COUNCIL FOR MEDICAL SCHEMES Annual report of the Registrar of Medical Schemes

Transcription

1 COUNCIL FOR MEDICAL SCHEMES Annual report of the Registrar of Medical Schemes

2 COUNCIL FOR MEDICAL SCHEMES OUR VISION A medical schemes industry which is regulated to protect the interests of members and to promote fair and equitable access to private health financing in order to maximise the health of South Africa. OUR MISSION The Council will act in an administratively fair and transparent manner with integrity and professionalism and will achieve this vision by: Informing the public about their rights and obligations in respect of access to medical schemes; Ensuring that all entities conducting the business of medical schemes comply with the Act; Ensuring that complaints raised by members and the public are handled appropriately and speedily; Contributing to improved management and governance of medical schemes; and Advising the Minister of appropriate regulatory interventions that will assist in attaining national health policy objectives. COUNCIL FOR MEDICAL SCHEMES 1267 Pretorius Street, Hadefields Block E, Hatfield, Pretoria Private Bag X34, Hatfield 0028 Telephone: Telefax: ISBN: Number: RP 105/2003

3 Annual report of the Registrar of Medical Schemes Contents 1 Chairperson s foreword 3 2 Registrar s overview 5 3 Report of the Auditor-General 33 Balance sheet 34 Income statement 35 Statement of Changes in Equity 35 Cash flow statement 35 Notes to the Financial Statements 36 4 Review of the operations of medical schemes during Annexures 65

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5 Chairperson s foreword 1 It is my pleasure to thank everyone who participated in the production of this Annual Report. This is the culmination of another year of excellent contributions by the Registrar and his team, working with the direction and oversight provided by the Council. I am most grateful to the deputy chairperson of Council, Ms Gando Matyumza, as well as to all the other Council members, for their commitment to the role which the Minister of Health has entrusted to us. It is a pleasure to work with such a dedicated and resourceful team. Of course, this report would not have been possible without the efforts of all the medical scheme trustees and employees, administration staff and auditors who worked hard to provide the data which forms the basis for the analysis in this report. It is our hope that these efforts have been rewarded by production of a report which will provide stakeholders with information they need to understand and strategically position themselves better within the health care environment. A key impression in reading the contents of this report is that there appears to be strong evidence of continuing stability in the medical schemes industry. There is gradual improvement in overall solvency of medical schemes, and dramatic improvements continue to be seen in operating results and accumulated funds. For the first time in 2002, it appears that regulatory and industry efforts to contain the rate of growth of non-healthcare expenditure are bearing fruit although the levels of both non-healthcare expenditure and medical inflation continue to be a concern. This is, however, not the time for complacency. We must use the opportunity afforded by relative industry stability to focus our operations on making quality health care more generally available and responding to societal needs which are important determinants of health status. With an annual gross contribution income of a massive R43 bn, debate in the private health industry needs to shift to whether this money is being used in the most effective way possible to maximise the health of South Africans. If we were able to start from scratch in designing our health system, would we spend that R43bn differently? And if we would, are there modifications that can Professor Nicky Padayachee, Chairperson of the Council for Medical Schemes. There appears to be strong evidence of continuing stability in the medical schemes industry. COUNCIL FOR MEDICAL SCHEMES Annual Report

6 Chairperson s foreword continued be made at present to get us closer to that ideal? In addition, I challenge the private health industry as a whole to ask more searching questions in relation to whether more can be done to respond to matters which are particularly pertinent to the South African context today, including issues related to HIV, poverty, poor nutrition and the need for black economic empowerment. It is imperative that, as regulator and industry, we must bring visionary leadership and progress to the private health sector and acknowledge the importance of our contribution to health system development overall. From a regulatory perspective, we are keen to continue to engage with the industry in developing a shared vision for the future of the industry, and to creating a regulatory environment which is best conducive to the achievement of this vision. In the context of a shared vision, differences in regulatory approach can be addressed through strategic dialogue, and resources of both regulator and industry can be effectively allocated toward interventions which will most efficiently move us in that direction. Prof. Nicky Padayachee Chairperson - Council for Medical Schemes 4 COUNCIL FOR MEDICAL SCHEMES Annual Report

7 Registrar s overview 2...we are making great strides to enhance member protection and public confidence in medical schemes T. Patrick Masobe, Registrar of Medical Schemes. Factors in the wider context which impact on our work During 2002 and the first three months of 2003 the Office of the Registrar of Medical Schemes has grown and matured, ensured compliance in a number of critical areas and succeeded in establishing itself in the public eye as an impartial regulator working in the public interest. The period under review is 15 months from January 2002 to the end of March 2003 after the Council changed its year end from end- December to end- March as required by the Public Finance Management Act. There have been a number of developments during this period which continue to influence the extent to which we are able to deliver on our statutory responsibilities. The early part of 2002 saw the publication of the Report of the Committee of Inquiry into a Comprehensive Social Security System. The chapter on health cover made substantive recommendations on possible movement towards mandatory cover for health care, changes to the current tax subsidy for membership of medical schemes and the setting up of a risk equalisation fund for medical schemes. In addition to this key development, tensions increased sharply between medical schemes and provider associations on a number of issues. These included the COUNCIL FOR MEDICAL SCHEMES Annual Report

