CIRCULAR 8 OF 2006

1. CIRCULAR 8 OF 2006 WILLEM CLAASEN 9 MARCH 2006

2. Agenda • Background • Objectives • Benefit Design • Provider contracting • Contributions and reserving • Suggestions

3. Background Where does this come from? • SHI framework • Open enrollment and community rating • Income Cross-subsidisation (including tax) • PMB’s and BBP’s • Risk equalisation • Mandatory membership

4. Background Where does this come from? • Other stated objectives • Simplification of Benefit Designs • Greater transparency and increased competition • International Review Panel of REF • Benefit designs too complicated • Suggested standardised benefit packages

5. Objectives Problems Targeted • The current silo design permits “excessive risk rating” • Section 29(1)n does not allow for differential pricing depending on service provider • Implementation of REF requires industry-wide community rate iro PMB’s – price should not vary except by service provider • Medical savings accounts are an anomaly in scheme design and require a more flexible framework

6. Objectives Stated Objectives • Remove fragmentation of risk pools, as options currently need to be “selfstandig” • Remove risk selection in respect of essential health care • Improve benefit and contribution transparency • Improve access to PMB’s and remove opportunities for arbitrary denial of benefits by schemes • Improve price competition between medical schemes • Foster development of selective contracting with service providers

7. Agenda • Background • Objectives • Benefit Design • Provider contracting • Contributions and reserving • Suggestions

8. Benefit Design Benefit Structure • Scheme-wide common benefits • Mandatory for all scheme members with the same price for all members • Must include PMB’s • Also include all benefits common to all members • Includes all hospital benefits and benefits during hospitalisation • Supplementary benefits • Members can choose - voluntary basis • Limit suggested on the number of these “options” • Only out-of-hospital benefits

9. Benefit Design Benefit Structure • Only PMB’s equalised in terms of REF • Scheme may apply “reasonable” waiting periods on members that move to the supplementary options or to a richer supplementary option • May charge lower rates if member chooses specific providers • This is applicable to the common and the supplementary benefits

10. Benefit Design MSA? OPTIONAL PMB’s & other “common benefits” COMPULSORY Change in Option Design

11. Benefit Design Questions on Benefit Structures • What is seen as reasonable waiting periods? • If too short, members will still select against scheme • No certainty given in Circular on MSA’s • Although in the presentation to ASSA it was hinted that MSA’s should either be offered in schemes but outsourced to banks, or removed totally • Uncertain what level of differentiation allowed in terms of levels of reimbursement • Need to be able to pay different providers at different rates • Will different offerings be allowed in terms of eg different percentages of NHRPL?

12. Benefit Design Implications for Benefit Structures • Total redesign of most multiple option schemes • Significant administration and IT impact • Schemes may be encouraged to move to lowest common denominator in terms of benefits • Significant portion of benefits not equalised by REF • Profile still important • Richer benefit designs generally attract poorer risks • Simplification of designs may be achieved • Significant contribution increases for options currently providing less benefits – typically better risk profile

13. Benefit Design Impact on Low Cost options

14. Benefit Design Impact on Low Cost options • Options with lower benefit levels iro chronic medicine and out-of-hospital benefits generally have a better risk profile • In-hospital benefits currently cost the scheme less to provide to these members • The scheme has to allow for the cost of these benefits at the average cost of all members • Many of these options will already face significant increases as a result of the REF being introduced • Circular 8 exacerbates the increases

15. Benefit Design Impact on Low Cost options • Analysis of the open schemes administered by Medscheme shows a consistent pattern for the lower cost options • Example for an option in one of the schemes: • REF expected to result in required contribution increase of ca 40% • Circular 8, together with REF, expected to result in required increase of ca 105% • More benefits than just PMB’s are equalised within the scheme • Numerous examples of options expected to require an increase in excess of 40% with both REF and Circular 8

16. Benefit Design Impact on Low Cost options • Lower cost options generally have younger, healthier members with lower earnings that will probably not be able to afford these increases • But they can most afford to go without private medical cover, as they are healthier • There are no income cross-subsidisation or mandatory membership foreseen for 2007 • The younger healthier members will have a strong incentive to leave the medical schemes environment • Should this happen it will result in a deterioration of the risk profile of the whole industry

17. Provider Contracting Provider Contracting • Scheme can charge lower rate if member chooses more restrictive network of providers • No contract is needed with providers to do this • This can all be done in the current environment, but • Requires registration of separate option • Registrar not enthusiastic about new options • The scheme can now allow for multiple contribution tables within one “option” or the common benefits, based on different providers • Also, waiting periods allowed where member moves from restrictive to open choice

18. Provider Contracting Implications of Provider Changes • More negotiating power to schemes, as it is easy to exclude a provider on a voluntary basis • Far easier to develop new models in conjunction with providers to bring down cost • Members are not forced onto restrictive option, but can see the benefit of moving very clearly • Waiting periods help protect against anti-selection to some extent • This should assist in changing provider behaviour • Good news for schemes and members

19. Contributions and Reserving Contributions • Contributions for Principal Member, Adult Dependant and Child dependant to be exactly the same • Only pay for the first three family members • Definition of family to exclude adult special dependants • Contributions for supplementary benefits community rated by option • Separate contributions for common benefits, supplementary benefits, and non-healthcare costs

20. Contributions and Reserving Impact of Contribution Changes • Singles and larger families will be subsidised by small families • Scheme experience will be more sensitive to changes in the average family composition • If generally larger families join, or small families add free children, claims can increase with contributions remaining at the same level • Adults claim more on average than children, especially for hospital benefits • Supplementary benefits that are community rated, but not subject to equalisation by the REF, will still incentivise risk selection by schemes

21. Contributions and Reserving Reserves • Separate reserves for common benefits and supplementary benefits • Not stated what the separate levels of reserves required are, or how current reserves will be split • These reserves may not be used to fund a shortfall on non-healthcare expenditure

22. Contributions and Reserving Impact of Reserving Changes • Reserves currently held for the whole risk pool • Requiring separate reserves for common benefits and supplementary benefits will require a higher level of total reserves, as the risk pools are smaller • Problem if there is an overrun in non-healthcare expenditure • The scheme can only use non-healthcare contributions as source of funding. • May require non-healthcare reserves as a cushion against uncertainty • A higher total reserving requirement results in higher levels of total contributions - reserves need to be maintained

23. Suggestions Suggestions for Comment • In the absence of mandatory cover or income cross-subsidisation, the cost impact of REF together with Circular 8 will be too much for lower cost options to bear in 2007 • Consider delaying Circular 8 until mandatory membership and/or income cross-subsidy is in place • Time lines far too short for proper consultation, discussion and implementation, if the full Circular 8 is to be effective from 2007 • The suggested provider contracting changes should be implemented as soon as possible, though

24. Suggestions Suggestions for Comment • Leave reserving at total scheme level • Allow risk rating (albeit with safe-guards) on all benefits not equalised by REF • This was recommended by the International Review Panel of the REF • It will reduce the incentive for risk-selection through benefit design • It will help to encourage younger, healthier risks to choose richer benefits • All this will reduce the pressure on schemes to move to the lowest common denominator and encourage them to provide sufficient cover

25. DISCUSSION