Allowing private companies to insure against risk

Business Days’ Cape editor, Dave Marrs reports in his piece “Finding fairer ways to insure against risk” (Mar. 8 ,2011) that the European Union court has ruled that insurers and pension funds may not discriminate on the basis of sex. Mr. Marrs then asserts that such legislation is unlikely to be emulated in SA. Unfortunately it’s too late. Since 1998 our medical schemes industry has operated under a system of open enrollment.

Open enrolment is the practice whereby medical schemes are compelled to accept all individuals, regardless of age, sex or health status (subject only to their income and number of dependents or both). The Medical Schemes Act of 1998 also made it compulsory for every scheme to charge the same premium to every member within an option, despite their age or state of health, a practice commonly referred to as community rating. So a 65-year old individual is charged the same premium as a 25-year old. An older person is charged less than actuarially necessary to pay their expected health care costs while a young person is charged more than is actuarially necessary.

Under this system, healthy people are charged more so that sick people can be charged less. This so-called act of ‘social solidarity’ has the effect of driving lower-income and healthy people out of the market or preventing them from even entering the market. The consequence is that the risk pool of insured people becomes smaller and less healthy, driving up contribution levels and making health insurance unaffordable. This vicious cycle could eventually lead to a situation where the entire health insurance market could disappear altogether.

People should be allowed to take responsibility for their own lives and pay premiums commensurate with their risks, leaving private medical schemes in a position to offer positive incentives such as reduced premiums or special discounts to members and policyholders who exercise regularly, drink in moderation, or do not smoke, etc. Similarly, medical schemes could create disincentives and charge higher premiums to policyholders who smoke, drink excessively and are obese.

Author: Jasson Urbach is an economist with the Free Market Foundation. The views expressed in the article are the author’s.

FMF Policy Bulletin/ 8 March 2011