8 Registrar s overview continued process for the setting of recommended tariffs and the operation of the system for the issuing of practice code numbers required by legislation to be inserted into the accounts sent for settlement by providers to medical schemes. Regulatory developments on the FAIS (Financial Advisory and Intermediary Services) legislation also had an important effect on the extent to which we were able to meet our statutory objectives. Committee of Inquiry into a Comprehensive Social Security System Council has agreed on the need to consider the... subsidy The Committee of Inquiry s report Transforming the Present, Protecting the Future was released in March 2002 for public comment. We recognised early on that some of the recommendations in the Committee s report would have an important influence on our statutory objectives of ensuring adequate protection for members and maintaining public confidence in medical schemes. These included the key recommendations that South Africa should ultimately move towards a system of National Health Insurance based on multiple payers, the development of an integrated subsidy system, including changes to the tax subsidy and the introduction of risk equalisation among schemes. After a careful assessment, Council agreed on the need to reconsider the nature and form of the current tax subsidy so as to ensure that the subsidy is more equitably distributed among income groups. Council also agreed that the case for introduction of a risk-equalisation fund was strong, especially if such a fund was, at the very minimum, to be based on a comprehensive set of prescribed minimum benefits. We also supported the notion, contained in the report, that the prescribed minimum benefits be developed in conjunction with the determination of the basket of services to be provided by the public health system. This would entail the expansion of the current prescribed minimum benefits to include out-of-hospital cover and chronic benefits. Finally, Council viewed as correct the approach taken by the Committee which focuses on the development of the low-cost medical scheme market before the introduction of any statutory mandates to belong to a medical scheme. The setting of recommended tariffs for health care Tariff negotiations between funder representatives and provider organisations worked relatively smoothly until the end of 2001 when, for the first time, the Board of Healthcare Funders (BHF) and the South African Medical Association (SAMA) were unable to reach agreement on certain of the tariff codes and the monetary value assigned to certain codes. Disagreements over tariff structures have multiplied since then, resulting in a growing disparity between SAMA and BHF tariffs with similar impasses in hospital tariff negotiations with the Hospital Association of South Africa (HASA). The situation came to a head at the beginning of 2002, further complicated by the fact that SAMA asserted copyright over the coding, descriptors and relative value units indicating that BHF had neither the right to publish nor the right to amend those aspects of the tariffs. Given the importance of this process to members of schemes and the overall efficiency of the system, we worked with BHF and SAMA to develop a deadlock- 6 COUNCIL FOR MEDICAL SCHEMES Annual Report

9 2 Members of EXCO: (back) Dr Jakes Jekwa, Patrick Masobe, Dr Siva Pillay, (front) Prof Nicky Padayachee, Gando Matyumza, and (right) Prof Heather McLeod. breaking mechanism to remove any problems that might emerge in an otherwise relatively workable system. As a starting point, we suggested that a number of basic principles should be agreed upon, including the following: The system of tariff determination is a matter of public interest, of benefit to medical schemes, administrators, health care providers and patients. As a consequence of the first principle, the system should in future not be subject to the proprietary interest of any particular stakeholder and should be maintained on a not-for-profit basis. Tariff negotiations should take place in a forum where all interested parties have sufficient representation, and where competing interests are appropriately balanced. These proceedings should be facilitated by a neutral facilitator. We proposed that the process of setting the criteria for the evaluation of tariff adjustments should be as inclusive as possible, inviting representations in particular from individual healthcare providers and their representative associations, medical schemes, administrators, labour, employers, medical scheme members, consumer organisations and government agencies. In addition, this process should be ongoing to defuse crises before they occur, as opposed to a set of negotiations convened toward the end of a year when the need for publication of tariffs is pressing which is then prone to causing a crisis in the industry in the event of deadlock. A committee appointed by Health Minister, Dr Manto Tshabalala-Msimang is taking the process forward. It is in this forum where differing views on these important issues will be resolved. In the meantime, we continue to work with the parties involved. COUNCIL FOR MEDICAL SCHEMES Annual Report

10 Registrar s overview continued Regulatory developments in relation to the Financial Advisory and Intermediary Services (FAIS) Act. From left : Milly Viljoen, training and education officer; Danie Kolver, head of registration and accreditation; Dr Jakes Jekwa, council member. Early in 2002, a key development in the regulatory framework was the tabling of the FAIS legislation by the Financial Services Board (FSB), which aimed among other things, to remove the capacity of the Health Ministry to regulate the conduct of health brokers. This would have severely constrained our powers to intervene in a major determinant of whether or not the policy objectives of the Medical Schemes Act are attained. We argued that a key obstacle to achieving statutory objective of greater access to medical schemes is increasing contributions. A significant contributor to these escalating premiums is the huge jump in non-healthcare expenditure. Expenditure on brokers is a significant contributor to nonhealthcare expenditure in medical schemes, both in terms of commissions paid to brokers and the so-called co-administration fees paid by medical schemes and administrators. In addition, we were concerned that, without the capacity to influence broker activity, another key policy objective that of attenuating large-scale member movement among medical schemes could not be achieved. A relatively stable risk pool is vital to stable and healthy medical schemes, and allows for accurate pricing of benefits, stability of solvency ratios and protection against sudden loss of members which itself may result in potential financial difficulties. We believe that appropriate health broker conduct could significantly advance the health policy objectives of the Act as much as inappropriate behaviour could undermine these statutory objectives. It was critical, we argued, that the Health Minister retain the capacity to influence these key determinants of success. A resolution which recognised the centrality of health policy in this regard was finally achieved with the FSB during March In terms of this resolution, provisions purporting to repeal the Medical Schemes Act were removed from the FAIS legislation. It was also agreed that while medical schemes brokers would be subject to the common code of conduct established by FAIS, the Health Minister will retain the power to exercise policy and regulatory interventions on matters specific to the achievement of the objectives of the Medical Schemes Act. The power to accredit health brokers was also left with the Council. 8 COUNCIL FOR MEDICAL SCHEMES Annual Report

11 2 Figure 1: Operating framework at Council CMS statutory objectives Environmental assessment Performance evaluation and report Regulatory risk assessment of schemes Statutory response Strategic aims Priorities and allocation of resources Strategic outcomes Describe what we are trying to achieve, and drive our priorities and allocation of resources Our evolving regulatory regime A new risk-based regulatory framework A new risk-based regulatory framework was adopted towards the end of 2002 and the Council s staff is working to give it effect. The framework is founded on the regulatory thesis that the CMS needs to focus on problems that are important to the achievement of our statutory aims. This framework was inspired by the work of Malcolm Sparrow and the following quote from his seminal work on regulatory practice: (regulatory agencies) must acknowledge the constant need to make choices. Make them rationally, analytically and democratically. Take responsibility for the choices you make. Correct, by using your judgment, deficiencies of law. Organize yourself to deliver important results. Choose specific goals of public value and focus on them. Devise methods that are economical with respect to the use of state authority, the resources of the regulated community, and the resources of the agency. And as you carefully pick and choose what to do and how to do it, reconcile your pursuit of effectiveness with the values of justice and equity Malcolm K Sparrow The Regulatory Craft, Brookings Institution Press, A thorough discussion and debate was therefore undertaken to understand better the statutory and strategic objectives as well as the risks that might pose an impediment to achieving those goals, as shown in figure 1. The strategic aims and outcomes of the Council were slightly revised during COUNCIL FOR MEDICAL SCHEMES Annual Report

