van den Heever BMC Public Health 2012, 12(Suppl 1):S5 http://www.biomedcentral.com/1471-2458/12/S1/S5 medicines the mandatory minimum benefits for chronic conditions, which took effect from 2004, incentivised immediate efficiencies through scheme-developed clinical protocols and medicine formularies. Generalised improvements in administration from 1999, which saw electronic claims processing introduced universally, also improved the capacity to manage costs. This capability was further enhanced from 2005 with a statutory requirement placed on healthcare providers to supply clinical codes together with invoices. Scheme consolidation The regulatory framework (through new minimum mem- bership requirements), together with commercial incen- tives already prevalent in the 1990s, saw schemes consolidate, with over 220 schemes in 1998 reducing to only 100 by 2010. The consolidation was also given a boost from 2005 with the introduction of the Government Employees Medical Scheme (GEMS) reversing the 1993 decision liberalising medical cover for government employees with significant implications for the market. As there are approximately 1.3 million general government employees, a maximum potential membership exists, when dependents are included, of around 3 million. GEMS is presently at around half this number and remains the fastest growing scheme in the country. Roughly coinciding with this period one commercial open scheme, Discovery Health Medical Scheme, also grew rapidly from around 250,000 beneficiaries at the beginning of 2000 to approximately 2.1 million benefici- aries by 2010. By 2010 just two medical schemes therefore covered 41% of all beneficiaries (3.4 million out of 8.3 mil- lion). Although the consolidation holds out some possibi- lity of better contracting with providers, it also reduces market penalties for over-priced scheme contributions. The consolidation of membership into a few national schemes reflects an apparent systemic trend resulting from the emergence of multi-employer commercial schemes in the 1980s. Differential pricing by group size Open enrolment, which required that all open schemes accept all applicants, eliminated contribution-based price discrimination based on the size of group joining an open scheme. Prior to 2000 open schemes would, at their dis- cretion, differentiate contributions on the basis of group size, with individuals and smaller groups paying more than larger groups. This practice prejudices small employers and the self-employed. The introduction of open enrol- ment together with community rated contributions (where the community is a plan or option offered by a scheme) eliminated this differential pricing according to group size without undermining financial sustainability, which has important implications for enhanced social solidarity. Page 10 of 13 Gaps in medical scheme regulation and its consequences Risk pooling The legislative framework of 1998 and implemented from 2000 enhanced the social protection possible through a voluntary (predominantly) competing health insurance environment, but retained significant and important gaps. The removal of discrimination on the basis of health sta- tus in the absence of inter-scheme risk-equalisation exposes competing health insurers to their demographic risk profile which they cannot control. Competing health insurers with poor risk profiles consequently need to be priced in excess of those with good risk profiles regardless of how efficiently they manage claims costs. This drives younger and healthier beneficiaries to schemes with better risk profiles, giving rise to a price-related death spiral and scheme failure. Given open enrolment, beneficiaries migrate to surviving schemes resulting in systemic scheme consolidation. Although unable to explicitly introduce risk-rated con- tributions, schemes have been able to manage this contin- gency by offering multiple plans, specified in law as options, with different levels of benefit. The limited range of mandatory minimum benefits (amounting to around 35% of a comprehensive package) allowed schemes to achieve milder forms of risk-rating by leveraging off the anti-selective conduct of younger and healthier families and groups who self-select benefit packages that reflect their risk profile. Options offering only catastrophic health cover therefore predominantly attract younger and heal- thier groups, while comprehensive benefit options attract older and sicker groups. As each option (or benefit plan) is priced separately, cross-subsidies between options within the same scheme can be set at the discretion of the scheme, allowing contribution rates to vary between options on two factors: the risk of claiming; and benefit levels. Despite community rating, therefore, comprehen- sive options implicitly include a risk-related loading, while catastrophic cover options benefit from a risk-related discount. The risk-sifting options designs remove scheme incen- tives to aggressively risk-select in exchange for an implicit contribution penalty for those choosing comprehensive options. However, the penalty is more subdued than occurred during the deregulations of 1989 and 1994 for a number of market-related reasons. Schemes have to bal- ance two factors in setting contributions: the average risk of claiming and income-based preferences. In a flat-rate con- tribution environment (i.e. no income differentiation), as incomes rise contribution rates decline as a proportion of income. Higher income groups, regardless of health status, prefer and can consequently afford more comprehensive benefits. Comprehensive options consequently attract