The case forPrivate Primary Healthcare Insurancein South Africa

Vernon Chorn, FSA, FFA, FASSA

Aims to outlaw or significantly restrict most health insurance products in order to protect medical schemes and the medical scheme risk pool

DEMARCATION REGULATIONS

Products that are allowed, are subject to community rating on a group basis

Requires that details of all products be provided to the Registrar of Medical Schemes, who in turn may request the Registrar of Insurers not to permit particular products

Non-profit entities regulated in terms of the Medical Schemes Act, 131 of 1998 and associated regulations.

MEDICAL SCHEMES

Medical schemes have the following legislative requirements:• PMBs: Provide a minimum benefit package known as the

prescribed minimum benefits

• Open enrolment: Anyone can join

• Community rating: Contributions need to be set on a community rated basis per benefit option

The PMBs and open enrolment largely resulted in Medical schemes contributions being:

MEDICAL SCHEMES: GROWTH

Reference: General Household Survey, 2014 as published by Statistics South Africa and CMS Annual Reports

• prohibitively expensive; and • unaffordable to majority of South Africans.

Percentage of the SA population covered by medical schemes is about 18% in 2014

If one excludes GEMS the percentage of the SA population covered by medical schemes has reduced by about 1.5% over the last 8 years

In addition, the number of people not covered by medical schemes increased by 5.25 million people over the same 12 year period.

Reference: General Household Survey, 2014 as published by Statistics South Africa

2002 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

10,000

20,000

30,000

40,000

50,000

60,000

The proportion of people who are members of medical schemes by race group are as follows:

  2002 2014 Increase

White 68.2% 76.9% 8.7%Indian/ Asian 29.0% 48.7% 19.7%Coloured 18.8% 20.3% 1.5%Black 8.0% 10.6% 2.6%

MEDICAL SCHEMES: MEMBERSHIP

• Very little increase for the Coloureds and Black population

• Membership for the White and Indian/Asian population has increased significantly

• Membership for the Black population is very low at 10.6%

Reference: General Household Survey, 2014 as published by Statistics South Africa

Black R 69 632 Coloured R 139 190 Indian / Asian R 252 724 White R 387 011

The average annual household income by race group is as follows:

MEDICAL SCHEMES: UNAFFORDABILITY

Medical schemes indirectly discriminate against Black people, as the majority of the Black population cannot afford medical aid – this is unconstitutional

The average medical scheme contribution is about R4 000 – R5 000 per month for an average family (2 adults & 2 children)

Average income for the Black and Coloured population is significantly less than the Indians/Asians and White population

Reference: Income and Expenditure of Households, 2010/2011 as published by Statistics South Africa

Population numbers by race and age group (thousands):

MEDICAL SCHEMES: COMMUNITY RATING

Age Group Mid-point Black Coloured Asian White20-29 25 8 288 810 227 60430-39 35 6 899 744 238 56740-49 45 4 634 668 192 65250-59 55 2 983 467 148 68060-69 65 1 732 249 97 54570+ 75 1 061 135 55 416Total 25 597 3 073 957 3 464

Avg Age 39.6 41.8 43.1 48.6

Reference: General Household Survey, 2014 as published by Statistics South Africa

Average weighted age is 9 years younger for the Black population compared to the White population

Medical scheme claims utilisation increases with age

Implies relatively younger Black population cross-subsiding older White population

Medical schemes perpetuate the inequalities of the past through community rating, which is unconstitutional

Medical schemes cover largely hospitalisation and chronic medication benefits

THE NEED FOR PRIMARY CARE

The General Household Survey 2014:85% of households required primary health care as their first consultation after becoming ill or injured

Implies that primary healthcare is the most essential need for the majority of South Africans

Medical scheme PMBs do not cover primary healthcare and do not meet the essential needs of the majority of South Africans

Medical schemes are non-profit entities

MEDICAL SCHEMES: INEFFICIENT

Medical schemes have very crude and archaic capital requirements resulting in an inefficient use of capital

They do not add to the tax revenues of the country

Medical schemes do not pay tax

If private health insurance products are permitted through insurance companies, this would result in:

