An economic analysis of the anti-adverse selection provisions in the Medical Schemes Act 131 of 1998

Abstract

The problems of adverse selection, asymmetry of information and moral hazard are well-known problems encountered in exchange markets. There are particularly well-recognized problems in the insurance market. To manage these problems in the insurance market, various measures have evolved in the Common Law such as recognizing the legal duty to disclose all material facts. Further insurance practice managesthese problems by inserting terms in insurance policies. These measures are discussed in the dissertation. In 1998, the Medical Scheme Act neutralized these measures when it introduced the community rating system and replaced these common law measures with statutory anti-adverse selection provisions such as late joiner penalty and waiting periods. Community rating prohibits the use of risk factors such as gender, age, and health status to determine the contribution to be paid by members and require all individuals to pay the same contribution irrespective of the difference in their risk profile. These are the very factors the common law requires the insured to disclose. The Medical Schemes Act thus creates a system vastly at odds with the common law position. Consequently, the reasons of government intervention in the health insurance market are examined by looking at the history of the legislation. Government intervention is discussed against the economic theory of competitive markets and market failure. Finally, the effectiveness of statutory anti-adverse selection provisions is discussed. This dissertation has two central conclusions, firstly the anti-adverse selection provisions affects the pricing mechanism and thus competitive efficiency of medical schemes. Secondly, these anti-adverse selection provisions are not the best way to solve and reduce the problems of adverse selection, asymmetry of information and moral hazard, they instead worsen the situation, and thus different measures should be proposed to achieve the policy objectives of the legislation