Consolidation of Medical Schemes Christoff Raath 22 August 2017 <Nice cover picture

What is NHI? A system designed to pool funds to provide universal access to quality, affordable health services for all South Africans. Will be implemented through the creation of a single fund. Services free at point of care. Funding based on ability to pay; Benefits in line with needs.

NHI Ideology “what” Implementation “how” Ideology vs substance “Equality” “Affordability” “Quality” “Accessibility” Funding? Pooling? Supply capacity? Service delivery? Administration? NHI Questioning issues of substance often construed as questioning the ideal itself

Administrative economies of scale Why the emphasis on “pooling” and a single NHI fund? Risk fragmentation Prevent clusters of young-and-healthy lives Administrative economies of scale Costs could reduce to say 3% (medical schemes currently at 11%) Monopsony purchaser benefit Ability to purchase at lower prices These could be plausible reasons why the white paper talks about a single fund Single fund can perhaps run non-health at 3% (compared to medical schemes currently 11%) Monopsony purchaser: single fund can push prices of providers down?

How does consolidation of medical schemes get us closer to NHI?

Administrative economies of scale How do NHI pooling principles manifest in the medical schemes industry? Risk fragmentation Are small restricted schemes younger or older than large open schemes? Administrative economies of scale How do small restricted schemes’ non-health expenditure compare to large open schemes? Monopsony purchaser benefit Do larger schemes necessarily negotiate lower prices?

Could these be conflicting objectives? Role of the Council for Medical Schemes Section 7(b) Control and coordinate medical schemes in a manner complementary with National Health Policy Section 7(a) Protect the interests of medical scheme beneficiaries Could these be conflicting objectives?

Acting Registrar presentation at BHF

Acting Registrar presentation at BHF

Potential ways in which consolidation could potentially be pursued Consolidation for the sake of consolidation Potential ways in which consolidation could potentially be pursued Small schemes - Regulation 2(3) read with Section 27(d) Loss-making options - Section 33(2)(b) Restricted scheme eligibility criteria As per restricted scheme definition in Section 1 “employer or trade or industry or calling” Small schemes – Debbie will talk about that Loss-making options? - You will talk about that Restricted schemes – based on Insight’s experience it would appear as if some schemes, especially those with multiple employers as the eligibility criteria, could be targeted

Impact of closing small schemes (< 6 000 members) Pensioner ratio by scheme size (No. of members) Solvency % – Small vs. Large open schemes Small schemes have large legacies of pensioners. This may be precisely why their existence has been tolerated by the regulator up to now. Many of these pensioners enjoy the benefit of income bands and comprehensive benefits. These schemes have established large reserves in order to be able to cater for the needs of these pensioners in the long run. Pensioners are likely not able to find similar levels of cover on open schemes * Source: Calculated from Council for Medical Scheme Reports (2015)

Market Curve – Benefit Richness vs. Cost Impact of closing small schemes On average, open fund members pay more than restricted fund members for the same benefits Market Curve – Benefit Richness vs. Cost 2017 Cost PMPM Benefit Value (Signal Model) * Source: Insight Signal Model (2017)

PRMA considerations Open vs restricted scheme contributions since 2000 Many small restricted schemes are backed by employers with post-retirement subsidies These pensioners have an expectation of continuing to enjoy comprehensive benefits, often on a low income band, subsidised by employer If the scheme ceases to exist, pensioners could question whether the employer is still meeting their reasonably expected employee benefits Employers have a significant interest in keeping contribution increases low Indexed at 100 in 2000 Source: CMS Annual Reports

+ 84% Impact of closing small schemes (< 6 000 members) Gross non-health expenses + Broker fees per life per month + 84% Small * Source: Calculated from Council for Medical Scheme Reports (2015)

Income cross-subsidies Impact of closing loss-making options Social solidarity Risk cross-subsidies Income cross-subsidies The founding principle of medical scheme regulation (and NHI policy) is social solidarity: a combination of Risk cross subsidies (healthy to subsidise unhealthy) Income cross-subsidies (high income to subsidise low income)

Typical multi-option scheme – cross-subsidies used to effect social solidarity Income cross-subsidy Risk cross-subsidy Comprehensive options Low-cost options Closure of loss making options will actually affect most vulnerable Loss Surplus Surplus Surplus Loss Closure of loss-making options will harm the interests of most vulnerable medical scheme members: high-claiming (unhealthy) members in comprehensive options, and low-income members in low cost options

Concluding remarks Policy uncertainty and political desire to effect change “Consolidation” narrative emerges as a strong theme Risk of careless and poorly analysed and detrimental policy changes Current consolidation drive likely harmful to most vulnerable beneficiaries Schemes or options superficially deemed non-compliant were historically allowed to persist for specific and sound reasons… …so it should not come as a surprise that those reasons are threatened if closure or consolidation is contemplated Risk of a new “missing middle” emerging, ironically in the pursuit of Universal Health Coverage Ongoing research and analysis a necessary part of the response

Does this represent a conflict? Questions Section 7(b) Control and coordinate medical schemes in a manner complementary with National Health Policy Section 7(a) Protect the interests of medical scheme beneficiaries Does this represent a conflict?