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Updated 10 April 2013

Medical schemes - a history

The world of medical schemes can be a confusing one. This article explains everything from medical schemes to Dread Disease.

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Major medical cover, similar to what we know today, was first introduced in the USA in the 1950s. In South Africa however, health insurance only dates as far back as the mid-1980s. Read a brief introduction to health insurance in South Africa.

Health insurance as we know it today was not always so streamlined. It started with Hospital Cash Products: probably the earliest form of health insurance, still sold in many of the major markets around the world. The cover varied as to the level of benefits and deferment periods (link to dictionary) and in many markets, was sold as part of a disability income product. The market in South Africa began developing in the mid-1980s, and by 1989 there were some 50 000 policies in place. This grew rapidly during the early 1990s, with the main sales channels being direct marketing through mailings and advertisements in the press.

Major medical cover, similar to what we know today, was first started in the USA in the 1950s with benefits payable on occurrence of major medical events like surgery or chronic diagnosis. These kinds of products became available to South Africans in the mid-1980s, initially sold on a group basis. Since the early 1990s however, these products became available to individual policy holders. They have also been offered on a universal basis where the benefit is packaged with an endowment benefit by a life office.

By 1991 at least 13 South African insurers were marketing either Hospital Cash or major medical policies. These products did not fit clearly into either short-term or life business as they incorporated aspects of both. The initial split of business between life offices and short-term insurers was probably 80/20 as a result of the development skills and financial strength of the life offices. The short-term proportion increased as direct marketing has been used extensively as a sales channel by short-term insurers.

Dread Disease
The Dread Disease product is recognised worldwide as a South African creation. These products were developed in the early 1980s and have largely become a standard addition to individual life products. Disability products are offered on a lump sum of income basis and the income benefits are usually included under pension or provident fund arrangements on a group basis.

These products may also be purchased on a group or individual basis. The experience on these products varied significantly from one insurer to another depending on their underwriting (link to dictionary) and claims control. By 1994, the annual premiums for dread disease and group lump sum disability business totalled approximately R21 million while the premium income for permanent health insurance (income replacement) market totalled approximately R582 million.

New draft discussion document
In 1996, the Department of Health released a draft discussion document on the financing of the private health industry in South Africa. The document reiterated the need found by the Melamet Commission in 1994 of a single legislative framework for all healthcare products.

At the same time, the Short-term Insurance Act and the Long-term Insurance Act were also undergoing revision. The 1996 amendments to the Long-term Act had included medical schemes as funds under the definition of a “life policy” to facilitate the re-insurance of medical scheme benefits by life insurance funds. A separate definition for a “health policy” was introduced and was worded in such a way as to ensure that the way a medical scheme works (i.e.: paying medical expenses to a health service provider) is not replicated through a health policy. Thus, demarcation was considered at the time when the legislation was originally drafted.

By 1998 there was a significant market in both group and individual businesses. The annual premiums for dread disease and group lump sum disability business had grown to R535 million while the premium income for permanent health insurance totalled over R870 million.

The new Long-term Insurance Act, the Short-term Insurance Act and the Medical Schemes Act were all promulgated in 1998. The wording in each allowed for the separation between indemnity business and health insurance. However, the interpretation of this led to further acrimony and unresolved resistance by the insurance industry.
(Information obtained from Financial Planning Institute.)

 
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