NOTE: REVIEW OF CONCERNS REGARDING THE DEMARCATION BETWEEN MEDICAL SCHEMES AND INSURANCE PRODUCTS

Transcription

1 NOTE: REVIEW OF CONCERNS REGARDING THE DEMARCATION BETWEEN MEDICAL SCHEMES AND INSURANCE PRODUCTS NOVEMBER 2012 Prepared jointly by: The Helen Suzman Foundation Section 27 Prof Alex van den Heever (Chair of Social Security Systems Administration and Management Studies, University of the Witwatersrand)

2 CONTENTS 1. INTRODUCTION OVERVIEW OF SELECTED CONCERNS SHORT-TERM INSURANCE ACT... 2 Category 1: Lump sum or income replacement policy benefits payable on a health event... 2 Category 2: Motor: Third Party Liability... 4 Category 3: Property: Third Party Liability... 4 Category 4: HIV and AIDS... 5 Category 5: International Travel Insurance... 5 Category 6: Domestic Travel Insurance... 5 Category 7: Emergency Evacuation or Transport... 5 Qualifications under section 7.2(2)... 5 Qualifications under section 7.2(3)... 6 Marketing and disclosures (section 7.3)... 6 Reporting of product information (section 7.4)... 7 Transitional arrangements LONG-TERM INSURANCE ACT... 7 Frail care... 8 Sections GAP COVER BROKERS CONCLUSIONS... 9

3 1 1. INTRODUCTION 1.1 This Note serves to provide further detail on particular concerns raised in our letter of 17 September 2012 sent to the Ministers of Health and Finance regarding the demarcation of medical schemes and for-profit health insurance (demarcation). 1.2 The letter outlined five major areas of concern: The legislative framework creates risk for the stability of medical schemes, and therefore healthcare The proposed method to adjudicate disputes concerning medical schemes and insurance products could potentially undermine the public interest The consultation processes regarding demarcation has been insufficient and fails to reflect the substantial public interest and constitutional issues involved No substantial analysis has been provided regarding the possible impact on the public interest of proposed regulations to the insurance acts There are concerns over the inter-relationship between insurers, the lobby targeting the removal of PMBs, and how this ties in to the demarcation debate. Brokers have also not been appropriately considered in the regulations. 1.3 In this Note we do not address all five areas noted in the letter. Instead we provide a broader overview on some related key areas of concern as follows: Firstly, we provide a broad introduction to our key conceptual concerns with the regulations (this predominantly relates to points 1, 2 and 4 above) Secondly, we provide a more detailed examination of some of our specific concerns related to the proposed regulations to the insurance Acts in terms of both the public interest and legal issues Thirdly, we briefly touch on concerns about related issues, namely, the possible watering down of PMBs, the problems related to gap cover, and the role of brokers (which relates to point 5). 2. OVERVIEW OF SELECTED CONCERNS 2.1 We recognize that there may be scope for exemptions to the Medical Schemes Act and that, in some instances, insurance policies could fill gaps not appropriately covered by medical schemes. Our concern is that the particular framework set out in the regulations gives rise to vulnerabilities that could be exploited. If this occurs the public interest is not served by such a framework. Below are some of the broad concerns that we have:

4 2 2.2 First, the framework is problematic if a combination of products created in accordance with the framework undermines the Medical Schemes Act. While it is clear that the regulations aim to exempt forms of insurance that individually may not impact on medical schemes, our concern is that on a broad interpretation these exemptions together create a framework that will allow insurers to circumvent the Medical Schemes Act. 2.3 This will occur if a suite of products is developed that can (or may appear to) replicate a medical scheme, without operating within a rights-based framework. While we will expand on this in greater detail below, an example would be purchasing a few products that include lump sum payments differentiated by disease and severity, combined with cover for accidents, HIV and AIDS and emergency care. If brokers sell these products as a group, consumers may believe that they are buying protection akin to a medical scheme when they are not. 2.4 Secondly, we have concerns regarding the oversight of these policies as they are not protected within a rights-based framework (as health coverage under the Medical Schemes Act is) and are adjudicated by the Registrar of Insurance who is not focused on the specifics of health rights. In particular we are concerned about the following: Adjudication of complaints: this is under the Registrar of Insurance and is not subject to protections of the Medical Scheme Act Alterations to policies subsequent to their initial approval: There is no process requiring companies to resubmit policies for approval if they are changed subsequent to the initial approval. This provides less protection to consumers than the Medical Scheme Act. 2.5 Thirdly, we are concerned that the exemption framework could become dangerous in the event that there are alterations to Prescribed Minimum Benefits (PMBs). If PMBs are altered the exemption framework would allow medical scheme administrators to design gaps in coverage that are covered through insurance products that are cosold, but that can be risk rated. This will be regressive and undermine the stability of pooling within a medical scheme environment. 2.6 A few of the identified loopholes and gaps within the current regulations are explained in more detail below. 3. SHORT-TERM INSURANCE ACT Category 1: Lump sum or income replacement policy benefits payable on a health event 3.1 While we acknowledge and understand that there are various income replacement policies that are not undertaking the business of a medical scheme, we are concerned that the wording used to describe these products is too loose and would allow for the creation of products that will have harmful effects despite technically complying with the regulations.

