Comment on the Proposed Amendments to Regulation 8
Prescribed Minimum Benefits
Free Market Foundation
13 October 2015
About the Health Policy Unit. 3
Proposed Amendment of Regulation 8. 4
“Social Solidarity” and the Medical Schemes Act of 1998. 5
PMBs raise the cost of medical scheme cover. 8
The Health Policy Unit (HPU) is a Non-Profit organisation and is a division of the Free Market Foundation (FMF) of Southern Africa, which is a Public Benefit Organisation and registered NPO. The FMF is one of the world’s oldest and most internationally respected think tanks. It has, for forty years, made influential, sometimes decisive, policy contributions locally and internationally. It has been consistently and unambiguously for personal liberty, equality at law, social justice, democratic values and the rule of law. As such, it was automatically and resolutely opposed to apartheid, and continues espousing the same values in the face of anti-freedom policies.
Since free markets are primarily about the rights of ordinary people, the FMF has always worked with and had close relationships with people in lower income groups, especially the representative bodies of small-scale farmers, SMMEs and consumers. Its work over many years has made it clear that the primary beneficiaries of economic freedom (properly defined) are not the rich, but the poor. Indeed, wealthy vested interests often are the most effective lobbies against freedom and social welfare, devoting considerable resources to securing government intervention that favours them.
The Health Policy Unit contends and persistently provides evidence that consumers are better served by competitive private enterprises and that government will be able to purchase higher quality health care at lower cost than if it attempts to provide the services itself. The HPU also argues that government should not dictate to firms how to manage their affairs, or at what prices they should sell their products and services.
The HPU believes that high quality health care is best achieved in a world of freedom and responsibility, free of centrally initiated force, where the individual’s self-interest is channelled into positive economic exchanges for mutual benefit by the rule of law, sound and properly functioning legal systems, secure property rights, the enforcement of contracts, and an absence of barriers to entry into economic activity. In such an environment, production is guided by the demands of consumers and co-ordinated by freely formed prices that inform producers regarding changes in those demands. In this system the indigent are largely dependent for assistance on philanthropy or voluntary collective action, including state assistance.
The HPU urges government to devote its limited health budget to financing services for the poor, to purchase an increasing percentage of those services from private providers, and to allow and encourage the rapid growth of the private health care sector, enabling it to supply services to an increasing percentage of the population. In carrying out its advocacy work the HPU’s central theme is that patients will be best served by a rapidly growing private healthcare sector, serving a steadily increasing percentage of the population, to the point where the government will no longer need to provide health care to the poor but purchase their health care needs from a competitive private sector.
The advocacy therefore includes proposals for the transformation, wherever possible, of public sector healthcare providers (hospitals, clinics, research laboratories etc) into privately owned entities, mainly by means of a massive BBBEE transfer to the people working in those entities, and to the people living in surrounding communities, together with negotiated contracts for the entities to provide government-funded services to their existing patients and clients.
The Health Policy Unit (HPU) welcomes the opportunity to comment on the proposed amendments to Regulation 8 pertaining to prescribed minimum benefits (PMBs) made in terms of the Medical Schemes Act, 131 of 1998 (henceforth the MSA). In this matter, as in the HPUs work generally, it espouses a pro-market approach because of the overwhelming evidence from the world’s experience that freer markets serve, above all, the interests of middle- and low-income groups.
International comparisons show that always and everywhere, people ‘at the bottom of the pile’ have higher living standards where markets are freer. That is why ‘the poor’ risk and often lose their lives trying to get from less-free to more-free economies. The poor know something that eludes many elites and intellectuals, that the best place to be poor is where markets are freer, where other people are rich, and where the course of events is determined by freely exercised consumer choice instead of one-size-fits-all regulation. Living standards, especially health care, are higher in relatively free economies than in economies characterised interventionism.
Unlike most submissions the government receives, HPU submissions reflect no vested interest. Being an independent think tank, HPU submissions are the considered and informed contribution to government policy formulation of staff, researchers and consultants, and do not purport to be the views of members, friends and supporters.
According to the Government Gazette (No 603), “Regulation 8 of the Regulations is hereby amended…
by the addition to subregulation (2) after paragraph (b) of the following subregulations:
either- (i) in respect of any service rendered by a health care professional who is registered with the Health Professions Council of South Africa, medical schemes are liable for payment for services in accordance with the billing rules and the tariff codes of the 2006 NHRPL tariffs published by the Council, the Rand value of which has been adjusted annually in accordance with the Consumer Price Index as published by Statistics South Africa; or
(ii) schemes may negotiate alternative tariffs with any provider of any relevant health service for which no co-payment or deductible is payable by a member”
This submission does not address the proposed regulations from the perspective of medical schemes, insurers or other providers of health care and cover. Instead, it is consumer-centred in that it considers the draft regulations and the MSA from a consumer perspective. It does so specifically from the perspective of middle- and low-income consumers, and shows that they, in particular, would be adversely impacted if the regulations are implemented in their present form.
