OLD MUTUAL HEALTHCARE
White Paper for the Transformation of the Health System in South Africa
20 March 1998

1. INTRODUCTION
Old Mutual Healthcare is part of the greater Old Mutual Group. As a group, Old Mutual through several of its activities currently services the healthcare financing needs of some 640 000 individuals. This figure includes principal members and their dependants. It also includes individuals enjoying healthcare cover through medical schemes and individuals enjoying cover for major medical expenses through insurance policies.

Old Mutual Healthcare, as a member of the group, focuses on the traditional healthcare financing market, namely medical schemes. As administrator of and advisor to medical schemes, OM Healthcare not only represents the interests of the Caremed Medical Scheme and its members, a commercial (or open) scheme offered by Old Mutual, it also represents the interests of a number of in-house (that is closed or employer/employee specific) schemes.

The benefits offered by these schemes range from the traditional medical indemnity environment as envisaged by the Department of Health, to the so-called new generation schemes with self-insurance pools. The contribution bases also range from the community rated income and dependants only basis through to a group rating based on age, geographic area, etc.

One last introductory comment before moving on to the proposals contained in the White Paper. Disparaging remarks have in the past been made with regard to the role of life insurance companies involved in the financing of private health care. We would just like to emphasise that life insurance companies, like any one else involved in the financing of private health care, do not make profits directly from the fact that the schemes which they administer are financially sound. Profits and reserves built up within a medical scheme belong to its members and beneficiaries only. The success of an insurance comp any in managing the affairs of a medical scheme is determined, as with any other administrator, with reference to the administration fee it gets paid by the scheme.

2. TOPIC FOR COMMENT
Our comments on the White Paper are restricted to some of the financial aspects of the White Paper contained in Chapter 3, "Financial and Physical Resources" which covers healthcare financing and resource allocation.

To place these comments into context, we would like to refer to the principles as contained in the White Paper with reference to "Financial and Physical resources":

Healthcare financing and resource allocation policies should promote:
equity of access to health services among all South Africans, between urban and rural areas, between rich and poor people, and between the public and private sectors;
the optimal utilisation of resources;
equitable allocation of financial resources;
equitable distribution of physical resources.

All participants involved in the financing of private health care and the community at large undoubtedly support these principles.

The policy objectives regarding the financing of the private healthcare sector specifically referred to in the White Paper include proposals for the introduction of a social health insurance system and introducing measures to reverse the deregulation of the private health insurance industry. The measures referred to include the prohibiting of medical schemes from excluding any individual on the basis of health risk and restricting the basis upon which contribution rates can be differentiated to income and family size only.

3. SOCIAL HEALTH INSURANCE
Since the release of the White Paper, a document entitled "A social Health Insurance Scheme for South Africa: Policy Document" which is dated September 1997, has become available. This document greatly expands on the comments contained in the White Paper. The document puts forward three policy objectives to be achieved by the social health insurance system:
To support the public health system which is the healthcare system of ultimate resort;
To provide an effective mechanism for collecting public hospital fees by ensuring that all formal sector employees and their dependants are insured for public hospital treatment;
To provide formal sector employees not covered by private medical schemes with state sponsored insurance cover for essential hospital care at low cost.

3.1 The public sector healthcare user groups targeted by the proposed SHI
The public sector healthcare user groups targeted by the SHI can be broken down as follows:
a) employed workers and their families who obtain services from public hospitals without paying although they can afford to do so;
b) medical scheme members who attend public hospitals when their scheme cover is exhausted and then fail to pay their own way;
c) employed workers and pensioners who formerly belonged to a medical scheme but are now dependent upon the public sector after so-called "dumping" by the medical schemes.

It must be noted that no official data has been released in respect of medical scheme membership since 1995. Based on the 1995 Report of the Registrar of Medical Schemes, some 2,6 million principal members were covered by medical schemes. According to the 1996/97 South Africa Institute of Race Relations survey, there were 7,7 million persons in formal employment.

