For the information of member offices we circulate the LOA submission on the abovementioned Bill, as prepared by the Health Care Standing Committee. An LOA delegation met with the chairperson of the Portfolio Committee on Health (Dr Abe Nkomo) earlier this morning and will be making an oral submission on the Bill to the Portfolio Committee on Health later this morning.

Click here to download a copy of the oral submission:

(Circulated in the absence of Mr Joubert)

The Life Offices’ Association (LOA) thanks the chairperson of the Portfolio Committee on Health for the opportunity to submit comments on the Medical Schemes Amendment Bill.

The LOA and its members represent millions of policyholders in South Africa and in order to assess the impact of the proposals and offer constructive comment, the LOA garnered opinions from wide-ranging sources within the medical schemes, long-term insurance, short-term insurance industry and others within the business community.

The consensus of opinion is that the wording of the Bill is unclear in many places and in addition, there are aspects that cannot be properly assessed since they depend on additional regulations, as yet to be disclosed and at the discretion of the Minister of Health. While it is practical for Parliament to confer particular powers on a functionary in this way, the manner in which those powers are to be exercised must be entrenched in legislation, along with guidelines. Crucial guidelines are absent from the Medical Schemes Act in general as well as in the proposed Bill.

In the past, the LOA has offered to assist the Department of Health with the formulation of policy and legislation prior to gazetting and reiterates that this is a model far more likely to arrive at practical and acceptable proposals. The LOA notes with concern that the Department of Health continues to decline the invitation to make use of the services of qualified professionals with in-depth industry knowledge and continues to operate in isolation. The previous modus operandi of the Department suggests that the intention is to once again manipulate legislation through parliament without due consideration of severe financial implications.

The concern of the LOA is that the Department of Health has issued the Bill, with no prior warning, and insufficient explanation as to allow comprehensive comment and will now introduce a Bill without significant changes and claim that industry-wide consultation has taken place.

The Bill is presented on the premise that the Medical Schemes Act is achieving the policy of broadening access and reducing the cost of private healthcare. This is in fact incorrect and the reality is that most medical scheme members are seeing cost of coverage increase significantly above the growth in their salaries and consumer inflation and are therefore being forced to reduce their level of medical scheme coverage.

The reduction in coverage has the negative impact of reducing access to benefits thereby achieving the exact opposite effect of the current policy goals.

The LOA also notes a number of Constitutional violations within the Bill, particularly in the areas of reinsurance and waiting periods.

The LOA nonetheless offers the following specific comments on the Medical Schemes Amendment Bill.

The current Act limits what qualifies as a complaint for purposes of the Act, as follows:

"complaint" means a complaint of a complainant relating to the administration of a medical scheme, the investment of its funds or the interpretation and application of its rules, and alleging -

• that a decision of the medical scheme or any person purportedly taken in terms of the rules was in excess of the powers of that medical scheme or person, or an improper exercise of its powers;
• that the complainant has sustained or may sustain prejudice in consequence of the maladministration of the medical scheme by the medical scheme or any person, whether by act or omission; that a dispute of fact or law has arisen in relation to the medical scheme between the medical scheme or any person and the complainant; or that an employer who participates in the medical scheme has not fulfilled its duties in terms of the rules of the medical scheme, but shall not include a complaint which does not relate to a specific complainant"

The Bill proposes to replace this definition with the following definition:

"complaint means a complaint of a complainant against any person required to be registered or accredited in terms of this Act, or any person whose professional activities are regulated by this Act, and alleging that such person has - acted, or failed to act, in contravention of this Act; or acted improperly in relation to any matter which falls within the jurisdiction of the Council".

It is not clear whose activities are to be regulated or what the intention is behind this altered definition. Professional persons such as doctors, auditors and actuaries are already bound by the codes of conduct of their professions and the Act surely does not aim to regulate their professional activities. ‘Brokers’ fall into the category of people required to be accredited, but their activities are also separately regulated and therefore subject to complaint against negligence.

3. Conditional Selling

We support the need to regulate market conduct appropriately in this regard making non- medical scheme business as a medical scheme, is clearly inappropriate.

However with regard to sections 21A (2) and (3), this attempt to outlaw conditional selling of non-medical scheme products in this regard we believe it to be the appropriate legislative change to make. In so doing though certain wording is too vague to ensure compliances.