12 Registrar s overview continued Storm over health cover product a clash between CMS and Liberty over its lifestyle product, cartoon by Colin Daniel appeared in Personal Finance, February This allocation of schemes into impact bands will allow us to focus on the big risks in medical schemes and to develop plans to solve these problems. the discussions on the new regulatory approach and are as follows: 1. To secure an appropriate level of protection for beneficiaries of medical schemes and the public by authorising the conduct of medical schemes business and monitoring financial performance and soundness of schemes. 2. Provide support and guidance to trustees, and promote understanding of the medical schemes environment by trustees, beneficiaries and the public. 3. Foster compliance with the Act by medical schemes, administrators and brokers and initiate enforcement action where required. 4. Investigate and resolve complaints raised by beneficiaries and the public. 5. Monitor the impact of the Act, research developments and recommend policy options to improve the regulatory environment. 6. Foster the continued development of the Council for Medical Schemes as an employer of choice. 7. Develop strategic alliances nationally, regionally and internationally. As part of the new regulatory approach, schemes have now been categorised into impact bands which allow us to estimate the significance any scheme may have on our statutory objectives and the medical schemes environment. Our research has found that 18,9% (n = 26) of schemes fell into the high impact band by virtue of their size, pensioner ratio or both. Almost two thirds of schemes (n = 87) were categorised as medium impact, with the remaining 16,8% (n = 23) rated as low impact. We also found that open schemes accounted for 65% of schemes in the high impact band, and restricted schemes made up 75% and 96% of schemes in the medium and low impact bands, respectively. This allocation of schemes into impact bands will allow us to focus on the big risks in medical schemes and to develop plans to solve these problems. We will focus both on the potential impact of any risks as well as the probability of such risks occurring. The new framework has important implications for the way in which Council 10 COUNCIL FOR MEDICAL SCHEMES Annual Report

13 2 is organised and how it relates to the entities it regulates. We are in the process of finalising Risk Assessment Plans (RAPs) for those schemes judged to have a potential high impact on the environment so that these schemes can be carefully assessed. A RAP will allow for the assessment of control and business risks identified in such schemes. The next step would be to develop Risk Mitigation Plans (RMPs) for identified risks in those schemes judged as high impact. It follows that extra resources will be devoted by the CMS to those schemes judged to have a high impact on our objectives. While all schemes will continue to enjoy a base level of oversight, we will provide additional supervision to high impact schemes through the development of RAPs and RMPs, the use of more visits to schemes, interviews with auditors of those schemes, more frequent management reporting as well as other work. All of these tasks were underway by the early part of 2003 with the use for the first time of routine inspections as part of the overall regulatory effort. We have also, as part of the risk-based framework, decided to shift the balance of our work towards thematic regulation. Three themes have been adopted and were given life within the first three months of The themes essentially describe projects of necessary work which will be conducted through the year. Each project draws on several members of staff from across the spectrum of disciplines within the Registrar s Office. The first of these in on the risk-based regulatory approach itself and completing the required RAPs and RMPs. The second one is called the Fair Treatment of Beneficiaries and Public. It is an endeavour to ascertain from the public and other, more-specific, stakeholders where situations exist in the medical schemes environment that do not operate optimally and for the benefit of beneficiaries. A thorough review has been undertaken to ascertain from consumer groups, trade unions and others where gaps may exist in the operation of schemes, administrators, Council and the law. Within the first three months of 2003 flaws in information, methods of redress, the interplay between employers, employees and schemes and other areas had been identified and were in the process of being analysed. This project is likely to move into the longer term enabling greater levels of protection for members, as well as for resolving complaints. The third theme project concerns capitation and risk transfer. This project is reviewing current capitation contracts to assess the appropriateness of risk transfer and to propose factors associated with such appropriate risk transfer. Amendments to the Medical Schemes Act and Regulations The Medical Schemes Act was amended and new regulations gazetted during the period under review, so as to ensure that schemes would be forced to observe the ideals enshrined in the Medical Schemes Act. A need for a Medical Schemes Amendment Bill arose during the year to help resolve a dispute over the FAIS Bill. The Amendment has now brought harmony to the provisions of that Act and the Medical Schemes Act without relinquishing important provisions of the MSA. Regulations gazetted in November 2002 seek to compel trustees to disclose COUNCIL FOR MEDICAL SCHEMES Annual Report

14 Registrar s overview continued From left: Patrick Matshidze, deputy head of research and monitoring; Alex van den Heever, senior advisor; Prof Jan van der Merwe, medical advisor. what they earn as trustees to members of the medical scheme to strengthen governance requirements. They also broadened the prescribed minimum benefits and included minimum conditions under which treatment could take place to ensure that the chronically ill were not discriminated against. And they tightened broker conduct to protect consumers against sharp practices. These regulations have also given visible effect to public protection with the further control of broker commissions to curb abuses. New restrictions have been placed on the amounts and manner in which intermediaries may earn their fees. Predictably these measures faced challenges early in 2003 while many brokers resorted to verbal abuse of staff at the Registrar s Office. Prescribed Minimum Benefits New regulations also continued the development of the package of prescribed minimum benefits (PMBs). These included the extension of the package to 25 chronic conditions that schemes will have to cover and that will come into effect in January In the early part of 2003 the Office finalised a costing study of the PMBs to measure their affordability. The study estimated the full price of the PMB package, which consists of the Inpatient package, the Outpatient package and the Chronic Diseases List (CDL), at R2 156,78 per beneficiary per annum (pbpa) or R 179,73 per beneficiary per month (pbpm). This is made up of an Inpatient package of R1 246,95 pbpa, an Outpatient package of R 232,10 pbpa and the CDL package of R 677,74 pbpa in 2001 prices. The CDL package contains the chronic medicine component together with an estimate for medical management which covers the diagnosis and management of the CDL conditions. We also studied the PMB package price by age. This is shown in figure 2. The price of the PMB package delivered in the public sector is superimposed on the graph. 12 COUNCIL FOR MEDICAL SCHEMES Annual Report