MEDICAL SCHEMES: INEFFICIENT

• More efficient use of resources and capital

• Relatively cheaper contributions (or premium rates)• Better value and greater participation to the consumer

Contribution increases are consistently well above CPI and usually these are in tandem with benefit reductions

MEDICAL SCHEMES: UNSUSTAINABLE

Medical schemes are not sustainable

An independent report written by an experienced consulting actuary, Professor George Marx, details why medical schemes are in a death spiral and not sustainable going forward

In summary, medical schemes:

MEDICAL SCHEMES: SUMMARY

It is therefore not rational to protect medical schemes through demarcation regulations

• Are unaffordable to the majority of South Africans• Are not sustainable going forward

• Have increases that are consistently well above CPI

• Are unconstitutional

• Discriminate indirectly against the Black population; most cannot afford medical schemes

• Perpetuate the inequalities of the past through community rating where poorer black people cross-subsidise wealthier white people

• Fail to meet the essential healthcare needs of the majority of South Africans

Primary healthcare covers the essential needs of the majority of South Africans and includes, inter-alia:

PRIVATE PRIMARY HEALTHCARE INSURANCE

Primary healthcare insurance premiums are about 10-15% of an average medical scheme contribution making it very affordable to the majority of South Africans

GP consultations

Acute & chronic medication

Basic & emergency dentistry

Basic radiology & pathology

Optometry

Maternity

TARGET MARKET

There are approximately 19 million people who do not have medical scheme coverage but have at least one member of the family that has an income

Reference: Quarterly Labour Force Survey, Quarter 3, 2015 as published by Statistics South Africa and CMS AR 2014-2015

Currently only 18.1% or about 8.8 million people on medical schemes

Expanding private healthcare insurance coverage to these 19 million people would result in about 500 000 new jobs being created in the private healthcare sector

SOCIO ECONOMIC BENEFITS

This translates to an increase in GDP and tax revenues ±3%

This would significantly reduce the public sector healthcare budget requirement and allow a reduction in government spendingIf the public healthcare sector is efficient they can in fact service private primary healthcare patients and generate income; resulting in a surplus created to the State, as opposed to an existing R135Bn public healthcare sector budget requirement

Public sector would take care of 19 million less people which would significantly release the stress burden on the State

Level of satisfaction with public and private healthcare facilities, 2014:

Individuals would enjoy better quality of care in a private setting and experience better health and well beingAllows immediate access to care (as opposed to waiting in long queues in the public sector)

Reduces absenteeism and improves productivity in the workplace which feeds through as an increase in overall GDP, job creation and tax revenues

SOCIO ECONOMIC BENEFITS

Level of satisfaction with the healthcare institution

Very satisfied

Public healthcare 57.5%Private healthcare 92.9%

Reference: General Household Survey, 2014 as published by Statistics South Africa

Private primary healthcare is preventative in nature thereby reducing the long-term healthcare cost burden

SOCIO ECONOMIC BENEFITS

This in turn improves longevity and reduces the disease burden resulting in increased productivity and a higher general overall well-beingEmployee benefit costs for life insurance and disability would reduce and allow company’s to finance private primary healthcare insurance premiums at very little or no additional cost in the long term

COMPETITION & QUALITY OF CARE

Consumers behave in a rational manner

This means for the same product, they will tend towards the cheapest price

Product quality is also critical otherwise consumers move to another product provider

COMPETITION & QUALITY OF CARE

Hence, in healthcare:

It is therefore not rational to disallow Private Primary Healthcare Insurance

• Greater competition would allow for higher quality of care at the cheapest possible price, which serves the public interest

• It is therefore rational to allow Private Primary Healthcare Insurance as this would lead to higher overall quality of care and efficient pricing to the consumer which serves the public interest

Private Primary Healthcare Insurance:

SUMMARY

• could cover about 19 million people not covered by medical schemes;

• result in about 500 000 additional jobs being created, which would increase GDP & tax revenues by about ±3%;

• is affordable, premiums are about 10%-15% of an average medical scheme contribution;

• benefits meet the healthcare needs of the majority of South Africans;

• allows millions of individuals the opportunity to enjoy a better quality of health and overall well-being;

• is preventative in nature reducing long-term healthcare costs; and

• Reduces absenteeism and improves productivity in the workplace

Private Primary Healthcare Insurance:

SUMMARY (Cont.)