5 3 3.2 The Policy benefits and Criteria do not narrow the allowable products sufficiently and therefore allow for the marketing of products that could indirectly indemnify 1 in full or in part medical expenses. This contradicts the implied objective (provided for in sections 7.2(2)(d) and (e)) which only allows products that offer a sum assured (i.e. non-indemnity). 3.3 The rationale for this qualification can only derive from some recognition that indemnification for category 1 products would harm medical schemes. However, this rationale is contradicted by permitting sum assured constructs that can be tailored to achieve an indemnity-type benefit. This can be seen with reference to the policy benefits and criteria used to define the allowable products. 3.4 Policy benefits are not limited to a specified contingency, such as loss of income, and implicitly allow for the coverage of other expenses through reference to and contingency expenses. Our concern is that this allows for a structure which implicitly allows for health expenses to be covered as expenses are delinked from an objective measure such as income. 3.5 The criteria for allowable products: Allows for multiple sums assured, which de facto permits a convergence on indemnity coverage merely by increasing the number of health events used as a trigger for each sum assured. This can be tailored to the approximate cost of medical expenses The limitation to 70% of the policyholder s net income appears to be based on linking benefits with income. However, in this form it is not clear whether this relates to a specific health event (trigger) and its associated sum assured, or to all benefits combined. For instance what happens if a policy-holder has multiple events? Policy benefits may be differentiated by severity. However, the contingency that can be differentiated is not specified. It is therefore open for insurers to differentiate according to the severity of medical expenses incurred, permitting the products to converge on an indemnity product. The limitation to 10 levels (which is plainly to prevent a convergence on indemnity) fails to mitigate this possibility if multiple policies, each with 10 levels, can be sold as a suite of policies, permitting an indefinite number of severity levels Reflecting policy benefits as a percentage of a sum assured creates a loophole which allows for tailoring of a benefit to actual expenses incurred and is not a sum assured in the usual sense. The value of a sum assured in such policies can be used as a conversion factor, which translates a 1 The term indemnify is used here to refer to all forms of insurance that seek to match in full or in part, the actual medical expenses incurred. This includes prospective and retrospective methods of reimbursement.

6 4 percentage into a rand value. The sum assured in this instance could be R1 or R1 million and yet provide the same benefit payout merely by altering the percentage linked for the level of severity. Given that the regulations effectively permit insurers to provide for an indefinite number of levels (by creating a suite of products), it becomes possible for insurers to duplicate indemnity-type benefits offered by a medical scheme The proposed configuration therefore permits the creation of insurance products with lump sums differentiated according to Diagnostic Related Groupers (DRGs) and procedure code lists The elimination or deferred period is unconstrained and, seen together with the allowable convergence on indemnity products, allows benefits, also covered by medical schemes, to be offered with waiting periods determined at the exclusive discretion of insurers. By way of contrast, medical schemes have regulated waiting periods which enhance access to coverage through the establishment of a level playing field. Competition with unregulated insurance products violates the level playing field and will harm overall access. 3.6 The framework for category 1 benefits therefore permit indemnity health insurance products to be created that circumvent and undermine the social protection measures implemented in the Medical Schemes Act no. 131 of 1998 (MSA). This will therefore harm risk pooling in medical schemes and allow for socially harmful and preventable discrimination against the old and the sick, thus violating the enabling provisions in the Short-term Insurance Act for these regulations. Category 2: Motor: Third Party Liability 3.7 The Policy benefits and Criteria allow for the indemnity coverage of medical expenses incurred. Such a product on its own would not be harmful. However, as there is no limitation on an insurer packaging this benefit together with other health insurance policies, our concern lies in the fact that if a suite of policies is designed to replicate health cover, the combined insurance policies would be harmful. 3.8 The health portion of this benefit should therefore not be offered on an indemnity basis to prevent the circumvention of the MSA. Category 3: Property: Third Party Liability 3.9 The policy allows for the indemnification of health expenses for third parties. It is however not sufficiently clear that the benefits are limited to the third-parties As the MSA covers all emergency care, medical scheme beneficiaries would not benefit from such a policy. It would however benefit people who are not on a medical scheme This form of policy is unlikely to result in a circumvention of the MSA if genuinely restricted to third parties. As such, we submit that it should be clarified that this is restricted to third parties.

