Comment on the Medical Schemes Amendment Bill, 2001

The Board of Healthcare Funders of Southern Africa

Submission to the National Assembly

Portfolio Committee on Health

Medical Schemes Amendment Bill, 2001

19^th October 2001

Preamble

Mr Chairman, honourable members of the Portfolio Committee, the Director-General of Health and the Registrar of Medical Schemes, Ladies and Gentlemen.

I wish to firstly convey the congratulations of the BHF Board of Directors to the Chairman of the Portfolio Committee Health, Dr Nkomo, on his appointment as South Africa’s Ambassador to Malaysia. The Board has every confidence that you will represent the interests of our country admirably.

In 1999, the national assembly passed a resolution to mark the launch of a new trade body for medical schemes, the Board of Healthcare Funders of Southern Africa (BHF). It wished BHF well in its long and challenging journey of transformation and urged it to uphold the great promise it made to unlock the potential for universal access to lifetime health cover for the family of the average working South Africans.

BHF presents its credentials formally to this august body today in the proud knowledge that its transformation project has not just been successfully prosecuted, but that it has been exceeded. Some 170 medical schemes in South Africa, Namibia, Botswana and Zimbabwe, or 95% of all medical schemes in Southern Africa, have voluntarily expressed their membership of BHF with great enthusiasm.

The transformation of BHF has been characterised by an inclusive political culture, innovative constitutional democracy, a progressive policy ethnic, smart organisational technology and profound intellectual rigour. At its launch in July 1999, BHF promised to elevate the sights of the industry, to locate, nurture and unleash the considerable talent required to make its vision a reality and not to succumb to the base temptation of being a watchdog over the State, leaving such canine proclivities to those who define themselves through the weakness of others.

As a measure of its transformational progress, the last election for the twenty Directors through unfettered and universal member franchise, yielded a Board that positively resonates with the culture of our new and tender democracy.

The Board is comprised of Directors 50% of whom are Black, 25% of whom are women, 45% of whom are member-elected trustees and 100% of whom are committed. The BHF program has been characterised by a profound reading of the sector we operate in, a fearless exposition of its ills and inefficiencies and a firm commitment to the tenets of the new economy viz. transparency, accountability, empowerment and the absence of scarcity.

We have subscribed to these principles in the pursuit of a seamless integration of solidarity and enterprise in healthcare and present ourselves as exponents of progress in a sector positively begging for it.

Overview

The Medical Schemes Amendment Bill 2001 ("the Bill") purportedly changes the Medical Schemes Act (131 of 1998) in two ways:

it addresses technical deficiencies in order to make the legislation clear;
it addresses the policy related issues that were inadequately defined in the Act

In a broad sweep, the four objectives of the Bill are:

to enhance the governing ability of the Registrar in order to act more effectively in the interest of the principal members and their dependants;
to expand the discretionary powers of the Registrar;
to redefine the term "beneficiary";
to enhance the independence of the Board of Trustees of a scheme by restricting the selection pool from which trustees and principal officers can be chosen.

In acknowledging the Department of Health’s intentions, schemes have articulated an overall concern of "Regulating for abuse" viz. the tendency to issue a welter of Regulations to curtail behaviour by a minority of parties which is deemed inappropriate, thereby investing the entire industry with the same onerous burden.

Too-frequent regulatory intervention, coupled with perceptions of a stern and unyielding regulatory authority, runs the risk of contributing to a debilitating operating environment.

The effect of these changes cannot accurately be measured at this time and the prospects for such measurement are further hindered by the proliferation of newer regulations.

It is recognised, nevertheless, that the new regulatory environment is still "bedding down", and that the pace of statutory change is also informed by the scale of the regulatory transformation. Consequently, it is BHF’s view that deeper, rather than distant, engagement of the industry in developing new regulatory instruments is desirable.

Any notion that such deeper engagement would tend to thwart the development of regulations consistent with health policy, because of perceived negativity from industry to the overall policy, is unsustainable. Indeed, it is in the clear interests of all funders and their agents that a smart regulatory environment, which incentivises non-discriminatory access to funding, is established. This makes the industry a positive, if self-interested, agent in the ongoing transformation of the regulatory framework. The concern, therefore, of ‘regulatory capture’ is unwarranted and should play no role in the development of health policy enrich by a shared analysis.

