CIRCULAR Reference: Guidance on benefit changes & contribution increases for 2019 Contact persons: Mashilo Leboho and Nondumiso Khumalo Tel: 012 431 0427/0514 Fax: 012 431 0631 E-mail: m.leboho@medicalschemes.com or n.khumalo@medicalschemes.com Date: 26 July 2018 Circular 33 of 2018: Guidance on benefit changes and contribution increases for 2019 This circular serves to stipulate the requirements that must be adhered to by medical schemes for the assessment of benefits and contributions for the 2019 benefit year. Section 7 of the Medical Schemes Act amongst other things mandates CMS to protect the interest of beneficiaries at all times, control and coordinate the functioning of the schemes in the manner that is complementary to national health policy. The overall objective being to encourage access to affordable quality healthcare, efficiency and long-term sustainability of the industry. Outlined below, are key considerations that will be taken into account when assessing the benefit changes, contribution and cost increase assumption for 2019. 1. Economic outlook overview The outlook for the Gross Domestic Product (GDP) growth forecast has improved slightly, with growth expected to moderately outperform the recent years performance, despite the shock 2.2% contraction in the first-quarter of 2018. According to the National Treasury, a GDP growth rate of 1.5% is projected for 2018, rising marginally to 1.8% and 2.1% in 2019 and 2020 respectively. This economic growth prospect can be attributed to higher commodity prices and improving investor confidence (National Treasury, Budget Review 2018). However, the Bureau for Economic Research (BER) has recently revised down the GDP growth forecast for 2018 to 1.4%, compared to 1.9% in March, while the 2019 growth prospects remain unchanged at 2% (BER, Economic Prospects, Third Quarter 2018). The unemployment rate of 26.7% remained unchanged over the first quarter of 2018 compared to the fourth quarter of 2017. This rate represents a slight improvement from 27.7% in the first quarter of 2017. This unemployment rate is high for both youth and adults; however, the unemployment rate among young people aged 15 34 was 38.2%, implying that more than one in every three young people in the labour force did not have a job in the first quarter of 2018 (Stats SA: QLFS, 2018). While the actual number of unemployed people increased by 100 000 to 6 million; the number of employed people rose by 207 000 to 16.4 million (see figure 1). The observed employment increases are mainly driven by the following sectors: community and social services, manufacturing, construction, trade and finance and other
business services industries. At the same time, employment declines were recorded in the transport, mining, utilities and agricultural sectors. The moderate growth forecast and the slight employment increases are however unlikely to make a significant impact on the unemployment rate. All these figures have a direct impact on medical schemes membership growth, application of underwriting as well as long-term sustainability of the industry. Figure 1 : Labour market Q1: 2018 Source: Stats SA, 2018 The South African Rand Exchange Rate has depreciated significantly in recent months mainly due to the stronger US dollar. The depreciation of the local currency coupled with the increase in the fuel levy (April) and persistent increases in international oil prices have resulted in the significant hikes in the domestic price of petrol. Consequently, consumers are expected to remain vulnerable going forward, as household income is further squeezed by the pass-through effect of the 1% increase in Value Added Tax (VAT) and other levies announced in the 2018 February Budget Speech. In addition, the weaker Rand Exchange Rate, increases in Brent Crude oil prices, and the impact of VAT rise, are likely to drive consumer inflation higher and therefore pose a threat of possible increase in the repo rate by the South African Reserve Bank (SARB, 2018). 2. Headline inflationary expectations The graph below depicts the South African Reserve Bank inflation targeting against historical Consumer Price Index (CPI) data as published by Statistics South Africa (Stats SA) for the twelve-month period up to June 2018. Page 2
Figure 2: Headline inflation 2017-2018 7% 6% 5,4% 5% 4% 5,1% 4,6% 4,8% 5,1% 4,8% 4,6% 4,7% 4,4% 4,0% 3,8% 4,5% 4,4% 4,6% Inflation 3% 2% 1% 0% Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 National Treasury Forecast (2019) Feb-18 Mar-18 Apr-18 Headline inflation May-18 Jun-18 National Treasury 2.1. The year-on-year (y-o-y) inflation rate as measured by the consumer price index (CPI) reached a year low of 3.8% in March 2018, before accelerating to 4.5% in April, with a marginal decrease to 4.4% in May. The upward trajectory continued with June s consumer inflation rate edging up to 4.6%, the highest level recorded so far in 2018. The weak exchange rate, higher oil prices, VAT and petrol price hikes are expected to drive consumer inflation higher going forward. 2.2. According to the latest inflation forecast of the SARB as outlined in its Monetary Policy Committee (MPC) statement, headline inflation is expected to average 4.8% and 5.6% in 2018 and 2019 respectively, before easing marginally to 5.4% in 2020 (SARB, July MPC statement). Similarly, according to National Treasury, the CPI is projected at 5.3% and 5.4% for 2018 and 2019 respectively, while the forecast for 2020 is 5.5%. 3. Historical contribution rate increases and consumer inflation The graph below (figure 3) provides an illustration of trends over time, on contribution increase rate as reported in the 2016/2017 CMS annual report, relative to CPI. In addition, figure 4 incorporates medical schemes contribution increases and CPI health basket as reported by Stats SA. Page 3