7 5 Category 4: HIV and AIDS 3.12 Medical schemes are required to cover HIV and AIDS as a prescribed minimum benefit and there is no coverage gap of any form. In addition to coverage requirements, the MSA protects access for dependents and provides a right-based framework to review the decisions of the scheme Health insurance products do not need to cover all aspects of HIV and AIDS and can deny access to dependents which they do, usually by limiting access to employees only. The complaints framework for short-term insurance of HIV and AIDS is also inadequate and will be largely limited to contractual agreements rather than rights embedded in legislation HIV and AIDS arrangements for employers only cover the anti-retroviral programme, which is the chronic disease management aspect of the disease. Hospitalization is not protected There is a need to properly supervise HIV and AIDS coverage, which is better managed by way of exemption via the MSA than the insurance acts. This would retain many of the protections available through the MSA while exempting the arrangement from the rest of the act. This framework results in absolute exemption from the MSA, removing all possible protections available through the more specialized regulator. Category 5: International Travel Insurance 3.16 This form of policy is unlikely to result in a circumvention of the MSA. However, many policyholders are exposed to sharp practices by product suppliers. This form of policy should be better regulated, with consideration given to supervision through the MSA which allows for better protection of healthcare rights. Category 6: Domestic Travel Insurance 3.17 Medical schemes already provide this coverage in full. As this provides for full indemnification, without even a qualification on what constitutes travel, this could lead to circumventions of the MSA and should not be permitted. Category 7: Emergency Evacuation or Transport 3.18 This benefit is fully covered by medical schemes and is a PMB. This can therefore lead to circumventions of the MSA if combined with other products and should not be permitted. Qualifications under section 7.2(2) 3.19 According to section 7.2(2)(a) the allowable benefits can be offered regardless of whether the policyholder has medical scheme coverage. There is therefore no limitation on the scope of these policies Sections 7.2(2)(b) does not in any way limit the ability of the product provider to underwrite with wide discretion. The MSA however has open enrolment and community rating. Insurers offering these products are however able to refuse access to policies and to load premiums.

8 Sections 7.2(2)(c) merely offers limited protection to a person permitted to take up a policy. This is not equivalent to the requirements medical schemes must comply with. For instance schemes: Cannot refuse an application for membership, due to open enrolment, whilst an insurance product can; Cannot underwrite applicants on entry aside from limited waiting periods, which only apply to membership of the system rather than an individual scheme, and a late joiner penalty, whereas insurers can; and Cannot terminate membership on the basis of their claims experience or health status, which is similar to this provision in the regulations The provisions that aim to prohibit indemnification in sections 7.2(2)(d) and (e) with respect to category 1 products are contradictory as the structure of the policy benefits and criteria allow indemnification in another form (as noted in paras ). Qualifications under section 7.2(3) 3.23 Section 7.2(3)(a) offers limited coverage protection in contrast to medical schemes for which membership cannot be terminated except where the scheme is to be wound up. In such circumstances members benefit from open enrolment and can move to another scheme without obstruction and minimal or no underwriting. As these regulations indirectly allow for these products to compete with medical schemes, it is inevitable that anti-selection against schemes will result, harming the risk-pooling necessary to protect open enrolment and community rating Section 7.2(3)(b) offers little protection to policy-holders as it is well understood that health insurance coverage is extremely complex and cannot be communicated exclusively through the product literature. Furthermore, conflicts of interest drive market conduct in the advice industry 2, reducing the value of the information they provide to policy-holders Given that section 7.1 of the regulations permits insurance products to de facto do the business of medical schemes, the safeguards under section 7.2 cannot remedy the inevitable anti-selection against medical schemes. Marketing and disclosures (section 7.3) 3.26 Although it is important to differentiate health insurance products from medical schemes, these measures may not entirely mitigate the likely anti-selection that will result from legalizing circumventions of the MSA in section Through the commission-based selling where broker remuneration derives from the product seller rather than the purchaser. Brokers are consequently beholden to product sellers rather than consumers, exacerbating the information asymmetries prevalent in markets for complex financial products.

