The empire of the competition regime

In the Common Law-Supreme Court framework, there is one law for the whole country crafted over centuries by the Supreme Court. This is the great triumph of the Common Law and Supreme Court. It is unthinkable that by obeying one law, you can violate another law. In the Common Law world, you cannot act unlawfully by acting lawfully. This system creates the optimum economic world of Alfred Marshall - that of maximum consumer’s surplus and Pigou’s maximum economic welfare and Robbins’ optimum resource allocation outcome. Statutory laws are not needed to achieve this since it is the natural outcome of the Common law – Supreme Court framework. This outcome is the consequence of competition within the common law framework.

The Empire of Medical Schemes, the subject of my previous column, is premised on some medical scheme members paying well above their own costs, in some cases it could be 300% to 500% in excess which cannot occur in the common law world. So common law contracts are made unlawful by the Empire. But that Empire is just one of many Empires nowadays. There is also the Empire of the Competition Regime. For medical schemes to do what it does it has to be exempted from the laws of the Empire of the Competition Regime or it would break that Empire’s laws. Unlike the Common law, the laws of the Empires of Medical Schemes and Competition Regime cannot then be laws of general application. – Medical Schemes by not competing on facts which set the price, break the laws of the Empire of the Competition Regime.

The Empire of the Competition Regime, made thing worse. It got involved in the Empire of Medical Schemes preventing the capping of some costs. A feature of insurance policies is where necessary, insurers cap their liability. An insurer can contract to indemnify the insured to a maximum amount; or insure for the loss of a vehicle up to the replacement value, a legal liability policy has a limit of the sum insured. For decades, medical schemes annually prepared a list of the maximum amounts they were prepared to pay for medical services. The Empire of the Competition Regime, failing to understand basic insurance principles outlawed this. By outlawing standard insurance practice, it looks as if the Competition Regime is colluding with the Empire of Medical Schemes to push up prices instead of allowing competition to bring down prices.

If these two empires did not exist, what medical insurance products would have evolved? That is easy enough to predict – the insurance market would create common law insurance products to cover health costs at virtually zero profits. Sandy Sandrock’s doctorial thesis recorded the underwriting profits of South African short-term insurance companies from 1975 to the date of his thesis. During this period insurance companies made an average underwriting profit of 1 percent. For every R1 paid to insurance companies, 99 cents were returned to consumers to cover the costs of claims and 1 cent went to insurance companies to cover the costs of administration and profits to shareholders. Now, to many, this may seem an extraordinary low figure. But, in the Common Law world this is not surprising at all. It is precisely what the UK economist Alfred Marshall and the US economist Frank Knight pointed out a 100 years ago. If profits are so low, what then drives the modern economy? Joseph Schumpeter gave the answer; innovation; new ideas, creativity, entrepreneurship. Competitive markets produce innovative optimum products at low profits, optimum total economic welfare and optimum resource allocation. Left to itself the insurance market would develop optimal products.

Insurance companies risk rate. They look for factors that are preferably costless to observe which characterise risk. In health insurance, age would be such a factor. If we break the population into three groups; those too young to work, those who work, and those who have retired, we can easily determine the average health costs of each group. Using US data to illustrate, the average health costs for persons over 65 are about 3.3 times that of working people and 5.6 times of those too young to work. In an insurance market, working people, therefore, would pay a much lower rate than a retired person, but, when people retire and their medical costs increase they often cannot afford higher premiums. So what would happen if the Empires of Medical Schemes and Competition did not exist? The market would design, indeed has designed. life-long medical insurance products which are economically optimum. But these cannot be sold; bureaucrats have created destructive Empires. The modern bureaucratic Empires prevent solutions.

It has taken nearly 30 years to draft the demarcation regulations which attempt to draw a line between insurance and medical schemes. These will come into operation this year. Demarcation does not solve the problem. Economically speaking the country would be far better off if the Competition and Medical Schemes Acts were simply repealed. The supply of medical insurance governed within the Common law-Supreme Court framework would evolve to provide optimal medical insurance products. Medical schemes which exist because that Empire violates the rules of competition, would disappear. And the Competition Regime which has failed to ensure competition exists could be discarded. With these two gone, South Africa would be on the road to an optimal economic exchange system in the field of medical health funding.

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 April 2018
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