This would indicate that approximately 33,8% or roughly one third of persons in formal employment enjoyed medical scheme cover. It can therefore be inferred that category (a) above would be drawn from a population of some 5,1 million persons (two thirds) in formal employment who do not enjoy healthcare cover.

Therefore approximately two thirds of persons in formal employment and their families could stand to gain from the introduction of a SHI scheme.

The reference to gain in this context needs some clarification. It is unfortunate that the public health system has been relegated to the health care system of ultimate resort, i.e. only being used by the poor and indigent and people who can no longer afford alternative "superior" private health care cover or have exhausted their cover. Ideally one would like to see tile public heath care system as providing a viable alternative to seeking private health care. The gain referred to relates to the SHI enabling the public healthcare sector to provide such an alternative.

3.2 Interaction between SHI and Medical Schemes
What of the other one third of persons in formal employment, who have membership of a medical scheme?

A formal sector employee should be able to secure cover either by way of direct participation in the SHI, or secure cover via a registered medical scheme.

A medical scheme in turn should have the option to reinsure itself with the SHI for the expected use of public hospital services by its beneficiaries. It should, however, also have the choice not to reinsure via the SHI, but carry its own risk for any of its members using a public hospital. As incentive to a medical scheme to reinsure via the SHI, lower fees could be levied in respect of the services obtained by the beneficiaries of these schemes in a public hospital.

In the event of SHI being introduced, we therefore submit that it is essential that medical schemes retain the choice of "opting out" of SHI.

3.3 Collection of Public Hospital Fees
Part of the rationale for the SHI is the need to provide an effective mechanism for collecting prescribed public hospital fees. This recognises that the current public hospital system is to a large extent incapable of collecting the fees, which it rightfully should be receiving. It is our view that the public hospital system should not only be charging the prescribed fees, but should also ensure that these are collected. There is no reason why the public hospital system should not be appropriately remunerated if it treats any person who enjoys medical cover or has other financial means to pay.

In order to achieve this, the administration and general management of the public hospital system must be improved and made accountable to ensure that the funds so collected will not simply disappear within the system with no tangible benefit for anybody, least of all patients.

Proposals by the Department of Health with regard to the administration and management of public hospitals are therefore welcomed and are fully supported.

3.4 Dumping on the State
It has been alleged that wholesale dumping of members occurs whereby medical schemes dump the ill and elderly on the State. We submit that there is little evidence to support this. As administrator of a significant number of employer-sponsored and an open medical scheme, we can state for the public record that we have not encountered any such dumping by schemes administered by Old Mutual Healthcare. We call on those who accuse the industry of such dumping to provide such evidence. To the extent that the SHI mechanism may ensure that sufficient funding is available should this in fact happen, the SHI must be supported.

3.5 Financing the SHI
It is stated in the White Paper that contributions will be shared between employers and employees. Whilst the provision of cover is laudable, it could be argued that the SHI constitutes double taxation as employers and employees are already funding public hospitals and other health services via general taxation. It is therefore essential that implementation of the SHI is not seen as an attempt to introduce a dedicated tax to fund the health system.

Due consideration must also be given to the impact of SHI on the cost of employment. Not only will it impact on costs to the employer, it will also affect the disposable income of employees and further increase the already substantial contribution that organised labour makes towards the State coffers.

It is submitted that the Department of Health should actively involve organised labour and business in developing its proposals with regard to the SHI

4. THE PRIVATE/PUBLIC SECTOR MIX
The White Paper asserts that medical schemes should continue to operate as a private source of funding, albeit in a more regulated environment. A number of regulatory mechanisms are then proposed to "reverse the recent deregulation of the private health insurance market". The objective to be achieved by such re-regulation can be ascertained from another document recently released by the Department of Health entitled "Reforming financial of private health care in South Africa: The quest for greater access and efficiency" dated November 1997. The stated objective contained in this document is to "introduce measures to improve the affordability of, and access to private health care through medical schemes".

Although the objective of improving the affordability of and access to private health care through medical schemes is undoubtedly supported by all stakeholders, the fundamental premise upon which suggested changes regarding the medical schemes industry is based cannot go unchallenged.