Figure 3: Contribution increase rate and headline inflation (2012-2017) 12 10 8 % 6 4 2 0 2012 2013 2014 2015 2016 2017 Average contribution increase Average CPI Difference Figure 4: Comparison of different rates (2012-2017) 12 10 8 % 6 4 2 0 2012 2013 2014 2015 2016 2017 CPI CPI "Health Basket" (Stats SA) Medical Schemes Contribution (Stats SA) Contribution Increase Rate (CMS) 3.1. The actual contribution increase rate of 11.3% for the 2017 benefit year as reported by the CMS is marginally higher than the 10.3% medical schemes contribution reported by the Stats SA. Moreover, the difference between the CMS average contribution increase rate and the Stats SA CPI health basket is 4.7%. Page 4
3.2. It is evident from the above figures, that medical schemes beneficiaries are consistently subjected to medical schemes premium increases that are persistently above both the consumer inflation and the CPI health basket. In this context, the CPI is used as a proxy measure for affordability since most sectors within the economy experience CPI-linked salary increases, if any. 3.3. The CMS remains concerned by the persistent high rates of contribution increases relative to the CPI, as this is clearly unaffordable and places an undue financial burden on members 4. Health Market Inquiry The CMS has noted the observations made by the Health Market Inquiry (HMI) provisional report on several market failures and gross inefficiencies within the private healthcare sector in general, and specifically the funder market. The main concerns for the CMS relates to the issues raised around benefit option configurations, access to care, pricing of benefit options, and long-term sustainability issues. In this regard, the CMS would like to remind the industry that medical schemes are not for profit organisations therefore they should be managed as such. It is the CMS expectation that members of the Board of Trustees should always exercise their fiduciary duties diligently for the benefit of the members; and not to encourage or tolerate inefficient fund management or profit making by third party providers whilst members are running out of benefits, and contributions remain persistently unaffordable. Trustees and Principal Officers are also encouraged to continuously review their remuneration philosophy and to link it to the schemes actual performance, with the prioritisation of members interests to ensure value for money spent on Trustee and Principal Officer s fees. Amongst other concerning issues highlighted by the HMI provisional report, is the issue of sustained levels of profitability across the funder market as well as the providers; failure by some administrators to address supplyinduced-demand; complexities of the available benefit options; the use of benefit design to weaken effective risk pooling and avoidance of price competition through clandestine preferential attraction of young and healthy members to the exclusion of the old and sick in the environment. All these factors will continue to have a detrimental effect to the national health system and erode value for money for members, thus exposing them to catastrophic healthcare costs. It is therefore expected that medical schemes with economies of scale and scope should always use their countervailing power to negotiate favourable tariffs with all service providers, including other third parties, for the benefit of scheme members, and be alert and highly responsive to profit making interests, after all healthcare is a public good and it shall not be treated like any other commodity of trade, but as a social investment. 5. Healthcare utilisation trends The table below depicts changes between 2012 to 2018 on the actual increase in contributions in relation to projected tariff and utilisation increases. Page 5
Table 1: Contribution increases and assumed rates Actual Contribution Increase rate Note: * to be published in the 2017/2018 CMS Annual Report Cost increase assumptions analysis for 2018 showed that the combination of demographic and utilisation factors is projected to add about 3.33 percentage points to the total cost increases in medical schemes. This projection represents a slight decrease when compared to the 2017 estimate of 3.96 percentage points (Circular 24 of 2018). The CMS continues to observe that utilisation estimates submitted by the schemes do not always strongly correlate with the changes in demographic and risk profile of the industry. In this regard, the observed increases in utilisation can be mainly attributed to factors such as supply-induced demand for in-hospital services, fee-for-service reimbursement, hospi-centric benefit designs, instances of aligned interests between private health establishments and practitioners, adverse selection and moral hazard. This brings into question the effectiveness and/or value of all cost pull interventions used by medical schemes or their administrators as well as managed care organisations in managing and channeling appropriate and cost-effective use of healthcare services. For this reason, medical schemes are requested to submit a comprehensive analysis of these factors when motivating for their respective cost increase assumptions (Appendix D). The CMS will undertake a detailed assessment of all submitted rules and pricing assumptions to ensure that members are not denied effective cover and that contribution increases are reasonable. 