BHF, informed by the outcome of wide-spread consultations on the Bill with its members and other interested parties in industry articulates the following general observations:

Rather than positioning the industry for growth, the extended regulatory framework is onerous and often contradictory, as demonstrated in our technical submission.
There is, arising from the above, a tendency to displace governance of a medical scheme away from Trustees and towards the Regulator. This disempowers Trustees and leads to poor corporate governance since the Regulator is not compelled to take fiduciary responsibility for decisions it could now take which affect the integrity of the scheme. This interposing role, in effect, leaves members exposed, since accountability is compromised. This proposition is supported by provisions in the latest King Code on Corporate Governance.
There appears a general lack of transparency in the process of regulatory development. This perception is fuelled by the lack of a regulatory ‘road-map’, with a short and long-term horizon, so that meaningful and constructive input on the future management of the system by interested parties can be secured.

The National Health Summit in November is most welcome and its agenda categorically demonstrates that Government’s responsibility for healthcare indeed stretches beyond private funding. To the extent that a broad regulatory canvas for the medium to long-term may be painted at the Summit, details such as this Bill before Parliament appears to suggest that very definite policy options have already been determined for the private funding, and, by extension, private delivery system.

This is fine, encouraging even, since it implies that clear strategic objectives have been identified. Ignoring, for now, the suspicion that these were indeed determined some time ago, we firmly submit that these strategic objectives be made known with alacrity and with confidence, since their rigorous examination will certainly ensue.

Unless we are able to debate the regulatory future of this industry in a collegial fashion, there is scant possibility of sufficient consensus in the industry being obtained in support of even these regulatory proposals. A reluctant and even surly constituency is inordinately difficult to regulate, and the current situation points to a scenario of indefinite and relentless attrition.

There appears to be an alarming degree of divergence with the assertions of the Registrar’s Interim Report as published three weeks ago from several quarters. While it is conceded that the Report is still subject to final publication, it is clear that any fine-tuning will not materially change the Regulator’s interpretation of the statutory returns in the Report.

Of immediate concern is the notion that the Report vindicates the regulatory framework as a stabilising, well-managed and growth oriented set of policies, on the basis in our view of an evidently statistically perilous modelling of the data. This will be discussed formally with the office of the Registrar, since BHF’s view holds that the industry is indeed experiencing a debilitating , rather than a stable, environment. This is borne out by the National Treasury Inter-Governmental Fiscal Review released by the Minister of Finance this week, which contends that expenditure in private healthcare is tracking twice the CPI, which the Registrar’s report appears to contradict. Our own figures correlate with those in the Fiscal Review rather than those in the Registrar’s Report.

It is axiomatic that if the interpretation of the data underpinning the Registrar’s Report, is in dispute then, by definition, the veracity of any regulatory provisions underpinned by such interpretation is equally in dispute.

The converse also holds that if the assertions made in the Registrar’s Report ie. that the industry is in good shape, were valid, there would be little reason to regulate the industry in a manner that leaves little doubt that the industry is rife with corruption and requires the very interventionist, even if poorly-motivated, ministrations of the Regulator.

v). Several amendments to the Medical Schemes Act contained in this Bill have the effect of replacing specific, unambiguous provisions, with vague and subjective clauses. This gives rise to the concern that the Regulations are imprecise and behave as blunt instruments in an industry where surgical precision is required to manage vast amounts of capital.

vi). The regulatory trajectory is designed, it is claimed, to protect members of medical schemes. This, BHF submits, is an incomplete mandate. The net effect of current regulations seeks to protect members already in a high-cost system and effectively reduces the ability of either existing or new schemes to rapidly expand into the uninsured market, both for commercial necessity as well as to reduce unfunded dependency on the State.

Regulating for this eventuality should be the central occupation of the Regulator, while the pursuit of abuse by the minority should be a matter of law enforcement. (The regulation of brokers is a case in point). However, conflation of policy making and legislation writing on the one hand and law-enforcement and a too-stringent focus on abuse on the other, hobbles regulation and cripples enforcement.

