Watch out for gaps in gap cover

People who rely on gap cover to make up for shortfalls in their medical scheme cover should watch out for changes to their cover, which are being made in anticipation of new regulations that will govern gap cover products.

Personal Finance, 17 November 2014

Proposed regulations published in May 2014 have yet to be finalised and will not affect gap cover in 2015, but some insurers are already implementing changes in anticipation of the finalisation and implementation of the regulations. One healthcare broker said that, in 2014, the payment of many policyholders' claims was delayed by disputes over liability for claims relating to conditions covered by the prescribed minimum benefits (PMBs), and he warns that this is one area where insurers are making changes to gap cover policies.

In May, National Treasury published the second draft of the demarcation regulations under the Short-Term Insurance and the Long-Term Insurance Acts in another attempt to separate clearly what constitutes the business of a medical scheme from that of health insurance, and to ensure that insurance does not undermine the cross-subsidisation by young and healthy medical scheme members of older, sicker scheme members. The first draft of the regulations, more than two years ago, proposed banning gap cover. The second draft provides for the continuation of gap cover for medical scheme members, but subject to an annual benefit limit of R50 000 per policyholder.

Currently, gap cover policies cover the shortfall between what a specialist charges and what a scheme reimburses the specialist. The cover limits are well in excess of the highest claims. Some policies also cover the co-payments a scheme may impose for certain procedures, such as scopes and scans, and some provide top-up cover for certain major medical expenses, such as oncology. There has been a huge uptake of gap cover policies, because the shortfall between what medical schemes pay and what specialist doctors charge has widened, and schemes have cut their benefits to contain the cost of contributions. The gap between what specialists charge and what schemes reimburse has grown because of the scarcity of specialists and the absence of guideline tariffs for their services.

National Treasury has received numerous submissions on the second draft demarcation regulations, which include proposals to ban products offering primary healthcare to lower-income earners and to limit hospital cash plans sold by insurers to benefits of R3 000 a day. Reshma Sheoraj, National Treasury's director of insurance in the financial sector policy unit, said Treasury, the Department of Health and other regulatory bodies are considering concessions in response to the public comments. Sheoraj said it is likely that the final regulations will be published either before the end of the year or early in 2015, pending agreement among all the stakeholders.

Therefore, the earliest that the provisions in the regulations will come into force is January 2016, although one insurer believes January 2017 is more likely. Nevertheless, insurers have started making changes to their gap cover products in anticipation of the regulatory changes. Richard Eales, the executive director of Guardrisk Insurance, a large player in the gap cover market, said the company will offer four Admed gap-cover policies in 2015. Three of these policies will have a design that is very similar to the one suggested in the draft demarcation regulations. The cheapest policy will not cover co-payments or shortfalls in PMB claims.

It is 26- to 27-percent cheaper than the corresponding policy that does cover PMB claims, and it could lower premiums for existing policyholders who choose it. Schemes are obliged by law to cover claims for PMB conditions in full, regardless of what a doctor or other healthcare provider charges. However, schemes can appoint certain doctors or other healthcare providers, known as designated service providers (DSPs), and stipulate that you must use them in order for your PMB claims to be paid in full. If you do not, except in certain cases, such as an emergency, it is likely that you will have to pay a portion of the bill yourself.

Although schemes should pay PMB claims in full, many members face shortfalls, because they do not have the PMB treated according to the scheme's rules, or because the claims are not coded properly by the healthcare provider and/or processed correctly by the scheme. In the past, gap cover policies have paid the shortfalls on all PMB claims, and Eales said one in three claims against Guardrisk's gap cover policies is for a PMB. Victor Crouser, the head of coastal at Alexander Forbes Healthcare, which provides healthcare cover advice to employer groups, said that, in 2014 Alexander Forbes was called on to deal with many gap cover claims related to PMBs that were rejected, because the insurer took the view that the policyholder's scheme should have paid the claim.

Crouser said schemes replied that the claims had been paid in line with their rules and the law, leaving consumers out of pocket. Insurers and medical schemes paid the claims only after the brokerage intervened. Tiago de Carvalho, the managing director of Ambledown, which underwrites gap cover policies marketed by Ambledown and Complimed, said many PMB claims are paid on Ambledown policies, but if the claim arises because members deliberately do not use the scheme's DSP, the insurer will not pay. De Carvalho said there was a huge increase in Ambledown's gap cover claims in 2013. Ambledown saw an average increase of 32 percent in the number of claims per policyholder, and the average amount of each claim increased by 25 percent.

This has resulted in a rise in premiums, with increases as high as 36 percent on policies sold through brokers to individuals, although in rands the increases are small, because gap cover premiums are low -typically, R150 to R190 a month per person or family. Some policyholders have anti-selected against the insurer - they take out policies only when they know they are about to undergo surgery. As a result, the waiting periods for certain procedures, such as hip replacements and spinal surgery, have been increased to 12 months, De Carvalho said.

Michael Settas, the managing director of Xelus Specialised Risk Solutions, said Xelus's gap cover policies will not change until the regulations are promulgated. The second draft demarcation regulations propose a six-month waiting period for all health insurance benefits and no exclusions for pre-existing conditions. Currently, insurers can set any waiting period and can exclude cover for pre-existing conditions. Eales said there should not be a dramatic reduction in premiums if the R50 000 limit on claims is implemented. Although one claim on an Admed policy in 2014 was for R160 000, the average Admed gap cover claim is just over R4 800, and only 20 percent of claims each year are over R20 000. The cost of covering claims over R50 000 accounts for less than two percent of Admed policy premiums, he said. The draft regulations also propose that policies be community-rated, as is the case with medical schemes.

This means that all policyholders will pay the same premium, regardless of their age or health status. Currently, most insurers apply a loading of 50 percent to premiums on policies sold to people over 70, and they set premiums for employer groups according to the risk the group poses. De Carvalho said premiums will increase if the final regulations prevent insurers from risk-rating.