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Response on LCBO's from Kaelo Leadership

Welcome to a new decade in healthcare. We look forward to walking the journey with you, as you continue to support our purpose of improving the lives of all South Africans by providing access to quality healthcare.

Given the attention and activity in our industry, we thought it appropriate to share some Kaelo insights, views and progress. The Future of Health Insurance Circular 80 and 82 were communicated by the Council for Medical Schemes (CMS) at the end of 2019. In short, the circulars stated that all products under the Demarcation Exemption Framework (DEF) must be wound down by 31 March 2021. Kaelo has been closely involved in the exemption process with the CMS as we have health insurance products currently exempt by the CMS within our short term insurance entity. We do feel, after appropriate consideration and interrogation, that due process was not followed by the CMS, and we therefore submitted a Section 49 appeal in terms of the Medical Schemes Act on 2 January 2020. On 23 January 2020, the CMS held separate stakeholder engagement sessions for health insurers and medical schemes. Given our direct involvement with both sectors, we had representation at both sessions. The overarching process was the same. Dr Sipho Kabane (CEO of the CMS) and Mr Michael Willie (General Manager: Research and Monitoring) presented the position of the circulars including the statistics noted in Circular 82, and then opened the floor for questions. The session was recorded, and we have obtained copies of the presentation. The CMS was direct in stating that it does not have a clear solution and that it is willing to engage with insurers and medical schemes to plan the best way forward. Dr Kabane indicated that the 31 March 2021 deadline could move, but before that happens, the CMS needs to have a clearer view on the way forward. He urged industry stakeholders to engage with the CMS to assist in defining the process collectively. During questioning, the CMS panel was asked by a number of stakeholders to provide a road map up to 31 March 2021. However, the CMS said it could not do so at this point, nor provide any clarity on the way forward, adding that it needs to be supported by the medical scheme and health insurance industry in setting the road map. Some medical schemes represented asked if they could apply to be insurers and the CMS responded that they are welcome to apply through existing channels and would be evaluated based on the current parameters set by CMS. A number of representatives stated that they were confused and unsure of the way forward, and therefore unable to provide any feedback to their clients in the absence of CMS guidance. The CMS again highlighted its willingness and need to engage with the stakeholder community to seek a way forward. Mr Willie presented an analysis of the Demarcation products offered in the health insurance market, through the lens of the CMS, in order to demonstrate the low value proposition of these products. The origin and completeness of the source data to create the evidence in Circular 82 was questioned by many stakeholders in the audience, as it is not congruent with the experience of many insurers and seems to be biased in demonstrating no value in insurance products. The CMS voiced the following concerns related to DEF products, referencing analysis provided in Circular 82: 1. Poor value for money - low claims ratios, high non-healthcare expense ratios

On the contrary, Kaelo’s data demonstrates extremely good value, appropriate utilisation and positive health outcomes for members.

2. Ignores social solidarity principles - provides poor-value-for-money products to lowest income earners

Kaelo’s products align to insurance law, provide good value for money, and make quality private healthcare affordable for all South Africans.

3. Insufficient levels of regulation – lack of standardisation in benefit design and pricing process, inconsistent broker commission structures, high levels of non-healthcare expenses, etc.

Kaelo operates under the jurisdiction of the short term insurance industry, regulated by the Financial Sector Conduct Authority (FCSA). Kaelo Prime Cure is a managed care organisation regulated by the CMS. Kaelo therefore welcomes and supports regulation in the health insurance sector.

4. Sizable unregulated industry – over 500,000 lives

At Kaelo we believe this industry is far larger than that, with over one million lives, as many products of this nature do not currently fall within the current DEF structures. With more than a million lives potentially impacted, the market force and clear value will undoubtedly drive the conclusion, and health insurance will be regulated and viable.

5. Not all products are as affordable as insurers claim.

Kaelo Health products, as a percentage of payroll, are market leaders in affordability and deliver return on investment to employer groups and members.

6. Needs to align with National Health Insurance (NHI)

The CMS has for a long time promulgated legislation that aligns to NHI, however in the absence of NHI, a wider scope of solutions that are affordable, accessible and that address positive health outcomes remain in demand.

Dr Kabane also subtly mentioned to attendees to not get “hung up” on the circulars and to remember that circulars cannot take precedence over the Act. The CMS gave assurance that this type of engagement session is the first of many, and that other affected stakeholders such as Insured parties, organised labour unions, intermediaries, and administrators will be invited to join the conversation. They also urged any stakeholder that wants to put its name up to be a part of the advisory committee must do so by contacting them as soon as possible. The engagement of 23 January 2020 resulted in no firm clarity as to how the CMS will proceed with Circular 80 besides stating, as previously referenced, that they are willing to engage the industry at large. However, there has been no formal retraction of Circular 80 and Kaelo is therefore proceeding with a Section 50 appeal. This is merely procedural, so it’s business as usual. I am more confident now than before, based on the meeting on 23 January 2020 and the position of the CMS, that a solution to make provision for health insurance products will be found. I will formally be engaging the CMS to take discussions around Circulars 80 and 82 forward outside the appeal process. In 2019 we secured a deal with Suremed Medical Scheme where Kaelo would take on the entire responsibility of the schemes Shuttle plan in terms of product design, marketing as well as a full risk transfer to Prime Cure (our managed care organisation registered with CMS). By using the large network and technology platforms in place at Kaelo, as well as our distribution capabilities, Kaelo is able to grow the scheme and reach new medical scheme members. Kaelo’s mobile application and seamless network integration, with over 9,000 providers, allows members to experience a high quality medical scheme cover with rich benefits and readily available care. The price point is affordable, as we are able to reduce non health care costs through our technology platform. The administrators will remain MomentumTYB as they have been for a number of years. Besides the medical schemes growth and managed care opportunity the scheme plan places Kaelo in a strong position should the CMS force through Circular 80, and in so doing cancel health insurance products and only allow for Medical Schemes. Kaelo would then have direct access to a high quality medical scheme allowing the transfer of all Health Insurance members onto this platform. This process to date, on Circular 80 and 82, has been very informative and based on what I have seen Kaelo is providing the best value to our clients and members in the health insurance industry, and we are very well positioned as a provider going forward. Based on all the evidence that we have at our disposal we are confident that Health Insurance (Primary Care) products will remain in place and in huge demand in the market.

Best wishes,

John Jutzen

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