We therefore, in making this submission, hold up this Bill and our analysis thereof as emblematic of the requirement to revisit the current separation of powers of the Council for Medical Schemes, the Office of the Registrar and the Department of Health.

vii). The Medical Schemes Act mandates non-discriminatory access to cover in the voluntary environment. The Act was predicated on the understanding that it would represent the first step in a policy flow ending in the Social Health Insurance mandatory environment, where principles of community rating work best. The movement to Social Health Insurance has been indefinitely delayed.

This effectively leaves the industry in regulatory limbo: the rather fraught scenario of community rating member contributions in an indefinite voluntary environment. It is respectfully submitted that this is highly prejudicial to the management of the prudential risk of schemes, and that either a definite program for implementing Social Health Insurance is presented, or that effective risk management by schemes to deal with real problems of anti-selection and opportunistic behaviour be allowed until the environment of compulsory cover is introduced.

3. Commentary on specific provisions in the Bill

Section 1 (a) Definition of beneficiary

This amendment allows for the substitution of the terms "dependant" and/or "member" by the word "beneficiary".

Comment:

The definition may be problematic in respect of the existing contractual relationship between the scheme and the member, with specific reference to Sections 7 and 28 of the Medical Schemes Amendment Bill.

Recommendations:

A clearer legal exposition with specific references to contracts should be obtained and considered.

Section 20 (3) Reinsurance Contracts

Reinsurance is universally recognised as a risk-management tool. However, the Office of the Registrar has expressed dissatisfaction regarding certain practices in the Industry which pertain to reinsurance. This amendment is motivated by the perceived need for tighter governance of reinsurance practice. Key features of this provision includes the approval from the Office of the Registrar for any reinsurance agreement "… entered into with a reinsurer." and "Any amendment in terms of the existing reinsurance contract…", as well as "…an independent evaluation of the proposed reinsurance contract…" The Office of the Registrar further seeks to entrench its regulatory control through the addition of subsection 20(3) 7 which allows for the rejection of a reinsurance contract when subject to a broad spectrum of conditions.

Comment:

The approval of reinsurance contracts will now reside within the regulatory ambit, and concern was expressed regarding the ability of the Office of the Registrar to, in effect, make executive decisions concerning the affairs of a medical scheme to the express exclusion of the Board of Trustees, which already has clear legal and fiduciary responsibilities. The intervention of a third party, such as the Registrar, will conflict with such fiduciary responsibilities.

Timeous assessment by the Office of the Registrar of all re-insurance contracts will be heavily dependent on expanded resources as well as the need to examine all the risk factors in each scheme which led to the Board of Trustee’s decision to reinsure.
Case by case intervention may well become terrain for arbitrary and possibly inconsistent regulatory oversight and could potentially place the Registrar and schemes in unnecessary ongoing attrition.
An extrapolation from the latest King Code of Corporate Governance appended hereto supports the above contention. (Annexure B).

Recommendations:

Reinsurance contracts should fall within the purview of the Boards of Trustees, who, after all, must account for the fund and its management very rigorously in terms of Trust law and other financial statutes.
Official guidelines, endorsed and supported by institutions such as SAICA the Council for Medical Schemes and BHF, may be helpful to trustees in providing the framework for acceptable reinsurance practice.
If the above recommendations cannot be adopted, then it is recommended that this amendment be deleted.

Section 21A. Marketing Material

This amendment seeks to protect scheme members from false advertising by schemes, brochures, administrators or other agents. The Office of the Registrar aims to achieve this objective by requiring that schemes do not engage in the promotion of ‘linked’ products through conditional selling which tends to make membership of a medical scheme conditional to the purchase of such products.

Comment:

The Bill, in trying to regulate the conditions in which medical scheme membership can be obtained, risks extending superfluous regulatory control where such control already exists in the Medical Schemes Act.
The proposed changes fails to recognise that the conditionality of membership in a closed scheme is employment and/or union or bargaining council membership and the proposed legislation will make illegal the promoting of such schemes.

