1. The Impact of the Sequential Implementation of Complex Healthcare Financing Reforms
Prof Heather McLeod Pieter Grobler
University of Cape Town Medscheme Health Risk Solutions
University of Stellenbosch

2. Options for Improving and Extending Coverage

3. The American Nightmare ?
Source: Prof Di McIntyre, Chair Of Health and Wealth, UCT

4. Public-Private Coverage
Source: McIntyre D., van den Heever A. Social or National Health Insurance. In: Harrison S., Bhana R., Ntuli A., editors. South African Health Review Durban: Health Systems Trust; URL:

5. WHO Resolution 2005
Sustainable health financing, universal coverage and social health insurance
WHO URGES Member States:
to ensure that health-financing systems include a method for prepayment of financial contributions for health care, with a view to sharing risk among the population and avoiding catastrophic health-care expenditure and impoverishment of individuals as a result of seeking care;
to ensure adequate and equitable distribution of good-quality health care infrastructures and human resources …
to plan the transition to universal coverage of their citizens ..
to recognize that [this] will need to be developed within the particular macroeconomic, sociocultural and political context of each country;
to take advantage of opportunities that exist for collaboration between public and private providers and health-financing organizations, under strong overall government stewardship;
FIFTY-EIGHTH WORLD HEALTH ASSEMBLY 25 May 2005

6. Transition from no Financial Protection to Universal Coverage
Political consensus in South Africa for universal coverage. Trajectory?
Source: Kirigia et al (2006) Health financing patterns and the way forward in the WHO African Region.

7. ANC Health Plan, 1994 Principles for National Health Insurance:
Current medical schemes form the basis.
Membership compulsory all formal sector employees and dependants.
Schemes may not exclude high risk [Jan 2000].
Basic package of care to be statutorily defined [PMBs].
Contributions for basic package will be income-related.
Pooled in central equalisation fund; each scheme paid according to risk profile i.e. a risk adjusted capitation fee.
Schemes can offer cover above essential package.
Long term goal for all citizens, including unemployed, to be covered under the NHI system.

8. ANC Manifesto NHI, 2009
“The ANC is determined to end the huge inequalities that exist in the public and private sectors by making sure that these sectors work together.”
Introduction of the National Health Insurance System (NHI) system, which will be phased in over the next five years. The principles of NHI will include the following:
NHI will be publicly funded and publicly administered and will provide the right of every South African with access to quality health care, which will be free at the point of delivery. People will have a choice of which service provider to use within a district.
The social solidarity principle will be applied and those who are eligible to contribute will be required to do so, according to their ability to pay, but access to health care will not be according to payment.
Participation of private doctors working in other health facilities, in group practices and hospitals, will be encouraged to participate in the NHI system.
Source: African National Congress 2009 Manifesto Policy Framework

9. Two Paths to Universal Coverage
Through SHI to NHI
Direct to NHI
1994 to 2007
Gradual, begin with highest paid workers and their families.
Subsidies for workers earning below tax threshold.
Medical Schemes are vehicles for SHI, buy from private and (increasingly) public providers.
Open enrolment, minimum benefits (PMBs), community-rating, income cross-subsidies, risk cross-subsidies, mandatory contribution.
Competitive purchasers, with Risk Equalisation Fund.
“Post-Polokwane” Dec 2007
ANC election promise: immediate “within 5 years”
Tax and progressive social security contribution.
Central buyer, with public and private providers.
Role for medical schemes undefined – perhaps top-up only?
Package not yet defined.

10. Analysis of Introduction of REF

11. Phased Coverage for NHI
Effectively mid-2006 figures, using patterns from GHS2005
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 Extended to include LIMS.

12. Current Situation Public sector facilities
Treasury allocation of funds to provinces
Government
Subsidy in the form of a tax break for medical scheme membership
Tax
Member
Private Medical Schemes
Employer
Direct community-rated contribution for total package of benefits

13. Risk-adjusted transfers for minimum benefits Risk Equalisation Fund
Private Medical Schemes
Employer
Member
Direct community-rated contribution for packages above minimum benefits
Government
Remove existing tax subsidy
Direct subsidy per person
(total population)
Income-based contribution
for private minimum benefits less direct subsidy
Public sector facilities
Risk-adjusted transfers
Remove existing provincial allocation
Tax

14. Policy Objective and Trajectory
Possible trajectory combining both risk- and income-cross-subsidisation
100%
Health tax introduced to fund value of comprehensive PMBs 8
Medical Schemes Act (2000)
Open enrolment
PMBs
Community-rating
Ultimate policy objective
Re-allocation of tax subsidy on an equal per capita basis at value of PMBs
Income cross-subsidisation
Comprehensive PMBs implemented 7
Risk Equalisation Fund
Extension of PMBs (2004)
Pre-1999
Removal of tax subsidy 6 1 2 3 4 5 0% 0%
Risk cross-subsidisation
100%
Source: Ministerial Task Team on SHI July 2005

15. 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 2007.
One person earning and paying income tax.
Using 2008/9 income tax tables, revised to 2007.
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.

16. Current Affordability Problems
Lowest income groups unlikely to have VHI and if so are probably fully subsidised by employer. At high income groups, 70-80% of people have voluntarily chosen to have cover.
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 2009.

17. Current Affordability Problems
Comprehensive package unaffordable except for highest income. People self-select to packages that are more affordable, largely because of reduced benefits. Demographic effect as well: younger and healthier in low cost packages.
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 2009.

18. Current Tax Subsidies for Health
Tax break has no impact on people earning below tax threshold. Has biggest impact for highest income group.
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 2009.

19. Remove Tax Break and Replace with Per Capita Subsidy
This has a dramatic impact for those earning below the tax threshold. The proportion of income may still be too high to be affordable but with some help from employer cover is now within reach.
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 2009.