The HPU is concerned that proposed regulations seek to alleviate real and perceived problems without asking why they exist. This submission shows that problems the government wants to alleviate are caused or exacerbated by pre-existing controls. The solution, as with many problems, is to discontinue causes.
The evidence suggests that the proposed regulations will compound rather than solve problems for consumers, especially those most in need of affordable quality care and medical scheme protection. Trying to solve regulation-induced problems by further regulations, instead of deregulation, will make things worse. That will, in turn, create the perceived need for yet more regulation in an endless downward spiral, the end result of which will be the destruction of affordable, competitive and innovative healthcare and cover, especially for middle- and low-income consumers. The only way for businesses to prosper when markets are free, or relatively free of regulation, is to offer consumers more innovative and attractive choices. Consumer interests demand freedom for consumers to choose between options offered to them by freely competing efficient and innovating suppliers.
The fundamental problem yet to be properly identified, let alone resolved, is the principle of so-called “social solidarity” contained in the MSA. The MSA changed the regulations governing the operations of medical schemes and set in motion the determined process of crowding-out private medical schemes. Four changes that drastically increased the cost of providing medical scheme coverage were: open enrolment, community rating, statutory solvency requirements, and the introduction of PMBs. Inevitably, consumers have borne the brunt of these cost increases.
An ever-tightening regulatory straightjacket made it increasingly difficult for medical schemes to offer consumers realistic choices, or for insurers to provide affordable cover. Each of the four changes described previously reduced consumer choices and forced them to pay more for medical scheme coverage. Since the marginal value of money is higher for the poor, they were the biggest victims. Such policies are the opposite of ‘progressive’ income tax, where the rich pay higher rates on the assumption that each rand is worth less ‘at the margin’. The MSA changes are regressive discrimination against the poor for whom cost increases are disproportionately prohibitive. That leaves society’s most needy people without protection or searching for alternatives, including insurance.
Open enrolment is the practice whereby medical schemes are compelled to accept all individuals, regardless of decisive variables such as age, gender or health status, subject only to number of dependents and income, which makes it another form of taxation rather than community rating. The MSA made it compulsory for every scheme to charge the same premium for members with nothing of relevance in common. That is like compelling supermarkets to charge the same for every trolley regardless of what consumers buy. In order to reduce the inevitability of schemes being overwhelmed by high-risk individuals, schemes were permitted to apply waiting periods and penalties to those members over a certain age joining for the first time.
The MSA also introduced statutory solvency requirements, which stipulate the minimum amount of accumulated funds each scheme had to hold in reserve, which further drove up consumer prices. Given the absence of preceding insolvencies, consumers incurred costs without benefits. The MSA made it compulsory for every scheme to provide PMBs, which drove consumer costs even higher. South Africans, especially middle- and low-income consumers, were forced by a law intended for their protection to vacate medical schemes and remain unprotected, or to seek whatever paltry surrogates they were allowed by law to get from insurers.
An idea of ‘social solidarity’ and ‘community rating’ would be manifestly absurd in other contexts, such as requiring supermarkets to charge the same price per trolley regardless of what consumers buy, or car dealers to charge the same price regardless of which car is sold. The predictable and predicted negative effects of the profoundly flawed medical scheme principle include:
1. Discrimination against healthy people, especially younger people. The ratio of young to old people is greater amongst blacks than other groups, and by far most young people are blacks. Furthermore, for various reasons, lower-income people have lower medical claims, even when they have cover, than wealthier people. Accordingly, the mirage of equality is in fact extreme discrimination, on average, against black youth. The degree of discrimination is greater than most people realise. Care for 80-84 year olds costs about nine times that of 45-49 year olds. Care for 5-9 year olds costs about 3 per cent of a 45-49 year old.
2. The medical scheme principles also discriminate unfairly against people who live healthy lifestyles; people who do not drink or smoke, do not eat junk food, exercise regularly, avoid unsafe sex, do not have dangerous recreations or jobs etc.