Specifically the term "indirectly conditional" is unnecessary since the sale either is, or is not conditional. Furthermore with regard to 21A (3) it is unclear as to who will be in a position to adjudicate whether a medical scheme has acted in such a manner so as to create the impression that membership of such a scheme is conditional upon an applicant purchasing any other product or service provided by a non-medical scheme. Again, either it is conditional to purchase a product with a medical scheme or it is not.

4. Conditions for Continuation Membership

It is proposed that sections 29(1) (s) and (t) be amended to remove the provision which allows for conditions for continuation membership to be prescribed by way of regulation. The regulations at present allow a scheme to specify a qualifying period of up to five years before a member who retires or a dependant of a deceased member may qualify for continuation membership. These provisions still date from the previous Medical Schemes Act where a scheme could refuse membership. In an environment with guaranteed access and open enrolment, where, in an open scheme, a member or dependant of a deceased member can simply apply to be registered as a member and the scheme will have to accept him or her, there is no need to remove the provision which allows for conditions for continuation membership which is relevant to restricted schemes. Depending on the circumstances, a commercial scheme can at best impose a waiting period or exclusion for a specified period.

The impact of this proposal is that restricted membership schemes will not be allowed to stipulate conditions for continuation – they would have to comply with the same provisions as open schemes. If the intention is to force closed schemes to offer continuation, then this would mean by implication that employers, (the funders of most restricted schemes) would have to account for this post retirement provision – either by means of a pre-funding vehicle, or via their balance sheets. The logical upshot of this is a straightforward disincentive to employers to offer medical scheme coverage even for active employees.

If such a measure is contemplated, the full financial impact must first be analysed and should be disclosed to and discussed with those who will be affected – primarily employer and employee representative bodies.

Section 29(3)(c) of the Act allows schemes to impose waiting periods to applicants who have not been members of another medical scheme for a continuous period of at least two years prior to application (with some additional provisos). The Bill proposes instead, that a medical scheme may not impose any waiting periods except as may be prescribed by way of regulation.

The protections contained in section 29(3)(c) are of critical importance in preventing ‘scheme-hopping’ and maintaining the financial viability of medical schemes. If members are allowed to join a low cost (low benefit) scheme when they are healthy and then move to a high cost (high benefit) scheme only when sick, then the entire principle of cross-subsidisation through community rating is undermined. The net effect is that the schemes that cost more because they offer the best benefits will be most attractive to members who will inevitably claim more than they pay.

The defence for schemes then, would be to either increase premiums or decrease benefits - exactly the opposite of what the legislative environment should be trying to create, namely reducing cost (premiums) and increasing benefits, the exact opposite of the stated policy goods with the ultimate impact being standard medical scheme products lending to prescribed minimum benefits.

The Bill does allow for waiting periods on transfer between schemes, but only as prescribed in regulations with the provision that these regulations must take "into account the need to reasonably protect medical schemes against adverse schemes". This statement is wide-ranging and vague. While there is no indication as to what these regulations might be, previous attempts by the Minister of Health/Council of Medical Schemes in regulating on exactly this issue have been universally rejected by the industry and have even led to the initiation of legal action. The attempts by the Minister of Health in changing regulations have ignored the current member behaviour patterns experienced by schemes due to the wide of range of benefits option currently available.

Given the track record of the Department of Health in this regard, to now suggest that the right to regulate in this fashion be gained in regulation cannot be supported in any way.

Section 36(2) of the Act makes the appointment of an auditor subject to the approval of the Registrar. It is proposed that this power be further extended to allow the Registrar to prescribe conditions as he may deem fit. Section 36(3) already disqualifies certain persons from being appointed as the auditors. It is proposed that the disqualification be extended to include any person who is an employee or officer of the scheme and any person who is an employee or officer of the administrator, or of the holding company, subsidiary, joint venture or associate of the administrator. It is unclear as to why the authorities deem it necessary that these further restrictions be legislated as the appointment of an auditor is already subject to the approval of the Registrar. Furthermore, in principle it should be accepted that any person acting in their professional capacity, in providing services to a scheme, is already governed by the strict codes of their professional body and also by the onerous impositions of existing medical schemes legislation all of which clearly overrides any other affiliation that such a person might have. Given the potential consequences of any willful misconduct or misrepresentation, such restrictions are patently unnecessary.

The Bill provides for the insertion of subsection (6) to section 37 of the Act. In terms of the subsection the Registrar is empowered to require "the board of trustees to prepare and furnish him with financial statements, in any specified medium or format, at such intervals as he may deem necessary". As stated in the long title to the Bill, the purpose of the amendment is to provide for more frequent submission of returns to the Registrar. Once again it is impossible to provide appropriate comment as it is not known what is intended. The proposed changes do have the potential to significantly increase the administrative burden on schemes and administrators, especially if schemes are to submit these financials in the electronic format as was required for the annual financial statements. And it will certainly push up the administration costs of schemes.