This premise is the claim that deregulation has resulted in "serious instability, increased costs and reduced coverage" in the medical schemes industry. This statement needs to be closely examined. In order to do so we would have liked to be able to provide the Committee with empirical evidence that demonstrates the impact of the 1994 deregulation. However, we are unable to do so. This is due to the fact that, as highlighted previously, no official medical scheme industry information has been made available since 1995. There are, however, some indicators that may be helpful.

4.1 Medical scheme coverage
According to the 1997 SA Reserve Bank Annual Report, "total formal sector employment outside the agricultural sector increased only once during the past seven years." The Report then goes on to say that "The extent of the change in employment during the 1990s was such that the average level of employment in the formal non-agricultural sectors fell by 6,9 per cent between 1989 and 1996, indicating a loss of about 392 000 formal sector job opportunities."

The annual reports of the Registrar of Medical Schemes, however, indicate that membership of medical schemes has grown from 2,3 million in 1989 to 2,6 million in 1995 (an increase of some 12 per cent)- despite the decline in formal employment.

Expressed another way, membership of medical schemes as a percentage of the formally employed population has in fact grown. The progress can be shown as follows:
Year Per cent Covered
1989 28,4
1990 29,4
1991 29,8
1992 29,1
1993 32,5
1994 39 9
1995 33,8

Since deregulation only occurred in 1994, it is too early to assess the impact of the deregulation. There is no evidence to suggest that deregulation has not worked. Evidence does, however, indicate that since 1989, the medical scheme industry has succeeded in growing its coverage of formally employed workers and the positive trend in coverage appears to continue.

4.2 Cost-containment measures
An important benefit of deregulation was that it enabled medical schemes to introduce various cost containment measures. These range from fairly unsophisticated co-payment measures to fully-fledged managed care arrangements. Some of the more popular cost containment measures include self-insurance accounts for day-to day expenses. For major medical, that is hospital expenses, measures include pre-authorisation, case management, hospital account audits, etc. Our experience shows that these measures do in fact reduce costs. It must again be strongly argued that the positive results achieved by these measures for the entire industry should first be allowed to manifest themselves before a re-regulation of the industry is considered.

4.3 Timing of the proposed re-regulation of medical schemes
It is our view that the full effects of deregulation have yet to emerge. The claim that the deregulation caused "serious instability, increased costs and reduced coverage" would appear to be unsubstantiated and therefore the introduction of regulatory mechanisms would appear to be premature.

The medical scheme's industry is characterised by conservative and deliberative decision-making and therefore any decisions regarding changes are usually deferred until the introduction of such changes is clearly justifiable. It would be tragic if any long-term benefits that may be accruing to the health care system from deregulation are lost because of a premature decision to re-regulate the industry.

4.4 The Impact of SHI on the Private Medical Scheme Industry
It is unclear at this stage what impact the successful introduction of an SHI would have on the private medical -scheme industry. It is our view that a SHI system and medical schemes (as they are currently configured) could co-exist in an environment which would indeed promote the provision of health care for a much greater section of the population - people who can and should pay for the medical services they obtain. This will allow Government and the Department of Health to focus their attention and resources on those not able to provide for themselves.

This is especially true if healthy competition is allowed to develop between these two health-funding mechanisms. Employers, employees and members of the public at large, who can afford it, will then be able to choose through which mechanism to obtain their healthcare cover.

5. CONCLUSION
The comments contained in this document in no way profess to even fully address the issues raised in the White Paper regarding private sector healthcare financing or even provide a solution to what is a very complex issue which needs to be resolved.

There is no doubt that the objectives of the Department of Health with regard to the provision of health care to all are laudable and, we firmly believe, attainable.

These objectives can, however, only be achieved if all stakeholders involved in the provision of private health care are actively involved in the process of developing the specifics required for meeting the objectives.

Stakeholders in this regard not only refer to role players within the medical schemes industry, but also include other providers of healthcare cover such as long term and short term insurers. And it also includes employers, employees and members of medical schemes.

In the interests of the entire private health care sector we therefore urge the Department of Health to establish a public forum where all interested parties can work together towards reaching a solution.