National Health Insurance in South Africa
Health System Reform circa 2005
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This is an extract from “Introduction to National Health Insurance” prepared for IMSA in May 2008. [download IMSA PDF]. See end of section for the download of the final document prepared by the Ministerial Task Team on Social Health Insurance in June 2005.
Reform of medical schemes to prepare them for mandatory insurance was planned throughout the 1990s and culminated in the completely revised Medical Schemes Act, No. 131 of 1998. This provided for improved governance of medical schemes and for the re-introduction of three key policy issues which enhance the risk pooling function of schemes:
- Community-rating: everyone must be charged the same standard rate, regardless of age or state of health (i.e. charging by risk or risk-rating is not allowed). However, the current implementation applies to each benefit option in each scheme rather than the scheme as a whole. Future changes will see community-rating applying to the industry as a whole.
- Prescribed Minimum Benefits (PMBs): a minimum package that must be offered by all schemes. Beneficiaries must be covered in full for these conditions with no limits or co-payments. The PMB package is a list of some 270 diagnosis-treatment pairs (DTPs) primarily offered in hospital (introduced January 2000); all emergency medical conditions (defined January 2003); diagnosis, treatment and medicine according to therapeutic algorithms for 25 defined chronic conditions on the Chronic Disease List (CDLs) (introduced January 2004).
In order to manage care for the Prescribed Minimum Benefit, schemes may insist on the use of a contracted network of providers (Designated Service Providers or DSPs) and formularies of medicines (lists of cost-effective medicines that the scheme will reimburse). Schemes are in theory able to negotiate fees with healthcare providers but have struggled against the concentration of power amongst providers, particularly the hospital groups in recent years. In practice most schemes adopt fee schedules which are some percentage of the National Health Reference Price List (NHRPL). The process by the Department of Health for determining the annual NHRPL has attracted much heated response from providers and there is general agreement that reimbursement methods need to move more towards per case and capitation forms of payment. Under capitation, instead of paying a fee for every service or visit, the healthcare provider is paid a fixed sum in advance for all the lives covered, whether they are healthy or need treatment.
At present, members (sometimes supported by an employer) make direct contributions to medical schemes as shown in the figure below. The contributions are community-rated and cover the legislated PMBs and optional amounts of care above the PMBs. There is a tax subsidy for private healthcare which favours the highest income but gives no subsidy to those in medical schemes who earn below the tax threshold (R3,833 per month for 2008/9 tax year for those under age 65 and R6,166.67 per month for those over age 65).
The tax break has reduced the sensitivity of higher income groups to the increases in contributions because until 2006 the subsidy escalated at the same rate as contributions. There is generally low awareness amongst individuals of the tax incentive for medical scheme membership. However the total amount of this tax break is large: in 2005 it was estimated as costing R10.1 billion which was some 20% of total government spending on public health services in that year.
Current Flow of Funds in Voluntary Medical Schemes
In January 2004 the Minister of Health stated there were three issues on the unfinished reform agenda toward implementing Social Health Insurance (SHI):
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The introduction of risk-adjusted cross-subsidies. This will effectively enforce community rating across all medical schemes so that everyone is charged the same standard rate for the common PMB package, regardless of the option or scheme they choose to join. This will be accomplished through a central Risk Equalisation Fund.
- The introduction of income-based cross-subsidies. This de-links the purchase of healthcare from family affordability concerns. It enforces the primary solidarity mechanism under which people receive a common package of benefits according to healthcare needs and contribute to healthcare on the basis of their ability to pay.
- The creation of a mandatory environment. People earning above a certain amount would be required to contribute to mandatory health cover.
The first reform as envisaged by the Department of Health is to establish a system of risk equalisation between medical schemes via a new statutory body, the Risk Equalisation Fund (REF). In the absence of risk equalisation, schemes are incentivised to “risk select” or “cream-skim” i.e. to seek younger and healthier lives and design packages that are not as attractive to those with chronic disease. A scheme with a younger and healthier profile has a lower community rate (contribution) than one with older and sicker members. The price of healthcare thus depends on the option or scheme you join.