• improves longevity and reduces diseases;

• reduces employee benefit life and disability insurance costs;

• reduces the healthcare burden on the State;

• could even result in the State generating income from servicing private primary healthcare patients; and

• increases competition which leads to an improvement in the quality of care at the cheapest possible price – which is progressive and clearly in the public interest

Disallowing Private Primary Healthcare Insurance is therefore not rational, not progressive and can be argued to be unconstitutional

NATIONAL HEALTH INSURANCENational Heath Insurance (NHI) proposes a mandatory system of health coverage to all South Africans

NHI wishes to reduce healthcare spend as a percentage of GDP from about 8.9% to 6.2%

Yet, it relies on consistent GDP growth of at least 3.5% per annumIn addition to finance the NHI, it requires financing in the form of raising tax rates - individual, corporate and VATGovernment will contract with private healthcare providers at reduced rates (as it needs to reduce the spend to 6.2% of GDP)Medical schemes would be allowed to continue (based on the Health Minister’s U-turn about a month ago)

Numbers in 1000's Percentages

Employed 15 828 43.8%

Unemployed 5 418 15.0%

Discouraged work seekers 2 226 6.2%

Others (not economically active) 12 641 35.0%

Total working age population 36 113 100.0%

NATIONAL HEALTH INSURANCE

The working age population are all those aged less than 65 of working age

Reference: Quarterly Labour Force Survey, Quarter 3, 2015 as published by Statistics South Africa

The employment rate in South Africa is very low at 43.8%

NHI – EMPLOYMENT RATESCountry Name 2014

Australia

61.20

Canada

61.50

Denmark

58.30

Finland

54.30

France

50.20

Iceland

70.10

Japan

56.90

New Zealand

63.90

Norway

62.60

Sweden

58.90

United Kingdom

58.20

Average 59.60

South Africa

39.40

NHI requires about a 50% higher employment rate to operate in other countries vs South AfricaIn addition, South Africa is an emerging economy & is more exposed to volatile economic circumstancesThis significantly increases the risk for South Africa to fund any government programme

NHI funding requires consistent strong economic growth which is very risky for an emerging economy

Reference: Employment to population ratio, 15+, total (%) (modelled ILO estimate)as published by World Bank

In addition, implementing the NHI funding plan increases the risk of downgrade on our Sovereign Debt Rating

NATIONAL HEALTH INSURANCE

NHI is struggling in most developed and stable economies:

Implementing the NHI Funding Plan is therefore very onerous on our economy and increases the risks of economic downturns and downgrades to our Sovereign Debt rating.

• because of an aging population

• poor utilisation controls, and

• quality of care being rationalised

• funding shortfalls (no pre-funding)

NHI: TAX INCREASES

The NHI proposes to increase individual and corporate tax rates as well as VAT

As a result companies will suffer a reduction in top-line revenuesCompanies will also have an increase in corporate tax rates leading to a further reduction in after-tax profits

Increases in individual tax rates and VAT results in:Consumers having less disposable income & spending less on goods & services

NHI: TAX INCREASES (Cont.)

This leads to:

• A reduction in GDP and overall tax revenues

• Curtailment of company expenses resulting in job losses

• Less money to fund and sustain the NHI leading to a reduction in the quality of care

In terms of NHI, government will contract private healthcare providers at reduced prices

NHI CONSEQUENCES

This leads to a reduction in overall revenues for the private healthcare sector

This will lead to:• a disinvestment in the private healthcare sector,• a reduction of new private healthcare

professionals, and• in turn lead to a reduction in the quality of care

CONCLUSIONS

It is clear that it is neither rational nor constitutional to protect medical schemes from private healthcare insurance products

In fact, it is irrational not to allow private healthcare insurance products to thrive as this has many socio-economic benefits to all South Africans and is progressiveNHI funding is not economically viable and significantly increases the risk of an economic downturn and Sovereign Debt rating downgrade