Healthcare Cover with Lifestage Modelling

The Impact of Best Advice on the Medical Schemes Industry

Anthea TowertTechnical and Actuarial Consulting Solutions

(TACS) Alexander Forbes Health (Pty) Ltd

Advice and Responsibilities

• Dual accreditation: Medical Schemes Act & FAIS Act• Conduct is jointly regulated: Council for Medical

Schemes (CMS) & Financial Services Board (FSB)• FAIS Code of Conduct

– Act in the best interest of your client– Establish clients’ needs and then match benefits to meet those

needs

• Other legislation aimed at protecting consumers: CPA and TCF

The Role of a Healthcare Advisor

• Client circumstances change every year• So do healthcare requirements• Advice needs to adapt to changing circumstances• Best advice is about the most appropriate benefit option

at any given stage of life

What Does Best Advice Mean for Healthcare

Lifestage Modelling

Choosing what you need when you need it

Changing Medical Needs

• Hospital cover• Limited or no day-

to-day cover

Stage 1:Young, single

member

• Hospital cover• Day-to-day cover • Maternity benefits• Limited chronic

benefits

Stage 2:Married with

children • Hospital cover• Higher day-to-day

cover• Higher chronic

benefits

Stage 3:Retired

Claiming Patterns Over A Lifetime

Needs vs. Ability

Advice vs. The Act

Best advice works against the Act

DILEMMA: Healthcare needs increase with age but income falls when comprehensive cover is needed most

RESULT: Members are generally over-insured in younger years and under-insured in retirement

OVER-INSURANCE: Inefficient use of income which could be better used as retirement funding or other savings

UNDER-INSURANCE: Increased out-of-pocket expenditure and compromised cover when needed most

The Impact of Best Advice on Members

• Seems to work against the Medical Schemes Act• Act requires... Each benefit option should be self-supporting

• BUT.... Almost impossible to achieve in the current environment

• SO... Schemes rely on surplus-generating options to subsidise loss-making options

The Impact of Best Advice on Medical Schemes

Regulator tends to turn a blind eye to this requirement – requiring schemes to comply fully would destabilise the industry

• The INTENTION of medical schemes is to facilitate life-staging– Priced on an annual basis– Members may change options annually to meet their needs– Multiple options offered to allow differentiation of benefits– Eg: Hospital plans on one extreme, Comprehensive plans on the

other extreme

Does Best Advice Compromise Medical Schemes?

because

• The IDEAL is to choose an option for a specific life stage at a suitable price

• In order to ACHIEVE this, benefit options should be self-supporting

• BUT, this doesn’t work in practice

• WHY, because of short-comings in the regulatory environment!

Does Best Advice Compromise Medical Schemes?

Short-Comings in the Industry

What are the driving factors?

• Voluntary Membership– Not everyone can afford medical scheme cover– Not everyone who can afford cover, chooses to obtain it– Anti-selective behaviour, people join when they get sick– Undermines effective risk pooling– Drives up costs

Shortcomings in the Industry

Contributions + Investment Income = Claims + Expenses

• PMB’s and Payment in Full– Intended to provide a basic level of treatment and care for most

common diseases– “Payment in Full” provides an opportunity for abuse of the

system– Providers may charge higher rates for PMB cases, resulting in

higher costs

Shortcomings in the Industry

• Self-Supporting Benefit Options– Not achievable in the current environment– Best advice means that members choose benefits based on needs– Comprehensive options attract older, less healthy members, which

drives up costs to unaffordable levels– Due to insufficient risk pooling within these options– To attract new members, low cost options are priced to make a

deficit– Low and high options therefore need to be subsidised by mid-level

options

Shortcomings in the Industry

Surplus-generating mid-level options subsidise loss-making options (Top 10 open schemes)

Benefit richness Low Medium High

% with operating surpluses

49% 64% 30%

% with operating deficits

51% 36% 70%

Source: CMS Annual Report 2012 (2011 Annual Financial Results)

• Unregulated Tariffs– Currently no guidance on prices– Providers can charge what they wish– For PMBs, schemes are effectively forced to pay these costs

Shortcomings in the Industry

Proposed Solution

Change the Advice or Change the Environment?

• The system does not support the theory of “best advice”

• However, members’ interests should always come first

• So, ADVICE should remain the same

– FAIS, CPA, TCF

• And the ENVIRONMENT should change

What’s the Solution?

• Key regulatory reforms

– Benefit standardisation and simplification

– Risk equalisation for a basic benefits package

– Regulated tariffs to control costs

How can we achieve this?

Basic Block Benefit: PMBs and Primary Care(Risk equalisation)

How Can We Achieve This?

Top Up CoverYoung, single

member

Top Up Cover

Married, with children

Top Up Cover

Retired

Risk Pooling /equalisation for the BBB Basic Block Benefit

(PMBs and Primary Care)

Thank-You