By Patrick Matshidze - Council for Medical Schemes
Acting registrar of Medical Schemes and head: Research & Monitoring (until 30 November 2009)

Various factors enable groups of individuals to join medical schemes.

Most South Africans join a medical scheme through their employment. Another reason why individuals join medical schemes is because they are seeking a perceived higher quality of care in the private sector, particularly for hospitalisation. Most people cannot afford to pay out-of-pocket for private hospitalisation, therefore they enrol in medical schemes.

There are people who join medical schemes purely because they are risk-averse, meaning that they are not compelled by their employer to do so but join because they understand the catastrophic nature of healthcare expenditure. Medical scheme cover gives these individuals access to better resourced healthcare facilities that would otherwise be beyond their reach.

Another reason why people join medical schemes is because they can afford to; membership becomes part of their overall approach to healthy living. These individuals consider check-ups and routine visits to general practitioners as essential and provide for these services through medical scheme cover. A tax benefit currently exists for being enrolled in a medical scheme and some individuals take advantage of this.

There exists a group of individuals which would benefit from membership in a medical scheme. But several constraints make realising this goal impossible.

Medical scheme membership is predominantly income-related: only high-income groups effectively access reasonable cover. This lack of affordability is a severe constraint that prevents low-income groups from joining medical schemes.

Low-income groups participating in the medical schemes environment are usually able to do so through their employers. However, many employer groups have relinquished the running of in-house or restricted medical schemes in recent years and the subsequent subsidies that accompany the monthly medical scheme contributions. Low-income individuals faced with "total cost-to-company" remuneration packages are consequently forced to make trade-offs between healthcare cover and other consumption priorities. Medical schemes have struggled to formulate benefit packages that would accommodate low income individuals whilst at the same time affording them reasonable cover.

Then there are those South Africans who can afford medical scheme cover but are either unwilling or not adequately informed about the pros and cons of medical scheme membership; they do not join a medical scheme as a result.

Most people view medical scheme membership as a grudge purchase; it is something they do not willingly prioritise over other household needs.
And so an individual who is young and healthy may not see the need to make a monthly payment towards a scheme which he or she may not have to use for many years to come. A lack of understanding of the concept of risk-pooling, whereby the healthier subsidise the healthcare needs of the sicker, usually means that many individuals approach medical scheme membership with a mentality that asks: "What's in it for me?" People who do not see an immediate benefit for themselves inevitably opt out of the environment. Some of these individuals will seek membership in a medical scheme at a later stage in their lives; we all get older and start experiencing more ailments. The Medical Schemes Act, however, protects the existing members of medical schemes by allowing the imposing of waiting periods and late-joiner penalties aimed at individuals who behave in this manner.

Improving the affordability of medical scheme contributions is central to any efforts to encourage more South Africans to join medical schemes.

Bringing together healthier and sicker individuals facilitates a form of cross-subsidisation whereby the sicker people do not pay contributions according to their health status. This measure improves affordability.

Another strategy for improving affordability is ensuring that individuals pay contributions according to their income levels but have access to healthcare benefits according to need. Low-income groups are hence afforded access to a package of healthcare services that would otherwise have been out of their reach. High income earners would then also experience a discount in their contributions because the number of contributors into the risk pool would have been broadened.

Engaging in mass education and awareness campaigns would also contribute towards informing people about the social solidarity nature of medical scheme cover. Many people continue to resist medical scheme membership because they do not understand how they can make monthly payments whilst not incurring any claims.

In spite of this lack of understanding, research has shown that medical scheme membership would increase significantly if contributions became more affordable.

The determinants of medical scheme membership

The strongest determinant of medical scheme participation is household income.

According to an analysis of the General Household Survey conducted in 2006, families join a scheme when medical scheme contributions fall roughly below 16% of gross household income.

A very reliable indicator of medical scheme participation is the number of tax payers (rather than registered tax payers). In 2006 there were roughly 3 000 740 tax payers and 2 985 350 principal members. This very close numeric correlation suggests that earning levels sufficient to require the payment of personal tax is an indicator of medical scheme affordability. This implies that, barring other structural factors, medical scheme membership will only rise if the number of personal tax payers rises.