9 7 Reporting of product information (section 7.4) 3.27 The reporting provisions merely require some form of disclosure of products already released into the market. Removing damaging products once they ve been implemented is far more onerous than a prospective approval process Exacerbating the weaknesses of section 7.4(1) is the inadequate process required to remove a product found to be damaging, provided for in sections 7.4(2) and (3) Here the regulator of the more substantive health insurance market, the registrar of medical schemes, remarkably, is reduced to an advisor to the registrar 3 of insurance, with the latter able to exercise discretion unfettered by the more stringent rights-based social protection framework provided for in the MSA. This is exacerbated by the fact that the registrar of insurance has no specialist expertise in the regulation health care or health insurance, a field that requires specialist knowledge As a result, a Registrar of Insurance, by not acting on a complaint, can exempt whole product classes operating in contravention of primary legislation in another act. The net effect would be that the Registrar is empowered through this legislation to make decisions that would impact significantly on an act of parliament. Transitional arrangements 3.31 The transitional arrangements (section 7.5) suffer from the same weaknesses as section 7.4. This process will allow the less specialized regulator to trump the more specialized regulator and the legislature. 4. LONG-TERM INSURANCE ACT 4.1 The allowable insurance products listed in section 7.2(1) of the regulations are identical to those provided for in section 7.2(1) of the equivalent regulations to the Short-term Insurance Act in three instances: Category 1: Lump sum or income replacement policy benefits; Category 3: HIV and AIDS; and Category 4: Emergency evacuation and transport. 4.2 For these categories the comments made in section 3 also apply. However, aside from category 1 (which could cover dread diseases), it makes little sense to offer long-term insurance for such contingencies and it is unclear why they are provided for. 3 It is worth noting that the Registrar of Medical Schemes is merely a functionary of the Council for Medical Schemes, which is the actual regulator. These regulations appear to give the Registrar powers he/she is not entitled to. Furthermore, any decision of the Registrar, where he/she exercises a power allocated to him/her, can be appealed to the Council by any aggrieved party. Plainly therefore, the decision to challenge a product can be appealed, even if it has no more legal effect than advice to another regulator. This adds to the excessively onerous process required to remove a harmful product from the market.

10 8 4.3 One additional category applicable to frail care is also provided for and discussed further below. Frail care 4.4 The policy benefits are specified as custodial care, which is odd as this is not an insurable event. Custodial care is entered into only when the people have already become frail and involves provision of a service. 4 It is therefore a concern that such agreements are cloaked in an insurance contract for reasons other than risk transfer, and as a means to circumvent the MSA for any (unspecified) aspect that does involve a risk transfer. 4.5 Whereas there is scope for frail care to have some form of coverage, the regulatory framework for long-term insurance does not provide sufficient protection. Old people are vulnerable to abuse and require a rights-based framework to protect them. It therefore makes sense for any contributory arrangement such as this to be offered by of exemption through the MSA and not the insurance Acts. Sections The comments made for equivalent sections in the regulations to the Short-term Insurance Act are also applicable here. 5. GAP COVER 5.1 Although gap cover is not dealt with in the regulations we would like to take this opportunity to reiterate the problems that could arise if such products are allowed. 5.2 We believe that medical scheme administrators, presently responsible for the annual determination of scheme benefits, coordinate with brokers on the sale of gap insurance into orchestrated benefit gaps. Low-quality risk-rated for-profit insurance is thereby substituted for medical scheme insurance coverage. The result is anti-selective behavior within schemes. 5.3 The MSA was designed to remove this form of market failure from health insurance, and has done so with reasonable success since Gap cover only has commercial merit where opportunities exist for anti-selection (i.e. competition with community rated open enrolment insurance). Health insurance markets that compete on the basis of anti-selective behavior systematically exclude bad risks from coverage. 5.4 An unconstrained gap cover market operating together with regulated medical schemes will cause the entire medical schemes system to become risk-rated. As a consequence, many people who today rely on medical schemes for their lifetime coverage will systematically lose protection at the time they most need it. 4 Essentially there is no transfer of risk. Members pay a monthly fee for services rendered. This would only be agreement of insurance when the probability of the insured event occurring was less than zero. This is not the case here.

11 9 6. BROKERS 6.1 We would like to highlight how brokers can adversely affect medical schemes. The proposed regulations fail to recognize that broker-driven sales are incentivized through a commission-driven mechanism. This can structurally undermine incentives to offer best advice. 6.2 It is therefore relatively easy for insurers and medical scheme administrators to coordinate packaging of parallel (to medical schemes) insurance arrangements, either to cover deliberately constructed gaps in medical scheme benefits or to sell stand-alone medical-scheme equivalent for-profit health insurance. In this way multiple insurance products can be bound together through the broker, who is paid by the product seller rather than the person advised. 6.3 The financial incentives involved may mean that the broker will not properly advise clients on the direct consequences of these products. 7. CONCLUSIONS 7.1 Substantial concerns arise from the regulations as they stand as the wording allows for permutations of insurance cover that could ultimately be harmful. The envisaged regulatory framework places the more important system of medical scheme coverage at risk with a probable regressive effect on existing rights to healthcare protection. 7.2 In key areas the regulations could be harmful to the public interest. For these reasons the policy framework requires more careful consideration. In particular, consideration needs to be given to the achievement of a more coherent and detailed framework able to optimize social protection without compromising regulatory clarity. Greater consideration of the specifics such as adjudication of complaints and approval mechanisms is required to ensure that consumers have strong rights-based protection.