The effect of risk equalisation is to ensure that everyone across all medical schemes pays a similar community rate for the same package of benefits (the PMBs). The community rate will no longer be influenced by age and disease, but only by the efficiency of the medical scheme in purchasing and delivering care to its members.
The primary objective of the Risk Equalisation Fund is thus to protect open enrolment and community rating. South Africa is unusual internationally in having open enrolment, community rating and minimum benefits without risk equalisation at present. Other countries with risk equalisation in a competitive market include Germany, Switzerland, Belgium, the Netherlands, Israel, Australia and the United States of America. Risk equalisation techniques are also present in many other systems like the United Kingdom where it is used to equalise risk between regions of the country in the National Health System (NHS).
It is expected that the REF in South Africa will equalise the expected risk faced by all medical schemes on the basis of several risk factors: age, gender (not yet implemented), maternity events, numbers with one of 26 chronic diseases and numbers with multiple chronic diseases.
Envisaged Flow of funds under Mandatory Health Insurance
The second reform envisaged would be to remove the existing unfair tax subsidy and replace it with a direct subsidy per person. The amount would be the same per person and equivalent to the amount being spent per head in the public sector. This would immediately provide substantial relief for lower income groups and make contributions more affordable for these families. The direct subsidy per person would be sourced from tax revenue and paid from government to the Risk Equalisation Fund. The REF would in turn make monthly risk-adjusted payments of this amount to medical schemes, as shown below.
The third reform would be to raise an income-related contribution for the difference between the price of the minimum benefit package and the public sector subsidy. This amount would be paid to the REF together with the direct subsidy per person, enabling the REF to make monthly risk-adjusted payments to medical schemes in respect of the total minimum benefit package. This income-related contribution would be mandatory for all people earning over a certain amount and would replace about half of the amounts paid directly to medical schemes at present.
It has been estimated that an income-related contribution of the order of 3-3.8% of income would be needed to cover the current definition of the minimum benefit package, depending on the income level at which contributions become mandatory.
McLeod, H. (2007). Framework for Post-Retirement Protection in Respect of Medical Scheme Contributions. In Department of Social Development (Ed.), Reform of Retirement Provisions: Feasibility Studies. Pretoria. Previously available on DoSD web-site.
URL: http://www.polity.org.za/article/reform-of-retirement-provisions-feasibility-studies-september-2007-2007-09-11 or URL: http://www.treasury.gov.za/publications/other/ssrr/General%20Papers/Reform%20of%20Retirement%20Provisions.pdf
A myth about this income-related contribution is that it is paid in addition to existing contributions to medical schemes. This is not true: it is simply another way of paying for contributions to medical schemes. Many restricted schemes already have contributions related to income. This reform would ensure that all medical scheme members contribute according to income in the same way. Direct payments to medical schemes as a whole would reduce by the amount of the direct subsidy plus the amount raised by the income-related contribution.
The amount needed to be raised to cover PMBs depends on the definition of the minimum package. Every R10 change in the cost of the PMB package for the industry increases the income-related contribution by between 0.4% and 0.6%, depending on the income threshold. The definition of the PMB package is currently the subject of a reform process initiated by the Council for Medical Schemes in conjunction with the Department of Health.
Members would still be allowed to choose packages greater than the minimum benefits, but would pay the additional amounts directly to medical schemes. These are shown in the diagram above as being on a community-rated basis but there could be some limited form of risk-rating allowed for standardized benefits above the minimum.
The diagram below indicates the policy flow from the mid 1990s to achieving a mandatory health system. Comprehensive PMBs were envisaged to include the existing definition of PMBs together with primary care.
Policy Flow in Medical Schemes to achieve Mandatory Health Insurance
(Source: Ministerial Task Team on SHI, July 2005, amended)
Substantial progress was made on the steps as shown above. Efforts were clustered around item 4, the establishment of the Risk Equalisation Fund, which is central to mandatory health insurance.
The last publicly-available document from the Department of Health on the issue of mandatory health insurance is thought to be dated July 2003 when the then Director-General of Health, Dr Ayanda Ntsaluba, spoke at the opening of the consultative process on the design of risk equalisation.
