Laura du Preez: Personal Finance

THE Registrar of Medical Schemes is taking legal advice on how to respond to a recent Supreme Court of Appeal ruling that blocked his attempt to close down the medical gap cover products of a short- term insurer.

Patrick Masobe, the registrar, described the ruling as being “as clear as mud" and said he would decide by the end of next week what to do about the ruling that could potentially have huge implications for healthcare cover in the country.

In 2006, two years after a demarcation agreement between the registrar's office and life assurance industry put an end to life products that the registrar believed were undermining medical schemes, the same problems with short-term insurance products had not been resolved. As a result, Masobe applied to the Johannesburg High Court for an interdict preventing Alexander Forbes subsidiary Guardrisk Insurance from selling its AdmedGap and AdmedPulse policies.

About 130 000 policyholders enjoy cover under these policies, which offer cover for the difference between your medical bills and what your medical scheme pays out.

Typically, policyholders join cheaper medical scheme options offering cover at National Health Reference Price List (NHRPL) rates (previously known as medical scheme rates) and then take out gap cover to top up this cover to up to three times NHRPL rates - the rate at which many specialists and some hospitals charge for private healthcare.

The registrar has argued that these policies undermine medical scheme cover because they "cherry pick" those who are healthy and are able to get the insurance cover cheaply, leaving older, sicker people in the more comprehensive medical scheme options without the necessary subsidisation from younger, healthier members within their particular option.

In December 2006, the High Court found in favour of the registrar and ordered Guardrisk to close its products within three months. Had it stood, the judgment could have had implications for other short-term insurers selling health policies, including hospital cash plans.

But Guardrisk applied to the Supreme Court for leave to appeal and the case was heard last month. The recently released judgment dismisses the High Court order.

The registrar's only remaining legal course of action is to appeal to the Constitutional Court - a route he followed without success in a separate case on an issue over the rules of Genesis Medical Scheme.

The only other way the registrar could prevent a possible proliferation of gap cover products following the Supreme Court ruling would be to recommend that the Medical Schemes Act definition of the business of a medical scheme be amended.

Three clauses

The registrar's initial application for an interdict against Guardrisk was on the grounds that the insurer's products fell within the Act's definition of the business of a medical scheme and the products were not registered as medical schemes and fell foul of other provisions of the Act.

But Guardrisk argued that there were three clauses in the definition in the Act and that its products needed to comply with all of these in order to be regarded as doing the business of a medical scheme.

The three clauses relate to:

a) Providing for members to obtain healthcare services;
b) Assisting members to defray the cost of a healthcare service; and
c) Rendering a health service, either by the medical scheme itself, or by a supplier or suppliers with whom the medical scheme has contracted.

The High Court disagreed with Guardrisk, finding that because its policies defrayed expenditure incurred in connection with the rendering of any health service, it was doing the business of a medical scheme.

But the Supreme Court of Appeal, in a ruling by five consenting judges, says an entity does the business of a medical scheme if it does the activities described in a) and b) and, where applicable, c).

The Supreme Court dismissed the registrar's arguments that an interpretation of the business of a scheme in this way would undermine the purpose and aim of the Medical Schemes Act. It said there was no evidence of this on an analysis of the cost and benefits of Guardrisk's products compared to medical scheme membership and the constitution prevented Guardrisk from discriminating against potential policyholders on the grounds of, among others, age and disability.

The Appeal Court then states that "practical reality has shown that there exists a need for this type of insurance and there seems to be no reason why it should not be permitted". It did not elaborate on this point, but concluded that as a result, it says, the appeal must succeed.

Clarity on gap cover issue?

Masobe says it is not clear from the judgment on what grounds the Guardrisk products regarded as okay, and where the boundary lies between these and other products. The final decision cannot be determined rationally from the reasoning, leaving regulatory uncertainty, he says.

Herman Schoeman, Guardrisk's managing director, says the ruling clarifies what the short-term insurance industry has always argued and will put policyholders' minds at ease about their cover.

Schoeman says insurers need to act responsibly and Guardrisk has no desire to compete with medical schemes, but its products enable policyholders to protect themselves against financial hardship.

He says one of the Guardrisk policies recently paid out R58 000 to a woman who, despite being a medical scheme member, was not fully covered for a heart bypass.

The issue of topping up medical scheme cover with gap cover products is increasingly important in light of the above-inflation increases in medical scheme cover and the costs of medical services.

In addition, the high cost of medical scheme membership is driving consumers to take out other cheaper insurance products such as hospital cash plans - often in place of medical scheme cover. However, you should be very careful about taking out short-term insurance cover in place of medical scheme membership because short-term insurance products are renewable and can be cancelled by your insurer.

Standard Bank recently informed a pensioner couple that their health policy was no longer viable and gave them 30 days' notice of the termination of their cover.

The couple were offered R1 000 as compensation. However, should they attempt to get medical scheme cover at ages 64 and 67 and with one of them being diabetic, they are likely to face late-joiner penalties- possibly as high as three quarters of their contributions - as well as waiting periods, including a 12-month waiting period for the treatment of the pensioner's diabetes.