IMPACT OF UNDERWRITING on a South African medical scheme AUTHORS Barry Childs Mudanalo Shavhani Rachael van Zyl
PEER REVIEWER: Paresh Prema
EXECUTIVE SUMMARY BACKGROUND: Underwriting is a tool used by insurers and medical schemes to manage anti-selection and moral hazard risks. To the extent allowed in regulation, if an applicant is considered high-risk an insurer may either deny the applicant’s cover, set limits to benefits or impose exclusions in the area of high risk or charge a higher contribution rate to reflect risk. Medical schemes have fewer underwriting tools available. The Government Employees Medical Scheme (GEMS) introduced underwriting, in line with the Medical Schemes Act 131 of 1998 (The Act), in the form of waiting periods from October 2016. The underwriting was introduced in order to address observed ongoing anti-selective behaviour. This behaviour primarily related to beneficiaries (principal members and dependants) who were resigning from the scheme, without resigning from the public service, and then re-joining the scheme at a later stage to access benefits. These beneficiaries were observed to resign from the scheme once the services had been paid for, undermining sustainable risk pooling within the scheme. AIM: The purpose of this article is for the scheme to share its learnings on the impact of underwriting. ANALYSIS AND FINDINGS: In South Africa the Act limits medical schemes’ underwriting ability to the imposition of waiting periods. A general waiting period of up to three months and a conditions-specific waiting period of up to 12 months can be applied for new applicants. In order to quantify the impact, the behaviour of new members entering GEMS was observed from January 2016 to December 2018. The observations included the number of new entrants, claims paid in respect of these new entrants, their average age and the ratio of chronic patients. A decrease in the scheme’s main risk areas was observed as a result of the underwriting introduced. The decrease led to an improvement in the scheme’s claims ratio in respect of new entrants from 181% in January 2016 to 55% by December 2018. CONCLUSION: Medical schemes in South Africa operate on the principle of solidarity; therefore, contributions are not calculated on an individual basis and in line with the risk associated with the individual, but rather are community rated based on beneficiary type, benefit option and, in some cases, income. Community rating and open enrolment expose medical schemes to anti-selection and moral hazard risks, whereby
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