Medical schemes versus health insurance: What is the difference and why you should care

A layperson’s guide to Demarcation

Much of the discussion on medical schemes centres on complaints about increasing premiums or unpaid claims. Few understand why we have medical schemes and why they are so important. This brief aims to explain that medical schemes, under the protection of the regulation of the Medical Schemes Act, have a large part to play in ensuring the right of access to healthcare. Similar protection is not afforded to other health insurance products. The right to healthcare may, therefore, be watered down if insurance companies, which are not governed by the Medical Schemes Act, are permitted to provide health insurance products similar to those provided by medical schemes.

Why we have medical schemes

South Africa’s health system consists of a public health system – which is tax funded and freely available to low or no income earners – coupled with a private system for higher income earners. Free access to the public health system is means-tested.  Almost all those who earn enough money to pay tax will not gain free access to public healthcare. The system is meant to ensure the full realisation of the right of access to healthcare for all citizens.

If we relied on ordinary insurance models to cover those who, by the nature of their earning potential, would be required to pay full fees even when using the public health system, we might find the following occurring:

• Just as with car insurance, different people would be required to pay different premiums depending on their risk profile, and those who have pre-existing conditions, or are getting on in age, would be subject to higher premiums.
• Some very sick people might even be refused cover as the insurance market cannot insure for something that is definitely going to occur.
• The for-profit nature of insurance could result in these and other forms of discrimination against certain sections of the population.

In South Africa, the right of access to healthcare is enshrined in Section 27 of the Constitution. Exposing a large section of the population to the financial and medical risks described above is clearly not acceptable in this rights-based-framework. The Medical Schemes Act was passed by government as part of its mandate to use reasonable legislative and other regulatory measures to achieve the progressive realisation of the right to healthcare. The Medical Schemes Act provides social protection to those who are required to pay for their healthcare and might be subject to catastrophic healthcare expenditure as a result. Not having medical schemes as a system of social and risk protection in a country where access to healthcare is a fundamental human right would subject the vulnerable, sick or injured and elderly to the arbitrariness of a for-profit market which is unable to provide appropriate protection to all who need it.

Medical scheme protections

Social protection comes in several forms as specified in the Medical Schemes Act. Organisations that carry on the business of a medical scheme as defined by the Medical Schemes Act are regulated by that Act. Broadly speaking, an organisation which does the business of a medical scheme charges a premium or contribution in exchange for undertaking a liability to assist in obtaining healthcare services or in covering the expenditure incurred while receiving healthcare services. Medical schemes are required to provide the following protections:

• Community Rating: This requires that medical schemes charge the same premiums for the same benefits. This prevents price discrimination against older or less healthy members who in an ordinary insurance market could be subjected to much higher premiums.
• Open-enrollment: Open medical schemes are required to accept all who wish to join them – regardless of their age or health status. This protects those who are less healthy as medical schemes are not allowed to deny access to them.
• Prescribed Minimum Benefits (PMBs): PMBs guarantee a minimum level of healthcare cover for certain illnesses and chronic conditions and are in place to prevent medical cover from running out for these conditions.
• Medical schemes are non-profit in nature.
• The reporting requirements for medical schemes are comprehensive and allow for examination of changes in benefits and contributions, governance structures, and amounts spent on non-healthcare costs such as administration.

The (health) insurance market

Insurance companies providing health insurance products are not subject to the regulation of the Medical Schemes Act. This means that they are allowed to risk-rate (charge different premiums to different individuals based on their health status and age), exclude certain individuals from cover, and are not subject to such stringent reporting requirements. They are also for-profit organisations. Ordinarily this should not be a problem as insurance companies do not form part of the rights-based social protection framework. A problem arises if insurance companies – which are not governed by the Medical Schemes Act – are allowed to offer products that are similar to those provided by medical schemes. This is where demarcation becomes important.

What is Demarcation and why we need it

Given the important differences between health insurance and medical schemes, a strict demarcation policy is required. Demarcation usually occurs between indemnity and non-indemnity cover. Indemnity health cover refers to compensation for an actual loss occurred as a result of a health-related event requiring healthcare services. Non-indemnity cover, on the other hand, provides an amount for a health-related event but the amount is not related in any way to the actual expenditure incurred as a result of healthcare services required. An example of non-indemnity insurance could be a lump sum payment unrelated to health expenses incurred whereas indemnity health cover would pay for actual medical expenses incurred.

If organisations that do the business of a medical scheme and provide indemnity cover are not required to be regulated under the Medical Schemes Act the following could occur:

• Logically, if the two different types of organisations doing the same ‘work’ are operating in two different environments, one in a highly regulated environment, and one in an unregulated environment, there is no incentive for an organisation to operate under strict regulations if it could move to an unregulated environment. Such a move could erode the protections of the Medical Schemes Act and negatively impact the right of access to healthcare.
• Medical schemes could change their business model from the not-for-profit nature to the for-profit nature and could thus take any leftover contributions (after claims have been paid) as profits.

When exemptions might be allowed

It is possible that some exemptions to the Medical Schemes Act could be allowed. These could be allowed where a health insurance product does not contravene the intention and protections of the medical schemes environment. It would make sense for exemptions to the Medical Schemes Act to be dealt with in Medical Schemes Act regulations.

Conclusion

If medical schemes are not protected, the public health system could be flooded with patients who usually make use of the private health system. However, they would still in all likelihood be required to pay full fees in the public sector, thus bankrupting themselves and putting undue pressure on a public health system which already lacks capacity.

The right to healthcare needs to be protected. Ensuring the soundness of the medical schemes regulatory framework is an essential part of protecting the right of access to health care.

For more information on demarcation policy and to read about the HSF’s joint intervention with SECTION27 and the Wits Chair of Social Security please go to our website.

Information contained in this brief was obtained from the following sources:
Alex van den Heever & Heather McLeod. 1999. Demarcation and the Medical Schemes Act.
Registrar of Medical Schemes. 2008. Founding Affidavit in the matter Registrar of Medical Schemes et al versus Guardrisk Insurance Company Limited, CC Case No: SCA Case No 168/07, WLD Case No: 9459/06. 
Office of the Registrar of Medical Schemes. 2009. Demarcation Between the Business of a Medical Scheme and Health Insurance.
NOTE: Review of Concerns Regarding the Demarcation Between Medical Schemes and Insurance Products
Joint letter to the Ministers of Finance and Health from SECTION27, the Helen Suzman Foundation and Chair of Social Security at Wits

Kate Francis - kate@hsf.org.za
Researcher
Helen Suzman Foundation