van den Heever BMC Public Health 2012, 12(Suppl 1):S5 http://www.biomedcentral.com/1471-2458/12/S1/S5 1984, couched in the pro-market language prevalent at the time, which argued that this would make medical schemes more affordable. The objectives underpinning the amend- ments to the Medical Schemes Act of 1967 stressed these “positive” intentions: “To have a medical scheme the ordinary person will be able to afford”; and “To prevent the socialisation of medicine” [15]. This led to the first sig- nificant deregulation of health insurance in South Africa. Medical scheme deregulation – the period from 1989 to 1999 In accepting the “pro-market” arguments, the ability to set premiums on the basis of the risk of claiming were implemented by government in 1989. From this period contributions could be set on the grounds of the num- ber of dependents, income, age, geographic area, claims experience, extent of cover provided, period of member- ship, and the size of the participating group [15]. This remarkable deregulation however was not suffi- cient to permit commercial or open medical schemes (which serve multiple employers and sometimes indivi- duals) to emerge. The requirement to comply with man- datory minimum benefits determined in relation to the scale of benefits constrained their ability to undercut the occupational schemes. Risk rating was not enough. Industry lobbies successfully influenced the govern- ment to implement a material further deregulation from 1 January 1994, just prior to the new democratic dispen- sation that would bring in a new government from May 1994. This removed the requirement for mandatory minimum benefits [15]. In 1993 government also made membership of a medical scheme voluntary for govern- ment employees, allowing them to choose their own open scheme. The former mandatory government-spon- sored schemes, of which there were four, were conse- quently converted into open commercial schemes. Three other public sector medical schemes remained closed and mandatory: the police force scheme; the par- liamentary scheme which includes all judges; and the scheme for correctional services (prisons) staff. The changes rapidly transformed the system of medical schemes with inter alia.: a substantial shift away from occupational schemes into open commercial schemes (from 50% of all beneficiaries in 1994 to over 70% by 1999) (figure 1); the use of illegal commissions to incenti- vise employers to close their occupational schemes and shift to open schemes [16]; and the explicit discrimina- tion against older and sicker members within open com- peting medical schemes [15]. Price competition between commercial medical schemes occurred on the basis of risk-selection (the selection of beneficiaries on the basis of health status) and risk-rating (the pricing of contributions on the basis of health status). Contributions paid through open schemes were flat-rate Page 6 of 13 (apart from variations due to health status) and eliminated the income cross-subsidies that characterised occupational schemes. Social solidarity principles inherent within medi- cal schemes were consequently wiped out in a mere five years. Although medical schemes could not lawfully distribute profits, open commercial medical schemes, dominated by their administration companies, began introducing rein- surance contracts to siphon off underwriting surpluses into entities, that colluded with administrators or were owned by them, and to pay brokers [17]. Another mechanism to circumvent the laws prohibiting the distri- bution of profits and the funding of brokers involved the commission-based co-selling of short- and long-term (for profit) health insurance products packaged together with medical schemes in collusion with the administrators. This intensified the commercial incentives to discrimi- nate against people and groups with a higher risk of claiming benefits. Risk-based scheme competition and costs Contradicting the apparent rationale for deregulation, that price competition through risk rating (and selec- tion) will bring down prices and increase membership, the opposite occurred. The period from 1994 saw a trend break in medical scheme per capita contribution increases (figure 2). Non-health care expenditure (administration expenses and net reinsurance losses) by medical schemes also demonstrate a break in trend from 1994 [15]. Importantly, new expenses over-and- above basic administration suddenly made their appear- ance from 1994. Over this period regulation involved little more than the registration of medical schemes and some low-key prudential supervision. The regulator itself was a low- level official in the National Department of Health with a staff of seven, none of whom were professionally qua- lified [18]. Although a Council existed to supervise the regulator, the majority of appointments were of indivi- duals working directly within medical schemes or medi- cal scheme administrators. It could be argued that the market was essentially self-regulated at this stage. Dramatic contribution increases from 1994 to 1999 consequently resulted from two sources: trend changes in the cost of healthcare services; and trend changes in non-health costs. Whereas the latter is explained by the latitude given to medical schemes and their administra- tors to profit from schemes, the former was driven largely by the nature of scheme price competition. As schemes could compete by passing risk onto members and benefi- ciaries (through risk-selection and risk-rating) they had no incentive to control underlying medical expenses. The inelastic nature of demand for medical scheme coverage furthermore meant that cost increases did not result in