Department of Health (2003). Opening Address to the Consultative Forum on Risk Equalisation by Dr Ayanda Ntsaluba, Director-General, Department of Health. 10 July 2003. Midrand. [Document can be downloaded from IMSA web-site]
Substantial work has been done since 2003 on the design of the risk equalisation formula by the Formula Consultative Task Team and subsequently by RETAP, the Risk Equalisation Technical Advisory Panel. Since 2007 the technical work has been continued by the Council for Medical Schemes.
McLeod H., Matisonn S., Fourie I., Grobler P., Mynhardt S. and Marx G., (2004) The Determination of the Formula for the Risk Equalisation Fund in South Africa. Prepared for the Risk Equalisation Fund Task Group on behalf of the Formula Consultative Task Team, January 2004.
URL: http://www.medicalschemes.com/publications/publications.aspx?catid=23
RETAP (2005) Methodology for the Determination of the Risk Equalisation Fund Contribution Table [Base 2002, Use 2005]. Recommendations by the Risk Equalisation Technical Advisory Panel to the Council for Medical Schemes. Recommendations Report No. 1 of 2005. 10 February 2005. URL: http://www.medicalschemes.com/publications/publications.aspx?catid=23
RETAP (2007) Methodology for the Determination of the Risk Equalisation Fund Contribution Table 2007 [Base 2005, Use 2007]. Recommendations by the Risk Equalisation Technical Advisory Panel to the Council for Medical Schemes. Recommendations Report No. 9. 17 April 2007. URL: http://www.medicalschemes.com/publications/publications.aspx?catid=23
The effect of the REF should be to substantially change the competitive dynamics between medical schemes. The intention is that funds will no longer compete on the basis of risk selection but increasingly on the basis of cost-effective delivery of healthcare. Funds that are successful at reducing the cost of delivery will retain that benefit for their members and will thus be able to lower their contributions for the minimum benefits. Funds that are not successful at lowering delivery costs to the industry community rate determined by REF would need to charge members for the difference on a community-rated basis.
The International Panel had argued for urgent implementation of the risk equalisation mechanism and the first date suggested was 2005.
Armstrong J., Deeble J., Dror D.M., Rice N., Thiede M., Van de Ven W.P.M.M. (2004) The International Review Panel Report to the South African Risk Equalization Fund Task Group. 16 February 2004.
URL: http://www.medicalschemes.com/publications/publications.aspx?catid=23
For a complete history of risk equalisation development in South Africa, including RETAP reports, academic articles, official and preferred tables, see
http://hmcleod.moonfruit.com/#/risk-equalisation/4522627754
Approval was obtained from Cabinet to begin shadow transfers from January 2005 with no money changing hands. The industry expected the full implementation of REF from 1 January 2007, but the legislative and capacity building process is taking much longer than expected. The targeted date for the REF implementation from which financial transfers would have taken place was 2010 but this has been delayed to an unknown future date.
The Ministerial Task Team on Social Health Insurance prepared some eight documents for the Department of Health and National Treasury in the course of 2004 and 2005. A final summary document was prepared for the Department of Health for Cabinet discussions and was dated June 2005. None of the reports was released in the public domain but in 2007 another government department made the final report available to some foreign and local researchers.
[Download from IMSA web-site]
In 2006, the Ministerial task Team on SHI initiated a process that was convened by the Council for Medical Schemes to consider other reforms that might result in an expansion of medical scheme membership for low income workers (the Low Income Medical Scheme or LIMS process). The stakeholder teams lead by Dr Jonny Broomberg produced extensive material on the issue. The terms of reference, evidence, final reports and stakeholder comments are available from
http://www.medicalschemes.com/publications/publications.aspx?catid=29
A process of reconsidering the Prescribed Minimum Benefits was begun by the Council for Medical Schemes in 2008. The documents relating to this on-going process are available from
http://www.medicalschemes.com/publications/publications.aspx?catid=33
The Bill for an amendment to the Medical Schemes Act of 1998, which would have established the Risk Equalisation Fund and created an enabling provision for LIMS options, was gazetted in but did not proceed through parliament.
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