Gap Cover – An Essential Employee Benefit

Opinion by Mike Settas, MD of Cinagi

The  majority of employers in the formal sector maintain medical scheme cover as a compulsory employee benefit for staff where affordability is realistically manageable. This is a good labour policy to maintain, as even the entry level options provide fairly good packages with access to the high quality private healthcare sector.

The downside is that right across the spectrum of benefits options, from the richest to the most economical, members are exposed to uncertain and often substantial financial shortfalls in their cover, especially for major medical treatments like surgery, oncology, and specialised diagnostic procedures.

A major problem for the medical scheme sector over the past two decades has been limited scope in managing run-away costs. Increases in private healthcare costs have exceeded CPI by a substantial margin over this period, creating pressure on schemes in maintaining affordable benefit packages. This pressure has been the result of above inflation provider fee increases, growing utilisation of healthcare services from an ageing medical scheme population, a growing shortage of medical specialists, fraud, a flurry of new expensive medical technologies, and a regulatory framework that is inconducive to better risk management.

From the early 2000s, the response from medical schemes in mitigating these risks has been to limit the annual increases in the tariff level at which they reimbursed members or doctors for treatment. Adding to this in the early 2000s, the Health Professions Council removed the ceiling on what doctors could charge, effectively allowing them to charge whatever they wanted. Over time, these two fundamental changes resulted in a rapidly growing ‘gap’ between what private doctors would charge and what medical schemes would reimburse members.

This is what spurred development of the health insurance products known as ‘gap cover’. This generic term amply described the function fulfilled by these supplementary health insurance products and the name has stuck firmly ever since.

Over the years, these gaps in cover have grown substantially, and now typically range from several thousand Rands on minor procedures to some even exceeding one hundred thousand Rand on larger procedures. A decade ago, it was unheard of to have such enormous shortfalls, but nowadays it is becoming more and more common. It is obvious that shortfalls of these magnitudes will place most employees in severe financial distress.

As the years of relentless cost pressures continued, medical schemes have been further compelled to include user payments - that members are liable for when receiving care - on certain medical procedures in a bid to better manage costs and excessive utilisation. Commonly known as co-payments or upfront payments, these are usually defined rand amounts deducted from benefit entitlements, similar to an excess on car insurance pay-outs.

The role of gap cover was initially quite simple – it paid for the gap between what doctors charged and what medical schemes refunded. Modern gap cover products still fulfil that original function but they have also evolved and now additionally also cover an array of other shortfall types, reflecting the complex nature of an ever evolving private healthcare industry.

If we look at government’s healthcare policy position, it remains almost exclusively focused on building a state-run National Health Insurance (NHI), which has meant that necessary reforms required in the medical scheme sector have been placed on the backburner. This remains a problematic stance, as any good policy position should seek to strike a balance between optimally leveraging the assets and skills present in both public and private sectors.

Nonetheless, the economic crisis brought about by the pandemic, along with government’s mammoth debt burden and high expenditure levels, means that the capacity to implement NHI with a comprehensive set of benefits is going to be severely constrained.

This means employers that wish to remain attractive to skilled employees, will need to continue facilitating attractive healthcare cover for employees.

As explained earlier, the medical scheme sector has evolved substantially in a bid to grapple with growing costs, but at the same time this has exposed members to ever growing out-of-pocket shortfalls. It has subsequently become unavoidable for employers to implement gap cover as a compulsory employee benefit if they wish to ensure that their employees are adequately protected financially.

Doing so has several significant advantages for both the employer and employees. For employers it achieves the principle of financially protecting their employees from massive health costs, making them more appealing when attracting scarce marketplace talent, and the employer avoids having financially distressed employees requesting financial assistance for large doctors’ bills.

The upside for employees is that a compulsory group scheme offers them comprehensive gap cover at a significantly lower cost than if purchased in their private capacity. Employers can typically secure these group arrangements at less than R250 a month per employee, whereas the same cover would cost around double that if they purchased it directly. Another key advantage is that compulsory group schemes will generally have waived waiting periods, so employees will enjoy full cover from day one that they start working at the employer.

As these out-of-pocket financial exposures grow, the demand from employees for more comprehensive health coverage from their employers will continue. The upside for employers is that virtually all good healthcare brokerages are now very well versed in the gap cover market and are well positioned to provide sound independent advice in implementing a compulsory group scheme.

For more information go to http://www.cinagi.co.za