15 2 The study found that there is a strong correlation between the price of the PMB package and age. The CDL package is barely in evidence before age 35 and becomes progressively more expensive until age 80, whereafter it reduces somewhat. The inpatient package has the greatest effect on the overall shape, with a high price for the 0-1 age band, very low prices in the childhood years, the classic South African early adult hump and the increase with age from 45 onwards. We also looked at the relationship between the price of the complete PMB package, excluding managed care and administration costs, and total benefit expenditure made by schemes, as shown below in figure 3. The industry total benefit expenditure per beneficiary per annum was found to be more than the price of the PMB package (excluding non-healthcare costs) for all clusters studied. This means that, technically, at an industry level the complete PMB package can be provided within current industry benefit expenditure and should thus not put upward pressure on contributions. Finally, the study explored the price of the PMB package, including administration and managed care costs, relative to gross contributions. This is shown in figure 4, with pooled contributions shown separately from savings account contributions. We found that, overall, pooled contributions more than cover the PMB package price. The weighted industry PMB price constitutes 43,4% of pooled contributions for all registered schemes, 44,2% for open schemes and 41,5% for restricted schemes. In all cases the proportion is less than 50%. Thus after meeting costs associated with the PMB package, schemes still have more than half of their pooled contributions to meet other benefits and non-healthcare costs in excess of those already in the PMB price. When total contributions are considered, the weighted industry PMB price constitutes 39,1% of total contributions for all registered schemes, 39,4% for open schemes and 38,3% for restricted schemes. Total contributions thus cover the PMB package by a substantial margin at an industry level. The conclusions of the study were therefore that the PMB package appears to be affordable compared to hospital benefits and the proxy for hospital and related benefits. The package also appears to be well covered when compared to the level of total benefits and contributions. We have also done extensive work looking at the development of therapeutic algorithms for the 25 chronic conditions stipulated in the Study shoots down claims about the cost of medical benefits, cartoon by Colin Daniel appeared in Personal Finance, February

16 Registrar s overview continued Figure 2: Price of PMB package by age Age Missing All ages Total CDL package Total outpatient package Total inpatient package Complete PMB package public sector Rand per beneficiary per annum Figure 3: Complete PMB package price relative to industry total benefit expenditure PMB low cluster PMB industry weighted PMB high cluster Open schemes Restricted schemes All registered schemes Rand per beneficiary per annum PMB. These algorithms will define the scope of diagnosis, treatment and medical management for these conditions, and should be published in the Gazette by the Minister before the end of August. Navigating the HIV / AIDS regulatory conundrum Through the private sector and with medical schemes doing the funding, tens of thousands of beneficiaries receive treatment for HIV/AIDS. Of those around are able to receive anti-retroviral therapy as well. The Council has received several complaints in connection with the provision of treatment for beneficiaries with HIV/AIDS. These include matters of privacy, exclusion of benefits and sub-optimal treatment with anti-retorivirals. However, because many employees have no medical scheme cover and are unable to have their condition treated with antiretrovirals in the public sector, several companies have attempted to provide this treatment and have designed various vehicles to fund such treatment without offering the full cover of a medical scheme. Several of those employers, as well as product designers from insurance groups and other service providers, approached Council for guidelines on how to introduce such care, or products, without contravening the provisions of the MSA. Developing strategic alliances nationally, regionally and internationally An important aspect to our evolving regulatory approach is the development of strategic alliances nationally, regionally and internationally In February 2003 the Council hosted a visit to the country by our Belgian counterparts in the Belgian Control Office of Mutual Health Funds and a representative of the industry from the National Alliance of Christian Mutual Health Funds. The visitors were accompanied by Mr Willy Palm, director of the International Association of Mutual Benefit Societies. The visit had been prompted by a study tour by a delegation from our office to Europe in 2001, where the similarities between the Belgian system and its regulation, and our own evolving system were noticed. Our visitors spoke to large groups of trustees in Cape Town and Johannesburg and also shared their experiences with our staff. We have also hosted two visits by our counterparts in Namibia, and are in the process of finalising a memorandum of understanding to guide our future cooperation. We continued to work closely with BHF during this period, with two meetings held between our respective executive com- 14 COUNCIL FOR MEDICAL SCHEMES Annual Report

17 2 mittees. We also held two consultative meetings with administrators of schemes and the CEOs of the ten largest administration companies to discuss issues ranging from requirements for quarterly returns to prescribed minimum benefits. There is also ongoing contact between our office and the FSB. Medical schemes, administrators and managed health care organisation Our strategic aims with regard to medical schemes, administrators and managed care organisations and other intermediaries are two-fold. First, we aim to secure an appropriate level of protection for beneficiaries of medical schemes and the public by authorising the conduct of medical schemes business and by monitoring financial performance and soundness of schemes. Second, we intend to foster compliance with the legislation by medical schemes, administrators and others and to initiate enforcement action where required. Securing member protection through registration of medical schemes and other intermediaries Figure 4: PMB package of benefits relative to industry contributions PMB low cluster PMB industry weighted PMB high cluster Open schemes Restricted schemes All registered schemes Savings contributions Pooled contributions Rand per beneficiary per annum While the normal processes of registering new schemes, rule changes and accrediting brokers took place, it was felt necessary to begin a process of accrediting administrators with a view to setting minimum standards among these companies. The tender, having been drawn up, was awarded to a consortium consisting of KPMG, SAB&T. and COHSASA. A lengthy process subsequently ensued to agree the criteria for accreditation and to prepare for the survey at three pilot sites. I am now pleased to report that these surveys are finally in progress. We intend to have finalised the accreditation survey of all administrators by March A process of accrediting managed care organisations has also begun. The Medical Schemes Act requires that all persons who provide managed care services should be accredited by 1 January 2004, and we have now finalised and published for comment the proposed standards required of managed care entities. Once these standards are agreed with industry, we will give effect to the accreditation requirement. During the 15-month period, ten schemes changed their names, seven schemes merged with other schemes, three new schemes were registered and four schemes went into voluntary liquidation. Further details are provided in the second part of this report. Several trends emerged during the registration of medical schemes and their rules during this period. There are no guidelines or set minima for benefit design aside from the package of minimum benefits ensuring widely differing expectations on how to design benefits. Very few schemes developed low-cost schemes or low-cost options for existing schemes. We hosted a visit by our counterparts in the Belgian Control Office of Mutual Health Funds COUNCIL FOR MEDICAL SCHEMES Annual Report

