SOCIAL HEALTH INSURANCE POLICY Presentation to Health Portfolio Committee 7 June 2005

Contents of presentation Some motivation for SHI policy Objectives of SHI Present proposals Envisaged way forward

Key Strategic Challenges Constitutional mandate to provide universal access Inequity in access to health care Ensuring that public health system remains backbone of SA health system care Private sector cost escalation Limited options for low income people Need to reduce financial risk to individuals at the time of accessing health care

Policy Context cont. SA - Health System 2002/2003 Public sector R33.2 billion Private sector R43 billion Serves 6.9 m Pcap = R Serves 37.9 m Pcap = R875.98

Number of Medical Scheme Beneficiaries

Benefits Paid on Hospitals in Real Terms (2003 Rands), 1990 to 2003

Proportions of Benefits Paid by Medical Schemes in 2003

Characteristics Of NHI and SHI Normally employment related, payroll deductions Contributions from employers and employees Premiums are income related and benefits are standardized Creates large risk pool and avoids adverse selection Social solidarity (healthy cross-subsidise the sick, and wealthy cross-subsidise the poor)

NHI versus SHI NHI provides cover for both contributors and non- contributors SHI covers only the contributors and their dependants However: Most industrialised countries evolved from SHI to NHI as their economies developed In SA, NHI can be achieved in the long term as the contributor base increases with improved economic performance

OBJECTIVES OF SHI 1. To ensure affordable universal cover to all citizens and legal residents of South Africa in an equitable manner within a unified health system. 2. To ensure a reasonable and equitable system of cross-subsidies across all income groups applicable to users of both the public and private sectors. 3. To remove unfair access barriers to medical scheme cover for lower-income groups.

Departmental position as at June 2003 In SA context, SHI has three components: 1. Risk-related cross subsidies; 2. Income-related cross subsidies; 3. Mandatory contributions

Risk Related Cross subsidies MSA requires all schemes to provide PMB for all scheme members Scheme have different risk profiles, resulting in different cost structures Research done by CARE found that there is a 180% price difference between the lowest and highest risk profile scheme, just because of different age profiles Clearly, schemes have incentive to risk rate in order to reduce their costs

Recommendation on Risk-related cross subsidies Urgently establish a Risk Equalisation Fund Primary objective of REF is to protect the open enrolment and community rating environment. Purpose is to prevent competition between medical schemes from occurring on the basis of risk selection. Will encourage competition between medical schemes on the basis of cost and quality of healthcare delivery.

REF Contribution Table [page 1] Source: REF Formula Consultative Task Team Report

Poor risks Good risks Poor risks Good risks Poor risks Good risks Poor risks Good risks Poor risks Good risks Poor risks Good risks Poor risks Risk Equalization: how does it work? Risk Equalisation Fund Net financial transfer Levies to, and payments from, the REF Medical schemes

Impact of Risk Equalisation Risk equalisation will equalise the risk profile faced by schemes, NOT the outcome of successful risk management or managed care. Schemes that are successful at reducing the cost of delivery of healthcare retain that benefit for their own members. All schemes will effectively face the same risk profile. The most successful ones will be those that can best manage that risk and reduce the cost of delivery. Future competition will be on healthcare delivery, not risk selection.

Income Cross subsidies Our medical scheme contributions are community rated Community rating achieves cross subsidies at option level only. Income related cross subsidies difficult to achieve in current industry structure Inequity exacerbated by tax expenditure subsidy

Tax Expenditure subsidy Made up of two components: Tax deductions on medical scheme contributions by employers Deduction on any medical expense in excess of 5% on taxable income Employer deduction regressive b/c of link to contributions Individual deduction more progressive, but depends on submission of tax return Estimated at 8,2 billion in 2004

Subsidy Framework - existing low middlehigh Tax expenditure subsidy Current public sector users (not in medical scheme) Private sector users In-kind subsidy Required medical scheme contributions Per capita expenditure Income level Low income groups are forced to co-pay for services without reasonable access to a subsidy or to risk pooling via a medical scheme

Mandates: emerging reform path Medical scheme membership Income- based Contributions VoluntaryMandatory Not required Mandatory Introduce membership mandates as membership improves within the voluntary environment Current position

Proposal on Income Cross-subsidies Need to restructure the Tax expenditure subsidy to be more equitable Need to move towards income-based contributions for medical scheme membership This will improve social solidarity in the funding of health care, and reduce out of pocket expenditure on health care The technical details of HOW still need to be agreed with National Treasury

Proposal on mandates Mandatory membership should be phased in over time First phase is to mandate income related contributions for high income earners or certain employer groups Such contributions to be based on the cost of providing common minimum package in medical scheme industry Implementation of compulsory membership of medical scheme should be gradual.

Proposed next steps Testing of Risk Equalisation framework from Phasing of income cross subsidies still to be finalised with Treasury Report to Cabinet in June/July SHI framework still not approved by Cabinet