1. Katy Caldis (Principal Officer)
Fedhealth Medical Scheme Presentation to Portfolio Committee on Health 2 June 2010
Katy Caldis (Principal Officer)

2. Historical Context Health Plan 1994 MEDICAL SCHEMES ACT
NO. 131 OF 1998
[ASSENTED TO 20 NOVEMBER, 1998]
[DATE OF COMMENCEMENT: 1 FEBRUARY, 1999]
(English text signed by the President)
as amended by
The ANC Health Plan 1994 set the long term strategy in terms of health provision for SA and it was in accordance with this plan that the Medical Schemes Act 1998 was promulgated. The long term objective was to ensure that all employed citizens should have cover for their basic healthcare needs through a medical scheme in the private sector freeing the state to only need to fund healthcare for the indigent. The most significant changes introduced were
Community rating – historically schemes were able to charge according to the risk profile of the member e.g. Age rated contributions so that older sicker members could be charged more than younger, healthier members. This is considered undesirable from a social perspective and from the perspective of social solidarity – particularly in terms of health
Open Enrolment – this implies that no one may be excluded from cover. If one excludes the sickest people from cover they effectively become a burden on the state.
Prescribed minimum benefits – once again the intention was to prevent “dumping on the state” and to ensure that all lives covered by a private medical scheme are guaranteed a certain minimum level of cover
Governance – a significant number of the changes in the act dealt with improving the governance of medical schemes and there has been a significant improvement in governance and the solvency levels of schemes over this period.
However in order to ensure the long term sustainability and to increase affordability and access to schemes two critical pieces of the reform have still not been implemented and theses are:
Mandatory membership – GEMS was launched as a precursor to mandatory membership so that at least the government was covering it’s own employees before it became compulsory for employers in the private sector to ensure all their employees were covered
Risk Equalisation fund

3. Fedhealth is a not-for-profit trust fund owned by its members (as indeed are all medical schemes in SA).
The scheme is governed by a board of trustees which are 100% member elected.
Fedhealth prides itself on its good governance and has an experienced and independent board.
The boards responsibility is to ensure that members interests are best served and they board has always maintained an open door policy with its members.

4. Member Contributions Healthcare Exp Investment Income
The scheme’s main source of income is member contributions and its main expense is healthcare expenditure i.e. paying for doctors, hospitals and medication etc.
The scheme must hold a minimum of 25% of annual contributions in reserves and investment income earned on these funds are used to subsidise member contributions.
Schemes generally offer members a number of different options to select from which differ in both the level of contributions and benefits. Within a single option, however, contributions may only be differentiated for adults and children or by income. i.e. All adults must pay the same rate irrespective of age or health status, unless the scheme chooses to differentiate the contribution by level of income. In order to try and include as many low income lives as possible schemes do offer options targeting entrants to the market with a lower contribution rate for those earning below a certain level of income e.g. < R4000 pm and R4000 – R6000 pm
Schemes have to balance a limited source of income (i.e. Contributions) against unlimited demand for consumption of healthcare. It is therefore not possible to provide unlimited benefits, but one needs to constantly balance the demand for healthcare against the affordability of contribution rates. As schemes are not-for-profit entities owned by members all funds effectively belong to the membership any surpluses generated belong to the members. But schemes generally aim to break-even after ensuring adequate contribution for maintaining reserves to given their members best value for money.
Operational Costs

5. Distribution of Healthcare Exp
Graph illustrates distribution of healthcare expenditure over different healthcare sectors for the 2009.
Expenditure on hospitals is generally highest at 44% in 2009 with medical specialists receiving 18% of expenditure.

6. Change in Dist. Healthcare Exp.
In May 2004 legislation governing the pricing of medication was promulgated. The impact of the Single Exit Price (SEP) can clearly be seen with a reduction in the proportion of expenditure on medication falling from 17% in 2003 to 10% in 2009.

