Medical Savings Accounts in South Africa
Table of Contents
Medical Savings Accounts
"MSA plans have captured half the market."
As noted above, Medical Savings Account (MSA) plans were introduced into South Africa only after deregulation in 1994. In the brief period since, they have captured about half of the private insurance market. [See Figure IV.] The plans have much in common with the Medical Savings Accounts in the United States, but they also have some important differences.
The U.S. Model: Uniform Deductibles. Medical Savings Accounts were introduced into the U.S. market rather recently, and their benefit design is restrictive. Essentially, MSA plans in the United States consist of traditional insurance with a single deductible across all benefits and a medical savings account to cover expenditures below this deductible.10 Health plans that seek to qualify for tax-free deposits and tax-free build-up in MSAs are required to implement this restrictive design.11
The South African Model: Differential Deductibles. In contrast to the United States, in South Africa insurers may design health plans that best meet their customer's needs. The result is a very different type of plan. The key features of the design of a typical MSA plan are:
- For nondiscretionary services, such as heart bypass operations and other inpatient hospital services, first-dollar coverage is provided.
- For discretionary expenses, such as visits to a general practitioner and other outpatient services, the deductible is about $1,100.
- The plan may also provide first-dollar coverage for medications required to treat such chronic conditions as diabetes, asthma and hypertension.
"MSA plans typically provide first-dollar coverage for inpatient hospital services and a $1,100 deductible for discretionary outpatient services."
The theory behind deductibles that vary with the type of service is straightforward. It makes little sense to ask patients to choose between health care and other uses of money under circumstances in which rational choice is largely impossible. This is typically the case in a hospital setting. On the other hand, most outpatient services are discretionary, and the insured can rationally decide whether a particular medical service is more valuable than any other use of the same money. Prescription drugs for chronic conditions are an exception to the latter rule; first-dollar coverage in such cases benefits both the insurer and the insured.
In general, South African individuals and employers have a great deal of discretion about contributions to MSA accounts:
- Individuals can contribute any amount to their own Medical Savings Account to cover expenses below the deductible.12 While a significant number of people choose an MSA deposit exactly equal to the deductible ($1,100), the average annual MSA contribution is $685.
- Thus, the average monthly contribution for a family is $57 for the MSA in addition to a premium of about $100 for insurance coverage that pays nondiscretionary costs and discretionary costs above the deductible - roughly a one-third, two-thirds division.
- MSA contributions may be made by the individual, an employer or a combination of the two.
Covered and Noncovered Services. The primary purpose of an MSA is to allow individuals direct control of medical expenses that are covered by insurance, but less than the deductible. However, MSAs also allow individuals to pay for health care not traditionally covered by third-party insurance. For example, corrective eye surgery in South Africa costs about $1,500. Since ordinary insurance does not cover the procedure, some people pay for it with MSA money.13
Tax Treatment. In South Africa, health insurance premiums are not tax deductible if paid by an individual unless the individual is over age 65. However, if the insurance is paid by an employer, two-thirds of the contribution is excluded from the employee's taxable income. Similarly, two-thirds of employee contributions to an employer-sponsored plan can be made with pretax money.14
The same rules apply to MSA contributions. That is, two-thirds of any employee MSA deposit can be made with pretax funds and two-thirds of any employer MSA contribution is excluded from the employee's taxable income. Thus MSA deposits and third-party premium payments are treated the same under the tax law.
"The tax treatment of MSA contributions and employer payment of insurance premiums is the same."
Withdrawals. The government's policy toward unused MSA balances has changed over the last few years. Initially, individuals could withdraw unspent MSA balances only after they had withdrawn from a health plan. Unspent MSA funds accumulated in an individual's account, although the account owner could partially offset the accumulation by reducing his or her MSA contributions in future periods. Under this system about 50 percent of
people had a positive MSA balance at the end of each insurance period (a year), and given an annual MSA contribution of $685, the average balance at the end of the year would be about $185.
Under newer regulations, insurers may distribute MSA balances to account holders at the end of every year. Two-thirds of these payouts are taxed as ordinary income.
Spending from MSA Accounts. In South Africa, most insurers negotiate fees for standard services with physicians and other providers. The rates are not binding on individual patients and doctors. If the provider charges the contracted rate the patient can pay directly, or the insurer will pay the fee to the provider. If the provider charges more than the contracted rate, the patient must pay the provider the higher rate and the insurer will reimburse the patient or the patient's MSA at the contract rate. Since providers who charge above the contract rate have to collect the entire bill, thus risking a cash flow and bad debt problem, they have an incentive to stick to the fee schedules.15
Managing Money Flows. A potential problem with an MSA is knowing the exact account balance. In general, at the time a medical service is purchased, both patient and provider want to know what portion of the cost will be paid from the MSA, what portion out of pocket and what portion by third-party insurance. Electronic funds transfers can give patients and providers this information on a timely basis and can allow automatic withdrawals up to the MSA balance - in a manner similar to cash withdrawals from ATM machines.
In South Africa, the insurer Discovery Health has made progress in implementing such a system for pharmaceutical purchases.
"MSA balances and prescription drug coverage can be checked electronically at the time of a drug purchase."
