1. Implications of Circular 8 of 2006
Emile Stipp
2 March 2006

2. Agenda The big picture Overview of content
Implications for medical schemes
Suggested comments
Time lines?
Implications of Circular 8

3. The big picture Overall policy objectives Problems fixed by Circular 8
Implications of Circular 8

4. Overall context Government policy objectives
Open enrolment, community rating, PMBs, risk equalisation, tax re-structuring, mandatory membership = SHI
In the process, however, there are other sub-objectives:
Industry consolidation (fewer schemes)
Benefit standardisation
Price control and increased competition amongst service providers
Service provision control to avoid over-supply to a few privileged people
Main assumptions behind this:
Private sector market failed to control costs
Market forces lead to unfair outcomes – cover denied to those who need it
Private sector service delivery is exploitative, monopolistic / collusive and driven by greed
Protectionism and elitism ingrained in SA industry….
Implications of Circular 8

5. Overall context What does Circular 8 address specifically?
Removes risk group fragmentation between options and the consequences of current s33(2) of the Act, namely, most importantly, option downgrading
Provides schemes with the means to potentially affect service provider prices without having to negotiate with service providers
Simplifies benefit design
Potentially shifts savings accounts to different regulatory framework
Enforces greater transparency in respect of administration fees
Enforces particular contribution structure
Implications of Circular 8

6. Overall context The major advantages of Circular 8
It removes the problem of option downgrading in respect of hospital and chronic benefits
It allows more scope for underwriting where members select additional supplementary benefits
It gives schemes substantially more bargaining power when negotiating with powerful service provider groups
The above advantages are to be valued and should be supported by the industry
The question is the best way to get to the above outcomes…
Implications of Circular 8

7. Overall context High level challenges
Circular 8 would not have been problematic IF:
We did not have fragmented risk pools by option in schemes; and IF
We did not have low risk and low income populations in schemes’ lower cost options; and IF
We had mandatory cover for all dependants
On the other hand, can we have risk equalisation without Circular 8?
REF is almost definitely going ahead in 2007!
We cannot have open enrolment and community rating without risk equalisation
But can we have risk equalisation without mandatory contribution and simultaneous income cross-subsidisation?
Implications of Circular 8

8. Overview of Content Benefit design Networks & service providers
Contributions
Administration fees
Savings accounts
Implications of Circular 8

9. Contents of Circular 8 Benefits
The definition of “benefit” is distinct from the service provider that provides the benefit – refers to the cover offered and not how the cover is offered
Cover is the liability established by the scheme…to defray expenses of relevant health service incurred by member
Hence: Benefit cannot be defined as “benefit in the Public Sector” or “Medicines from Network x”
Scheme has to offer “common benefits” to all members
Common benefits are those benefits available to all members of a scheme
Must include PMBs in full
And includes all other benefits of the scheme common to all members, given above definition of “benefit”
Implications of Circular 8

10. Contents of Circular 8 Benefits
Common benefits are priced at the same level for all members of the scheme (but see below re. networks)
There are no options in respect of common benefits
But there are options in respect of supplementary benefits
Number of options restricted (not yet specified to how many)
Underwriting will be allowed for movements between options
Supplementary benefits may not include any in-hospital cover
Hence: where a member chooses not to buy supplementary benefits, service providers may aim to have member hospitalised for treatment – esp mental conditions, dental treatment – schemes are expected to manage the incidence of this
Implications of Circular 8

11. Contents of Circular 8 Benefit structure
Option 1: Option 2:
Voluntary savings as add-on to any option
Voluntary savings as add-on to any option
Voluntary savings as add-on to any option
Higher supplementary benefits:
Higher level of non-PMBs: all out-of-hospital cover
Supplementary benefits: some non-PMBs – all out-of-hospital
Supplementary benefits
Non-PMB hospital cover & other common benefits
Prescribed minimum benefits
Common benefits
Implications of Circular 8

12. Contents of Circular 8 Provider networks
Common benefits to be community rated for entire risk pool of the scheme – i.e. everyone in scheme pays the same
(REF: members of different schemes pay the same for risk cost of PMBs)
UNLESS scheme:
Wants to encourage members to go to particular service provider network and / or
Believes that particular service provider network is less costly than others
Then scheme can allow discount on common benefits for all those choosing that network
Scheme can also do this in respect of supplementary benefits
BUT NO DISCOUNT FOR PROTOCOLS! All scheme members have to be on the same protocol…unless protocol is defined within specific network
Waiting periods can apply for transfer between service provider groups
Implications of Circular 8

