The empire of medical schemes

In recent days, many consumers, no doubt, have been receiving strange letters from their insurance brokers telling them that as a consequence of “demarcation regulations” which come into operation this year, the cover provided by certain medical expense related insurance policies will decrease. Two things should be noted. Firstly, generally there will be no reduction in premiums, meaning less cover for the same price. Secondly, there has been no concomitant announcement that medical schemes will increase cover for the same price as that taken away. These lost covers can be important. The demarcation regulations draw a line between insurance and medical schemes. One would expect that if the line moves by taking from one, it will add to the other and medical schemes should cover more. Sadly, people who do not have a medical scheme, will just get less cover. Why do demarcation regulations exist?

For some time now evolving in the background is a series of autonomous bureaucracies. Looking back, the development of these can be identified. For example, in the 1960s, some academics noted that legislation, generally, no longer came from Parliament. The source of legislation had become the bureaucracies and Parliament’s function, largely, to rubber stamp the laws emanating from these bureaucracies which have become increasingly autonomous, resembling autonomous states. I call these bureaucracies; unitary states within the state; independent Empires. This system does not operate in terms of a single set of laws - common laws. They each operate in terms of their own laws, which they increasingly dream up themselves. This system has several consequences. While obeying the laws of one bureaucracy, you could well be breaking the laws of another. This cannot happen in the normal traditional system operating under the Common Law subject to a Supreme Court. These parallel systems are an economic disaster unlike the Common Law-Supreme Court system which produced the optimum economic outcome.

Let me illustrate this by looking at a one unitary state within the state – the empire created by the Medical Schemes Act.

This Empire decided all medical scheme products would be priced in terms of the community rating system, not risk rated, so everybody within a scheme pays the same price, young and old. The average costs are however vastly different. At a unitary price the young could pay nearly 5.6 times their actual costs. Young people who are working could pay 3.3 times their own costs. This is an economic sub-optimum outcome.

In the common law which creates competitive markets they would each be paying only their own costs. This is the economic optimum outcome. Clearly the Empire of Medical Schemes cannot co-exist with the common law insurance market. If the two markets co-existed, all working members and all children would leave the sub-optimum medical scheme market and purchase insurance. As so demarcation regulations exist – to stop the public from purchasing optimal cover. It would be unlawful, in terms of the laws of the Empire of Medical Schemes to enter into a common law contract, which is otherwise lawful.

To create this suboptimum system, the Empire of Medical Schemes has had to pass it own laws to make it a crime for insurance companies to provide optimum medical insurance. This anti-competitive law from the Empire of Medical Schemes makes something which is conceptually legal, a normal common law contract, into something illegal.

The community rating system forces all risks into one pool. The idea is the young and healthy will subsidise the old and infirm all at the same price and not a price determined by the market. Well, the working young earn less than the working old, so, if subsidisation was the goal, it should be the working old subsidising the working young. To force the young to subsidise the really old, it would take the entire income of most young and they would be left with nothing to live on. So, affordable medical scheme products must be designed which consequently provide little cover. Young, low risk individuals end up purchasing low cover products whereas in the insurance market they would probably get uncapped cover at a much lower price.

The young then pay a higher price, not for their benefit, but to subsidise the old and infirm. While the old and infirm need the cover, they cannot afford it, and the young cannot afford to subsidise them. So, the old and infirm also are forced into low benefit cover. Neither the young nor the old get optimum cover. Older people, as long as they are working, can generally afford cover and subsidise higher risk older individuals. But then they stop working and as each year after retirement passes, in real terms they can afford less and less cover, and, in turn, are forced to buy down, imposing more costs on the young. When the day arrives that they actually need cover, they may be confronted by two things; firstly, they are in a scheme that does not provide any meaningful cover, or, secondly, they may have reached the position where they cannot afford any cover at all and they have no cover. After a lifetime of contributing to the Empire of Medical Schemes, they get nothing. After a lifetime spent subsiding others, they get nothing at all in return. What a tragic disaster. Without the Empire of Medical Schemes, they would have had a life time of optimal priced cover.

Robert W Vivian is Professor of Finance & Insurance at the University of the Witwatersrand

This article was first published in Business Day Law & Tax supplement in March 2018

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