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Why do medical schemes penalise late joiners?

Medical Aid

Why do medical schemes penalise late joiners?

Reading Time: 2 minutes
South African law allows medical schemes to charge monthly penalties if you try to join after the age of 35. The penalties can be up to 75% of your monthly contributions. These penalties are known as Late Joiner Penalties. Schemes apply the penalties at the same level but a particular scheme may choose not to apply them at all.

Reason for the penalty

Late joiner penalties were introduced with the Medical Schemes Act (1998). The penalties were meant to protect medical schemes from people who join only when they are in need of benefits.
 
Medical schemes rely on having a balanced mix of healthy and less healthy individuals. Older people tend to get sick more often and more seriously than young adults. Schemes thus need to have many young people supporting the older people.  This support occurs as young people tend to claim less than they pay into the scheme while older people tend to claim more than they pay. The excess money paid by young members should cover the shortfall created by older people. The penalties are thus intended to encourage individuals to join medical aid when they are younger.

What would happen if penalties were taken away?

Without penalties, a lot of young healthy people could leave medical schemes. These people would join only when they are older and in greater need of healthcare. This would mean that schemes would have an excess of older members who, more likely, claim more than they pay. At the very least, this would result in sharp contribution increases in each of the following years. This would result in what actuaries call an ‘Actuarial Death Spiral’. The spiral would lead to the collapse of the scheme.

Are these penalties fair?

There are situations where people cannot join medical schemes when they are young due to affordability issues. Say by some stroke of grace an individual in such a situation gets enough income to join a medical scheme after the age of 35. Would it be fair to impose a late joiner penalty? Especially given that they could barely afford cover in the first place? But, not having these penalties in place could be unfair to someone who has been contributing to the scheme from a young age. An older person could wait until they were in bad health before joining the scheme. That person would enjoy the contributions of those who would have been contributing from a young age. There are no easy answers to these questions. My personal opinion is that our public healthcare needs to be at a standard where people do not even feel the need for medical aid.

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Thando Ncube

Thando is currently the Group Actuary at Clinix Health Group, having previously served as Actuary in Discovery Limited's R&D Lab. Thando loves tech, design, reading and is very passionate about the development of the African continent. Thando also runs Litmail, a tech startup in the e-communication space. All views expressed are Thando's own and neither reflect nor are influenced by the views of affiliated companies.

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