3. Charging people different prices for different products is not discrimination. On the contrary, charging the same for different products discriminates against people who get less. That people get the same cover in medical schemes is obviously untrue. Higher risk people get more at the expense of lower risk people. We have no formal legal opinion on the matter, but it could be argued that ‘community rating’ is unfair and thus unconstitutional discrimination against low-risk people forced to subsidise high-risk people. Stated differently, the notion that charging different people different prices is ‘discriminatory’ either attaches an erroneous and thus misleading meaning to the word, or reflects misconceptions about the price mechanism, or both.
Supermarkets do not, as stated above, ‘discriminate’ when they charge customers different prices for different trolleys. Were they to do so, they would be discriminating against people who buy less, which, on average, means poor blacks. Car dealers do not discriminate when they charge different prices for different cars. They would be discriminating against the low-income buyer of an old bakkie if they charge him/her the same price as the buyer of a new Rolls Royce.
That health ‘benefits’, especially ‘minimum benefits’, might be nominally identical, creates a superficial illusion that consumers of ‘minimum benefits’ who pay the same price, regardless of individual differences, get identical value for money. This illusion is due to a failure to understand what cover is. Cover is protection against risk. The product sold varies according to risk, just as supermarket trolleys vary according to what is in them. A given person’s risk is a statistical, not a policy, question. Some people are more risky than others. Reasons vary enormously. People are more risky for such reasons of choice and chance as genetics, diet, obesity, unsafe sex, occupation, culture, smoking, sport or neighbourhood.
The self-interest of insurers, including medical aids, is to price risk accurately and objectively. Their self-interest is, contrary to popular myth, the opposite of discrimination. Maximal efficiency and profitability for them is zero discrimination. Discrimination means distinguishing between people for reasons of prejudice instead of differentiation according to objective criteria. That is why our constitution outlaws ‘unfair’ discrimination and allows both fair discrimination and differentiation.
It is not unfair, for example, to have separate male and female toilets, to sell bigger clothes to bigger people, or to charge different prices for what people order in restaurants. To charge the same price would be to discriminate unfairly against someone who orders salad instead of lobster. To force medical schemes to charge the same for people with different risk profiles is to force them to discriminate against low-risk consumers, especially young healthy people with safe virtuous lifestyles. To charge low-risk people as much as high-risk people, is discrimination. It is so self-evidently unfair that it might well be unconstitutional.
The reason medical schemes do not challenge such laws is simply that it is not in their interests to do so because all competitors are subjected to the same rules of the game and thus there is little or no relative prejudice. However, seductive terminology, like ‘social solidarity’, conceals more than it defines. It means in effect that consumers are forced to purchase and pay for full expensive medical cover or have no medical cover at all. It necessarily discriminates against people, especially poor people, who want lesser cover because it is more affordable. As such, it discriminates directly against middle- and lower incomes people, which in South Africa, means mainly black people, in favour of higher income people who are mainly black elites and whites.
These are practical real world flaws in the ‘social solidarity’ myth. There are more profound jurisprudential, ideological and philosophical reasons for rejecting the idea. The anti-apartheid struggle was, if anything, a struggle not just against discrimination, but for freedom, specifically the freedoms whites retained for themselves and denied blacks. It would be a tragic irony were blacks in the new South Africa to find that all that changed was for whites to be subjected to the lack of freedom blacks endured instead of blacks celebrating true individual liberation.
Personal liberty means freedom to choose. Allowing people to decide for themselves what cover, or anything else for that matter, they buy should be regarded as an essential hard-won liberty. All citizens should be accorded the dignity and respect entailed in emancipating them from pretentious regulation. Paying for what you want is called “discrimination” if you do not subsidise the sick, lame and lazy. You may not, for instance, pay lower premiums justified by your healthy lifestyle; medical schemes and insurers may not charge you accordingly. You must subsidise strangers with self-inflicted problems. Health cover ‘solidarity’, as it is called, is as irrational as ‘supermarket solidarity’.
Any “social solidarity” principle unavoidably raises the price of medical scheme coverage which prevents low-income people from entering the private medical scheme market. As a result of PMBs, medical scheme actuaries are prevented from devising schemes to suit particular categories of members and circumstances, particularly schemes that cater for low-income people. When benefits are determined politically, rather than by what individuals want, the benefit package and the costs required to cover them expand and raises the cost of providing medical scheme coverage.
Moreover, according to Christoff Raath, joint CEO of Insight Actuaries, some medical specialists manipulate costs for treatment of conditions covered by the prescribed minimum benefits and charge significantly more for such procedures than for illnesses not covered by the minimum benefits. Raath said it was not illegal for doctors to determine what they charged for procedures, “but the law that their costs will be covered in full removes the incentive for doctors to enter into price negotiations with medical schemes and negotiations on price are needed to keep costs down”.