The increased medical scheme participation seen in recent years is in part related to employment growth affecting the number of tax payers, the implementation of the Government Employees Medical Scheme (GEMS), and the development of effective low-income options.
GEMS, however, reflects the leveraged impact possible through employer mandates and a relatively minor income cross-subsidy (via the employer).
But open medical schemes, affecting 70% of all beneficiaries, cannot implement income crosssubsidies, and would only be able to rely on a government intervention to achieve a similar effect.
As a consequence they must rely on trying to make packages affordable. Although this will meet with some success, it will be limited and related to improvements generally in formal employment and the number of tax payers unless a desired package can be offered at a cost that falls within the affordability threshold.

A significant number of people without medical scheme cover pay for private ambulatory services despite having access to free public services.
Expressed as a catchment population, this amounts to roughly 10% of the total population. On average these households spend around 2% of their gross income on these services.

Surveys carried out as part of the Low Income Medical Scheme (LIMS) process, however, identified a preference for many non-medical scheme members to obtain coverage for more than just ambulatory services, specifying emergency and maternity care.

Quite clearly people choose insurance mechanisms for expenses that are more catastrophic and infrequent in nature. Within the context of healthcare they would also be concerned about access to services that are regarded as safe. This would be a particular concern in relation to emergency and maternity care, given the poor record of the public sector in both areas. Given this, it is possible that low-income groups would pay more for this coverage than they would for ambulatory care.

Consequently, existing out-of-pocket expenditure levels on ambulatory care would not reflect the potential demand for coverage for insurable events which would be valued differently. Very slight changes in employer support, government subsidies, and differential pricing for these services could dramatically increase the demand for this form of cover, even without a relaxation of prescribed minimum benefits (PMBs). However, exempting certain income classes from the PMB requirement could attract roughly 5 million additional beneficiaries into partial catastrophic cover options. Changes to the existing tax subsidy to prioritise lower-income groups, as proposed by National Treasury, would ensure that around 2 million of the 5 million would have access to comprehensive cover, including PMBs.

Given the uncertain direction of health policy at present, keeping medical scheme costs in check remains a priority. During 1999-2004 medical scheme costs rose sharply relative to international trends. This undoubtedly led to the exclusion of lower-income groups at the margins of participation.
But a fairly dramatic change in contribution costs occurred from 2005 onward, with index changes converging back on international trends. This has also contributed to participation at the margin from 2006.

A more rational cost trend may require that prices are determined in a concerted manner by all role players rather than relying on price competition, which is almost entirely absent from the provider market at present. Concerted actions to respond to price determination would have the advantage of driving up the demand for cover and increasing the normal demand for services while simultaneously reducing the pressure on healthcare providers to ar tificially drive up prices and demand.

Hopefully South Africa will be in a position to take advantage of these opportunities in future.

Who could be a member...but isn't?

Many South Africans have the desire to join a medical scheme but are prevented from doing so.

Most South Africans realise that being enrolled on a medical scheme is the only avenue through which private providers, especially hospitals, can be accessed. This is because the services of private providers are often priced beyond what most individuals and households in South Africa can afford.

Most South Africans, given a choice, would seek care in the private health sector due to the well-documented problems with state facilities. Consequently, the majority of individuals that are not enrolled on a medical scheme are not doing so out of choice.

The inability to join a scheme is largely attributable to affordability constraints which, in turn, arise from various conditions, some of which are outlined below.

The biggest barrier

Lack of affordability is the single biggest constraint that forces many to abandon medical scheme membership. Private provider charges are the single most impor tant contributor to medical scheme contributions. The private healthcare sector has exper ienced a sustained costescalation trend for most of the past decade, resulting in contributions increasing at levels that have consistently been above inflation.

Two groups of individuals are affected by the affordability constraint.

The first consists of those who have never belonged to a medical scheme. Most of these either do not have sufficient income or have not yet held jobs where medical scheme membership is a condition of employment. The unemployed, self-employed, and low-income earners fall into this group.