6. Single Exit Price Table 2 below depicts historical Single Exist Price (SEP) from 2012-2018 relative to the CPI. The approved SEP is published by the Minister of Health towards the end of each year. The gazetted increase for 2018 is 1.26% whilst the SEP for 2019 is still to be published. Even though the approved adjustment will be published later in the year, medical schemes are advised to assume a reasonable estimate for 2019 based on the historical figures. Table 2 : SEP Publications (2012-2018) Year CPI Approved SEP Increase 2012 5,6% 2,1% 2013 5,7% 5,8% 2014 6.1% 5,8% 2015 4,6% 7,5% 2016 6.4% 4.8% 2017 5.3% 7.5% 2018 4.6% 1,26% Note: SEP formula is published by the Pricing Committee 2012 2013 2014 2015 2016 2017 2018 9.7 8.9 8.9 9.5 8.8 11.3 * CPI 5.6 5.7 6.1 4.6 6.4 5.3 4.6 Assumed utilisation increase 2.0 2.8 2.3 2.9 3.1 3.9 3.3 Tariff 6.2 6.8 6.9 6.2 5.7 6.2 5.5 Total assumed increase 8.3 9.6 9.2 9.2 8.6 11.3 8.2 Page 6
7. National Health Insurance (NHI) Risk pool fragmentation in the absence of an industry wide risk adjustment mechanism continues to pose significant challenges within the industry. The CMS continues to be concerned about fragile pools with less than 2500 members at a benefit option level, where such benefit options are incurring operational deficiencies and members are running out of benefits. To this end, during the registration of the 2018 benefit options, the CMS requested the affected medical schemes to provide the Registrar with reports indicating the reasons for the underwriting deficit and the course of action that the scheme intends to undertake to ensure the sustainability of such options. In response to the CMS regulatory intervention, the affected medical schemes have since undertaken to implement the following corrective measures amongst others: - Submission of operational plans on how to reduce the operational deficit over time through benefit design initiatives without denial of care. - Reviewing of current benefit design to measure appropriateness according to the provisions of Section 33 of the Medical Schemes Act, No. 131 of 1998. - Reviewing the benefit offering to address and limit potential abuse of benefits by members. - Tightening of contractual agreements with service providers to improve cost containment whilst protecting access to benefits. - Application of value-based managed care initiatives such as disease management and case management, including adjusting benefits offered for certain non PMB conditions. - Implementation of medical insurance risk management policies. - Strengthening the schemes waste & fraud prevention and detection strategy. In addition, in 2017, the CMS appointed an actuarial firm to undertake an impact analysis on medical schemes consolidation, with a view of proposing a framework for scheme consolidation for the industry. The following is a summary of the key recommendations: a) Application of a systematic approach involving a phased consolidation with a limited number of schemes amalgamating at a time. b) Phased-in consolidation will allow for more predictable financial outcomes whilst reducing the danger of large financial shocks including operational risks. c) This approach will also allow for the individual characteristics of each scheme such as the following to be considered in detail: Membership eligibility criteria Employer subsidies Income bands Dependent eligibility Benefit option defaults and Calculation and transfer of reserves between schemes d) This process will also ensure that the existing members are not worse off compared to prior to the amalgamation. e) Possible amalgamation and liquidations will be guided by Section 63 and Section 64 of the Medical Schemes Act. f) The buy-in from different stakeholder groups is important. Page 7
Circular 51 of 2017 also encouraged industry stakeholders to contribute in the nomination process for participation in the Ministerial and National Advisory Committees to give an input to the NHI implementation process. Lastly, CMS will be publishing the above draft document for comment and input shortly. 8. Administration requirements for rule amendments submission The submission process remains largely the same when compared with the requirements for the 2018 submission. The following process must be adhered to when submitting amendments in terms of section 31(3), Section 33 (1) (2) (5), Regulation 2(d) and Regulation 4(b) & (d) of the Medical Schemes Act: 8.1. All schemes must submit a dated and certified resolution of their respective Board of Trustees with the wording Certified as having been adopted in terms of the rules together with a summary of, or copy with tracked changes of the proposed amendments to the respective benefits and/or contributions to fast track the review process. The format for tracked changes can either be shown in the margin in balloons or as underlined/strikethrough of the text to ensure that the submission is apparent. 