8. Restrictions as to who may be a member of a Board of Trustees

The Bill proposes to extend the restrictions in section 57(3) as to who may be a member of a board of trustees. In addition to a director or employee of the administrator, the section also disqualifies the principal officer of the scheme and also any person who as part of his business provides a service or advice in respect of the introduction of prospective members to that medical scheme.

The Medical Schemes Act already specifies that all trustees must be ‘fit and proper’ and lays down guidelines as to what this means. The unilateral exclusion of these additional categories of persons precludes many schemes from utilising the services of qualified professionals associated with their organisations who are the most ‘fit and proper’ candidates for trusteeship. Since these persons are already governed by the existing conditions within the Medical Schemes Act, and by virtue of their membership to established professional bodies, all of which have entrenched codes of conduct with severe penalties for misconduct, there is no reason to disqualify them as trustees, merely by virtue of any association they might have with the administrator.

9. Restricting who may be a principal officer of a scheme

The Bill introduces a new subsection (7) under section 59 of the Act. The subsection provides that no person may be the principal officer of a medical scheme if such a person is associated in any way with the administrator or is a broker.

The need for legislative interference in who may be appointed as principal officer must be questioned. As stated before, a Board of Trustees has fiduciary duties towards a scheme. In terms of its fiduciary duty it is up to the Board to ensure that it appoints an appropriate person to the position of principal officer. Specifying categories of persons who are disqualified implies that persons not falling within the specified categories do qualify. The issue is not, however, who falls within or without the specified category. The issue is whether or not the principal officer can act in the best interests of the scheme and without a conflict of interests. The fact that an advisor to the scheme does not fall within one of the specified categories does not mean that there will not be a conflict of interest. And the fact that a person is associated with an administrator does not mean that there will be a conflict of interest.

In the final analysis, the principal officer is accountable to the Trustees. And it is the duty of the Trustees to ensure that the principal officer fulfils his duties accordingly and without a conflict of interest. If the Trustees are not able to or fail in fulfilling their duty, the Act already provides for a number of ways to address the problem.

The Act at present only contains provisions relating to the compensation to be paid to brokers for the introduction of members. This does not, however, prevent a scheme or administrator from paying brokers fees for other services. The Bill proposes to extend the restrictions that may be imposed to also cover ongoing services provided by brokers to a scheme.

The long-title of the Bill makes it clear that the intention is "to limit the purposes for which medical schemes may compensate brokers and provide for the regulation of their professional conduct". The proposals are inadequate even for that intention, and the intention itself is questionable.

The definition of broker refers only to a person who provides "a service or advice in respect of the introduction of prospective members". The definition does not recognise that brokers also provide services and advice to existing members, i.e. not only in respect of prospective members. To deliver on the intention in the long title, the definition would have to be extended to include persons providing service and advice in respect of existing members.

The current provision in the regulations that commission may only be paid for the first year for the introduction of members, provides a perverse incentive to brokers to move members on a regular basis. Any changes should make provision for neutralising this perverse incentive for the retention of members in a scheme.

In addition, provision is made for the Minister to make regulations relating to the professional conduct of brokers and the conditions under which brokers may provide professional services to, or on behalf of, a medical scheme, beneficiary or any other person. The impact of this will depend on what is contained in the regulations.

However, the LOA does not accept that the Department of Health/Council for medical schemes should be regulating Financial Advisors in the first instance.

Cabinet has recently approved the draft Financial Advisory and Intermediary Services (‘FAIS’) Bill, after extensive consultation by the Policy Board for Financial Services and Regulation, as well as the Financial Services Board. The Portfolio Committee of Finance has recently had a hearing regarding the "FAIS" Bill and it is expected to be enacted in 2002. The Bill attempts to regulate advice and intermediary services in general, in respect of a large range of financial products. In terms of the Bill, all financial services providers are to be licensed and professional conduct will be controlled through codes of conduct and enforcement measures.

We would once again caution against duplicating such a regulatory measure and would suggest that holistic market conduct regulation in terms of a single statute and regulator will offer meaningful consumer protection, in contrast to fragmented and ad hoc regulatory interventions by a multitude of regulators. Since many Financial Advisors offer their services in respect of Medical Schemes as well as the other Financial Services products as governed by the FAIS Bill, all regulations within the Medical Schemes Act relating to broker services and commissions are at best a duplication, a definite complication and most likely not in the interests of members and consumers in general.