18 From left: Dr Siva Pillay, Exco member of council; Lindelwa Ndziba, senior human resources manager, Thabo Rapodile, senior database administrator. On the other hand, there have been several initiatives by schemes to contract with networks of providers. There has also been a marked increase in alternative reimbursement systems and managed care interventions in a bid to control costs. These have included network arrangements with preferred providers and capitation arrangements, for example with clinic-based primary care. There has also been a developing unhealthy trend, noted by various different units of the Council, to propose exclusions from cover which are not acceptable and frequently unlawful. There are also more frequent challenges in the matters of exclusions and limitations again noted in other units. Certain schemes, apparently in an effort to control costs, cut back on benefits. Unfortunately the data on this is uneven, making a refined analysis of the phenomenon difficult. While such behaviour has occurred in a minority of cases it has, nonetheless, invited attention. In the early part of 2003, the accreditation criteria of the South African Local Government Association schemes were finalised. This, together with the budding civil service medical scheme, has resulted in a number of inquiries about potential amalgamations, and has demonstrated the potential power of employers in medical scheme benefit design and selection. Promoting financial soundness of medical schemes A great deal of energy and effort goes into developing key financial indicators, with solvency of medical schemes under scrutiny in differing contexts. The Financial Soundness Working Group is one such endeavour: the group is made up of industry representatives as well as experts from the Registrar s Office and looks at issues such as investments schedules, (which were published in regula- 16 COUNCIL FOR MEDICAL SCHEMES Annual Report

19 tions), benefit design and its impact on financial solvency, the risk-based formula for solvency and other issues impacting on financial soundness. In several schemes that had been facing financial problems we found that precarious states of financial health were exaggerated by inappropriate reinsurance agreements. Changes to the Act, necessitated by the previous large-scale inappropriate use of reinsurance, have given the Council the necessary legal tools to intervene and force schemes to claim back large amounts paid to reinsurers. The intervention of the Office in these agreements saw the return of R9 million to Omnihealth; R42 million returned to Medicover 2000 which had been placed under curatorship the year before, and the return of R4 million to KZN Medical Scheme. Where schemes are not meeting their solvency requirements a method has been devised to coax schemes back to financial good health involving a triage approach and regular consultations between our office and the scheme. We have seen impressive turnarounds in schemes that we have worked with, including Fedhealth, Openplan, Caremed (now called Oxygen) and Omnihealth. We also put in place a system of quarterly returns and require schemes to report each quarter on their financial position in a format established by our office and on-line. Initial indications during the testing phase of this system appeared to indicate that the reports will produce the early warning system the office wished to see when assessing the financial soundness of schemes. In March 2002 we finalised a set of standardised management accounts that are now being used by schemes, as part of quarterly returns or monthly reporting. Feedback from trustees has been positive, and trustees now understand the sort of information that they need to receive from administrators so as to make Staff meeting. COUNCIL FOR MEDICAL SCHEMES Annual Report

20 Registrar s overview continued Registrar steps in as scheme tries to sell administration arm. Cartoon by Colin Daniel appeared in Personal Finance, June informed decisions. On the other hand, some administrators have not been pleased, complaining that the new management accounts require them to do too much work, and to change their internal reporting systems to make this data available. During 2000 we raised a number of concerns on the manner in which reinsurance was being abused by some schemes to the detriment of members. During the course of 2001, we continued to analyse and gauge the real effect reinsurance was having on the financial soundness of the schemes. The cases reviewed showed the possibly devastating effect on reserves of schemes that conclude inappropriate contracts with various service providers. It also became clear that the trustees were not always fully informed about the consequences of certain contracts entered into. This work resulted in the issuing of Reinsurance Guidelines at the beginning of 2002, as well as legislative changes introduced by the Amendment Act 2001, to ensure that members of medical schemes are protected and that trustees are fully informed when taking decisions on reinsurance. In 2001 we reported a concern over the standard of certain auditors contracted by medical schemes. We have found it necessary to review the approval of certain of these auditors in terms of the Act. The anomalies identified in financial statements and statutory returns and the fact that such schemes were provided with unqualified audit opinions were serious causes for concern. This review has resulted in our refusal to approve the appointment of at least one auditor. Monitoring financial performance and soundness of medical schemes Full details of the findings of the review of the operations of medical schemes 18 COUNCIL FOR MEDICAL SCHEMES Annual Report

