SUBMISSION BY THE ACTUARIAL SOCIETY OF SOUTH AFRICA TO THE PORTFOLIO COMMITTEE ON HEALTH ON THE WHITE PAPER RELEASED IN APRIL 1997
On behalf of the Actuarial Society of South Africa I wish to thank the Portfolio Committee on Health for the opportunity to make this submission.
Attached hereto are two papers in which we have commented on two other documents that were recently released by the Department of Health on Social Health Insurance and on Reforming the Financing of Private Health Care. Both these documents, and our comments, are directly relevant to the White Paper.
The purpose of this note is to highlight certain points which we believe are of crucial relevance.
The need for health care and the provision thereof on a basis of providing access to all citizens, at an acceptable level of quality and in a way that the country can afford in the long run, is a universal goal. We as the Actuarial Society whole-heartedly support this goal for South Africa.
However, the goal of efficient, affordable and sustainable health care, is one of, if not the most difficult, societal challenges. South Africa is not unique in the world in experiencing these problems. The solutions that will work for South Africa are probably unique.
The Actuarial Society wishes to offer its sincerest assistance and support, tangibly and otherwise, to the government in order to develop these solutions.
2. The Actuarial Society of South Africa (ASSA)
The ASSA is a professional body consisting of some 350 internationally qualified, yet locally operative, actuaries. Although actuaries' traditional role has been in life assurance and pensions, their contribution to general insurance and health care is now being sought and recognised throughout the world. We believe that our training and experience in the quantification and management of immediate and long-term risks and their financial outcomes not only assist business but it is extremely valuable to the public at large.
To illustrate their public role, it is worth noting that a large number of actuaries are employed by government departments, for example in the United Kingdom, ranging from the Departments of Trade, through Revenue Service to Health.
3. The macro position of health care financing in SA
South Africa spends about 8% of GDP on health care, roughly in equal proportions by the public and private sectors. By international standards this figure is probably adequate. However, from the public perspective, there is a mal-distribution of the resources in that too much is spent on tertiary levels of curative care and too little on primary preventative care. In the process a minority of the country's citizens receive selective high-level care whereas the majority enjoy inadequate basic/primary care.
The private sector is largely arranged through medical schemes under the auspices of the Medical Schemes Act of 1967. Until 1989 this Act prohibited differentiation in contributions on any grounds other than number of dependants and income level and provided for a comprehensive set of benefits as a minimum. In other words, the Act required flat community rating. Under this dispensation, contributions to medical schemes escalated at approximately double the general CPI inflation rate.
4. New Regulations for Medical Schemes since 1989
The hyper escalation in contributions became untenable and the Regulations to the Act were changed to allow differentiation in contribution rates, practically on any grounds, and minimum benefits were done away with. Although the practice of risk rating was possible under the new Regulations, many schemes, if not the majority, have not been making use of this opportunity.
It is our contention that schemes that have moved towards a dispensation where responsible risk rating has been applied, together with a sound risk management approach using medical savings accounts and utilisation management techniques, have succeeded in harnessing the hyper escalation. They have also succeeded in providing better access and showing improved financial positions. Statistics to prove this are provided in one of the accompanying documents.
Therefore, the statement in the White Paper that the deregulation has been unsuccessful, is in our opinion not substantiated. We wish to respectfully submit that re-regulation of the private health financing industry based on this premise, is extremely irresponsible. We wish to recommend that the activities of those medical schemes that have succeeded in harnessing the escalation be scientifically investigated, and compared with those schemes that have persisted in applying community rating.
5. The pensioner problem
The White Paper argues that community rating is justified to ensure continued coverage of older people. Thereby the young pay more than the cost of their benefits and their excess contributions are used to subsidise the older members.
Such a dispensation is no other than relying on the current active population to pay for the pensions of retired members of society. In pensions circles this is referred to as a pay-as-you-go system. It has been proven worldwide that, even if such a system is made compulsory for all citizens, the aging of populations causes its demise in the long run. It is simply a case of too few active people who are required to pay for too may old people.
Furthermore, the current younger members of medical schemes have become aware of the long-term threats. Their argument is simply that in the absence of a guarantee that they will be subsidised once they are old, they will not contribute more than the cost of their benefits. The only way in which their benefits can be protected in the long run, is for their excess contributions to be saved for themselves. In other words, the long-term solution lies in advance funding for post-retirement medical costs and not in short-term cross-subsidisation.
