Impact of Healthcare Reform on Members 12 July 2010 National Health Insurance Policy Brief 12

Reforms for Risk and Income Cross-Subsidies

Illustration of Affordability Family of four: two adults and two children. Earning an illustrative level of income. Eight income groups. Purchasing typical health insurance products in the market in One person earning and paying income tax. Using 2008/9 income tax tables, revised to Social security contribution for health of 4.1% of income. Covers existing Prescribed Minimum Benefits. Extra social security contribution for extra R10 of benefit package is 0.53% of income. Flexibility to look at other family structures (important for tax and subsidy incidence). Flexibility for different year for tax treatment.

Per Capita Subsidy, REF and Income Cross-Subsidy Source: McLeod and Grobler, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming Affordability can be improved for lower income groups by implementing income cross-subsidy and Risk Equalisation Fund together.

Expansion of PMBs with REF Sequence REF Sequence is per capita subsidy, REF and income cross-subsidy for balance of risk-equalised package in each case. The larger the package, the better for the lowest income groups due to income cross-subsidy. But 20% contributions unaffordable for highest income groups. Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

Expansion of PMBs Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009 Insurable Families analysis produces slightly younger age profiles than Households used previously. Assumption about fully-subsidized cover for over age 65s not in above figures – lowers contribution for extra R10 of package.

Sequencing the Reforms for Risk Equalisation

Income cross- subsidisation Risk cross-subsidisation 0%100% 0% 100% 1 Pre Medical Schemes Act (2000) Open enrolment PMBs Community rating 3 Extension of PMBs (2004) Removal of TES Re-allocation of TES on an equal per capita basis at value of PMBs 8 Health tax introduced to fund value of BBP Ultimate policy objective Possible trajectory combining both risk- and income- cross- subsidisation Risk Equalisation Fund Comprehensive BBP implemented Policy Objective and Trajectory Source: MTT July 2005

Other Sequences of REF Reform REF on its own before the per capita subsidy or any income cross-subsidy is seriously damaging to all lower income groups, putting them in a much worse position than now. High income groups benefit most. This is why RETAP never envisaged REF being introduced in isolation. Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Other Sequences of REF Reform REF after per capita subsidy but before full income cross-subsidy is almost the same as the current position. The per capita subsidy on its own would have been better for lower income groups. Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Other Sequences of REF Reform The per capita subsidy on its own would have been better for lower income groups. Saw-toothed effect of sequence but this does NOT mean that REF and income cross- subsidy “are not worth it”. Without REF, will still have the unfair differences between options or schemes that the amount paid depends on the demographics of the option or scheme joined. Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Benefit Design and Option Design Reforms

Proposed Option Structure Was in MSA amendment bill 2008 but not legislated. Source: Council for Medical Schemes. PMB review consultation document. Third draft 25 March 2009

Option Reform: Common PMB Benefits All PMBs in a single common pool within the scheme, before per capita subsidy, REF and income cross-subsidy. Has disastrous consequences for lower income groups – worse than introducing REF on its own. Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Option Reform: Common PMB Benefits Lower income groups worse off than REF sequence (green), although better than now (blue). Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Option Reform: Expanded Common Benefits Common benefits to include PMBs and all in-hospital benefits. Only the highest income groups benefit. The larger the package of common benefits, the better for the highest income groups and the worse for lower income groups. Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Option Reform: Expanded Common Benefits If treat expanded common benefits as expansion of PMBs, then more paid via income cross-subsidy and thus better for lower income groups. CMS version has only PMBs in REF: benefits highest income groups and takes lowest income groups back to almost current situation. Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

Conclusions

The Sequential Implementation of Complex Reforms From an implementation point of view, there are considerable risks in implementing all the steps towards a system of mandatory membership at the same time. If all steps are not introduced at the same time, the order in which the steps are introduced will have a different impact on different stakeholders. In order to retain stability within the current system as well as to attract new members into the system it would be essential to introduce income cross-subsidies simultaneously with risk equalisation and before other reforms to the benefit package. If not it will decrease the affordability of private health insurance for many members, thereby forcing them to opt out of the system. At worst, risk equalisation needs to be introduced after the per capita subsidy and before full income cross-subsidies, but prefer risk equalisation together with full income cross-subsidy. Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Preferred Sequential Implementation The sequence that will cause the least instability and seems most viable in terms of the impact on workers is as follows: Already in place: open enrolment, community rating, minimum benefits. Remove tax subsidy and replace with a per capita subsidy; Introduce the Risk Equalisation Fund to operate between options; Simultaneously introduce an income cross-subsidy; Introduce mandatory membership for all earning any income (very lowest income need some form of wage subsidy or subsidy of social security contributions if these are a flat percent of income); Deal with option restructuring issues to improve community-rating at scheme level and enlarging the package of minimum benefits. Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Conclusion on Sequential Implementation The difficulties raised by the sequential implementation of complex reforms are significant in the transition from a voluntary to a mandatory health insurance system. Risk equalization is a critical institutional component in moving towards a system of social or national health insurance in competitive markets, but the sequence of its implementation needs to be carefully considered. Source: McLeod and Grobler (2009), The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa

Innovative Medicines South Africa (IMSA) is a pharmaceutical industry association promoting the value of medicine innovation in healthcare. IMSA and its member companies are working towards the development of a National Health Insurance system with universal coverage and sustainable access to innovative research-based healthcare. Contact details: Val Beaumont (Executive Director) Tel: Fax: Innovative Medicines SA (IMSA) Cell: PO Box 2008, Houghton, South Africa

Material produced for IMSA by Professor Heather McLeod