Targeting medical scheme reserves for vaccine funding is NHI by stealth

Pat Sidley's article "Medical scheme reserves: A shot in the arm for mass Covid-19 vaccination campaign" (Daily Maverick 11 January 2021) raises several aspects of historical and current contention in the private healthcare industry. No doubt some of her points are valid, but they have also raised a few questions, potentially requiring a more nuanced appraisal of the history of medical schemes, government's policy on healthcare funding and the contentious National Health Insurance (NHI) proposal.

Sidley appears to be at ease in presuming that the overcharging of vaccines for medical scheme members — in order to subsidise uninsured citizens — is appropriate. In the context of the nation's current dire situation in battling the Covid-19 pandemic, she may well be correct. But we should be cautioned against potentially treating this glibly if that is indeed the stance from medical schemes. If schemes fail to apply their minds collectively, there is considerable risk in the proposition manifesting precedence for future policy discussions.

The fact that the state is turning to the private sector to cover its own financial obligations is of significant concern. I do not need to reiterate here why the gross negligence that has purveyed through our fiscal management policies and state-owned entities over the past decade and a half is of existential concern to the country.

But what is even more disconcerting regarding this proposed bailout of the state by the private sector is that it is coincidentally a precursor to the impending NHI Bill. The bill proposes to nationalise the private healthcare sector in order to create a single state-run NHI Fund that will manage and apportion the delivery of all healthcare in the country.

The state's stance is now thus squarely predicated on duplicitous arguments. On the one hand, it argues that the exigency for nationwide vaccines, along with its apparent inability to finance them, is sufficient reason to expropriate judiciously acquired private monies from medical schemes. On the other hand, the state claims that it will be more efficient and skilled in managing the nation’s healthcare and thus wishes to replace medical schemes with a state-run NHI.

This is astonishing hypocrisy to say the very least, but I will cover that at another time.

Sidley argues that the regulator and designers of the Medical Schemes Act (MSA) gave us "a fairer community-rated system in which all members, irrespective of their age or state of health, had the same protections and rights according to the law"
 and that "schemes were operating in an expensive, highly restricted and regulated environment in which they were unable to charge more for sicker or older members, or to exclude those with high-risk profiles."

But she fails to emphasise that this regulatory framework that the government imposed upon the private industry from 2000 was half-baked, altered at the 11th hour after protest from labour in the late 1990s. The alteration was the omission of an essential pillar — mandatory medical scheme membership for employed citizens — that would have delivered a fair framework if retained.

The current rights-based system, sans the mandatory membership requirement, is anything but fair. It provides extensive rights to consumers to consciously anti-select against the system, joining as and when they need healthcare, without obliging them to contribute proportionately to the system while they are healthy. Members who do prudently maintain their membership are exploited for the gain of members gaming the system to their individual advantage. This can hardly be considered a just system by any measure.

Alongside several other seemingly intractable woes besetting the industry, including the regulator's insistence in 2008 that any treatment for a PMB is to be paid for at cost and not at a pre-agreed tariff, annual cost escalations in medical scheme claims since 2000 (when the current MSA became effective) have been substantially higher than they had been throughout the 1990s.

This unbalanced framework was underscored as a major problem by the Competition Commission's six-year-long Health Market Inquiry (HMI) into the private sector, which went further to apportion blame on the regulator for not appropriately regulating the sector.

This has often placed onerous financial burdens on families in maintaining private cover, evidenced by the substantial and forced membership migration to cheaper options with lower cover levels.

Sidley's argument that many schemes did not have sufficient reserves in 2000 is accurate, but that does not equate to it not having been a regulatory requirement previously. The requirement of a 25% solvency level was not a new design feature of the MSA – it has been in place since the early 1950s. The new MSA just gave the regulator more teeth in enforcing adherence. And rightly so, as it would be financial madness to underwrite potentially large and variable risks without retaining appropriate solvency levels.

Unless of course, a scheme is 
appropriately deploying reinsurance to amortise risks across the larger risk pools of local and international reinsurers. I emphasise "appropriate" as I do again agree with Sidley that there was egregious abuse of some of these arrangements in the early 2000s. I was personally involved in dismantling some of them.

However, for her to insinuate that Adrian Gore (CEO of Discovery) was arguing for a continuance of such nefarious activities is disingenuous. Gore's arguments at the time – rightly so – were for an alignment of incentives between schemes and the much larger and more diverse risk pools within reinsurers. These principles of aligning interests still hold sway today in many complex financial institutions. It is now considered as fundamental in the insurance and financial services industries, a well-reasoned and accepted argument for all stakeholders in a transactional arrangement to possess what is colloquially known as "skin in the game".

Medical schemes are non-profit mutual entities owned collectively by their members. There exists no profit motive, and subsequently no motivation to manage costs or improve efficiencies save for the goodwill and intent of the officers managing the scheme. But herein lies the rub – the vast majority of medical schemes employ exactly one person, a chief executive called a principal officer who reports to a board of non-executive trustees. The balance of all services required by a medical scheme, such as administrative, managed care, actuarial and clinical services are outsourced to for-profit entities.

The oversight required to manage the numerous technical and complex aspects of a medical scheme business is onerous enough for even a large management team, let alone a single person. Hence, the only manner to effectively achieve this oversight is to align the interests of all stakeholders contracted to the scheme, since they would be servicing their own self-interests whilst simultaneously achieving those of the scheme.

The blanket removal of this principle in the medical schemes industry left schemes out on their own, with no other legal entity involved in the financing of private healthcare truly taking risk. It has become a zero-sum game where these "
non-profit schemes" carry all the risks and for-profit outsourced sub-contractors can wrap their services around the scheme with less consideration of value.

Effectively, the removal of "skin in the game" took the focus away from value and infused complacency in its place, which brings me to the essence of my argument.

Given that reinsurance has been virtually excised through regulatory intervention from the industry, the only protective mechanism that has been available to medical schemes for many years has been the building of their reserves.

But building reserves alone is a very blunt instrument, capable only of cushioning aberrations from the expected — such as pandemics.

Sidley infers from the sole attribute of large reserves that we have a sustainable private healthcare system. It is stable for the short-term, because of these reserves, but it cannot by any measure be considered sustainable.

As the HMI found after six years of evidence gathering in 2018, the industry is not as efficient or as cost-effective as it should be and suffers from a multitude of, thankfully, rectifiable problems. Some of this concerns the lack of alignment-of-interest principle but it also deals with a number of other weaknesses within the sector.

Fortunately, the HMI also went about developing a meticulous blueprint, something that the government could implement to improve the long-term sustainability of the private sector.

If the government now wishes to leverage off the positive consequences (ie the financial reserves) of the prudence of medical schemes, managed effectively under difficult circumstances over the past 20 years, then the least they could do is to recognise it as a valuable sector of our economy.

In doing so they could revise their NHI proposals to be more inclusive and include medical schemes as parallel insurers with the NHI Fund, and then implement the essential reforms that the government itself initiated via the establishment of the Health Market Inquiry.

This article was first published on Daily Maverick on 14 January 2021

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