This advance funding mechanism is nothing new. It is a well-established feature of traditional whole-life and endowment assurances as well as private pension and provident funds. Without such cautionary advance planning and consequent funding, the security of the system is undermined and its survival is greatly threatened.
The Medical Schemes Act did not require proper advance funding, since it relied on continued cross-subsidisation in the flat community rated system. It has left pensioners destitute. A return to the flat community rating system will not contribute to the solution but only aggravate the problem in the long run.
6. The solution to the pensioner problem
The ASSA has the greatest sympathy with existing pensioners under medical schemes who may have been left destitute. However, the solution does not lie in the return to a community rated system. The solution, respectfully so in our opinion, lies in:
setting the practice straight with regard to future pensioners, i.e. funding in advance for them and through an entry-age-rated contribution table, which would inevitably require actuarial supervision as for life assurers and retirement funds and negotiating with former employers and with medical schemes to obtain a commitment for the continued support of the existing pensioners.
To the extent that there remain "orphaned" pensioners which can not be absorbed by the public system, there may be need for a special levy or dedicated tax.
7. Community rating versus risk rating
As members of the ASSA we find it regrettable that there is a perception that these two concepts are mutually exclusive. It is true that the short-term insurance industry is characterised by a practice that the insurer may cancel the cover at his will.
However, this is not the practice in long-term (i.e. life) assurance. Once admitted, the life assurance policyholder is guaranteed cover for the whole term of the contract, which may be for the whole of the insured's life.
We propose that a whole-life type contract should be the preferred one for private health insurance. Again, it is not a new concept. For example, the German private health insurance system is run on such a basis. It would however require the supervision of actuaries to ensure sustainability in the long run; the same as for life assurance and retirement funds.
Furthermore, compulsory group life schemes afford members of such schemes valuable cover because there is no, or very limited, proof of insurability (and of good health) required. This practice provides a key social support system in which the uninsurable few are able to obtain cover which they would not be able to do if cover was not made compulsory for eligible members.
Therefore, if employers were given the right to make medical scheme membership compulsory for eligible employees, there is only very limited need for individual risk rating. We sincerely believe that groups other than employers, such as labour unions and professional bodies (e.g. lawyers), can also avail themselves of the group underwriting opportunities.
As the ASSA we would most sincerely recommend that these avenues be pursued before a return to the community rated, open enrolment, system, as suggested in the White Paper, is reintroduced.
8. Social Health Insurance
It is generally accepted that the health care for the poor and indigent should be provided by the State out of general revenue. The only practical way to obtain universal coverage for the rest of the population is to compel all employed citizens (or their employers on their behalf), as well as the self-employed, to contribute to health insurance. There are many examples of national systems across the world.
It seems inevitable that the rules for such a national system ought to allow for the opting out by individuals or groups from the national system in order to provide for themselves via the private system.
The ASSA support the possibility of opting out of the national system. We further wish to stress the importance that anyone who so opts out, is not supposed to fall back on State support. Therefore, the private system ought to be regulated to prevent the demise of a private scheme. This would mean that at least the same kinds of measures as are applied to ensure the survival of the insurance and retirement funds industries, are required for the private health care system. Again, there are examples to be consulted elsewhere in the world.
9. Health policy is tax policy
The ASSA respectfully wish to emphasise the fact that public health policy necessarily affects the country's fiscus. To the extent that a social health insurance may add to the cost of employment, without advancing productivity, it will simply make our country's economy even less competitive against our competitors.
In view of the welcome longer term budgetary approach introduced by the honourable minister of finance in his latest budget speech, we expect that the longer term effects of current health policy decisions, would and should be anticipated. It appears as if such a longer term assessment has not been done in the compilation of the White Paper. For one, the likely and very substantial effect of the HIV / AIDS epidemic, has not been referred to in any significant way.
As the actuarial profession, we believe we are expertly equipped to evaluate the long-term effects. Therefore we would sincerely like to offer our services in this regard.
As the Actuarial Society of South Africa we sincerely appreciate and support the goal of universal access to quality health care for all South Africans. We are concerned that the proposals in the White Paper have been based on perceptions and beliefs and not on scientific evidence and analysis. Their implementation may therefore rather contribute to the problem and not the solution of South Africa's national health care dilemma.
Therefore we should like to offer our services to assist in a scientific analysis of the long-term effects of the proposals contained in the White Paper and to possibly consider other alternatives.
Professor George L Marx
On behalf of the Actuarial Society of South Africa
Tel (021) 509-5242 Fax (021) 509-0160
17 March 1998