Benefit Design

At the recent BHF conference we had an opportunity to talk about benefit design – an area that is top of mind for schemes at the moment as 2016 pricing is finalised and preparations are underway to take 2016 products to the market.

During this time of year benefit design can feel like just a part of the annual pricing process – a means to an end, a box to be ticked. But in reality benefit design is fundamental to the existence of a medical scheme. Benefit design determines what goods and services are purchased and how rationing decisions are made. And importantly benefit design is (or should be) a major determinant of a scheme’s competitiveness and marketability. This applies to restricted schemes as much as it does to open schemes because members will still have perceptions of the relative positioning of their scheme to other available products.

The notion of “value” has been (re)popularised by Michael Porter (where value encompasses both cost and quality). He argues that healthcare funders (in our case medical schemes) should compete on the basis of value. This is a useful lens to consider benefit design through: how much value do consumers derive from the benefits on offer?

To some extent this rests on the ability of consumers to make informed and empowered choices. The choice of medical scheme cover is essentially a two-tier decision-making process. One choice relates to a choice of scheme (which may be restricted to a subset by the employer) and the other choice relates to a choice of option. This immediately complicates the decision-making process as there are different factors to consider for the two decision components, and there is a wide array of choice: 24 open schemes and more than 150 benefit options (excluding efficiency discounted sub-options).

The complexity of the products themselves arises from the inherently complex nature of medical care, the extensive use of jargon and the lack of standardisation in presentation and terminology. Whilst many modern products are complex, the consumer experience is often intuitive and simple. The medical scheme industry has failed to separate out the detailed inner workings of the products from simplified key metrics designed to aid decision making.

In theory consumers should have a high level of involvement in the medical scheme purchasing decision based both on the financial significance of the purchase, and the impact on their wellbeing. It is sobering to note that 32% of households with medical scheme cover spend more than 10% of their income on contributions.

However, the complexity of medical scheme products limits the ability of consumers to engage meaningfully and to make decisions based on intrinsic value. The result is a reliance on perceived benefits, expert advice, brand awareness and decisions motivated by bells and whistles (like loyalty programs).

Product complexity and product choice also increases the risk of cognitive dissonance. Cognitive dissonance refers to consumers to holding conflicting attitudes about a purchase, and is common for purchases that require a high level of commitment. Cognitive dissonance culminates in feeling of anxiety and regret – not the way we want consumers to feel about their medical scheme cover. Dis-satisfaction is almost inevitable since approximately 80% of beneficiaries pay more than they claim in any given year due to the nature of cross-subsidies and the nature of the insurance mechanism. Those who join the industry when they are young and healthy will accumulate a sense of entitlement over time. Add to this the emotional nature of any denial of care or partial payment and it becomes clear that schemes need to do everything possible to enable better consumer decision making.

The industry currently falls far from a consumer-centred ideal. Both the Consumer Protection Act, and the Treating Customers Fairly framework (that applies to other aspects of the financial services sector) set a bar that schemes would currently not meet. The incentives created by the regulatory environment are partly to blame – the absence of risk equalisation and mandatory membership create an incentive to use benefit design as a risk selection tool. There is a clear price advantage that arises from competing for the young and healthy. It is essential for (open) scheme sustainability in the current environment to protect against high-risk lives. Schemes effectively face a tension between empowering consumers and managing their risk profiles.

The regulatory environment also stifles innovation. For example, Prescribed Minimum Benefits (PMBs) dominate benefit design, but do not function well as a stand-alone package and create a high minimum cost of cover. It essential that the medical scheme industry collaborate to lobby for regulatory change that would enable a more sustainable industry. Industry could also consider collaborating on standardising elements of product presentation and terminology to enable consumer decision making (in much the same way that long-term insurers worked together to simplify critical illness products). Such collaboration allows for competition on intrinsic value and not consumer confusion.

In some respects benefit design has shifted in the last ten years: the set of rationing tools has expanded beyond limits and co-payments to include more clinical approaches (such as clinical protocols and formularies) and there has been a gradual recognition of the importance of supply-side rationing.

These shifts call for a fresh approach to medical scheme benefit design and advice:

1. A collaborative approach to benefit design is essential (at a minimum clinicians and actuaries working together).
2. The line between managed care and benefit design is continuously more blurred – benefit design advice and managed care advice cannot be divorced.
3. Deeper consideration of the rationing tools available with advice to enable choice of the appropriate tools to use.
4. The way in which schemes engage with providers needs to shift to being more collaborative, with more closely aligned incentives and a sharing of financial responsibility for the care of patients.

The pressure on the medical scheme industry to demonstrate value (and therefore to get benefit design right) is immense. There is political pressure and uncertainty regarding the long-term role of medical schemes in the healthcare system. And in the short term affordability pressures continue to mount, as well as competition from insurance products.

A more consumer-centred approach requires understanding of how medical scheme purchasing decisions are made and concerted efforts to empower consumers. Thinking about benefit design in this way will allow the industry to move from fragmented approaches to benefit design to value-based approaches. In part this involves thinking about the nuts-and-bolts aspects of benefit design separately from the way in which the consumer interacts with product information. Simply put (but not easily done) schemes need to communicate better.

Perhaps the best way to protect the industry against worsening risk profiles is for the industry to grow. And a clear focus on delivering value may be the key to doing that.