Recommendations:

Subsection (1) of this amendment should be deleted.
Subsection (2) of this amendment should be part of Section 29

Subsection (3) of this amendment should be replaced with the clause "Membership of a medical scheme is not conditional on the purchase of any other products". In addition, any literature such as an application form to join the medical scheme, as well as the agents promoting the product be required to disclose this provision to any potential client.
Alternatively, it is recommended that the ‘negative’ connotations be made ‘positive’. For example, subsection (3) can be rephrased as "It is the duty of the broker to inform any potential client that membership of a medical scheme is not conditional upon the applicant purchasing or participating in any product, benefit or service provided by a person other than the medical scheme in terms of its rules.". This rephrasing is recommended for the subsection in its entirety.
Finally, if the above suggestions cannot be accommodated, then it is recommended that this amendment be deleted.

Section 29 3 ( c ) Waiting Periods

This amendment removes one of the discretionary barriers to joining a scheme – the waiting period. It removes, from the Act, the ability of a scheme to provide for waiting periods in its rules by stating that "A scheme shall not provide in its rules-… for the imposition of waiting periods [or new restrictions] on account of the state of the health of any [member who has been a member or a dependent of a member of another medical scheme for a continuous period of at least two years and whose membership has been terminated because of change of employment and who applies for membership within three months after the termination of membership from another medical scheme] beneficiary as may be prescribed taking into account the need to reasonably protect medical schemes against adverse selection".

* bold text to be deleted from the Act, underlined text to be added.

Comment:

Waiting periods are essential to the building of reserves, which current regulation compels schemes to incrementally provide for.

The net effect of the proposed amendment, is to dilute the current protection, enjoyed by schemes, in favour of allowing members unfettered opportunity to select against the scheme and prejudice the interests of the long term members.
This provision could stimulate significant anti-selection against schemes, since current regulation does not offer sufficient protection against this behaviour.
A very specific and quantifiable measure in the act is replaced by the wording "…taking into account the need to reasonably protect medical schemes against adverse selection" which tends to be rather vague in its assurances, and its ability to stand in a court of law was brought into question. The concern remains of the likelihood of adverse selection in a voluntary environment, and the proposed legislation removes key protection against such risk which is contained in the Act.
Creates an environment for opportunistic behaviour regarding maternity benefits for pregnant women.

Recommendations:

The current provisions on waiting periods should be maintained, in order to continue to give effect to the specified and stated intention of the legislator to provide sufficient protection against anti-selection and other undesirable consequences of community rating in a voluntary environment.
A rights-based framework should be applied to financing certain types of cover, such as pregnancy. The removal of a waiting period for pregnancy does, however, pose a significant financial risk to schemes in the current system.
This risk can be managed in a financially sound manner through a rights-based benefit framework that facilitates access to healthcare cover for pregnant women who cannot, and should not, be barred from access to a scheme on account of the pregnancy. (Some proposed methods of curtailing opportunistic behaviour, while guaranteeing access, have been outlined in the BHF submission on previously published draft Regulations on 31^st July 2000.).
There is a lack of motivation why the current subsection should be changed. There is no empirical evidence that reflects that waiting periods are not essential to the financial well-being of a scheme, this amendment should be tabled only after due scientific evaluation of credible research demonstrates that such a measure is warranted.

Section 37 (6) Financial Statements and Section 44 (4)

This amendment allows for the Registrar to call for financial statements as frequently as he or she may deem fit.

Comment:

Concern was expressed over a provision that allows for random monitoring which may not necessarily be motivated by any prima facie conditions giving rise to the Regulators interest
Furthermore, existing legislation provides ample power to the Office of the Registrar to conduct financial or other inspections to ensure compliance. The provision 44(4)(b) therefore seems unnecessary.

Recommendations:

Further clarification is required from the Registrar since provision is made in Section 44 (4)(b) for the submission of statements.
Alternatively, this amendment should be deleted.

Section 57 (a) Principal Officer Eligibility

This amendment restricts the appointment of a Principal Officer from an interested party, and hence precludes any agent of an administrator or brokerage acting as the Principal Officer, who will now have to be employed on a full-time basis by the scheme. This amendment deals with the potential conflict of interest between the Principal Officer’s duties to the scheme and loyalty to his or her employer (the brokerage or administrator).

