Council for Medical Schemes Budget: briefing

Meeting report

HEALTH PORTFOLIO COMMITTEE
8 March 2006
COUNCIL FOR MEDICAL SCHEMES BUDGET: BRIEFING

Acting Chairperson: Ms M Madumise (ANC)

Documents handed out:
Council for Medical Schemes: Registrar’s Overview (email [email protected])
Council for Medical Schemes Regulatory Plan and Budget 2006/7

SUMMARY
The Council for Medical Schemes briefed the Committee on its regulatory plan and budget for 2006/2007. The focus would remain on ensuring that beneficiaries received fair treatment, and promoting the stability of medical schemes. Members were concerned that the money allocated to consumer education would not support this goal. Many questions were raised about how medical schemes could be better regulated and monitored so that scheme members could be treated fairly and enjoy maximum benefits.

Minute
Council for Medical Schemes briefing
Mr Patrick Masobe (CMS CEO) gave the Committee an overview of the Council’s activities and regulatory plan for 2006/07. The focus would remain on ensuring that beneficiaries received fair treatment, and promoting the stability of medical schemes. Part of the plan would focus on ensuring better management of benefits, adequate financial supervision, support to trustees and beneficiaries, as well as adequate research and monitoring. In ensuring that beneficiaries were fairly treated, the CMS would, via a number of activities, foster compliance with the Medical Schemes Act and initiate enforcement actions when necessary. It aimed to investigate and effectively resolve complaints raised by the public.

Mr Dan Lehutjo (CMS Finance Manager) then briefed the Committee on the Council’s budget for 2006/07. Its total budget was about R41 million, the bulk of which would be spent on salaries (R26.1 million). About R535 000 would be spent on conferences and seminars, and R500 000 on media and promotions aimed at consumer education.

Discussion
Mr B Mashile (ANC) asked when the Council had been established. Was it exempt from paying taxes? Mr Masobe replied that the Council had been established in terms of the Medical Schemes Act of 1998. The Council started operating in May 2000.

Mr Lehutjo (CMS Finance Manager) said that the Council was not exempt from paying income tax or Value Added Tax (VAT). After the promulgation of the VAT Amendment Act, which took effect in April 2005, the Council had not been a VAT registered entity. This meant that government entities not involved in government business were required to register as VAT-paying entities. The Council did however pay VAT to its suppliers. Mr Masobe added that because the Council was not a profit-making entity, it was not taxed on profit. It was not tax exempt from any other taxes though – it had to pay income tax, VAT on its activities, as well as regional services taxes (up until June 2006).

Ms M Madumise (ANC) asked whether the members of medical schemes would benefit from the surplus mentioned in the budget.

Mr Masobe said that the Council’s activities were funded by the levies it charged medical schemes. In terms of the Medical Schemes Levies Act, the Council charged a levy of about R11 per member per year. From time to time, the Council would receive an allocation from the Department. If, at the end of the year, the Council found that it had a surplus (for this year R1.5 million) they, with the permission of the Treasury, used it to reduce the levies.

Ms M Matsemela (ANC) asked whether medical aid schemes had any stakeholders? How did they benefit from the schemes?

Mr Masobe said that essentially, even if in practice it did not always look like it, a medical scheme was a trust fund owned by its own members. Other service providers were also involved and behaved and functioned "as if these things belongs to themselves". The legislation was set out such that medical schemes were independent, legal, not-for-profit entities that belonged to their members. Council work in consumer education was aimed at teaching this. March was consumer awareness month. Medical schemes did not belong to administrators or trustees, but were intended to finance the health care of its members.

Trustees were also stakeholders. In terms of the Medical Schemes Act, they were required to manage the scheme. Section 57 of the Act stated that the medical scheme should have a board of trustees, 50% of whom should be elected by the members. The trustees were representatives of the members. As in practice it did not always work like this, the Council had a compliance division, which focused on issues of governance within schemes. Doctors were also beneficiaries, and hospitals were an important and "really unfair" stakeholder.

A Committee Member commented that when members’ dependants finished their schooling it did not necessarily mean that they could ‘stand on their own two feet’. Could the category of dependants be extended to include dependants who could not support themselves, even if this was at extra cost to the principal member?

Mr Masobe responded that the Medical Schemes Act clearly defined the principal member and his or her dependants. ‘Dependant’ could refer to the spouse, children as well as someone who depended on the principal member for family care and support. Some medical schemes did specify the age for dependants. He reminded the Committee that one had to consider the other part of the provision too – if a dependant was older than the specified age and was dependant upon the principal member for care and support, there was no reason why he or she should not be covered by the scheme. He admitted that the implementation of this provision has not been smooth.