The proposed amendment is that medical schemes should be liable for payment for services according to the billing rules and the tariff codes (adjusted for inflation to reflect current prices) of the National Health Reference Price List (NHRPL), published by the Council for Medical Schemes (CMS) in conjunction with the Department of Health (DoH) in 2006. Alternatively, schemes may continue to negotiate directly with providers of health services but are not permitted to use cost-saving measures such as co-payments or deductibles.
The DoH’s head of regulation and compliance, Dr Anban Pillay, said the draft regulations aim to protect medical schemes from open-ended claims for PMBs because, “There is an unequal balance between medical schemes and providers, who have a blank cheque to charge what they like”. Dr Pillay correctly pointed out that PMBs push-up the cost of private healthcare and are making the medical scheme industry unsustainable. He could have also added that community rating, open enrolment and statutory solvency requirements also push-up the cost of private healthcare.
Medical scheme member contributions cover a defined list of benefits which are set out in the member’s agreement with the medical scheme. Medical scheme administrators are compelled to guard the interests of all members by ensuring that in carrying out their administrative duties they adhere strictly to the terms of the contract between the individual member and the medical scheme. If they were to obey the current laws and routinely pay the full costs for PMB treatments, without there being any limitations, they would end up bankrupting the medical scheme and failing in their duty to the entire pool of members.
The DoH is correct – it is unreasonable for government to force medical schemes to pay service providers in full regardless of what they charge. But, more importantly, it is unreasonable for government to dictate what benefits should be included in private contractual agreements. According to the Council for Medical Schemes (CMS), the cost of providing PMBs varies between R332 and R1,150 per beneficiary per month, with the average being approximately R510. The average cost per month for babies under one year of age, was R861, and for a beneficiary 85 years or older, R2,548. To increase the number of private medical scheme beneficiaries, the cost of medical scheme coverage needs to be reduced. Government needs either to remove PMBs, or, at the very least, exempt low end market schemes from having to cover PMBs so that actuaries can devise more affordable options.
The DoH’s proposal – to use the NHRPL – is a poor idea, even after adjustment for inflation, and a thinly veiled attempt to further control prices within the private medical sector. According to the CEO of the South African Private Practitioners Forum (SAPPF), Dr Chris Archer, the NHRPL was flawed from the start, since it did not reflect the true cost of providing medical care. Moreover, since 2006, medical costs have increased at a faster rate than inflation due to a number of different reasons – including but not limited to – the fact that the South African population is aging; incomes are increasing (people tend to spend more on healthcare as their incomes rise); the introduction of new technologies and procedures etc.
One of the many fundamental flaws of government controlled prices is that governments cannot react fast enough to new developments. Any price list it introduces will quickly become irrelevant and cause confusion in the private medical sector. More specifically, in order to reduce the price of private medical scheme cover and increase the number of people enrolled in private medical schemes the Competition Commission, as a matter of urgency, should be asked to repeal its 2004 ruling that prevents medical schemes from negotiating prices with service providers. If medical schemes, as a group, are permitted to negotiate prices, they will have greater bargaining power to secure more favourable prices with healthcare providers and then pass these savings on to consumers through reduced premiums. This is a normal commercial arrangement where medical schemes, acting on behalf of their members, try to secure the lowest possible prices.
Medical schemes must also be able to negotiate effectively with service providers. To achieve this, actuaries must be allowed to devise policies that cater for the individual healthcare needs of each beneficiary and not be forced to include procedures and conditions that consumers do not want.
We repeat our appreciation for the opportunity to comment. The FMF (and HPU) contends that capping PMBs will not adequately address the underlying problem of “social solidarity” or prevent government from including more conditions over time. To increase the number of beneficiaries of private medical scheme cover, the cost of medical scheme options need to be reduced. For this to happen, government needs to remove PMBs. At the very least, government should exempt certain schemes at the low end of the market from PMBs to enable actuaries are able to devise options that cater for low income individuals. We are also of the view that in order to reduce the price of private medical scheme cover and increase the number of people enrolled in private medical schemes the Competition Commission, as a matter of urgency, should be asked to repeal its 2004 ruling that prevents medical schemes from negotiating prices with service providers.
Private health insurance has the ability to relieve a great deal of the pressure related to the provision of health care currently borne by government and leave it to rather concentrate its scarce resources on the truly destitute. For this to occur, medical scheme actuaries must have the freedom to design polices that recognise when resources are limited but still cater for such an individual’s needs.