8.2. All schemes must submit an original plus one copy of the amendments to their respective benefits and/or contributions. Any rule amendments that the CMS requested in previous submissions must be incorporated into the current amendments, if not effected already. 8.3. All schemes with amendments taking effect from 1 January 2019 are advised to adhere to the submission deadline which applies to the receipt of signed hard copies of the amendments, and NOT the electronic copy. 8.4. No text should be underlined in the original documents or copies of the rules of each medical scheme. 8.5. All submissions must be printed in black and white on one side of an A4-size paper. The printed text must not be highlighted in anyway, punctured and/or bound in any form. 8.6. Appendix 1A or 1A (2) must only be completed for each benefit option which was registered in 2018, and again for all benefit options which the scheme intends to register in 2019. 8.7. Appendix C or C (2) must be completed for each benefit option which was registered in 2018, with different contribution rates based on income band or efficiency-discounted (EDO) sub-options, in an instance where the benefit option is to be registered for 2019. 8.8. Appendix 1B must be completed for the entire medical scheme for both 2018 and 2019. Please note that schemes under close monitoring by the CMS need to provide input on the approved solvency ratio (row x) for 2018 and 2019 in Appendix B as per the approved business plan. The projected solvency ratio for 2018 and 2019 in Appendix 1B will be assessed in terms of the solvency ratio outlined in the business plan approved by the CMS, and any deviation must be explained in the scheme s submission. 8.9. Appendix D (revised) requires information about the assumptions on cost increases and utilisation that medical schemes used in determining their respective contribution increases for the 2019 benefit year. The Annexure has been updated in line with the CMS Annual Report 2016/17 Annexure G which separated the total risk benefits Page 8
paid by discipline codes to be consistent with the schemes annual return submissions. Each medical scheme must complete the spreadsheet once only, and deviation(s) from the guideline assumptions must be explained in the motivation for increases. 8.10. Both hard and soft (electronic) versions of all the Appendices must be submitted by the deadline date. Only the spreadsheet template provided should be used for the submission. The spreadsheet is available here and on the CMS website. 8.11. Schemes seeking to register efficiency-discounted sub-options must have obtained exemption from section 29(1) (n) of the Medical Schemes Act. Section 8(h) stipulates that only Council (the Board of the CMS) has the power to grant exemptions from any provision of the Act. It should be noted that an exemption must be granted by the CMS for each efficiency-discounted sub-option. An exemption is not granted at scheme level. 8.12. Applications for all new benefit options taking effect from 1 January 2019 must reach the CMS by 1 September 2018 in terms of section 33(1) of the Medical Schemes Act. Applications received after 1 September 2018 will not be attended to until the CMS has considered all the benefit and contribution amendments of those medical schemes that submitted their amendments by the stipulated deadline. 8.13. Schemes are further required to indicate percentage changes on any benefits that are being amended in a tabular form (submitted in word/excel format electronically) and hardcopy, as follows: Name of benefit option Benefits / services 2018 2019 % change E.g. day-to-day limit E.g. R10 000 per beneficiary E.g. R11 000 per beneficiary 10% increase 8.14. In instances where registered rules or rule amendments impose monetary limits on benefits, an explicit condition must be included indicating that the limit does not apply to the prescribed minimum benefit (PMB) conditions; and further stating that PMBs are paid in full when making use of a designated service provider (DSP). The submission of rule amendments with limits on PMB conditions will be amended to highlight the fact that the PMBs are provided at no cost to beneficiaries. This is to ensure that rule amendments are compliant with the Medical Schemes Act, and are fair to beneficiaries. 8.15. To expedite the 2019 registration process, schemes are requested to submit amendments to rules relating to the changes to the contributions, and benefit changes only. Any changes to the scheme s main rules will not be given priority except for changes that have an impact on the changes to benefit and contributions for 2019, for example the amendment of scheme tariffs for 2019. 8.16. Schemes are also required to submit proof of advance written notice to members of any changes in contributions and benefits in terms of Section 29(1)(l) of the Medical Schemes Act. Any submission without all the above requirements will be deemed non-compliant and will not be attended to. Page 9
