Discussion of proposals by Ms Kalyan to amend the Medical Schemes Act and Patents Act

The proposed amendments recommend the introduction of compulsory licensing for non-commercial use of patented articles, as well as for compulsory licensing in the case of a national emergency. The proposed amendments essentially seek to enhance existing provisions in the Patents Act and to promote easier access to the mechanisms contained in the Act by way of introducing an administrative procedure rather than the judicial process currently in place.

It is the view of the Department that the Patents Act currently provides for the State to access patented articles in three different provisions:

1. Section 4 of the Act provides that a Minister of State may use an invention for public purposes on terms and conditions agreed upon with the patentee. The section stresses that if agreement cannot be reached between the patentee and the State, a Commissioner of Patents (a Judge of the High Court) may grant permission to use such invention on terms and conditions determined by him or her.
2. Further provision is also made in Section 56 of the Act for the issuance of compulsory licenses under certain circumstances. The honourable member pointed out the limitations pointed of these circumstances in her submission.
3. Finally, section 78 provides that a Minister may acquire any invention or patent on such terms and conditions, as may be agreed upon.

Thus, the Patents Act currently provides various mechanisms by which the State may acquire the rights or the technology to produce goods for public purposes, essentially the same as for non-commercial purposes. While only Section 56 makes reference to compulsory licensing, the other two provisions give the State broader, more general access to patented rights, arguably more useful than the limited application of compulsory licensing. As such, the Act is already in line with Article 31 of the TRIPS Agreement. Furthermore, the proposed amendments, therefore, do not represent a departure from current policy, but rather in the duplication of policy already contained in the Act.

The process by which rights may be acquired by the State involve a Commissioner of Patents (a Judge of the High Court) in all three provisions. This process, it is averred, is cumbersome and costly, which the Department concedes may be the case. However, the alternative proposed is problematic from a number of perspectives.

Firstly, it is proposed that the Board of Trade, which it is assumed is a reference to the Board of Trade and Tariffs (BTT), fulfill the function of adjudicating whether a patent right can be acquired in the case of a dispute and sets a fair price for the use of such rights. The BTT is the body that evaluates anti-dumping claims and that regulates the implementation of tariffs. It is not clear from the honourable member's motivation why this would be an appropriate administrative body. Furthermore, in the new legislation that will create a Commission for International Trade Administration (CITA) in the place of the BTT, it is envisaged that CITA will have a wider role in Southern Africa. It is thus questionable whether a body with transnational responsibility for anti-dumping actions should be tasked with the adjudication of compulsory licenses for patented rights.

Secondly, taking the decision about the remuneration for the use of patented rights away from the courts in cases where there is no agreement will not ensure that matters are addressed outside of court, as they will almost certainly be referred to the courts on appeal or review. In essence, therefore the introduction of an administrative procedure may only result in further prolonging of disputes. Furthermore, it is questionable whether a body that forms part of the State should adjudicate matters in cases where there is a dispute between the State and a third party.

The Patents Act does not currently provide for the compulsory licensing of patent rights in cases of national emergency. The term "national emergency" is not defined in the proposed amendment and would therefore revert to the provisions in the Constitution on national emergencies. In terms of the Constitution, a (State) national emergency may be declared for a maximum of 21 days and may be extended only 3 times. The 84 days provided therefore through the Constitution would not yield any benefits to the State. Thus, the introduction of a provision on national emergencies may be of little practical use.

The Department is currently involved in preparations for the next round of WTO negotiations. The TRIPS Agreement is one of the aspects that will be negotiated. The recent DOHA Declaration provides that member states of the WTO should implement strategies, policies and laws that promote access to health. However, the exact nature of these efforts still needs to be negotiated and may result in changes to the TRIPS Agreement that can be implemented once negotiations have been concluded. Efforts to implement changes in line with the DOHA Declaration would be premature at this point in time. Furthermore, the provisions relating to parallel importation in health legislation needs to be implemented and may be of greater use than the introduction of further compulsory licensing provisions in the Patents Act.

In conclusion, therefore, it is the view of the Department that the proposed amendments would result in unnecessary duplication of provisions currently contained in the Act, that there are provisions that would be more easily implemented rather than resorting to the declaration of a national emergency and, finally, that the proposed amendments may undermine the position of South Africa in WTO negotiations. The Department, however, acknowledges the concern by the honourable member that access to patented rights through the courts may be a complex and costly process and will examine this concern within a broader review of the Patents Act and research that is being conducted on compulsory licensing in other jurisdictions.