21 2 during financial year 2002 will be found in the second part of this report. This section provides a brief summary of the most important trends. The total number of principal members of schemes has remained largely stable at (an increase of 0,97% compared with 2001). There was, however, a 1,8% decline in the number of dependents, resulting in a slender drop of 0,89% in total number of beneficiaries on the preceding 12-month period. Total gross contribution income for all medical schemes increased to R43bn in 2002, up 16,6% on Medical schemes continued to show a surplus from operations (before taking investment income into account). Operating surpluses increased to R1,1bn during 2002, the second year in succession that schemes have enjoyed operating profits. This surplus increased to R2,4bn when investment income is taken into account, an increase of 72% on Given the pervasive operating losses of the late 1990s, we believe that this is one of the more impressive achievements of the last two years since the implementation of the new Medical Schemes Act. Solvency margins also improved during 2002 and increased to 23,1% (up 13% from 20,4% at December At an industry level this solvency margin is already higher than the required phasing-in level set at 17,5% for 2002 and represents a concerted effort to improve the financial soundness of medical schemes. These solvency margins translate into increasing reserves per beneficiaries and real protection for members and the public. Figure 5 shows the changes in overall industry solvency since the inception of the Medical Schemes Act. Administration costs increased to R4,1bn in 2002, an increase of 15,7% from the previous year. Administration costs in open schemes went up to R3,2bn during 2002, an increase of 14,3% on 2000). Administration costs in restricted schemes, on the other hand, went up 23,9 %, to R899 million. This latter trend mirrors the migration of some previously self-administered restricted schemes to outsourced administration arrangements during this period. While still way above the rise in the consumer price index, cost increases in the open schemes market appear to be levelling out after our interventions of the last year. Managed care costs went down to R966 million in 2002 from R986 million in 2001, even though membership covered by these interventions increased slightly by 1,7%. 25% Fees paid to health care brokers rose by 22,5% to R354 million during As in 20 20,16% 20,4% the previous year, these fees represent in the 15 main the churning of members from 10% 13,5% scheme to scheme. New regulations on brokers came into effect at the beginning of , and we are optimistic that this situation will be reversed. 0 Legislative interventions since March 2002 appear to have succeeded in reducing the Figure 5: Industry solvency trends since 2000 for registered schemes 23,07% 17,5% Prescribed Consolidated COUNCIL FOR MEDICAL SCHEMES Annual Report

22 Registrar s overview continued From left: Gando Matyumza, vice chairperson of council and Exco member; Wilma Warden, senior executive assistant; Jaap Kugel, senior IT manager. previously rampant losses attributable to inappropriate reinsurance. Overall reinsurance losses were R297 million during the year, down 11% from Open schemes made a loss of R302 million (78,2% of these losses were attributable to a single large open scheme) while restricted schemes made a profit of some R5 million (again a single restricted scheme accounted for 43,7% of the losses). While some parties have complained about the strict enforcement of these new reinsurance provisions, we note that not a single scheme has been affected adversely. In fact, in our experience, many of the schemes that were refused approval of reinsurance have usually ended the year in much better shape from a reserves point of view. Total non-health care costs increased to R5,8bn from R5,3bn during When viewed as the cost for each beneficiary, total non-health care costs increased to R775 from R766 during 2001, a real (inflation adjusted) increase of only 1,1%. It would appear that controls over reinsurance and declining year-on-year increases in administration costs of open schemes have contributed to these reductions. Real contributions per beneficiary went up 17,9%, while claims per beneficiary increased by 15,9%. The overall claims ratio decreased to 82% in 2002 from 83,4% in 2001, its lowest levels in ten years. Policing the perimeter, fostering compliance and initiating enforcement action Early in 2002 we decided to create and staff the post of Head of Compliance within the Registrar s office. The post grew out of the need to ensure that infringements which could result from a wide spectrum of the Act s requirements could be adequately dealt with. The focus of this post would be to conduct inspections of schemes where necessary, deal with broker conduct, unregistered operations, governance within schemes, demarcation (the line that delineates medical schemes and insurance products and therefore who regulates them) among other issues. 20 COUNCIL FOR MEDICAL SCHEMES Annual Report

23 2 The Act was changed in 2002 to make provision for routine inspections a provision unused by the year-end although seven full inspections were undertaken to determine compliance. Among the inspections undertaken was Omnihealth to enable us to determine the problems in the scheme as well as possible areas of non-compliance. The move had been prompted by the fact that management accounts had shown the scheme s reserves to be suddenly depleted. As a result of the inspection the Registrar decided to place a limit on the amount spent on non-health care costs, such as administration; restrict the amount brokers could be paid from the scheme; void an inappropriate and illegal reinsurance agreement; and instruct the scheme to report to the office monthly with its management accounts. At the end of the reporting period, the scheme s finances were in a much healthier state and some of the benefits which members had lost had been restored. Procure was an unregistered entity which operated as an open medical scheme, administered by Liberty, and which was aimed at individuals. Members of ProVia, also administered by Liberty, found that when they resigned from employment they were moved to Procure and that their contributions were increased. Additionally, when the office began exploring the issues, records showed this scheme was not registered. After the inspection, members of Procure were moved to ProVia, and the scheme renamed Liberty Medical Scheme. We also asked a firm of chartered accountant, Manase & Associates, to conduct an inspection into the financial position of Vulamed. The inspection was finalised in December 2002 and dealt at length with the financial position of the scheme and the proposed business planning. Discussions were subsequently held with the trustees of Vulamed to attempt to return the scheme to better financial health. An inspection into the administration by Bensure of the Benmed benefit option of Omnihealth was also commissioned to PricewaterhouseCoopers. The inspection focused on the manner in which this benefit option was administered, reinsurance practices in the option and other related matters. We received the final inspection report during February 2003, and discussions are still continuing with the parties in order to resolve the concerns raised by the report. We also intervened in the ongoing dispute between Medscheme, Metropolitan Health Group (MHG), Topmed and Selfmed. Both Topmed and Selfmed schemes were previously administered by MHG, before moving to Medscheme at the beginning of There then ensued a dispute between MHG and Medscheme over the transfer of member data of the two schemes (largely on medical savings accounts balances during 2001) to Medscheme. After discus- Fikile Mothobi is now chief operations officer. COUNCIL FOR MEDICAL SCHEMES Annual Report