Case Study: Discovery Program for Drug Approval and Payment. At the time a prescription drug is purchased, the customer presents the pharmacist with a Discovery Health membership card. Information from the card is entered into the pharmacy computer along with the drug prescribed or requested. This information is then sent electronically to Discovery Health to determine if the drug is covered and what if any deductible applies. Simultaneously, the system checks the patient's MSA balance. Within 30 seconds the system responds, telling the pharmacist how much the MSA can pay and how much the member must pay out of pocket. Actual payment of Discovery's (the insurer) share of the bill occurs within at least 14 days.
Managed Care. Since many medical services are covered on a first-dollar basis, many health plans use various managed care techniques to control the cost of these services. These techniques include pre-authorization, case management, utilization review and retrospective analysis. The most successful methods of cost control are those that give providers financial incentives to control costs, particularly hospital costs. For example, general surgeons are typically paid on a fee-for-service basis. But under a contract with an insurer, every six months they receive a bonus based on actual generated hospital costs vs. expected costs. Very few HMO-type capitation arrangements exist, and these are largely confined to small communities.
"Diabetics can use their MSA funds to enroll in a diabetic treatment center."
Focused Factories for the Chronically Ill. To improve the management and cost of care for diabetes, Discovery Health has contracted with local centers of excellence to manage the care of diabetic patients in all major metropolitan areas. Under the contract, Discovery Health pays the diabetic center approximately R600 (about $80) per patient per month. In return the diabetic center covers all treatment costs, including medications; consultations with endocrinologists, dieticians, ophthalmologists, podiatrists and other specialists; even hospitalizations resulting from diabetic complications.
The arrangement gives the diabetic center an economic incentive to deliver services efficiently. If the center ensures compliance with the medication and appropriate treatment, fewer diabetics will be hospitalized and the center will be more profitable.
Discovery Health requires that each diabetic patient pay R150 (about $20) of the R600 monthly charge (again, a one-third, two-thirds division). This copayment gives the patient an incentive to fully utilize the program. Discovery Health benefits through lower and more predictable costs. The patient also gets low, predictable costs plus treatment through a center of excellence whose profits are tied to the quality of care it provides.
Because the diabetes program is so new, the data needed to assess it are not yet available. If the program is successful, it can serve as a model for treating such other chronic conditions as asthma.
Lending Programs. Under a typical MSA plan, individuals and their employers make monthly deposits to an MSA account based upon a contribution rate chosen at the beginning of every year. Health plans typically allow members to draw against up to 12 months of MSA deposits at any time during the year.
"MSA plans allow members to borrow up to 12 months of projected deposits for health care claims."
For example, an individual who selects an MSA deposit of R400 ($50) per month can "spend" up to R4,800 (R400 X 12 months; $600) from the account from the beginning of the year. If the individual incurs a claim for, say, R2,000 in February, it will be available to him. But since he or she has, at that point, contributed only R400 to the MSA the insurer must make a "loan" of R1,600 to cover the remaining balance. If the member leaves the plan before repaying the loan, the insurer will make efforts to recover the amount still owed.
In general, members repay their loans from their future MSA contributions. Discovery Health charges interest on loans at a varying rate of approximately 7.5 percent per year, which is roughly equal to the annual rate of consumer price inflation in South Africa. At the same time, all positive balances in the MSA earn 7.5 percent per year interest, payable monthly.
Information Systems. MSAs allow individuals to tailor their health care spending to their specific needs. Individuals require more and more information as medical services become more and more complex. Currently, information is available from various sources, including the Internet. Discovery Health also offers members easy access to clinical information through a toll-free telephone call answered by a nurse who uses a triaging system to give guidance.
Most questions relate to small medical incidents at home. Should the patient self-treat a problem and, if so, how? Or should the patient see a doctor or other health care provider? Depending on the severity of the case, the nurse will either answer these questions using the computer program, forward the call to a doctor or advise the patient to see a doctor.
This technology has also been used to help individuals entering, or considering entering, a hospital. When a patient calls to tell the health plan he or she is entering a hospital for non-emergency treatment, the call can be forwarded to the information hotline.
Bargaining with Providers. The South African medical community is well organized. This is especially true with regard to specialist services, which are in relatively short supply. Their level of organization gives providers a leverage in fee negotiations. To offset this advantage, all insurers negotiate collectively with providers to create the benchmark fee schedules discussed above.
Because the supply of pharmacists is relatively more abundant, insurers have been able to negotiate discounts of up to 20 percent on the cost of drugs. Moreover, since many insurers are slow in paying their bills, individuals paying cash at the point of service can obtain discounts of as much as 30 percent. So even in cases where the insurer is liable, many insurers encourage patients to pay from their MSA accounts and they then reimburse the patient's MSA.
"Patients use their MSA balances to get discounts for cash payment of up to 30 percent, reimbursed later by the insurer."
Incentives to Invest in Personal Health. Discovery Health has an additional program called Vitality, designed to encourage wellness and a healthy life style and costing about 5 percent additional premium. Vitality is a point system: individuals gain points by participating in such wellness-related events as getting mammograms and Pap smears and exercising at a health spa. For example, a mammogram would earn a woman over 45 2,500 points. An improvement in health status also earns points. The points can be used to obtain a variety of benefits. For example, members with no points can purchase round-trip domestic airline tickets on British Airways for 29 percent of the normal fare; members with 60,000 points or more can purchase the same ticket for 8 percent of the normal fare.