159month. This would mean a total flat contribution per working

person for the balance of PMBs of R116.20. This is only 16%

more than the average amount needed to be funded for the balance of PMBs under Social Health Insurance. However, the incidence will fall more heavily on lower-income people unless full cross-subsidies are instituted as envisaged in Period 5.

Both solutions above assume a pay-as-you-go approach to funding for minimum benefits for healthcare for those over age 65. They have also been estimated only for existing pensioners on medical schemes and those in the households of Scenario 1 contributors. If more pensioners are added, as was envisaged in the Scenario 3 costing, then the figures quoted above would increase.

The most effective means of pre-funding for post-retirement medical scheme contributions for those over age 65 is to proceed as fast as possible to full implementation of Social Health Insurance. The additional cost for funding in full for the balance of PMBs for those over age 65 was shown in section 5.4 to be 0.1% of contributions under all three scenarios.

9.3 Definition of PMBs and Desirable Option Designs With greater clarity on the sequencing of reform for Social Health Insurance, it will become easier to deal with the sequencing issues of reform for medical schemes. A major area of concern in the industry at present is the lack of certainty on the timing and definition of future extensions to PMBs and on the options structures that may be used for benefit design.

Many of the concerns raised with the extension of PMBs are in connection with the impact on low-income workers. There are also concerns over the implementation of the REF in an isolated form rather than in conjunction with a per capita subsidy.

In order to conduct further work on Social Health Insurance costing, it is critical that there be broad agreement on the desirable future definition of PMBs. Even if the extension of PMBs needs to occur sequentially, as broader healthcare reform proceeds, having a common vision of the end goal will substantially reduce confusion and uncertainty. Once the definition of future PMBs is agreed, then the implications for supplementary benefits above the PMBs can be resolved and desirable options structures clarified. This work needs to be performed by the Department of Health and Council for Medical Schemes in conjunction with stakeholders.

9.4 Linkage using a Monthly REF Community Rate There is a technical issue that arises in the transfer from the central social security retirement fund to the Risk Equalization Fund. When the REF was designed in 2003, it was envisaged that the industry community rate would be held constant for one year at a time. This fitted in neatly with medical scheme pricing, which occurs on an annual basis.

Subsequently, the Ministerial Task Team on SHI reported to the Department of Health⁵² recommending that any risk to

government should be eliminated by determining the industry community rate for the REF on a monthly basis. That report was not publicly released and there has not been any subsequent technical report on how the monthly community rate would function. There are several issues that need to be addressed, including the means for determining payments for schemes with poor-quality data and how resolution of data problems will be brought into the monthly calculation. Further, there is a timing issue on the reporting of maternity events due to the run-off of claims and the implications of run-off in reporting have not yet been addressed.

More seriously for this work on post-retirement medical scheme funding, having a fluctuating community rate from month to month makes the administration of payment flows much more complex. The diagrams in section 7.2 and Appendix H and the costing in section 5.4 were devised on the basis of a constant amount needed each month.

The use of a monthly industry community rate for the REF is well-suited to the Period 3 reforms with an isolated REF. However, its use begins to be problematic for Period 4 and its use becomes difficult under Period 5 with full income cross-subsidies. Under Social Health Insurance the intention is that income cross-subsidies provide for the difference between the cost of PMBs and the per capita subsidy. Members would only pay directly to their medical schemes the amount needed to cover non-healthcare costs. A monthly fluctuating amount for the value of PMBs is thus problematic.

The cashflows preferably need to be determined annually so that SARS will know the income-related contribution amounts needed for one year at a time. Medical schemes would then also know for one year at a time what additional contribution to charge to members. The post-retirement subsidy could then also be fixed for one year at a time.

It seems to make sense that in Period 5 the REF should pay risk-adjusted amounts depending on the cashflow it receives. The solution to the risk faced by government may be better dealt with by making the payments from the REF subject to monthly fluctuation rather than the payments to the REF.

This administrative issue needs attention from the Council for Medical Schemes in conjunction with stakeholders in the Risk Equalization Technical Advisory Panel, together with policymakers dealing with health reform and retirement reform.

9.5 Employer Liabilities and Employer Reaction Employers are still grappling with the implication of the tax-subsidy reforms in 2006 with respect to medical scheme contributions for those in retirement. Tax deductibility in the employer’s hands of contribution subsidies paid on behalf of workers is clear but the situation for pensioners⁵³ has not been clarified.

This proposed reform of funding for the balance of cost of PMBs for pensioners is complex and wide-ranging. The central funding

52Ministerial Task Team on Social Health Insurance (2005) Social Health Insurance Options: Financial and Fiscal Impact Assessment.

53Undated letter from Actuarial Society Health Committee to National Treasury at the time of tax-subsidy reforms implemented in 2006.

160

for those over 65 will reduce the liability of employers for funding medical scheme contributions in retirement. This will reduce both the annual charge to the income statement and the liability on the balance sheet. The likely response of employers will need further testing in discussions with stakeholders.

In principle we would not want this proposed structure to jeopardize any pre-funding for post-retirement medical scheme contributions that is already in place. Even if PMBs become fully paid for those over age 65, the amounts already set aside for pre-funding could assist members to enjoy more comprehensive care until a dispensation of enhanced PMBs is introduced. We need to be wary of the possibility that some consultants and advisers might move swiftly to relieve employers of as much of

the remaining post-retirement liability as possible before any reform actually occurs.

It is important that decisions taken by government in this regard are clearly and rapidly communicated. Silence on the issue for several years may have undesirable impacts on pensioners if employers freeze any consideration of dealing with the question of medical scheme subsidies for workers and pensioners. This report thus ends with a plea for openness and transparency in the discussions about social security reform for both retirement and healthcare.

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Appendix A

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Appendix A

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