The Council hoped to look more closely at the impact of legislation. It needed to redefine the application of those provisions. The research and monitoring team has done work, which showed that in families where at least one person was a member of a medical scheme there were about two other people who were not covered. If one could get such people covered by using adequate definitions of dependants then the number of members in schemes could go up quite substantially. This was a key issue. The Council was hoping that the Minister would come back during the course of the session with some amendments to that part of the legislation.

Mr Madella (ANC) pointed out that even though the members of the medical schemes were the primary beneficiaries, they were also the most uninformed, so consumer education was very important. He was concerned that the money allocated to consumer education in the Council’s budget would not reach even 10% of these members. Much more has been allocated to conferences. He hoped that the more than R500 million spent on conferences and workshops would also target and benefit members. He feared that with the small allocation made for consumer education, the Council might only be able to reach 5 000 to 10 000 of the very people it was meant to protect.

Mr Masobe said that this fair criticism had often been voiced by the Council’s own consumer education team. Although in the last couple of years the allocation towards consumer education had increased, the Council needed to spend a bit more money in this environment. He cautioned that one also needed to be mindful of the Council’s capacity to absorb any new funds. There were also many other activities emanating from the other units focussing on consumer education. There was, for example, a separate budget under media and promotion. Part of that budget was to produce pamphlets and to take part in public campaigns. One of the public campaigns proposed for this year was aimed at creating awareness around how minimum benefits worked. Similarly, other units also spent money to ensure that consumers were able to better understand and participate in the affairs of the schemes. Most of the units were expected to participate in the training initiative. The budget for consumer education had to be balanced against the absorption capacity and against scarce resources, as well as against all the resources brought in from all the other components.

Mr Madella mentioned that, in the last couple of years, trade unions had forged relationships with the Council in order to educate and empower their members. Despite this, very few workers had participated in the election of boards of trustees.

Dr A Luthuli (ANC) added that, in her experience, training of employees at a high level took place frequently, but no-one monitored that the training ‘trickled down’ to their colleagues at lower levels. Could the Council monitor the process to ensure that information did reach all levels?

Mr Masobe agreed that the Council worked quite closely with trade unions. Much consumer education work was done through shop stewards, and the Council often financed their meeting attendance. Hopefully information was being transmitted to workers.

As far as the election of trustees was concerned, the Council has consulted on matters relating to governance and the governance model itself. The governance model was predicated on the notion that the members should elect 50% of the trustees. The outcome of the consultations indicated that the governance model should not change, but that it needed to be enhanced in certain areas. One such area related to how schemes managed elections. At present, it was felt that they were being managed in a way that excluded their members. The consultations also revealed that one needed to look at how Annual General Meetings were held, and more importantly, how elections were managed. The Council would advise the Minister to look at this and would seek regulatory changes this year.

Mr Mashile and Mr Madella wondered why the allocation received from the Department of Health was not indicated in the Council’s income budget.

Mr Masobe explained that the Department of Health from time to time requested the Council do to specific pieces of work. These would then be funded. The Council’s core functions were shown in the budget presented to the Committee that day. At the moment, the Department was working on a possible equalisation fund mechanism for medical schemes. The Council was involved in the development of this policy. The Department might actually fund this work, but this was not reflected in the budget presented.

Mr Mashile asked whether it was appropriate to not reflect an activity for which the Council would be receiving funds. It could appear as though the Council was receiving funding for activities that were hidden.

Mr Masobe said funding received from the Department was always reflected in the audited financial statements of the Council. He conceded that nothing was preventing the Council from adding one more line to the budget, indicating the funding it received for activities, in addition to its core functions.

Mr Madella said that the Committee had been given a presentation by the Department of Health on their strategic plan for 2006/07. It clearly indicated the allocation made available to the Council. This probably meant that there had not been discussions between the Council and the Department prior to the finalisation of its budget.

Mr Masobe replied that the Department has been in discussion with the Council regarding the support required. The budget presented to the Committee reflected only the Council’s core mandate. Additional activities that would be done to support the Department have been finalised and could be sent to the Committee.

Mr G Muller (Chief Financial Officer: Department of Health) confirmed that the Department requested the Council to do some work from time to time. Starting from this year, the Council would assist the Department with the risk equalisation fund. In the 2005/06 financial year, about R5 million would be transferred to the Council; in the next financial year, it would be about R15 million. He assured the Committee that these funds were very well motivated in the business plan presented to the Department. This document could be made available to the Committee. He reminded the Committee that Treasury would not allocate money unless one presented a well thought-out business plan and motivation. In addition to the Council, the Department monitored two other public entities. These three entities fell under the auspices of the national Department. In this instance, the Department definitely exercised its governance duty. The Council’s whole budget had come to the Department for scrutiny and approval before it was published or presented anywhere.

