1. CIRCULAR 8 OF 2006
WILLEM CLAASEN
9 MARCH 2006

2. Agenda Background Objectives Benefit Design Provider contracting
Contributions and reserving
Suggestions

3. 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

4. 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

5. 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

6. 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

7. Agenda Background Objectives Benefit Design Provider contracting
Contributions and reserving
Suggestions

8. 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

9. 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

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

11. 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?

12. 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

13. Impact on Low Cost options
Benefit Design
Impact on Low Cost options

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. DISCUSSION