemes also offer medical savings accounts (MSAs) on behalf of individual members. There are certain treatments that must be covered by the risk fund (including the prescribed minimum benefits*) and others that members can pay for using their MSAs. Contributions made to MSAs accrue and are owned by the member and his or her dependents, and are only to be used for paying for their benefits. Any unused balance is carried over to the next year or paid on exit. If the MSA balance is insufficient to fund the benefits, the member will need to cover these costs out-of-pocket. Medical scheme plans that combine the use of risk coverage and MSA coverage are referred to as “new generation” plans.

Medical schemes coverage aims to address the need of meeting medical expenses. The Medical Schemes Act prohibits medical schemes from offering benefits other than those that meet the definition of the business of a medical scheme. Benefits are based on the medical costs incurred. Medical schemes usually offer a menu of benefit options from which members make an annual selection. All benefit options are required to offer the prescribed minimum benefits.

Benefits options will differ according to:
• The categories included (e.g., dental, optometry, specialist consultations)
• The benefit limits per category (which may be monetary or frequency limits)
• Overall benefit limits (except on the prescribed minimum benefits)
• Coinsurance, deductibles, copayments, and levies
• Provision for member savings
• Tariff scale used for reimbursement
• Service providers included in the network
Medical scheme benefits are determined with reference to a set of tariffs. These tariffs are negotiated between providers and schemes. Any expenses not covered by medical schemes are paid out of pocket by members.

Health insurance policies, in contrast, provide non-indemnity benefits for specified health events. This means that the insurer provides a predetermined amount of money on the occurrence of the event, rather than reimbursing the actual cost of healthcare. Health insurance products in South Africa are sold as both long- and short-term insurance, and are seen as separate from the medical scheme industry. Health insurance payouts typically only account for a small percentage of total private health expenditure.

Health insurance products include:
Hospital cash products: Pay out a set amount for each day the policyholder is hospitalized.
Major medical coverage: Benefits under these policies are payable on the occurrence of a major medical event, such as surgery or chronic diagnosis. Initially sold on a group basis, they are now also available on an individual basis. They have also been offered on a universal life basis where the benefit is packaged with an endowment benefit.
Dread disease (also known as critical illness): Available on a group or individual basis, a lump sum is paid out on the diagnosis of one of the defined conditions.

While some health insurance policies are considered short-term insurance and others long-term insurance, the vast majority of health insurance policies are written as one-year renewable policies with no guarantees on premium levels or renewability.

All commentary that follows refers to medical schemes rather than health insurance.

Underwriting, risk equalization, and community rating
Current legislation for medical schemes enforces open enrollment, community rating, and the provision of a package of prescribed minimum benefits. The aim of these three provisions is to restrict risk rating and protect older and sicker members of medical schemes against discrimination. Underwriting and charging according to the risk of the individual or group have not been allowed since January 2000. All open schemes have to accept anyone who wants to become a member, at standard rates (open enrollment). Schemes may, however, make use of waiting periods and age-related late-joiner penalties (as defined in regulation) to protect against adverse selection and moral hazard. Legislation permits differentiation in contributions only on the basis of the following: income, family size, and adult/child dependents, and the contribution/premium structures are usually presented in terms of these.

Risk equalization, in South Africa, is understood to be a mechanism to ensure that everyone pays the same industry community rate for a common package of benefits rather than the rate determined by the age and health profile of the medical scheme they have chosen to join. There was a risk equalization “shadow period,” which commenced in 2005. During the shadow period, data was collected and a risk adjustment structure developed. However, because of uncertainty surrounding likely healthcare reform and the possible introduction of a national health insurance system, a risk adjustment system was never put in place. The Council for Medical Schemes continues to collect risk profile information to study the impact of a potential risk equalization scheme.

Policymakers are in ongoing discussions about healthcare reform. Current debate considers whether and how South Africa could move towards a national health insurance system that integrates the public sector and private medical schemes in a universal contributory system. Some policymakers recommend an initial goal of a social health insurance system (only those who contribute receive benefits) with an ultimate goal of a national health insurance system (taxpayers contribute but all citizens are entitled to the same defined package of benefits). Some doubt exists about whether a national health insurance system is affordable, given the high level of unemployment, which is usually cited as the main barrier to implementation of such a system. Details for the new health system are yet to be finalized. The impact of healthcare reform on the future operation of medical schemes and the private healthcare sector is likely to be substantial.

Open enrollment and community rating is not accompanied by compulsory membership, which is of concern to actuaries in South Africa. There have been several calls by the actuarial profession and major employers to enforce compulsory membership to certain subsectors of the population in order to stabilize risk pools. The uncertainty about the future of the public healthcare system fuels uncertainty in the private healthcare system, although if a social health insurance system is implemented as a stepping stone towards a national health insurance system, membership to a medical scheme may become mandatory.

* Prescribed minimum benefits (PMBs) consist of a list of: (a) 270 diagnoses and treatment pairs. Diagnosis and treatment must be covered in full from pooled funds, without financial limits or copayments. (b) Emergency medical conditions. (c) Diagnosis, treatment, and medication according to therapeutic algorithms for 25 defined chronic conditions. The cost of diagnosis, treatment, and medication for these conditions must be covered in full by the medical scheme, subject to published treatment algorithms. Because South Africa faces further challenges that are due to the HIV/AIDS pandemic, the PMBs package includes certain treatments and interventions with regards to HIV/AIDS.