It is of great concern to the LOA that aspects relating to the regulation of Financial Advisors on health related matters were taken out of earlier drafts of the FAIS Bill at the request of the Department of Health and that this was done without any consultation within the industry.

This again raises the question as to why the authority over the financial aspects of medical schemes should rest with the Department of Health, when there is already a formally constituted body within government structures to deal with these matters. Financing for healthcare, be it in the private or public sector, is a financial issue and not a health issue and as such belongs under the preserve of the Department of Finance and the Financial Services Board.

The Bill proposes that the requirements for managed health-care contracts are to be prescribed by regulation. This appears to legitimise the current regulations that already contain provisions relating to the requirements for managed health-care contracts.

However, the LOA disagrees with the intervention of the Council/Registrar in managed care arrangements in their entirety.

The proposed amendment is assumed to be to protect schemes against Managed Care arrangements that are not in the best interests of members. The method by which the authorities wish to achieve this, however, cannot be supported. The trustees of a medical scheme are charged by the Act to manage the affairs of the scheme. In doing so they have a fiduciary duty to fulfil, failing which, they can jointly and severally be held liable for any damages suffered by the scheme through their negligent or fraudulent actions.

The proposed amendment will remove the decision-making power relating to Managed care arrangements from the trustees and bestow it on the Registrar who has no fiduciary duties to members of medical schemes. The Registrar, however, is not charged with managing the affairs of medical schemes. He is the executive officer of the Council for Medical Schemes and together with the Council fulfils an overseeing/regulatory function in respect of medical schemes.

The Bill proposes to empower the Minister to make regulations relating to penalties to be applied to an administrator who fails to pay any benefit as provided for in section 59(2) of the Act.

In theory, only a medical scheme can ‘pay’ a claim, but if it is assumed that the intention is to allow action against administrators who are negligent, then two aspects require clarity:

The Medical Schemes Act already specifies that medical schemes must enter into formal agreements with administrators – presumably these agreements make provision for penalties in case of non-payment or late payment.

If these terms are to be regulated, will there also be provision for early payment incentives.

If the intention is to allow the Registrar/Council to impose punitive penalties on administrators, then the rationale is unclear and requires clarification.

In any event, in the absence of any explanations and until such time as the regulations pursuant to this proposal are promulgated, the exact impact and how this is to be managed in practice cannot be determined.

The LOA strongly disagrees with the principles underpinning the proposed regulation of reinsurance as provided for in the Bill, considers the regulations as unworkable and highly unlikely to achieve their stated aim.

The LOA’s membership is regulated by the Financial Services Board (the "FSB") and provides considerable risk capacity to South African medical schemes.

The provisions of the Bill severely threaten the ability of reinsurers to continue to provide attractively priced reinsurance capacity to medical schemes. The regulations will not achieve the stated aim of preventing inappropriate reinsurance by medical schemes. Instead the Bill as worded will ensure that all reinsurance by medical schemes will be deemed inappropriate.

The medical scheme environment is an unstable one where many medical schemes are facing uncertain future claims experience. The financial muscle of the reinsurance sector is available to provide financial certainty to medical schemes. The Bill will lead to the withdrawal of significant reinsurance capacity from the medical scheme marketplace.

This can only lead to further deterioration of the ability of the medical schemes industry to provide healthcare benefits at an affordable and predictable price.

The Explanatory Memorandum explains the need for reinsurance regulation "… has arisen from widespread abuse of reinsurance since 1996, resulting in significant losses to medical schemes."

The LOA does not agree that widespread abuse of reinsurance has happened. Equally the LOA does not condone any abuse of reinsurance.

The LOA fully supports the principle that appropriate reinsurance contracts are entered into by medical schemes. The reinsurance contracts must be in the interests of members and demonstrably so.

However, the LOA does not agree that this principle will be achieved by granting the Registrar the powers to approve each individual Reinsurance contract with a medical scheme.

The principle of granting this power to the Registrar is flawed on the following grounds:

1. The responsibilities of the trustees of a medical scheme to manage the medical scheme in the best interests of the members are now subordinate to the Registrar. This undermines the entire thrust of the Medical Schemes Act where the role of the trustee is paramount in protecting the interests of the members.
2. The nature of regulation envisaged provides for micro management of the reinsurance environment within the medical schemes industry. Micro regulation is expensive and ineffective and is not considered to be best practice either within South Africa or globally.

