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Updated 18 February 2013

Gap cover: 2 sides to the story

Here are two very different industry responses on the proposed changes to gap cover, top-up cover and hospital insurance.

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Here are two very different industry responses on the proposed changes to gap cover, top-up cover and hospital insurance.

The first, from Discovery Health, supports the proposed changes and the second from the financial services industry says the changes will not benefit the consumer.

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The CEO of Discovery Health, Dr Jonathan Broomberg, feels that the changes are well-conceived, robust and fair and that the products in question provide poor value for money anyway.

The second response is from Neels Barendrecht, CEO of Agility Chanel, a strategic marketing, distribution and loyalty service provider in the financial services industry says this move will leave lower-income consumers out of pocket.

 

Discovery Health's response

Discovery Health is strongly supportive of the principles and approach of the proposed regulations; they appear to be well conceived, robust and fair. We are currently studying the regulations and will submit detailed comments before the due date.
 
These regulations, once implemented, will eliminate the vast majority of 'gap cover' and other health insurance products, which will be very positive for individual consumers, and for the members of medical schemes.

These products provide poor value for money due to very low payout ratios, since many policy holders fail to claim on these products due to their complexity and to the fact that many members don’t know when they can claim. Typical payout ratios of health insurance products are in the range of 30%-50%, whereas medical scheme payout ratios for hospitalization or cancer are typically above 98%. The low payout ratios of health insurance products make them artificially cheap at present.

However, they will become more expensive over time, as policyholders claim more and as they age and experience health events.
 
What impact does gap insurance, and other health insurance products have on Discovery Health medical scheme? To what extent have they lured young and healthy members away from the scheme?

The impact of gap and other health insurance products on DHMS has thus far been relatively limited. However, we have come across instances in which clients have been advised to buy down from competitor schemes to lower options within DHMS and to purchase gap cover products to make up the difference.

We are concerned that this impact will increase over time, and that these will have several increasingly negative impacts on medical schemes. Their main impact is that they encourage scheme members and employers to buy down to cheaper options that provide less cover than they actually need. Health insurance products often do not provide the additional protection policy holders believe they are getting. In addition, the premiums of health insurance products are based on the individuals health risks and age. This means that these products will become more and more expensive as individuals age or have health risks.

The net result is that both consumers and schemes are worse off. Consumers have inadequate cover, and will no longer be able to afford this cover if they become ill, and schemes are being undermined in their ability to provide lifetime cover, which is based on those who are well subsidising those who are ill over time. Many smaller schemes, and those with relatively poor risk profiles, are already experiencing these negative impacts.

The financial service industry responds

Government’s recent announcement of its plans to cut medical top-up and gap cover could hit middle- and low-income consumers the hardest.

“The announcement clearly highlights the importance of establishing an overarching master plan of healthcare funding as well as the need for a regulatory framework to ensure that the entire healthcare system is working towards the same goals. At present, ad-hoc and interim steps are being taken to change legislation where decisions should rather be driven by a strategic, well thought out master plan,” says Neels Barendrecht, CEO of Agility Channel, a strategic marketing, distribution and loyalty service provider in the financial services industry.

The latest changes follow years of debate about whether short-term medical insurance products undermine the business of medical schemes. 

“Consumers spend millions each year on top-up and gap cover. This form of insurance play an integral role in assisting existing medical scheme members and ensure that they are not out-of-pocket when using providers who charge more than medical scheme rates,” says Barendrecht. “With medical scheme contributions becoming increasingly expensive, putting private healthcare out of reach for many South Africans, it’s often lower- and middle-income members who opt for this type of insurance.”

Barendrecht is concerned that government’s plans of cutting top-up and gap cover will leave this market out-of-pocket as the move will not necessarily encourage these consumers to buy up into more expensive benefit options. This could have knock-on effects and could negatively impact consumer spending and therefore the broader macro economy.

Instead, Barendrecht suggests that a strategic approach which addresses the underlying causes of spiralling private healthcare costs should be used to make healthcare more affordable. In particular, Prescribed Minimum Benefits (PMBs) which have become increasingly expensive for schemes, as well as a lack of standardised tariffs after the guideline National Health Reference Price List (NHRPL) was struck down in 2010, should be addressed.

“The PMBs were introduced at a time when government was considering making medical scheme membership compulsory for all formally employed South Africans under a social health insurance system,” says Barendrecht. “Since then, the strategy has been replaced with the National Health Insurance (NHI) system and medical scheme membership has remained largely stable at the current 8 million or so members, leaving the current market reach to deal with the increasing cost and not cross-subsidising benefits with additional membership.”

If membership increased to around 12 million formally employed citizens and their dependants, it would have been possible for medical schemes to cross-subsidise and finance the increased cost. However, schemes remain hamstrung by current regulations which leave little room for the industry to reduce its costs.

According to Barendrecht, some products do need closer regulation, especially hospital cash plans which some consumers buy as an alternative to medical scheme cover, but often have extensive exclusions. 

“It’s a good thing that the Council of Medical Schemes (CMS) monitors and regulates all products more closely, but this should be done on a case-by-case basis,” Barendrecht emphasises. “The demarcation debate between insurance products and medical scheme cover should follow a constructive approach based on sound business principles.”

He believes that, rather than undermining the business of a medical scheme, top-up and gap cover should assist existing medical scheme members and encourage them to stay in the system.

“If top-up and gap cover is eliminated, it could cause more members to exit medical schemes as they may not see value in purchasing monthly medical cover.  It is integrally important that low-risk consumers stay part of the medical scheme system for it to remain viable,” says Barendrecht. 

“What’s needed is innovative thinking, guided by a well-planned, well-thought out national strategy on the future of healthcare funding,” Barendrecht concludes. 

 
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