7. Healthcare Expenditure
Price - Competition Commission Ruling
6 years ago the Competition Commission ruled that it is anti-competitive for medical schemes on behalf of consumers to collectively bargain for the price of healthcare. We believe this ruling has not in fact been in the interests of consumers or the affordability of healthcare in South Africa. Historically there was more certainty in medical scheme pricing and for providers in terms of knowing at what rate a scheme would reimburse them.
Hospitals
There are three main hospitals groups in South Africa, therefore schemes it is therefore practical for schemes to achieve a negotiated price with hospitals in that one only has to negotiated with the representatives of each group. However as schemes are prevented from collective bargaining they are effectively price takers and cannot meaningfully bargain as it is extremely difficult to establish a national network of hospitals without including all three of the main players. On the other hand at least in this arena there is certainty that members bills will be covered in full if one achieves a negotiated price
Healthcare professionals
Given the number of healthcare professionals it is impossible for schemes to negotiate a tariff structure with each individual provider. In order to bring structure in charging the National Health Reference Price List gives both schemes and healthcare professionals and common language in terms of pricing and reimbursement. For most categories of professional this is a relevant guideline e.g. One finds many general practitioners that charge at NHRPL and they are therefore reimbursed in full when schemes also pay at NHRPL. However there is a critical shortage of medical specialists in SA and there is significant differentiation in the charging practice of specialists particularly in hospital.
Medication
In this area there is legislated price control, so there are no issues in terms of the competition commission ruling and as illustrated in the previous slide there has been significant price control in this area

8. Healthcare Expenditure
Utilisation & Funding Policies
In order to try and keep medical inflation under control one cannot only look at price, but one has to consider utilisation as well.
Fee for service environment
Third party payer
Doctors do not often consider the impact of their behaviour on the affordability of healthcare. We need to work together more closely to understand each others worlds
Funding policies are imperative for schemes particularly in the fact of new technology including biological drugs. One has to consider the cost impact in relation to the improvement in health outcome.
Disease management programs assist to ensure members conditions are well managed and preventable hospitalisation is avoided e.g. HIV and Diabetes.
Enrolment in HIV programs is critical
Use of generic medicines also assists significantly in keeping costs under control

9. Operational Costs Administration Managed Care
New Business (broker commission & marketing)
Management
Complex environment in which we operate, but we always aim to keep operational costs to a minimum so that the maximum proportion of each contribution can be spent on healthcare.
Operational costs include
Processing and verification of new members and changes to membership info eg adding dependants
Receipt and reconciliation of contributions
Payment & verification of claims
Query resolution
Manage Care
Various interventions as discussed to ensure optimisation of expenditure of each healthcare rand
New Business
Without new business schemes would have an aging population which in turn would lead to an increase in contributions due to the fact that members tend to claim more as they age. Therefore schemes need to constantly market themselves in order to bring in new younger members

10. Legislative Environment
Open enrolment
Community rating
Prescribed Minimum Benefits
Compulsory membership
Risk equalisation fund
(Income cross-subsidisation)

11. Source: Council for Medical Schemes Annual Report 2008-09
Graph clearly illustrates anti-selection in the industry whereby younger individuals who do not have a great need for healthcare cover chose not to join the system.
The system is dependant on cross-subsidisation – the more the healthy opt out of the system the more expensive it becomes for those who remain in turn chasing away more healthy people. This erodes value for all and effectively the old and the sick that we were trying to protect by community rating effectively end up covering their own costs.
Source: Council for Medical Schemes Annual Report

12. Source: Council for Medical Schemes Annual Report 2008-09
Anti-selection even more strongly illustrated by the fact that there are more females than males covered between 20 and 40 (maternity)
Source: Council for Medical Schemes Annual Report

13. Legislative Environment
Open enrolment
Community rating
Prescribed Minimum Benefits
Compulsory membership
Risk equalisation fund
(Income cross-subsidisation)
The single biggest change that could be introduced to increase affordability and access to medical cover would be to introduce compulsory membership for all earning above a certain level of income.
In addition the risk equalisation fund would assist scheme to focus only risk management rather than the need to focus on risk selection to ensure sustainability.

14. Pot of gold at the end of the rainbow (Holy grail) = quality healthcare for all SA citizens at an affordable price