20. Per Capita Subsidy, REF and Income Cross-Subsidy
Affordability can be improved for lower income groups by implementing income cross-subsidy and Risk Equalisation Fund together.
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 2009.

21. Other Sequences for Risk Equalisation

22. 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, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

23. 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, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

24. 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, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

25. Critical Need for Risk Equalization between Medical Schemes
International Review Panel found the need for risk equalization “was urgent” in February 2004.
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 2009.

26. Tax Reform in Absence of REF

27. Proposed Tax Credit, 2009
A consultation paper will be released later this year …
Deductions for medical scheme contributions and other allowable medical expenses could be replaced with a tax credit or rebate of 30 percent of the deductions you are currently allowed.
SARS example: 2009/10 tax year claim a deduction of R (contributions for family of four at R2,010 x 12) for medical scheme contributions and taxable income reduced by this amount. Effect depends on tax rate.
Proposed system: allowed a tax credit or rebate equal to 30 percent of the R24,120 i.e. R7,236.
SARS says proposed system will benefit middle- and lower-income earners, who are paying a marginal tax rate of less than 30 percent, and will be disadvantageous to those who are paying a higher rate.
Source: Laura du Preez, Personal Finance, 14 February 2009

28. Proposed Tax Credit, 2009 No impact
Only two groups benefit: “Low-paid civil servants” and “Clerical and service”. No impact on any groups earning below R5,000 pm (in this analysis). Effectively, most of LIMS target market (R2,000 to R6,000) gets no subsidy.
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

29. Proposed Tax Credit, 2009
Replacing the tax break with a per capita subsidy gets the subsidy to the lower income groups.
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

30. Prescribed Minimum Benefit and Benefit Design Reforms

31. PMBs and Total Benefits
PMBs in a 2007 study were found to be close to 49.4% of total benefits. Restricted schemes typically offer more benefits above PMBs than open schemes. Wide variation in out-of-hospital benefits covered.
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 2009.

32. 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, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

33. Option Reform: Common PMB Benefits
Lower income groups worse off than REF sequence (green), although better than now (blue).
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 2009.

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

35. 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, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

36. 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

37. Proposed Revisions to PMBs
Source: PMB review consultation document. Third draft 25 March 2009

38. 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

39. Estimate of Social Security Contribution for Health
Estimates using REF Study 2005 and GHS2005. All figures in 2005 Rand terms.
Source: McLeod, H. (2007). Framework for Post-Retirement Protection in Respect of Medical Scheme Contributions. In Department of Social Development (Ed.), Reform of Retirement Provisions: Feasibility Studies. Pretoria.

40. Expansion of PMBs
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.
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

41. LIMS Reforms

42. Access to Essential Healthcare
Proposed …
Source: PMB review consultation document. Third draft 25 March 2009

43. LIMS and Medical Schemes
LIMS already on medical schemes – will they migrate to LIMS options /schemes? Would leave only 10.5% of population on medical schemes with 19.5% on LIMS schemes if cover mandatory from LIMS threshold of R2,000 pm
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009
Effectively mid-2006 figures, using patterns from GHS2005

44. Population for LIMS
LIMS potentially much younger tail so leaves medical schemes with very old profile. Alternatively, most of these members go to LIMS (low pensions).
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

45. PMBs, BBPs and LIMS PMBs
Initial estimates: BBPs = PMBs + additional primary care
LIMS PMBs = MAT from DTPs + all CDLs + all RELs + additional primary care; adjust for provider access in delivery
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

46. LIMS Impact on PMB Price
LIMS PMB costs perhaps R24 less than full PMBs for this group.
Need to ask tough questions as to whether taking LIMS group out of current schemes is in their best interest. Consider impact on other groups.
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention Initial estimates, prefer to redo by age and gender.

47. Per Capita Subsidy in 2007
Government Subsidy per annum was R1,300 in 2005 Rand terms.
Adjusting for inflation (CPIX) gives R1,450 in 2007 Rand terms.
Direct per capita subsidy set equal to this amount: R1,450 pbpa or R pbpm.
LIMS per capita subsidy needs to exclude non-LIMS benefits as these would be provided in the public sector.
Estimate that LIMS PMBs are 53.4% of comprehensive package for the LIMS age profile, hence LIMS partial subsidy is R775 pbpa or R64.57 pbpm.

48. LIMS Reform without REF
LIMS helps workers close to tax threshold but worse than staying in PMBs for two lowest income groups.
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

49. LIMS Reform
LIMS achieves result for workers just above tax threshold largely due to reduction in direct package cost compared to what they were buying: R719 compared to R1,960 for family of four.
Hospital cover has changed from private to public.
Assumption is that all public sector benefits paid from remaining portion of subsidy.
But what if UPFS charged rather than capitated partial subsidy?
What should public sector charge for taking the whole of the tail of the benefit curve?
Expect aging of LIMS group. Impact on partial subsidy?
LIMS costings need more work. Need costings by age and gender in capitated primary care settings and in public sector.
NHI costings similarly need to be by age and gender.

50. LIMS Reform with LIMS REF Pool
Use this technique to investigate consequences …
Put hard evidence on the table when talking to policy-makers and stakeholders.
Source: McLeod and Grobler, additional affordability analysis for ASSA Convention 2009

51. Conclusions

52. 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, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

53. 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, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

54. 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, The role of risk equalization in moving from voluntary private health insurance to mandatory coverage: the experience in South Africa, forthcoming 2009.

55. Professor Heather McLeod
Pieter Grobler

56. 2009 Convention Lite and the Pensions, Health and Life Seminars May Sandton Convention Centre Johannesburg, South Africa