Comment:

Whilst it is acknowledged that potential conflicts of interest may exist in current Principal Officer arrangements with schemes, concern was expressed regarding the cost implication of this provision on smaller schemes.
Requisite expertise in existing administrators may also be the desirable option for several schemes seeking executive management of a scheme.
The role of the Principal Officer is not defined in the Act. It is BHF’s view that the Principal Officer’s fiduciary role should equate to that of company secretary, rather than that of managing director, which current and proposed legislation assumes to be case.
If the intention of this amendment is to eliminate any potential conflict of interest, then, logically, this effectively prohibits all categories of individuals, including members of schemes, to serve as the principal officer, or even as Trustee, due to a conflict of interest. The intention of the legislation can surely not be to selectively preclude certain parties from Trusteeship while permitting it for others who potentially demonstrate a conflict. Existing statutes, codes of conduct and corporate governance provide overwhelming protection against moral hazard anyway, and this amendment may only serve to amplify a restrictive environment without materially improving corporate governance, or reducing moral hazard. The value-add of this amendment is therefore insubstantial.

Recommendation:

An administrator-sourced Principal Officer may well be better suited to schemes in certain instances. Proper governance criteria will offer a better solution to any potential conflict in the event of such a situation arising.
The duties of the principal officer should be defined. Cognisance of the King Report on Corporate Governance in South Africa 2001 (King II) should be taken into account in the definition of the role of the principal officer. BHF views the function of this position as that of a company secretary rather than that of a CEO. (see also Annexure B)

Conclusion

BHF wishes this submission to be read as balanced, forthright and constructive, and reiterates its readiness to play a progressive role in the future.

The vast majority of medical scheme members are presently facing interim increases of double digit figures, as schemes try and cope with huge funding shortfalls for service provision, a rapidly consolidating and, we would aver, a contracting business environment, a one-year budgetary horizon for large risk pools, a groaning and lurching public-private engagement, severely restrictive and anti-competitive supply-side dynamics, employer abdication of cover, over-servicing, abuse and fraud, a woeful lack of credible information and the slow pace of transformation. All this in a regulatory environment that positively invites all manner of unhealthy speculation and mutual suspicion, and a high-risk business model.

The key principles of the Medical Schemes Act, ie. good governance, non-discriminatory access and minimum benefits are reaffirmed by BHF. The regulatory extensions of the Act, however, tend to distort, rather than entrench, these principles. [By definition, community rating in a voluntary environment requires regulatory protection from anti-selection, which itself creates several new opportunities to subvert the principles of the Act and, in particular, non-discriminatory access].

A central feature of the promulgation of the Medical Schemes Act was that it represented a critical milestone in the reorganising of the industry, a policy flow logically extending to the establishment of Social Health Insurance. We hold this to be self-evident and are therefore dismayed at the indefinite delay attending the implementation of Social Health Insurance. We accept that Cabinet responsibility in respect of Social Security extends well beyond Social Health Insurance, but it is equally self-evident that the industry has now been left in the regulatory limbo of applying community rating to a voluntary membership, with no protection against the prudential and systemic risks that this eventuality occasions. Indeed, this piece of legislation worsens that predicament.

We have great understanding for the Regulator’s dilemmas and challenges in this transforming environment. We, however, categorically assert that a primary condition to be met for the efficient and positive regulation of such a volatile sector, is an unwavering commitment by all parties to openness and collegiate engagement in the elaboration of the future policy path.

The overarching goal of the Regulator should be the maintenance of the systemic stability of an accountable and prosperous industry. Any other outcome of regulatory intervention present alarming prospects for market failure in an industry responsible for 5% of the country’s GDP and must be avoided.

We look to the legislator to objectively interrogate the propositions we present, with a view to guiding the Regulator and strengthening its ability to fulfil the regulatory mandate presented by the Medical Schemes Act and the Constitution.

BHF is resolute in its faith in the ability of this industry and this Government to craft imaginative and creative prospects for healthcare. After all, transformation is not just about affirmation of the excluded but, through such affirmation, demonstrably improving the product.

