SOCIAL HEALTH INSURANCE POLICY

1. SOCIAL HEALTH INSURANCE POLICY Presentation to Health Portfolio Committee 7 June 2005

2. Contents of presentation • Some motivation for SHI policy • Objectives of SHI • Present proposals • Envisaged way forward

3. Key Strategic Challenges • Constitutional mandate to provide universal access • Inequity in access to health care • Ensuring that public health system remains backbone of SA health system care • Private sector cost escalation • Limited options for low income people • Need to reduce financial risk to individuals at the time of accessing health care

4. Policy Context cont. SA - Health System 2002/2003 Public sector R33.2 billion Serves 37.9 m Serves 6.9 m Private sector R43 billion Pcap = R875.98 Pcap = R6231.88

5. Number of Medical Scheme Beneficiaries 1974 - 2003

6. Benefits Paid on Hospitals in Real Terms (2003 Rands), 1990 to 2003

7. Proportions of Benefits Paid by Medical Schemes in 2003

8. Characteristics Of NHI and SHI • Normally employment related, payroll deductions • Contributions from employers and employees • Premiums are income related and benefits are standardized • Creates large risk pool and avoids adverse selection • Social solidarity (healthy cross-subsidise the sick, and wealthy cross-subsidise the poor)

9. NHI versus SHI • NHI provides cover for both contributors and non-contributors • SHI covers only the contributors and their dependants • However: • Most industrialised countries evolved from SHI to NHI as their economies developed • In SA, NHI can be achieved in the long term as the contributor base increases with improved economic performance

10. OBJECTIVES OF SHI • To ensure affordable universal cover to all citizens and legal residents of South Africa in an equitable manner within a unified health system. • To ensure a reasonable and equitable system of cross-subsidies across all income groups applicable to users of both the public and private sectors. • To remove unfair access barriers to medical scheme cover for lower-income groups.

11. Departmental position as at June 2003 • In SA context, SHI has three components: • Risk-related cross subsidies; • Income-related cross subsidies; • Mandatory contributions

12. Risk Related Cross subsidies MSA requires all schemes to provide PMB for all scheme members Scheme have different risk profiles, resulting in different cost structures Research done by CARE found that there is a 180% price difference between the lowest and highest risk profile scheme, just because of different age profiles Clearly, schemes have incentive to risk rate in order to reduce their costs

13. Recommendation on Risk-related cross subsidies • Urgently establish a Risk Equalisation Fund • Primary objective of REF is to protect the open enrolment and community rating environment. • Purpose is to prevent competition between medical schemes from occurring on the basis of risk selection. • Will encourage competition between medical schemes on the basis of cost and quality of healthcare delivery.

14. REF Contribution Table [page 1] Source: REF Formula Consultative Task Team Report

15. Risk Equalization: how does it work? Risk Equalisation Fund Levies to, and payments from, the REF Good risks Good risks Good risks Good risks Good risks Good risks Good risks Medical schemes Poor risks Poor risks Poor risks Poor risks Poor risks Poor risks Poor risks Net financial transfer

16. Impact of Risk Equalisation • Risk equalisation will equalise the risk profile faced by schemes, NOT the outcome of successful risk management or managed care. • Schemes that are successful at reducing the cost of delivery of healthcare retain that benefit for their own members. • All schemes will effectively face the same risk profile. The most successful ones will be those that can best manage that risk and reduce the cost of delivery. • Future competition will be on healthcare delivery, not risk selection.

17. Income Cross subsidies • Our medical scheme contributions are community rated • Community rating achieves cross subsidies at option level only. • Income related cross subsidies difficult to achieve in current industry structure • Inequity exacerbated by tax expenditure subsidy

18. Tax Expenditure subsidy • Made up of two components: • Tax deductions on medical scheme contributions by employers • Deduction on any medical expense in excess of 5% on taxable income • Employer deduction regressive b/c of link to contributions • Individual deduction more progressive, but depends on submission of tax return • Estimated at 8,2 billion in 2004

19. Subsidy Framework - existing Required medical scheme contributions Private sector users Per capita expenditure Current public sector users (not in medical scheme) Tax expenditure subsidy In-kind subsidy low middle high Low income groups are forced to co-pay for services without reasonable access to a subsidy or to risk pooling via a medical scheme Income level

20. Mandates: emerging reform path Medical scheme membership Voluntary Mandatory Current position Not required Income-based Contributions Mandatory Introduce membership mandates as membership improves within the voluntary environment

21. Proposal on Income Cross-subsidies • Need to restructure the Tax expenditure subsidy to be more equitable • Need to move towards income-based contributions for medical scheme membership • This will improve social solidarity in the funding of health care, and reduce out of pocket expenditure on health care • The technical details of HOW still need to be agreed with National Treasury

22. Proposal on mandates • Mandatory membership should be phased in over time • First phase is to mandate income related contributions for high income earners or certain employer groups • Such contributions to be based on the cost of providing common minimum package in medical scheme industry • Implementation of compulsory membership of medical scheme should be gradual.

23. Proposed next steps • Testing of Risk Equalisation framework from 2005-2006 • Phasing of income cross subsidies still to be finalised with Treasury • Report to Cabinet in June/July • SHI framework still not approved by Cabinet