13. Contents of Circular 8 Provider networks
Waiting periods in respect of hospital group selection:
If you had restricted choice in the past and then move to open choice of hospital group
There may be a waiting period on conditions diagnosed to receive treatment within any hospital group for up to 12 months
In other words, you can get treatment in originally selected hospital group, but not in any hospital network, until a year has expired
Not specified in Circular, but presumably this implies that you pay higher contribution from year 1, but only have freedom of choice from year 2
This waiting period clearly only to be implemented if choice is exercised after diagnosis of disease – requires some level of medical underwriting
Also not clear, but what will happen if you relocate, and new town does not have a hospital in your original restricted network? Will waiting period still apply?
If you chose restricted network, and get discount, and then you go to another hospital, you may have to pay penalty
But will this apply to PMBs, emergencies, or when travelling?
Implications of Circular 8

14. Contents of Circular 8 Provider networks
Waiting periods in respect of primary care service provider selection:
You can choose on an annual basis
But there are no waiting periods
Are penalties allowed if you go outside you primary care network?
Are there exceptions, e.g. emergencies, PMBs?
Chronic medicaton:
No waiting periods – clearly
But IF you are a chronic member and you choose a restricted network
The Scheme may, but does not have to, offer you a discount
Similar discounts may not be offered to non-chronic members who choose a restricted chronic network even before registering for chronic condition
BUT discounts do not have to be passed on in full to chronic members, and other members may indirectly benefit from chronic members’ choice
Implication: chronic members may end up paying less
Question: is this in contravention of s29 of Act which prohibits discrimination on the basis of health status?
Implications of Circular 8

15. Contents of Circular 8 Contributions & financial matters
Community rated contribution set separately for common benefits
Taking into account REF proceeds / payment i.r.o. PMBs
Same rate for principal member, adult and first child
No contributions levied for second child onwards
Hence: great for singles, and large families – will be subsidised by small families!
Supplementary benefits: community rated per option
Also same rates for PM, adult and first child
No cross-subsidation between common benefits and supplementary benefits – each one priced to be self-standing
Non-health expenditure: separate contribution for non-health expenditure, per beneficiary / family.
May have separate non-health contribution for supplementary benefits based on actual costs
Implications of Circular 8

16. Contents of Circular 8 Contributions & financial matters
Hence: capitation providers will have to split out non-health expenses (what about risk-sharing arrangements?), and also split between non-health expenses relating to common benefits vs supplementary benefits
Schemes are not allowed to use reserves accumulated from risk benefit contributions less claims to fund shortfalls in non-health expenses
Need separate non-health expenditure reserve if there is uncertainty about non-health expenditure
Schemes would have to separate reserves for common benefits from reserves for supplementary benefits to avoid cross-subsidisation
But what are the required levels of separate reserves?
Savings account “deposits” to be kept separate from risk contributions and non-health expenditure contributions
Perhaps handed over to banks?
Implications of Circular 8

17. Implications for Schemes
Implications of Circular 8

18. Circular 8 implications…. For schemes and members
Systems re-design to report on new option structures, and to assess claims and determine contributions correctly – not driven only by option any more
Effectively members would belong to more than one “option” (common vs supplementary)
But within one “option” there could be:
Different contribution levels
Different benefit entitlements
Singles and large families subsidised by small families
Considerably more expensive for small families for most schemes
Depends on relationship between adult and child contributions
And family structures within schemes
Schemes more exposed to family movements between options
And joining and resigning of families of particular sizes
Implications of Circular 8

19. Circular 8 implications…. For schemes and members
Considerable risk of anti-selection in this regard: large families now register dependants without having to pay for them (but there are restrictions on who such dependants may be). Counter-argument: but they don’t claim a lot!
Pricing for 2007 would have to estimate:
Which members would select supplementary benefits
And their family sizes
Taking into account impact of REF on common benefits
Most significant impact of Circular 8: on low income members in low cost options where typically low claims…and where s33(2) currently means that such options are priced at low levels
Implications of Circular 8

20. Circular 8 implications…. For schemes and members
For low cost options with low claiming healthy membership (mixture of low income and high income) for typical scheme with split risk pools in different options:
Increase due to latest REF community rate: 35% in risk costs
Increase due to equalising common benefits: another 19% in risk costs
Overall 61% increase in risk costs
Overall increase in total contribution costs: 32%
Plus added inflation and potential increases in admin fees: 39% to 45% increases for “low cost” option next year?
The above just takes into account impact on principal member rate
Child dependant rate affected by:
Higher cost “per beneficiary” of REF community rate (i.e. 81% increase)
Then equalising for common benefits: 19%
Overall: 115%
BUT then still has to equalise adult and child rates, and subsidise larger families – will be large increase
Implications of Circular 8