24 Registrar s overview continued New regulations empower Council to take disciplinary action against brokers found to have broken their code of conduct sions with the schemes, we agreed to conduct an inspection into the matter. The report raised a number of concerns which have now largely been resolved. MHG nonetheless chose to appeal against some of our findings in this regard. The appeal was subsequently heard by Council and dismissed as being without merit. We have also had to look into the operation of an unregistered entity called Africa Health. We have had to remind several brokers who have been selling the scheme that they stand to lose their accreditation by selling membership of an unregistered scheme. But the larger difficulty has been in closing this illegal operation down. Several members have complained to the office that they have lost money, but of course we have to rely on the police and the prosecuting authorities to bring the operators to book. This has been particularly difficult. We applied to the High Court for the curatorship of Telemed after concerns about governance and financial management within the scheme. The provisional order was granted during February We were also engaged with the ongoing management of the Medicover curatorship. Our office has also been concerned with several areas of operation of brokers who were (mis)selling medical scheme memberships. The area of greatest concern was the practice by which some brokers and various scheme collude to split the risk among groups of members so that certain schemes benefited by gaining the healthier and younger group while older, sicker members were forced into other schemes. This behaviour forced the office to publish its intention to declare the practice an Undesirable Business Practice. New regulations empower Council to take disciplinary action against brokers found to have broken their code of conduct and the Council has constituted a disciplinary body that will follow up on any untoward broker conduct. The Registrar s dispute with Discovery Health Medical Scheme was conducted in the full glare of the media and came to a head in the first quarter of The dispute had its resolution in a directive by the Registrar to Discovery to take specific actions to ensure compliance with the Act, to effect considerable reduction in its reinsurance practices, a fixing of the administration fees paid by the scheme and the accumulation of required reserves within the medical scheme itself. We meet on a monthly basis with the scheme to ensure appropriate implementation of the directive. Consumers and boards of trustees Our strategic aim with regard to consumers and boards of trustees is to provide support and guidance to trustees and to promote understanding of the medical schemes environment by trustees, beneficiaries and the public. An ambitious schedule of trustee training as well as consumer training was expanded and developed so as to ensure a basic level of knowledge among trustees, shop stewards and members. However, a key group so far not reached is that of employers. They account for a substantial proportion of annual medical schemes expenditure but provide little input into the environment. 22 COUNCIL FOR MEDICAL SCHEMES Annual Report

25 2 The Council has developed good relationships with the media from the large electronic media to small community operations and across a wide range from specific journals targeting professions to newspapers reaching a mass market. This proved useful when Council wished to introduce complex topics such as the study commissioned to cost the package of minimum benefits. Round table discussions were organised in two centres to ensure journalists could question and understand a particularly complex section of our environment. The media covered developments extensively and a great deal of time has been spent with various journalists which has led to the establishment of constructive relationships and good understanding of the key regulatory processes and decisions. Most media focus during the year was on the dispute with Discovery which provided an opportunity to impart some of the more intricate concepts in the Medical Schemes Act as well as ensuring the point was grasped that this law is applied to all equally. We commissioned and published research on Governance in Medical Schemes which provided an insight into many areas and from which a set of guidelines is being developed. The study found that though the functioning of boards of trustees was comparable to international practice, there were, nonetheless, areas where we required changes. These include the need for board policy on conflicts of interest, a review of the composition of boards to provide for adequate diversity in skills and the need to stagger board appointments to ensure continuity. Other recommendations focused on the training and development requirements of the board, and on the institution of systematic evaluation of board performance. We have spent a lot of time reviewing the findings and recommendations of this report with a view to developing a definitive set of guidelines for good prac- Patty Sidley, head of communication and education. COUNCIL FOR MEDICAL SCHEMES Annual Report

26 Registrar s overview continued From left: Craig Burton- Durham, head of legal services; Daniel Lehutjo, finance manager; Maggie Grobler, chief financial analyst. tice by trustees. We expect that these guidelines will be in place before the end of this year. At the same time, regular monthly trustee training has continued in several centres throughout the country. This training is sponsored by the Council, as reflected in our budget, and covers topics such as fiduciary duties, governance, compliance, financial management and investment guidelines. These sessions also provide valuable interaction with trustees who appear to value the experience. The same opportunity is afforded to consumer groups around the country as well as to trade union office bearers so that organisations representing workers and consumers interests better understand the Act and the power it gives members of schemes. We ran four workshops for POPCRU, attended by about 120 delegates overall. Another four hundred social benefits coordinators of the National Education, Health & Allied Workers Union (NEHAWU) attended ten workshops organised during the period under review. A further eight workshops were held with some 300 shop stewards representing the Democratic Nursing Organisation of South Africa (DENOSA), while a further 150 representatives from the South African Banking Organisation (Sasbo) attended the four workshops organised around the country. We continued to work closely with other consumer organisations and advice offices, and conducted two workshops for these partners, one attended by 100 delegates in Port Elizabeth, and another by 50 consumer representatives in Garankuwa. The feedback has been very good, and we believe that we have made a good start on enabling consumers to understand the intricacies of medical schemes. We have also focused on ensuring that consumers have access to objective and accurate information to help them in their dealings with medical schemes. We have produced information sheets on the manner in which consumers can lodge complaints and have those complaints resolved by schemes and our own office. We published brochures on the rights of members of schemes. We also published a fact-sheet on prescribed minimum benefits as well as a CD on findings of the minimum benefits costing study. 24 COUNCIL FOR MEDICAL SCHEMES Annual Report