9. Key CMS recommendations Having considered the above macroeconomic factors affecting the country s economy and the important issues raised by the HMI provisional report, medical schemes are advised to limit their cost increase assumptions for contribution increases to 5.4 % for the 2019 benefit year. It is the CMS view that increases above this rate will continue to create affordability challenges leading to a decline in the number of dependents covered within the medical schemes environment including the overall loss of membership especially in the context of the recent increases in 2018, including Value Added Tax (VAT), Pay-as-you-earn tax (PAYE), fuel prices, food, and other administered prices. It should be noted that although the SARB kept the repo rate on hold during the last MPC meeting, sustained rand weakness and the rising oil prices, may force the MPC to hike interest rates. Notwithstanding the impact of the fluctuation in the exchange rate and other industry specific factors, it remains the position of the CMS that the increase in hospital fees, pharmaceutical products and therapeutic appliances should also be limited to 5.4% in line with CPI. Similarly, the assumed increases in non-healthcare expenditure (i.e. administration and managed care fees) for 2019 should not be greater than the CPI projections for 2019. Medical schemes are also called upon to be mindful of the fact that when faced with expenditure choices and prioritisation in the current economic climate, most household s expenditure often goes towards housing and utilities, followed by transport, miscellaneous goods and services, food, beverages and tobacco. Within the basket of insurance products, medical schemes cover competes with other items such as social protection, dwelling and transport insurance as well as other financial services products. The Council for Medical Schemes is also conscious of the unique industry cost-push factors besetting the healthcare sector, Trustees and Principal Officers must continuously seek innovative and efficient ways of curbing costs as opposed to merely shifting the financial burden onto members through unaffordable contribution increases, reduction in discretionary benefits, payment of PMBs from the members savings accounts, or through out-of-pocket payments, including blatant denial of care or use of balance billing of members. Such behavior is not only in contravention of the provisions of the Medical Schemes Act but also affects membership growth, worsens adverse selection and abuse of benefit entitlements by members. As communicated in Circular 24 of 2018, the assumed 3.33 percentage point price increase attributed to changes in the utilization of healthcare services for 2018, remains a major concern for the CMS as in some cases it does not always correlate with worsening or improving demographic and disease profiles of the medical scheme. Accordingly, medical schemes are required to submit a comprehensive analysis of these factors when motivating for their respective assumptions (Appendix D) used in determining contribution increases. Trustees and Principal Officers are further encouraged to review their funding and contractual models with their service providers in order to better manage healthcare and non-healthcare related costs for the benefit of their members. Where third-party entities have failed to demonstrate value for money in respect of services, the Board of Trustees are called upon to review and tighten such contractual agreements. Any pricing model for 2019 premised on shifting the financial burden onto members through higher contribution increases and reduction in discretionary benefits will be rejected by the CMS. Furthermore, due to the adverse effect of the number of existing benefit options on consumers and related complexities, the CMS will only consider application for registration of new benefit options in exceptional circumstances. Page 10
A detailed motivation for the required changes to benefits and contributions must accompany all submissions. The guidance provided above regarding the limit on the cost increase assumptions should be taken into consideration when determining the adequacy of contribution increases. As indicated in Circular 29 of 2012, a report that is sent together with the proposed amendments must take into account the requirements of the Advisory Practice Note (APN303) published by the Actuarial Society of South Africa (ASSA) called: Advice to South African Medical Schemes on Adequacy of Contributions. The report must be prepared by a person with the appropriate actuarial and/or statistical skills, and should include the following detailed information: benefit changes contribution increases non-healthcare expenses assumptions financial projections The Advisory Practice Note mentioned above can be accessed on the ASSA website (http://www.actuarialsociety.org.za). No amendments to the rules of a medical scheme will be valid unless they have been approved and registered by the CMS in terms of Section 31(2) of the Medical Schemes Act. The marketing of amendments that have not been approved and registered is strictly prohibited, and will be constitute a transgression in terms of Section 66 of the Medical Schemes Act. The deadline for medical schemes to submit their rule amendments scheduled to take effect from 1 January 2019, is 1 October 2018, although the CMS welcomes early submissions. Kindly refer any queries you may have to the Benefits Management Analyst responsible for your scheme. Your cooperation is always appreciated. Dr Sipho Kabane Acting Chief Executive & Registrar Council for Medical Schemes Page 11