National Health Insurance
Regulations and Risk Adjustment to Improve Pooling
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The Risk Equalisation Fund (REF) was designed to create effectively one risk pool across all medical schemes in respect of the common benefits, the PMBs. In investigating the need for risk-adjusted payments to schemes15, it was found that there were extreme differences in age profile between funds. The price for minimum benefits in open funds ranged from 38% cheaper than the industry community rate to 142% more expensive, based on the difference in age profile alone. This is unfair to members of medical schemes as the price that they pay for the same package of benefits differs depending on the scheme and option that they join.
A system of risk equalisation effectively creates one single pool for the defined benefit package so that all medical scheme members effectively pay the same amount for the same package of benefits. This means that risk cross-subsidies are fully operational across the industry. The graph below illustrates how some schemes (with a younger age profile) would contribute to REF and others (with an older age profile and thus more beneficiaries with chronic disease) would benefit from REF. The net effect is to create a single community rate or common price for PMBs, which would have been R224.90 per beneficiary per month in this period.
Figure 4: Expected Transfers to and from the Risk Equalisation Fund March 2006
The design of the REF formula was performed by the Formula Consultative Task Team established by the Department of Health in July 2003. Stakeholders were invited to assist and some 60 people participated in the six teams that evolved during the stakeholder consultation process. The guiding principles for risk equalization and the choice of risk factors were developed and agreed. In the context of REF, risk was defined as the expected and predictable significant deviation from the theoretical national community-rated price for groups of beneficiaries with a measurable set of risk factors. The industry community rate is the reasonably efficient achievable price for the common set of benefits.
The highly competitive nature of the South African market and the need for certainty about net REF payments at the time of pricing for annual contribution increases led to the predominant use of prospective risk factors. The risk factors agreed for use in risk adjustment were as follows:
- Age last birthday on 1 January, summarised into age bands Under 1, 1-4, 5-9, 10-14, …, 75-79, 80-84, 85+.;
- Gender (recommended for inclusion from 1 January 2007 but not yet implemented);
- The 25 PMB Chronic Disease List (CDL) conditions. Where a beneficiary has more than one chronic condition the fund may select the most expensive of the conditions.
- HIV/AIDS provided the beneficiary is receiving anti-retroviral therapy according to national guidelines;
- An additional factor for multiple chronic conditions with provision for 2, 3, or 4+ simultaneous chronic conditions; and
- A retrospective factor for maternity events, defined as the delivery of a single/multiple foetus, either stillborn or alive.
Initial work by stakeholders on the standardisation of disease definitions resulted in a comprehensive manual of Verification Criteria that is now in its fourth iteration. The Verification Criteria have been developed with the emphasis on the verifiability of cases and are used to ensure that gaming of the REF is identified and addressed. There are two elements to the criteria:
- the diagnosis of a particular disease, which includes specification of applicable ICD-10 codes and limitations on the practitioners that may diagnose certain complex conditions. There may also be certain mandatory tests needed to differentiate between diseases and these test results must be retained by the fund; and
- a proof of treatmentelement which is based on paid claims data. Initially this was based on payment date information but was changed to service date information which is less open to manipulation. Data for at least two of the three calendar months prior to the month of submission is typically required in order to demonstrate proof of treatment.
A decision was taken to publish the REF formula in the form of a contribution table rather than a mathematical formula which has made the risk equalization process more understandable and more accessible. Regular submissions of data in the form of grids in the same tabular format meant that any trustee or consultant could determine expected REF payments using simple spreadsheets.
The final report on a viable risk equalization formula was delivered to government in January 2004. An International Review Panel of experts from six countries was invited to review the proposals8. They supported the findings on the formula but recommended the inclusion of gender and not only maternity events. Importantly, the panel found that the need to introduce risk equalization was urgent and recommend that the system should begin in 2005 if feasible.
The Department of Health formally adopted9 the REF as policy in September 2004 and the testing phase of the REF was approved by Cabinet in January 2005. Responsibility for implementation was placed with the Council for Medical Schemes which embarked on a “shadow process” for REF (with no money changing hands) during 2005. This allowed for a process of developing and testing the central REF systems and also encouraged the administrators and funds to develop systems to handle the REF returns. The industry expected the full implementation of REF from 1 January 2007, but the legislative process has taken much longer than expected.
The systems for risk equalization have been developed but cannot be fully tested and implemented without the enabling legislation and regulations that will allow for the collection of industry data. The draft Bill for an amendment to the Medical Schemes Act of 1998, which would establish the Risk Equalisation Fund, was gazetted in November 2006 Amendments to the bill were again delayed and the bill was not ready to be submitted to parliament until 2008. Consideration of the bill was then withdrawn. Detailed testing of REF has thus been delayed from 2007 to an unknown future date.
The delayed implementation of the REF has very adverse consequences for schemes with high average age profiles and chronic disease. There have also been increasing attempts to lobby for exclusion from REF by certain funds on the grounds that as net payors to REF they would be adversely affected. While there is no legislation yet in place, legal challenges have not yet been possible. A rapid implementation of REF in 2005 or 2007 would arguably have had a smoother passage than can be expected if the legislation comes to parliament in 2011 or later. As REF is a key organisational component of the envisaged mandatory system, any delays in REF imply concomitant delays in any mandatory system.
A critical issue is the sequencing of health reforms including REF. It is important that the per capita (per head) subsidy discussed in section 4 of Policy Brief 720 be implemented at least at the same time as REF. If REF is implemented before the per capita subsidy it will negatively affect the lower income groups. This impact on affordability will be explained in more detail in a future policy brief.
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