TO: Dr TM Cachalia (Chair: Portfolio Committee on Health)
FROM: Mr S Harrison (Head: Research and Monitoring- Council for Medical Schemes)

18th June 2001


1. Your letter dated 11 June 2002 refers. Thank you for the opportunity to comment on this proposal.

2. The intentions behind this proposal are meritworthy, in that they seek to address the financial difficulties experienced by pensioners in maintaining medical scheme coverage after retirement. This issue is becoming of utmost concern given the trend over recent years among employers to terminate post-retirement benefits of their employees.

3. Whereas previously employers typically provided medical aid subsidies for their employees which extended, until after retirement, there is now a growing trend among employers to contain their post-retirement financial liability by providing employees with "total cost to employer" annual packages, which provide very limited employee benefits.

4. In relation to contributions payable to medical schemes, the existing Medical Schemes Act makes no distinction between the employment status of individuals. Medical schemes are only permitted to differentiate premiums on the basis of income or number of dependants - and so are not, for example, allowed to give certain categories of members such as pensioners a discounted rate.

5. If an employer provides a medical aid subsidy to its employees, the employer subsidy and the member's portion together would constitute the total contribution paid to the medical scheme. If the employer terminates that subsidy upon retirement, the member would have to pick up the whole portion.

6. The proposed amendment seeks to allow medical schemes to offer a discounted contribution rate to members who retire from employment due to retirement age or ill-health. This discounted rate would continue to be applied to the member's spouse on the death of that member.

7. Although the intentions behind the amendment are supported, the amendment itself can regrettably not be supported by our office, for the following reasons:

a. It shifts responsibility for funding post-retirement liability for medical scheme coverage from the employers, where it really belongs, to medical schemes. Post-retirement provision for medical expenditure is an employee benefit, and the appropriate statutory avenue to correct declining provision being made in this regard is through labour legislation (e.g. Basic Conditions of Employment Act), rather than placing additional financial burden on medical schemes.

b. A medical scheme is in the business of receiving contributions and paying claims (short-term liabilities) - and is not designed as a vehicle for prefunding port-retirement liabilities. The appropriate vehicles for putting away funds to meet future liabilities of this nature are through a range of annuity vehicles available to employers, which can then be used to pay contributions of retirees to medical schemes.

c. Permitting medical schemes to apply discretion as to application of a discounted rate for retirees (as provided in the proposed amendment) opens new avenues for indirect discrimination, in the sense that it is possible that the non-application of such discounted premiums to certain persons could be used to discriminate against people with poor risk profiles.

d. The financial implications of this proposal for medical schemes and the industry as a whole have .not been assessed, but could potentially be significant. For example, it could result in further inflation of contribution rates for younger people, which could lead to lower enrolment of young persons and increased drop-out of younger members from medical schemes. This could result in destabilization of the environment, as the potential for cross-subsidisation (crucial for the stability of medical schemes) could be undermined.

8. Nevertheless, the identified issue of declining provision for post-retirement medical
expenses of employees is critical - and it may be appropriate to suggest a joint process between
Health and Labour to identify potential solutions to this problem, including possible amendment to
legislation concerning employee benefits.

I trust that this will be of assistance to you.

Kind regards

Stephen Harrison