Most people probably tend to believe their private healthcare cover operates in much the same way as an insurance policy. However, although there are certain similarities, we really need to be grateful, because the two differ in some very important aspects. Though some members may complain about the cover they receive or the way in which their claims are processed, more often than not, their concerns occur as a result of their limited understanding of how a medical scheme actually works.
Yes, it is a form of insurance, but with a life policy or a hospital cash plan, the sums to be paid in the event of a claim are fixed and known in advance, giving the insurance company a clear idea of the ratio between its premium income and its potential liabilities arising from claims. This means that the total amount, which can be claimed by an insured party, can be based directly upon the cost of the premiums that they will be required to pay. When insuring a life, companies rely on actuarial tables to assess their risk, using that information to calculate individual premium rates.
By contrast, in understanding how a medical scheme works, the first thing to be aware of is that assessing an individual’s risk of illness or accident is impractical. Consequently, with regard to the premiums it charges for a given product, each member will pay precisely the same, for which each will receive exactly the same benefits.
Because the purpose of membership is not to compensate for a loss, but to cover the estimated costs of members’ private medical treatment as completely as possible, a scheme’s funds must be managed with exceptional care. Actually, the need for good governance is even greater given that, in South Africa, all such schemes must operate as non-profit entities.
The key to understanding a medical scheme lies in recognising that it must balance its potential risks and its operational costs with a sufficient surplus of cash derived solely from its monthly premium income. To do so requires the membership to be large enough while preserving a balance between its younger and generally healthy members and those of more advanced years who represent a correspondingly greater risk of more frequent and larger claims.
Apart from the uncertainties governing the same shared risk principle on which the insurance companies rely, there are some other factors that should improve one’s understanding of how a medical aid scheme differs from the products of the insurance industry. While the insurance companies have the right to refuse to provide cover for an applicant who is believed, based on past history, to pose a high risk, the specialised healthcare insurers are mandated to accept everyone regardless of their medical history. Instead, they may refuse claims for a pre-existing condition for up to a year, but are obliged to provide cover for over two hundred other conditions, including 25 chronic illnesses, such as asthma and diabetes.
Understanding how a medical aid scheme maintains affordable premiums is also important. Some simply limit their benefits to keep their costs down. Others rely on incentives to create the illusion of added value. KeyHealth, however, appoints preferred service providers to control costs without limiting benefits.