Mr Mashile asked whether there was anything that governed the extent to which the Council was allowed to have an interest in medical schemes. Were any regulations or prohibitions related to this matter?

Mr Masobe said that Council staff were obviously entitled to be members of a medical scheme. However, it prohibited Council staff from being on Boards of Trustees of medical schemes, or have any other interests. The Minister of Health appointed Council members, taking into account a number of factors. She took care to ensure that there were no conflicts of interest as far as board members were concerned.

Mr Mashile asked about the structure of the organisation. From the large percentage of the budget allocated to salaries, he assumed that the staff complement was "massive". Alternatively, the structure might comprise of highly qualified experts only. How did the Councils organogram compare with the organograms of other similar statutory bodies? How many medical schemes did the Council oversee? Did the number of medical schemes really demand such a large salary budget? If the organisation grew, then the levies charged to medical schemes should also increase.

Mr Masobe responded that the Council employed a staff compliment of about 70 people. This year it had chosen to move the management of the accreditation system in-house. When this function had been outsourced to an outside accounting firm, it had not worked very well for the Council. Much capacity and information was lost in the process. Moving this function in-house meant employing two or three more people. The 70 staffmembers regulated 150 medical schemes and provided oversight over the contribution income of medical schemes of about R54 billion. If one considered the salary budget in terms of the work needed to oversee 150 medical schemes with 7 million members, the R26 million spent on salaries paled in comparison. The levies charged accounted for R11 per member per year. It was precisely because of the Council’s successful oversight that they had seen schemes moving out of complete insolvency to the R2.5 billion surpluses that prevail now. It was also important to finance the regulatory activities properly because a well functioning regulatory system generated more confidence in medical schemes.

Mr Muller (Health Department) added that in comparison with the salaries of the top management of the other two entities under the Department’s auspices, the salaries earned by the top management of the Council was not out of line. In a normal hospital, the percentage of salary cost was between 55-60% of the cost of the hospital. The Council could be seen as a ‘think tank’ whose product was largely in the form of documents as well as policy-making issues and monitoring, thus it employed specialists.

Ms Matsemela said that the Council had reported that it would improve the governance of the medical schemes. People who wanted to join a particular medical scheme were key stakeholders. Yet each time they went to doctors they needed to receive some kind of verification from the medical scheme. Where was the monitoring and regulation of the process in this situation? She also asked how the Council was regulating Discovery Health? Discovery Health was a major stakeholder in the process. It decided on governance and policies, yet members were burdened with high administration costs.

Mr Masobe reiterated that medical schemes and administrators were separate entities. The administrator was the contracted intermediary or the service provider. Many times there was a ‘blurring’ of this distinction. Many times people did not see the distinction between Discovery Health Medical Scheme on the one hand, and Discovery Health Administrator on the other. Sometimes this blurring was deliberate.

Looking at the market overall, the administration costs were probably at about 10% of the contributions which more or less equalled the market average. In 2000, the administration costs in South Africa was closer to 18%. There were some schemes whose administration costs were at about 15% of the contribution income. The Council believed that 10% was still a bit high because in countries such as Ireland, Holland or Belgium, administration costs were probably at about 4% or 5%. One of the biggest interventions was to work on the reinsurance contract, which in the Council’s view, was just a way of getting money out of members’ schemes and into service providers. After some controversy, this loophole has been closed and this had contributed to the decline in health care costs. Fees paid to healthcare brokers were a key contributor to non-healthcare costs. Over the last year the fees to healthcare brokers had skyrocketed from R560 million in 2004 to about R700 million in 2005. One needed to look at how this cost could be brought down consistently over time. Ultimately one could not solve the problems through regulation only, but it needed to be fixed via government and trustees taking the necessary actions to govern these medical schemes.

Ms Matsimela said that some medical aid schemes had ‘standard and deluxe packages’. How were different benefit packages regulated?

Mr Masobe said that medical schemes needed to specify their benefits in a manner that was simpler and easier to understand. In addition, work was needed to ensure that access to these benefits also improved over time. This was being done in the Accreditation Division.

Ms Matsemela said that in August and September every year, many patients were turned away because their medical aids had been exhausted. Dr Luthuli agreed. Surely there should be a way for the Council to prevent this?