27 2 Investigate and resolve complaints and disputes We devoted a great deal of attention to investigating and resolving complaints raised by members of schemes and the public. The complaints department, which ensures that complaints from the public are sorted out, attended to complaints during the course of 2002 (down around 15% on 2001) with a similar trends in the patterns of complaints in the first three months of this year. A comparison of the 12-month periods of 2001 and 2002 gives an indication of why complaints may have dropped off. Certain schemes with difficulties, like KwaZulu-Natal Medical Scheme which was placed under curatorship, showed a marked drop in complaints levels between the two years as problems within the scheme were sorted out. Figure 6 shows that the bulk of complaints are about unpaid accounts of which doctors having problems with schemes which reimburse them directly on behalf of members accounted for 20%. Members account for 50% of the total, while advice offices and consumer groups acting on behalf of members account for 15%. The next largest categories of complaints concerned poor service, refunds, the exclusion of benefits, unauthorised deductions and the termination of benefits. Exclusions of benefits, echoing developments in other departments, showed a large increase in complaints reflecting a possible trend in the industry in general to exclude individuals perceived as bad risks. A continuing vexed problem among members is that of pre-authorisation. Insufficient clarity exists over the exact meaning of this concept and this frequently leads to expensive disputes and misunderstandings between schemes and their members. It was also the focus of many complaints during the research phase of the Fair Treatment project. A consistent theme in this complaint is that medical schemes hold all the power in a dispute such as this, and are able to halt necessary medical treatment, dip into the bank account of the member for funds, A continuing vexed problem among members is that of pre-authorisation Figure 6: Type of complaints (Jan 2002 March 2003) Unpaid accounts Poor service Refunds Exclusion benefits Unauthorised deductions Termination of membership Exorbitant premiums Misunderstanding with scheme Broker complaints Refusal to give authorisation Suspension Late joiner Waiting Period Exclusions Pre-existing Withholding benefits Fraudulently assigned membership Rejection/application Unethical marketing practice % COUNCIL FOR MEDICAL SCHEMES Annual Report

28 Registrar s overview continued Linda Gabela, complaints manager. or issue a summons which may have the effect of forcing a member to sell the roof over his or her head. Schemes on the other hand, are faced with a gap between the need to authorise necessary treatment and the fact that benefits used but not yet paid may show that the benefit is in fact not available. Hospitals and schemes have difficulties in this area too, causing hospitals to complain to the Registrar about scheme behaviour. These disputes are sometimes over large amounts of money. Other complaints handled by our complaints unit concerned the operation of benefits such as those in the prescribed minimum benefits. Once again, the question of who bears responsibility at various stages for decisions taken on hospitalisation or other procedures, or who undertakes them, is frequently in dispute. Some of these types of complaints are likely to be resolved in 2004 when the regulations on chronic conditions take effect. These regulations will stipulate that the rules of schemes must reflect which providers have been designated for procedures in the minimum benefits package and the route to be used to bring the treatment about. However other problems are likely to arise in this particularly complex piece of consumer protection, and these will undoubtedly land in the complaints department for resolution. Several other specific trends have emerged in the complaints department, such as real member unhappiness with the working of waiting periods as well as the operation of the late joiner penalties which, it is felt, discriminate unjustifiably against certain categories of people. When a complaint cannot be resolved by the intervention of the complaints staff, the issue can be taken further, and a process of appeals can be used. The final stage in this appeals process is the Appeal Board, which is appointed by the Health Minister. The period from the beginning of 2002 until the end of March 2003 has allowed for a consolidation of the complaints and appeals process. Previously there was not a clear understanding of the process of lodging a complaint, what the requirements on the scheme might be and how the process might be followed through. A system has been devised to ensure and systematise the process as well as the research undertaken to ensure that the complaints process follows the requirements of the Administration of Justice Act. The process has now been adequately streamlined so that from the time a complaint arrives in the complaints unit, a process follows of adjudicating a dispute. This can, if necessary, be appealed against through various levels ending up in front of an Appeal Board. Schemes had earlier appeared not to understand fully the flexible nature of the disputes resolution process. Nor in the earlier stages of the operation of the complaints procedure did some of them understand what the implications of a directive from the Regulator meant. Several found themselves simply ignoring a directive that had followed a complaint and action had to be taken to force them either to comply or to lodge an appeal. 26 COUNCIL FOR MEDICAL SCHEMES Annual Report

29 2 Although there are still those schemes which choose to abuse the system, most now understand and act in accordance with both the spirit and letter of the law. The Appeal Board is assisting in clarifying the dispute resolution regime as provided for in our Act. Several disputes reached the Appeal Board and three of these were particularly instructive. Doctors representing the Gaucher s Society had laid a complaint with the Council over the fact that medical schemes with members with the disease were refusing to treat the condition as a PMB (or part of the Package of Minimum Benefits which would mean the scheme would have to pay all the costs of the disease). The disease is a very rare requiring very expensive treatment for the lifetime of the member. Various decisions through the process were appealed against until the Appeal Board finally ruled in favour of the doctors and patients and against the schemes concerned. The decision was made in 2002, but in the first three months of 2003 certain schemes were still resisting complying with the finding. Senior Counsel has been briefed by the Registrar but action has not yet proceeded. The AIDS Law Clinic at the University of the Witwatersrand brought a case to the Council s complaints department over the withdrawal of benefits by a scheme (Compcare) on the grounds that the member had failed to disclose knowledge of his HIV condition. Again, the scheme challenged the finding at each step of the way until the issue went to the Appeal Board which confirmed Council s ruling that the termination of membership and withdrawal of benefits by the scheme were unlawful. The scheme was forced, again with delays, to comply. In the third case, the Appeal Board highlighted the imbalance inherent in a scheme which can, using its considerable financial resources, drag the process out indefinitely and expensively, while a member does not have this ability. In a finding in favour of a member of Discovery Health Medical Scheme, the Board upheld a Council imposed costs order on the scheme forcing it to refund the member and pay the costs. The dispute arose out of whether or not the patient s condition was part of the PMBs, whether or not he should therefore have a waiting period imposed, and if a private hospital should be paid for. Discovery had maintained that the condition was not a compulsory benefit that it would have to pay for and wanted to impose a waiting period. It then said that if it was a PMB then its rules stated the patient should be treated in a state hospital, but this patient had been treated in a private hospital. So the scheme did not want to pay for the hospital costs. The Appeal Board found that this was unlawful, ordered the scheme to pay for the medical expenses incurred as well as the legal expenses of the member. There is however a slight downside to this picture as certain schemes have opted for abusing the dispute resolution mechanism as it is quick, easy and cheap and can delay a directive from the Council for a long period. Evan Theys, head of compliance. COUNCIL FOR MEDICAL SCHEMES Annual Report