3. The principle of granting Regulatory powers to the Registrar regarding reinsurance will result in duplication of regulation. The reinsurers are already subject to the regulation of the FSB. The infrastructure to regulate financial services companies already exists within the FSB. It is Government policy to ensure that rational demarcation of duties exists between the various government bodies. This Bill does not follow said policy.

This section explains these problems and proposes alternatives where possible.

1. "A reinsurance contract …. is not valid.. unless… it complies with any condition which may be prescribed."

This clause gives the Registrar carte blanche to apply any conditions he/she feels appropriate on approval of each contract and over time. The effect will be to create considerable uncertainty in the reinsurance marketplace as to what will and will not be an acceptable reinsurance contract. The potential then for arbitrage to exist between reinsurers will exist according to each reinsurer’s knowledge of the Registrar’s thinking.

The LOA proposes that this clause be removed and replaced with: "Guidance as to what constitutes appropriate reinsurance will be published by the Regulator from time to time as market practice evolves. This guidance will be published following a consultative process with stakeholders including reinsurers."

2. Section 20 Sub Clause 5b part ( i ) conflicts with Section 20 Sub Clause 5b parts (ii) to (v). The intention of this sub clause is to ensure the independence of any expert opinion on the appropriateness of a reinsurance contract.
   

The conflict arises as the level of independence sought by the Bill is virtually impossible to achieve. The Bill ignores the practicality that there is an extreme scarcity of such experts in South Africa. Any independent consultants already providing advice to medical schemes will be prevented from providing an independent report to the Registrar. These consultants are best placed to review any reinsurance contracts proposed.

The LOA accepts that employees of Reinsurers have a direct conflict of interest and should not provide independent Reports.

The LOA proposes that Section 20 Sub Clause 5b parts (ii) to (v) be deleted. Instead the Registrar should rely on the requirements of professional bodies for their members to manage issues of independence. A certification process for acceptable experts can be implemented as required, either by the Registrar or a professional body such as the Actuarial Society of South Africa.

In the case of the actuarial profession, the Actuarial Society of South Africa is in the process of drafting a detailed guidance note for its members with regard to the provision of Reports on reinsurance contracts with medical schemes. It is the LOA’s understanding that this guidance explicitly deals with the need for members to be appropriately qualified and independent. A disciplinary process also exists where the professional guidelines are not followed.

3. Section 20 Sub Clause 7 effectively declares all reinsurance contracts to be inappropriate. The LOA assumes that this is not the intent of the Bill.

For example, the requirement that "the reinsurance contract will not adversely affect the accumulation of reserves" mitigates against all reinsurance contracts. The nature of reinsurance is such that reinsurers accept risks that are reinsured. As part of this contract, the reinsurer makes financial provision (sets up reserves) for its share of the risks reinsured. It is obliged to do so by regulation and for the prudential management of its business. The medical scheme can reduce the reserves it needs as a result of reinsuring.

The intent of the clause is presumably to prevent a reinsurance contract being entered into that undermines the financial stability of a scheme.

The LOA proposes that this risk be managed by issuing appropriate guidance, either directly or via an appropriate professional body (such as ASSA) rather than attempting to define appropriate reinsurance in broad and subjective terms.

4. Further practical hurdles arise as follows:

• There is no obligation on the Registrar to decide on a timeous basis whether a reinsurance contract is approved or not. In the event of months elapsing, the reinsurer and the medical scheme concerned must manage the uncertainty. The reinsurer cannot manage this uncertainty and will be obliged to protect its financial security by not going on risk until the effective date of the Registrar’s decision. If the experience of the scheme is adverse during this time, the trustees may pursue damages against the Registrar even where the contract is approved.

• In the event of the Registrar declining to approve a reinsurance treaty, there is a risk that the Trustees of a medical scheme may seek damages from the Registrar in the event of the following experience of the scheme resulting in losses that would have been reduced by the unapproved treaty.

• The transitional arrangements provide for a period of six months grace (to 30 June 2002) where existing reinsurance contracts may continue without approval. There is a strong risk of creating further uncertainty in the medical scheme environment where reinsurance contracts may potentially become invalid half way through the benefit year.

14. Conclusion

In conclusion, given the current status of the medical schemes environment, and the fact that the Medical Schemes Act is not meeting its stated policy objectives, the LOA repeats its strong recommendation that the Department of Health enters into dialogue with all interested parties in a transparent constructive and collaborative spirit, to achieve the aim of increased access and reduced cost of medical scheme coverage.

19 October 2001

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