NOTES ON NON-EXECUTIVE TRUSTEES EXTRAPOLATED FROM KING REPORT (DRAFT 7)

The background to this note is to briefly investigate the King Report ("King") with regard to the Medical Schemes Act ("The Act") and particularly the governance issues as contained in S57 of the Act

The most contentious provision on governance in the Act is S57 (3), which states " A person [who is a director or an employee of an administrator of a medical scheme] shall not be a member of the board of trustees of [such] a medical scheme." S57 (3) is also one of the provisions which the Dept of Health intends amending in its amendments to the Act by extending the prohibition on persons acting as trustees to principal officers of the scheme, and brokers.

This provision is aimed at ensuring that an absolute degree of independence is maintained between a medical scheme and the company contracted by it to administer it. This principle is sound from a corporate governance perspective but lacks crucial insight into the manner in which the medical scheme industry operates.

Medical Schemes are by their legal nature "not-for –profit" mutual funds which are owned by their members. There are no shareholders in a medical scheme with all profits achieved by a scheme being required to remain in the scheme in the form of reserves. Given that South Africa is still a country abiding by a capitalist style economy and given that medical schemes are recognised as separate legal entities operating in such an economy the provisions of S57(3) are out of line with the South African economic reality for the following reasons;

Trustees may not have any direct beneficial interest in the medical scheme concerned as the scheme is "owned" by its members
Trustees may not be associated with any company (ie. administrators) who may have a beneficial relationship with the scheme.
Trustees are effectively excluded in their board meetings from any contact with day to day managers of an administrator by virtue of the administrator’s employees being prohibited from acting as trustees.
Trustees of a medical scheme have the same fiduciary duties as directors of companies ie. they assume full responsibility to the members of the scheme for the activities of the administrator, yet by virtue of S57 are prohibited from inviting onto the board, representatives of the administrator.

It is and will be extremely difficult for any individual to assume the duties of a trustee of a medical scheme given the absence of any shareholder reward and the effective lack of control of the day to day affairs of the medical scheme concerned. It is therefore essential that a solution be found to take into account the requirements of an independent board of trustees and while at the same time ensuring that the board of trustees are knowledged in and familiar with the operations of the scheme and have an acute interest in the management of the scheme.

These issues have been considered previously from a company perspective, and have resulted in various recommendations being put forward by Mervyn King, his latest draft (draft 7) of his report on Corporate Governance suggest some useful initiatives which should be adopted in the medical schemes environment

King Recommendations.

All companies should be headed by an effective board which can both lead and control the company comprising executive and non-executive directors to the extent appropriate. The concept of a unitary board , constituting executive directors with their intimate knowledge of the business and non-executive directors who can bring a broader view to the company’s activities remains the favoured board structure for companies in South Africa

The board should be able to exercise objective judgement on the corporate affairs of the business enterprise, independent from management but with sufficient management information to enable a proper and objective assessment to be made by the directors collectively.

The board should be composed of individuals of integrity who can bring a blend of knowledge, skills, objectivity, experience, and commitment to the board under the firm and objective leadership of a chair (preferably an independent non-executive) who accepts the responsibilities and duties which the post entails to provide the direction necessary for an effective board.

Conclusion

The current environment is unworkable given the reasons outlined above. There is however an effective and tested solution to the problems facing board of trustees. As described above it is our recommendation that the board consist of a balance between executive trustees appointed by the administrator of the scheme concerned, and non-executive trustees on the same basis as contained in the King Report. We further support the view of having an independent non-executive chairman of the board.

We believe that this mix of personalities on the board will ensure a sufficient degree of independence from the administrator (particularly in light of the non-executive trustees together with the chairman forming a majority of the board members) while at the same time maintaining a significant amount of input from executive trustees who will be able to accurately and effectively report on the day to day activities of the medical scheme concerned.

It is our view that should the board continue to be comprised of only independent trustees who lack any actual incentive to act in this capacity while at the same time being required to assume all the risks inherent with holding an office which demands adherence to fiduciary duty principles, will ultimately lead to a lack of interest from any person of value to act in the capacity of a trustee of a medical scheme.