Mr Masobe said that it was necessary to understand the Council’s problems. Statutes defined the Council’s powers. The set of ‘minimum benefits’ entailed a list of 270 hospital-based conditions, plus 25 chronic conditions. There was absolutely no way that a medical scheme could say that these benefits had been exhausted. Over and above the protected benefits, medical schemes were at liberty to limit other benefits because of cost and efficiency considerations. The Council did not have the power to say that a benefit not in the protected package could not be exhausted.

This did not mean that there were not important policy questions. Such issues were being discussed with the Department, such as those related to primary services such as General Practitioner (GP) care. Going forward, policies would have to address the extent of protection of some of the primary care benefits. The Council was looking at whether the minimum benefit package could be modified.

Dr R Rabinowitz (IFP) asked whether something that could be done in terms of amended legislation that would help the Council to "have more teeth"? Although the Council did have some capacity for demanding figures and for monitoring performance, it was as though the Council could not help the public to tackle medical schemes. She mentioned the recent court battle of members of the Discovery Health medical scheme. Was there no way that the Council could have acted as an intermediary on behalf of the public? Discovery Health was earning incredible profits and yet its members, who were told that they were the owners of the scheme, were bearing increased burdens. Much of Discovery Health’s benefits were coming out of so-called savings plans.

Mr Mashile asked whether the legislation that established the Council was ‘user-friendly?’

Mr Muller responded that the medical scheme industry was an evolving industry. One set of regulations would be produced and then medical schemes would find a way around it. The Department was working on an amendment to the Medical Schemes Act. Like all Acts, the present one was rather difficult for lay people to read. Although he was not certain that there was a layman’s version of the legislation, he agreed that this was the type of document that was needed in order to educate members. The Department did from time to time amend legislation in order to combat the ‘perverse incentives’ that existed in the industry.

Mr Masobe added that the Council had a regulatory function while medical schemes governed the business of the scheme. As the Council had proposed legislation, it needed to be made clear that it was not taking over the functions of trustees and principal officers, but was doing oversight. Some of the Council’s activities were about strengthening legislation as well as the regulatory environment to give regulatory bodies more powers. At the moment, the law stated that breast cancer was covered as a minimum benefit, yet the law did not specify what medicines needed to be given for this. Part of regulation was to understand why legislative gaps happened and to make proposals about how they could be dealt with.

He could not answer for Discovery as far as their profits were concerned. To his understanding, there were a number of companies within Discovery Health – Discovery Life (life insurance), and Discovery Health (PTY) Ltd, which did administration. Discovery Health had entered into an administration contract with Discovery Health Medical Scheme. The Council’s activities related to Discovery Health and Discovery Health Medical Scheme only. If profits went up 8% this year, this was a consequence of the Council’s insistence that the medical scheme should reduce their administration fees and stop the reinsurance contract. He had been told that Discovery as an entity, had made 30% profits. This profit did not necessarily come from the medical scheme but came from all the company’s other activities as well.

Dr Rabinowitz asked whether it would be in the Committee’s rights to request Discovery Health to present their structure and their profits to the Committee. The scheme dominated the health insurance market. If it was in the Committee’s rights, then she would propose that the Committee invited them.

Ms Madumise said that Parliamentarians were members of PAMED, the Parliamentary medical scheme. PAMED however bought products from Medscheme that, to her knowledge, was very expensive. Would it not be cheaper if PAMED brought products directly?

Mr Masobe pointed out that PAMED probably bought administration services (collection of contributions and the payment of claims) from Medscheme. The Council could not tell PAMED’s board of trustees who to buy their services from. Neither could it tell medical schemes which benefits to provide. It was important to get trustees to work together in the interest of their members.

Dr Rabinowitz asked how could the Committee assist the Council to best act in the interest of the public, and educate consumers.

Mr Masobe said a number of pamphlets explained the functions and powers of the Council as well as how members could get in touch. On its website, there was information on how to contact the Council with regard to specific problems, as well as how to contact the trustees of particular medical schemes.

Dr Rabinowitz commented that the public was aggrieved about the complaints backlog. The public sent their complaints; they tried get through to the Council but got no responses.

Mr Masobe responded that members often needed immediate responses to their complaints, as there medical care often depended upon that. The Council had been able to resolve about 97% of the complaints sent within the set timeframes. Each time a complaint was received, the law required that that complaint be passed on to the medical scheme involved so that they could have an opportunity to respond. The law gave the medical schemes thirty days in which to submit their response. If the Council did not respond to complaints immediately, it was not because it was not doing its work, but because it was abiding by the law.

The meeting was adjourned.