Many companies have made membership of a Medical Scheme a condition of employment (i.e. compulsory) for all or specific categories of employees. This has been the case for decades and reflects a noble concern and desire on the part of employers to ensure their people are adequately protected in the case of unexpected and expensive medical events.
Gap Cover is a short-term insurance policy taken out by Medical Scheme members to help cover the shortfall between the actual costs incurred in the event of hospitalization, surgery or other serious issues, and the amount reimbursed by the Medical Scheme under its rules and the specific options selected by the member. When Gap Cover was first introduced a dozen years ago, most companies viewed it as a luxury add-on, and gave employees the choice of buying the extra protection (and paying for it) themselves.
However, as time has passed, market forces and the supply & demand of health services has seen the typical shortfall increase very substantially – much faster than the increase in the underlying costs! To illustrate this simplistically, consider a hypothetical event costing R10,000 in 2017, for which the Medical Scheme option reimbursed R8,000 leaving a gap of R2,000. If healthcare costs have grown by 10% pa since then, and Medical Scheme reimbursement levels by 6%, then the shortfall will have grown by an astonishing 22% per year, and after 5 years the gap will be more than a third of the total price of the event.
That simple picture is actually a very realistic depiction of what has happened in practice. Medical Schemes have worked very hard to keep contribution increases to manageable levels, and in part they’ve achieved this by holding down increases in reimbursement levels. In contrast, high quality specialists and high intensity hospital services are in very short supply and have much more pricing power. Hence the growing gap.
This situation has been exacerbated by economic circumstances and financial pressure on Medical Scheme members, which has seen people forced to “buy down” (ie select less expensive and less generous options on their Medical Scheme), and in some cases exit the Medical Scheme completely.
In our view, Gap Cover can no longer be considered a luxury purchase. The FAIS Ombud shares this opinion, and indeed has indicated that an intermediary cannot be considered to have given appropriate advice if Gap Cover was not at least discussed and considered for a client.
This leaves employers in an interesting predicament. An increasing number of companies have adopted “cost to company” remuneration packages. Requiring employees who are on compulsory Medical Aid to take out Gap Cover as well results in a reduction to take-home pay, not to mention being a change in conditions of employment with the associated HR and legal implications.
So why do it?
Gap Cover is “risk rated”, like all insurance products. At a company level, the average age of the employees, their occupation and industry, the past claims history and other factors that affect the probability of claiming and the likely severity of claims will all be reflected in the premium rate. However, where cover is voluntary, an additional factor needs to be priced in too, and this is called “anti-selection”. It sounds nasty, but basically it means that someone who is more likely to claim is more likely to buy the product in the first place!
Anti-selection is a feature in all types of insurance. It’s much higher in health-related insurance products than say in life insurance, however. Dying is not in the short-term plans or desires of most people, whereas that knee operation you’ve been putting off is something else entirely. Insurers can try to manage the anti-selection by rigorous underwriting, but that’s expensive and time-consuming. So in the Gap Cover market, the insurers make allowance for a certain inevitable level of anti-selection in waiting periods, and their premium rating.
The net effect is quite dramatic. For a sizeable company the premiums for voluntary Gap Cover may be substantially more than those for compulsory cover. If the insurer knows that all eligible employees will be taking out Gap Cover, then the anti-selection aspect is eliminated, and other costs (marketing, facilitating payment, administration) are also significantly reduced. This reduces the premium significantly.
From an employer’s perspective, if you believe strongly that your people need adequate protection against the costs of medical crises – so strongly that you make it obligatory to buy that protection – then logic would suggest you should make Gap Cover compulsory too. Not only does that ensure a more complete degree of protection, but the costs per employee are considerably less as well.
Some companies may not wish to go through the employment law process associated with a change in conditions of employment (even if the payoff to employees is substantial). In such cases, an intermediate step that usually does not require legal formalities is to give employees an “opt-out” provision. In other words, if you’re on compulsory Medical Aid and hence are eligible for Gap Cover, we will put you on the policy unless you explicitly opt out and sign a statement confirming that you understand the implications of not having the cover. This type of “nudge” can still result in a significant savings compared with pure voluntary cover, and many companies find this an easier step (or first step) than changing employment contracts.
The reality of the South African healthcare services industry is such that both Medical Aid and Gap Cover are required in order to be adequately protected. If employers are comfortable requiring the former, the benefits to doing the same for the latter are there for all to see.
The NMG SA Group of Companies are authorised financial service providers t/a NMG Benefits