21. Circular 8 implications…. For schemes and members
For low cost options with low claiming healthy membership (mixture of low income and high income) for typical scheme with split risk pools in different options:
Overall increase for those on lower cost option will be very high
Also depends on family size: small families hit the hardest – probably more than 100% increase
But some relief for singles and large families, although there will be an overall increase
The above quantified for a scheme having to pay into REF
For schemes receiving from the REF, impact will be softened, although equalisation of cost between options will lead to significant increase for low cost options
Of course, high cost options may decrease in cost
Interactions complex for every scheme – think carefully about impact of various increases on membership movements & consider scenarios
Implications of Circular 8

22. Circular 8 implications…. For schemes and members
Reserving implications: separate reserves for:
Common benefits
Supplementary benefits
Non-health expenses
Cross-subsidisation between reserves not allowed…
This means that, overall, higher reserves would have to be held
In particular, if membership choices of supplementary benefits entirely different from anticipated, reserving margin built into contributions may not be sufficient to build up required reserves
E.g. if large number of members choose particular supplementary option
Problematic, as schemes have no source of capital other than contributions
Implications of Circular 8

23. Circular 8 implications…. For service provider relations
Entire relationship with service providers changing:
Scheme can now offer a contribution discount to members if they agree not to use a hospital in a specific network
Also, intention to de-link individual hospitals from group ownership? Then schemes can offer a contribution discount to members if they agree not to go to specific hospital!
Schemes do not have to negotiate this with hospital or hospital group
If service provider group increases price as a result of this, scheme can offer larger discount to members electing not to use service provider group
If schemes perceive group to be expensive (e.g. by 10% or 5%), they can immediately offer this discount
If contributions increase a lot due to other changes, members will be more inclined to take the discount
HOWEVER….
Implications of Circular 8

24. Circular 8 implications…. For service provider relations
Entire relationship with service providers changing?
…HOWEVER…
If discount attractive and many members choose restricted service provider network
There may be problems with supply
AND remember that cheaper prices in one hospital vs another may be as a result of case mix
Members may have to pay penalty to obtain the surgery they need, if not offered in restricted network chosen by member – or have waiting period imposed
This will be perceived as unfair as no member can predict upfront what surgery they might need
Ability to offer discount obviously constrained by geographical spread of hospitals and the spread of different surgical procedures amongst different hospitals and hospital groups
Implications of Circular 8

25. Circular 8 implications…. For service provider relations
But with significant discounts, doctors’ referral patterns might change, because members will want to avoid out-of-network penalties
Supply of Specialists might make it harder for ill members to adopt restricted choice
Implications for capitation arrangements:
Separate disclosure of admin fees
And perhaps separate for common benefit admin fee vs supplementary benefit admin fee
Separate cap fees required for common benefits and supplementary benefits
Cap fees not involving restricted network choice would have to be offered to all members of scheme (since common benefits priced at one level)
Implications of Circular 8

26. Circular 8 implications…. For service provider relations
Implications for capitation arrangements:
Cap fees involving restricted network choice would have to be offered at a discount to risk cost for scheme as a whole
BUT will service provider group experience anti-selective member choices? This is significant danger
Which might mean that cap fees are offered for common benefits either for the scheme as a whole or not at all
Protocols
Would have to be linked to a restricted network OR
To the scheme as a whole
Otherwise not in a position to offer discount as a result of protocol
Hospital pre-authorisation
Should have additional vigilance to avoid hospitalisation as a form of access to benefits
Implications of Circular 8

27. Circular 8 implications…. For service provider relations
Council intention to also impose capital requirements on risk taking service provider groups
To be competitive and minimise risk to scheme, service provider capitation fees would probably have to follow contribution structure imposed by Circular 8
Plan early and comment: if increases particularly high for some options, consider:
Risk of selective member withdrawals
Risk of insurance products targeting schemes’ members
Risk of employers implementing off-site treatment programmes for employees, given new rules relating to tax deductibility
Implications of Circular 8

28. Suggested comments
Implications of Circular 8

29. Circular 8 Suggested comments
Specific comments:
Combined Impact of REF and Circular 8 on low cost options too high
Rather implement when there is a LIMS alternative available
Or phase in rather than implement at once
Could commence by removing s33(2) restriction without imposing equalised contributions for common benefits at once
Rather look at reserving from an overall perspective
Consider contribution structure content carefully – equalised adult and child rates lead to many complications
Allow for contribution differentiation due to protocols in addition to restricted networks
We need certainty sooner rather than later, on:
REF community rate
NHRPL
Circular 8
Implications of Circular 8

30. Time lines
Implications of Circular 8

31. Time lines Comment on Circular 8 by end March
Submitted to Parliament during March
Draft bill published end April
Out for comment up to end May
Implemented for 2007
Together with REF
Implications of Circular 8