An examination of the theory and planned application of a risk equalization mechanism within the South African medical schemes industry
Date
2022
Authors
Zwane, Sibongile
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
S29(n) of the Medical Schemes Act 131 of 1998 proclaims all schemes may set the levy (price) also known as a member contribution due for each available benefit option based exclusively on two characteristics: Income and number of dependents. The former pricing procedure results in a regulatory requirement known as community rating. In reality, there are other observable characteristics which are more indicative of claims experience such as age and a patient health condition(s) which medical schemes cannot take into consideration in setting the levy. The inevitable consequence of this restriction is that high and low risk members could be in the same scheme and the same risk pool. Therefore, two schemes offering the exact same benefits would have different prices. Arguments are put forward which suggest that in the interests of preserving social solidarity, the introduction of a risk equalization mechanism would act as a necessary support for the current community rating provisions. That is, a risk equalization mechanism would transfer funds between the two schemes so that in the end both schemes would charge the same price. Although it was proposed in the 1990s, that a risk equalization mechanism be adopted within the South African medical schemes industry, it was not implemented. Grounded theory is used to build a theoretical basis for risk equalization using data that is extrapolated from the situational maps of other similar global private, healthcare funding markets that have enacted and applied community rating legislation alongside some form of risk equalization. The general theory which emerges from the grounded theory process shows that generally, in private, healthcare funding markets where community rating is adopted, a risk equalization mechanism is also adopted. Not surprisingly, consistent with theory and global experience, the re-introduction of a community rating system as a centerpiece of the 1998 Medical Schemes Act with plans to also adopt a risk equalization mechanism was a sound policy decision. However, recent healthcare policy changes suggest that medical schemes will not disappear completely but will play a less significant role in future. As such, the most opportune time for implementing risk equalization in South Africa has in all probability passed.
Description
A dissertation submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, in fulfilment of the requirements for the degree of Master of Commerce (MCom)