The second group are those who have previously belonged to a medical scheme but have had to lapse their membership for various reasons.

Research indicates that medical scheme coverage drops dramatically for people aged 20-29 and over 50. Individuals in the 20-29-year age group include those that used to depend on their parents for membership but were forced to relinquish their membership due to statutory provisions. (The Medical Schemes Act (Act 131 of 1998) stipulates that you can remain a child dependent on your parent's medical scheme cover up to the age of 21.) Since these young adults are just entering the job market, they may not be earning enough to afford medical scheme cover - even if they want to sign up for it. It is, however, also conceivable that several of these young and healthy individuals are simply postponing their enrolment and thus engaging in anti-selection behaviour.

Many people over the age of 50 are also likely to be former medical scheme members who have subsequently been compelled to relinquish membership as they enter retirement. Medical scheme membership is correlated with employment and many South Africans are unable to afford contributions without suppor t from their employers. This situation becomes worse at retirement when most people's incomes drop substantially.

The efforts of the medical schemes industry to introduce products for low-income earners have met with very little success. Existing products are still priced at levels unaffordable to most low-income earners. Purchasing these products often implies that low-income earners have to spend 30-40% of their income on cover compared to less than 10% spent by middle- to high-income earners. Lowincome individuals can thus meaningfully participate in the medical schemes industry only through substantial subsidies from their employers.

Some suggest that the requirement for prescribed minimum benefits (PMBs) in medical schemes is a major obstacle to devising medical scheme products for low-income earners.
Subsequent recommendations have been made for a modified PMB package targeted specifically at low-income earners. It is not clear how such a product would be structured but perhaps it would need to be introduced with caution to avoid creating the perception of "a medical scheme product for the poor" which is likely to greatly affect the potential uptake of such a product.

It is important to emphasise that those currently not participating in the medical schemes environment, even though they desire to, are not a homogenous group. Strategies to facilitate their enrolment must thus be structured to accommodate their unique expectations and pay special attention to the issue of affordability.

How affordability influences membership

Statistics show that most South Africans cannot join the private health sector because the medical scheme contributions are simply too costly for them.

The General Household Survey (GHS) which was conducted in 2007 estimated that the percentage of South Africans belonging to medical schemes declined from 15% in 2002 to 14% in 2007. According to these estimates, there were 6.8 million medical scheme beneficiaries in the year 2007 while 40.8 million South Africans did not enjoy access to private health cover in 2007.

However, in its Annual Report covering the financial year 2007-2008 the Council for Medical Schemes (CMS) reported that there were 7.5million beneficiaries as at the end of 2007 – significantly more than was reported in the 2007 GHS findings. The overall medical scheme membership had grown to 7.8 million by the second quarter of 2009. This growth may be attributed primarily to the Government Employees Medical Scheme (GEMS) which has managed to increase its membership by more than 50% from 2007.

Using the figures compiled by the CMS, the number of South Africans covered by medical schemes and enjoying access to private doctors and hospitals has increased from 14% in 2004 to 16% at the end of 2008.

So the growth in medical scheme membership has been slow. There can be little doubt that this is primarily due to affordability issues.

Participation in the private health insurance environment is known to be strongly associated with income levels of individuals and households.

A more in-depth analysis of the 2006 GHS shows that about 80% of people who earn at least R15 000 are beneficiaries of medical schemes, as shown in the figure below.

It is also worth noting that medical scheme coverage decreases to less than 50% for people whose salaries are R4 000 and below. This may suggest that people prefer to use private health services once the affordability barrier is overcome.

More research needs to be conducted to enable us to talk to the issue of affordability in the context of the South African medical schemes industry, but the latest estimates do seem to suggest that households opt out of their medical scheme when the monthly contribution equals or exceeds 16% of their total income for the month.

Still, the majority of those who are not members of a medical scheme have little or no income at all.

South Africa is facing many challenges when it comes to the provision of universal care and healthcare cover for all its citizens.

Medical scheme participation by households who earn up to
R16 000 per capita on a monthly basis (2006)