CIRCULAR 8 OF 2006 WILLEM CLAASEN 9 MARCH 2006

Agenda Background Objectives Benefit Design Provider contracting Contributions and reserving Suggestions

Where does this come from? Background Where does this come from? SHI framework Open enrollment and community rating Income Cross-subsidisation (including tax) PMB’s and BBP’s Risk equalisation Mandatory membership

Where does this come from? Background Where does this come from? Other stated objectives Simplification of Benefit Designs Greater transparency and increased competition International Review Panel of REF Benefit designs too complicated Suggested standardised benefit packages

Objectives Problems Targeted The current silo design permits “excessive risk rating” Section 29(1)n does not allow for differential pricing depending on service provider Implementation of REF requires industry-wide community rate iro PMB’s – price should not vary except by service provider Medical savings accounts are an anomaly in scheme design and require a more flexible framework

Objectives Stated Objectives Remove fragmentation of risk pools, as options currently need to be “selfstandig” Remove risk selection in respect of essential health care Improve benefit and contribution transparency Improve access to PMB’s and remove opportunities for arbitrary denial of benefits by schemes Improve price competition between medical schemes Foster development of selective contracting with service providers

Agenda Background Objectives Benefit Design Provider contracting Contributions and reserving Suggestions

Benefit Structure Scheme-wide common benefits Supplementary benefits Benefit Design Benefit Structure Scheme-wide common benefits Mandatory for all scheme members with the same price for all members Must include PMB’s Also include all benefits common to all members Includes all hospital benefits and benefits during hospitalisation Supplementary benefits Members can choose - voluntary basis Limit suggested on the number of these “options” Only out-of-hospital benefits

Benefit Structure Only PMB’s equalised in terms of REF Benefit Design Benefit Structure Only PMB’s equalised in terms of REF Scheme may apply “reasonable” waiting periods on members that move to the supplementary options or to a richer supplementary option May charge lower rates if member chooses specific providers This is applicable to the common and the supplementary benefits

Change in Option Design Benefit Design Change in Option Design MSA? OPTIONAL COMPULSORY PMB’s & other “common benefits”

Questions on Benefit Structures Benefit Design Questions on Benefit Structures What is seen as reasonable waiting periods? If too short, members will still select against scheme No certainty given in Circular on MSA’s Although in the presentation to ASSA it was hinted that MSA’s should either be offered in schemes but outsourced to banks, or removed totally Uncertain what level of differentiation allowed in terms of levels of reimbursement Need to be able to pay different providers at different rates Will different offerings be allowed in terms of eg different percentages of NHRPL?

Implications for Benefit Structures Benefit Design Implications for Benefit Structures Total redesign of most multiple option schemes Significant administration and IT impact Schemes may be encouraged to move to lowest common denominator in terms of benefits Significant portion of benefits not equalised by REF Profile still important Richer benefit designs generally attract poorer risks Simplification of designs may be achieved Significant contribution increases for options currently providing less benefits – typically better risk profile

Impact on Low Cost options Benefit Design Impact on Low Cost options

Impact on Low Cost options Benefit Design Impact on Low Cost options Options with lower benefit levels iro chronic medicine and out-of-hospital benefits generally have a better risk profile In-hospital benefits currently cost the scheme less to provide to these members The scheme has to allow for the cost of these benefits at the average cost of all members Many of these options will already face significant increases as a result of the REF being introduced Circular 8 exacerbates the increases

Impact on Low Cost options Benefit Design Impact on Low Cost options Analysis of the open schemes administered by Medscheme shows a consistent pattern for the lower cost options Example for an option in one of the schemes: REF expected to result in required contribution increase of ca 40% Circular 8, together with REF, expected to result in required increase of ca 105% More benefits than just PMB’s are equalised within the scheme Numerous examples of options expected to require an increase in excess of 40% with both REF and Circular 8

Impact on Low Cost options Benefit Design Impact on Low Cost options Lower cost options generally have younger, healthier members with lower earnings that will probably not be able to afford these increases But they can most afford to go without private medical cover, as they are healthier There are no income cross-subsidisation or mandatory membership foreseen for 2007 The younger healthier members will have a strong incentive to leave the medical schemes environment Should this happen it will result in a deterioration of the risk profile of the whole industry

Provider Contracting Provider Contracting Scheme can charge lower rate if member chooses more restrictive network of providers No contract is needed with providers to do this This can all be done in the current environment, but Requires registration of separate option Registrar not enthusiastic about new options The scheme can now allow for multiple contribution tables within one “option” or the common benefits, based on different providers Also, waiting periods allowed where member moves from restrictive to open choice

Implications of Provider Changes Provider Contracting Implications of Provider Changes More negotiating power to schemes, as it is easy to exclude a provider on a voluntary basis Far easier to develop new models in conjunction with providers to bring down cost Members are not forced onto restrictive option, but can see the benefit of moving very clearly Waiting periods help protect against anti-selection to some extent This should assist in changing provider behaviour Good news for schemes and members

Contributions and Reserving Contributions for Principal Member, Adult Dependant and Child dependant to be exactly the same Only pay for the first three family members Definition of family to exclude adult special dependants Contributions for supplementary benefits community rated by option Separate contributions for common benefits, supplementary benefits, and non-healthcare costs

Impact of Contribution Changes Contributions and Reserving Impact of Contribution Changes Singles and larger families will be subsidised by small families Scheme experience will be more sensitive to changes in the average family composition If generally larger families join, or small families add free children, claims can increase with contributions remaining at the same level Adults claim more on average than children, especially for hospital benefits Supplementary benefits that are community rated, but not subject to equalisation by the REF, will still incentivise risk selection by schemes

Contributions and Reserving Reserves Separate reserves for common benefits and supplementary benefits Not stated what the separate levels of reserves required are, or how current reserves will be split These reserves may not be used to fund a shortfall on non-healthcare expenditure

Impact of Reserving Changes Contributions and Reserving Impact of Reserving Changes Reserves currently held for the whole risk pool Requiring separate reserves for common benefits and supplementary benefits will require a higher level of total reserves, as the risk pools are smaller Problem if there is an overrun in non-healthcare expenditure The scheme can only use non-healthcare contributions as source of funding. May require non-healthcare reserves as a cushion against uncertainty A higher total reserving requirement results in higher levels of total contributions - reserves need to be maintained

Suggestions for Comment In the absence of mandatory cover or income cross-subsidisation, the cost impact of REF together with Circular 8 will be too much for lower cost options to bear in 2007 Consider delaying Circular 8 until mandatory membership and/or income cross-subsidy is in place Time lines far too short for proper consultation, discussion and implementation, if the full Circular 8 is to be effective from 2007 The suggested provider contracting changes should be implemented as soon as possible, though

Suggestions for Comment Leave reserving at total scheme level Allow risk rating (albeit with safe-guards) on all benefits not equalised by REF This was recommended by the International Review Panel of the REF It will reduce the incentive for risk-selection through benefit design It will help to encourage younger, healthier risks to choose richer benefits All this will reduce the pressure on schemes to move to the lowest common denominator and encourage them to provide sufficient cover

DISCUSSION