Healthcare Cover with Lifestage Modelling

1. Healthcare Cover with Lifestage Modelling The Impact of Best Advice on the Medical Schemes Industry Anthea Towert Technical and Actuarial Consulting Solutions (TACS) Alexander Forbes Health (Pty) Ltd

2. Advice and Responsibilities

3. Dual accreditation: Medical Schemes Act & FAIS Act • Conduct is jointly regulated: Council for Medical Schemes (CMS) & Financial Services Board (FSB) • FAIS Code of Conduct • Act in the best interest of your client • Establish clients’ needs and then match benefits to meet those needs • Other legislation aimed at protecting consumers: CPA and TCF The Role of a Healthcare Advisor

4. Client circumstances change every year • So do healthcare requirements • Advice needs to adapt to changing circumstances • Best advice is about the most appropriate benefit option at any given stage of life What Does Best Advice Mean for Healthcare

5. Lifestage Modelling Choosing what you need when you need it

6. Changing Medical Needs Stage 2: Married with children • Hospital cover • Day-to-day cover • Maternity benefits • Limited chronic benefits • Hospital cover • Limited or no day-to-day cover • Hospital cover • Higher day-to-day cover • Higher chronic benefits Stage 1: Young, single member Stage 3: Retired

7. Claiming Patterns Over A Lifetime

8. Needs vs. Ability

9. Advice vs. The Act Best advice works against the Act

10. DILEMMA: Healthcare needs increase with age but income falls when comprehensive cover is needed most RESULT: Members are generally over-insured in younger years and under-insured in retirement OVER-INSURANCE: Inefficient use of income which could be better used as retirement funding or other savings UNDER-INSURANCE: Increased out-of-pocket expenditure and compromised cover when needed most The Impact of Best Advice on Members

11. Seems to work against the Medical Schemes Act • Act requires... Each benefit option should be self-supporting • BUT.... Almost impossible to achieve in the current environment • SO... Schemes rely on surplus-generating options to subsidise loss-making options The Impact of Best Advice on Medical Schemes Regulator tends to turn a blind eye to this requirement – requiring schemes to comply fully would destabilise the industry

12. The INTENTION of medical schemes is to facilitate life-staging • Priced on an annual basis • Members may change options annually to meet their needs • Multiple options offered to allow differentiation of benefits • Eg: Hospital plans on one extreme, Comprehensive plans on the other extreme Does Best Advice Compromise Medical Schemes?

13. because • The IDEAL is to choose an option for a specific life stage at a suitable price • In order to ACHIEVE this, benefit options should be self-supporting • BUT, this doesn’t work in practice • WHY, because of short-comings in the regulatory environment! Does Best Advice Compromise Medical Schemes?

14. Short-Comings in the Industry What are the driving factors?

15. Voluntary Membership • Not everyone can afford medical scheme cover • Not everyone who can afford cover, chooses to obtain it • Anti-selective behaviour, people join when they get sick • Undermines effective risk pooling • Drives up costs Shortcomings in the Industry Contributions + Investment Income = Claims + Expenses

16. PMB’s and Payment in Full • Intended to provide a basic level of treatment and care for most common diseases • “Payment in Full” provides an opportunity for abuse of the system • Providers may charge higher rates for PMB cases, resulting in higher costs Shortcomings in the Industry

17. Self-Supporting Benefit Options • Not achievable in the current environment • Best advice means that members choose benefits based on needs • Comprehensive options attract older, less healthy members, which drives up costs to unaffordable levels • Due to insufficient risk pooling within these options • To attract new members, low cost options are priced to make a deficit • Low and high options therefore need to be subsidised by mid-level options Shortcomings in the Industry

18. Surplus-generating mid-level options subsidise loss-making options (Top 10 open schemes) Source: CMS Annual Report 2012 (2011 Annual Financial Results)

19. Unregulated Tariffs • Currently no guidance on prices • Providers can charge what they wish • For PMBs, schemes are effectively forced to pay these costs Shortcomings in the Industry

20. Proposed Solution Change the Advice or Change the Environment?

21. The system does not support the theory of “best advice” • However, members’ interests should always come first • So, ADVICE should remain the same • FAIS, CPA, TCF • And the ENVIRONMENT should change What’s the Solution?

22. Key regulatory reforms • Benefit standardisation and simplification • Risk equalisation for a basic benefits package • Regulated tariffs to control costs How can we achieve this?

23. Basic Block Benefit: PMBs and Primary Care • (Risk equalisation) How Can We Achieve This? • Top Up Cover • Top Up Cover • Top Up Cover Retired Young, single member Married, with children Risk Pooling /equalisation for the BBB Basic Block Benefit (PMBs and Primary Care)

24. Thank-You