A new cap on gap cover policy payouts, which form part of the Demarcation Regulations on Health Insurance policies, is reportedly unlikely to affect claims reported by the vast majority of policyholders.
The regulations, effective April 1 2017 for all new policies and January 1 2018 for existing policyholders, will impose a R150 000 payout limit per gap cover beneficiary. The short-term insurance policy covers shortfall between medical costs and the rates charged by private medical care providers on specified procedures.
According to National Treasury, the regulations seek to differentiate between medical schemes and health insurance in order to better protect consumers. Following the October 2012 first draft Demarcation Regulations which sought to prohibit gap cover, the now final regulations were amended to make allowances for gap cover products.
Despite the pay-out cap, industry players say the gap cover rules are not restrictive as very few shortfall claims in excess of R150 000 are processed.
“Under the new regulations, we will still pay up to R150 000 per individual. Very few procedures result in a shortfall in excess of R150 000 per individual so the new regulations aren’t going to affect everyone or all procedures,” said Feroza Joosub, head of Sanlam Gap Cover. She added that the average cost of shortfall claims processed by Sanlam range between R500 and R8 000 per individual.
According Michael Settas, director of KaeloXelus, the cap is unlikely to make any difference to insurers or most policy members save for those requiring very serious medical care.
“All it does is expose a very small portion of individuals who are unlucky to have claims over R150 000 and who have already taken policies to insure against shortfalls. We can pay R150 000 and nothing more if a claim happens to exceed that limit,” he said.
To date, the largest claim processed by the company, for cardiac surgery, was R140 000, he said. KaeloXelus data shows that the largest claims are often related to cardiac or spinal care.
Submissions to the Treasury, based on 2014 data, show that between 11 000 to 585 000 lives are covered by gap cover, with a reported claims ratio of between 30% and 82.75%. Treasury, in turn, found that the typical claim value tends to be lower than R30 000. It said less than 1% of claims exceed R50 000 and only a handful exceed R100 000.
Optivest Health Solutions, which welcomes the new regulations, has said the cap will ensure that gap cover plays a complimentary role to medical schemes.
“The defined benefit is further in the interest of the member, and more specifically aimed at ‘containing’ excessive charges by medical professionals for service rendered,” said Marcel du Toit, chief executive of Optivest.
He went on to add that a per-beneficiary approach, especially for collective benefits of a four-member family, is more realistic and practical than the uncapped per-policy-benefit levels offered by some providers in that it aligns better with the known benefit structure and practices of medical schemes.
“Capping the annual benefit level at R150 000, furthermore equalises the playing field for gap cover providers in the interest of the consumer. Price and access becomes a key differentiator,” he said.
However, risk management among gap cover providers is likely to be affected by a new rule which legislates open enrolment, says Joosub.
Open enrolment means that gap cover providers can no longer prescribe a maximum age of 60 years for coverage.
“If a large number of pensioners – who arguably need gap cover the most – pile in, it may cause some instability and could have a massive impact on the cost of services,” said Settas.
According to Du Toit, differentiated pricing on a per group basis would be for open enrolment and avoid “anti-selective” practices.
The average cost of gap cover has increased over and above inflation and medical scheme contribution increases over the past year. On average increases have been around 15%, with some as high as 30%.
Settas explained that higher increases are meant to offset the shortfall that gap cover policies carry especially as doctors’ fees are unregulated. Data shared with Moneyweb show that a 10% annual increase in specialist fees and a 5% increase in medical scheme tariffs would result in 13.3% shortfall.
Du Toit added that gap cover premium increases, especially over the past two years, have been due to “fast increasing risk pools” and claims experiences of underwriters.
“To date, uncertainty around the responsibility for payment of Prescribed Minimum Benefits by Medical Schemes, has led to less than ideal claims experiences for some gap cover providers in the market. This has led to “above medical inflation” increases in order to manage underlying risk pools,” he said.
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