Appendix 2:
6/10/2002
The Director-General: Health
Fax: 012-323 0093

Dear Dr Ntsaluba

PROPOSED AMENDMENT TO MEDICAL SCHEMES ACT: PRIVATE MEMBERS' BILL

The Standing Committee on Private Members in the National Assembly has proposed an amendment to section 29(1) of the Medical Schemes Act, which allows medical schemes to offer a discounted contribution rate to members who retire from employment due to retirement age or ill-health. This discounted rate would continue to be applied to the member's spouse on the death of that member.

1. Such arrangement would at present be inadmissible under the Medical Schemes Act, which allows for premiums to be differentiated only on the basis of income or number of dependants (section 29(1)(n)).
2. The proposed amendment can regrettably not be supported, for the following reasons:
1. The proposal shifts post-retirement liability for medical expenditure from the employer to the medical scheme. Post-retirement provision for medical expenditure is an employee benefit, and the appropriate avenue to correct declining provision being made for this by employers is through labour relations legislation rather than through placing additional financial burden on medical schemes.
2. A medical scheme is in the business of receiving contributions, and paying claims (short-term liabilities) - and is not designed as a vehicle for prefunding post-retirement liabilities. The appropriate vehicles for putting away funding to meet future liabilities of this nature are through a range of annuity or insurance vehicles which are available to employers, which can then be used to pay contributions of retirees to medical schemes.
3. Permitting schemes to apply discretion as to application of a discounted rate for retires opens new avenues for indirect discrimination, in the sense that it is possible that the non-application of such discounted premiums to certain persons could be used to discriminate against people with poor risk profiles.
4. The financial implications of this proposal for schemes and the industry as a whole have not been assessed to determine the impact of this proposal on the contributions of younger members - and the consequent potential impact on enrolment and drop-out of younger members from the medical schemes environment (and the resultant impact on capacity for cross-subsidisation within the industry).
3. Nevertheless, the identified issue of declining provision for post-retirement medical expenses of employees is a critical issue, and it is recommended that the opportunities for addressing this through appropriate changes to labour legislation (e.g. Basic Conditions of Employment Act or the Labour Relations Act) be fully explored.

1. Your letter dated 11 June 2002 refers. Thank you for the opportunity to comment on this proposal.
2. The intentions behind this proposal are meritworthy, in that they seek to address the financial difficulties experienced by pensioners in maintaining medical scheme coverage after retirement. This issue is becoming of utmost concern given the trend over recent years among employers to terminate post-retirement benefits of their employees.
3. Whereas previously employers typically provided medical aid subsidies for their employees which extended until after retirement, there is now a growing trend among employers to contain their post-retirement financial liability by providing employees with "total cost to employer" annual packages, which provide very limited employee benefits.
4. In relation to contributions payable to medical schemes, the existing Medical Schemes Act makes no distinction between the employment status of individuals. Medical schemes are only permitted to differentiate premiums on the basis of income or number of dependants - and so are not, for example, allowed to give certain categories of members such as pensioners a discounted rate.
5. If an employer provides a medical aid subsidy to its employees, the employer subsidy and the member's portion together would constitute the total contribution paid to the medical scheme. If the employer terminates that subsidy upon retirement, the member would have to pick up the whole portion.
6. The proposed amendment seeks to allow medical schemes to offer a discounted contribution rate to members who retire from employment due to retirement age or ill-health. This discounted rate would continue to be applied to the member's spouse on the death of that member.
7. Although the intentions behind the amendment are supported, the amendment itself can regrettably not be supported by our office, for the following reasons:
1. It shifts responsibility for funding post-retirement liability for medical scheme coverage from the employers, where it really belongs, to medical schemes. Post-retirement provision for medical expenditure is an employee benefit, and the appropriate statutory avenue to correct declining provision being made in this regard is through labour legislation (e.g. Basic Conditions of Employment Act), rather than placing additional financial burden on medical schemes.
2. A medical scheme is in the business of receiving contributions and paying claims (short-term liabilities) - and is not designed as a vehicle for prefunding port-retirement liabilities. The appropriate vehicles for putting away funds to meet future liabilities of this nature are through a range of annuity vehicles available to employers, which can then be used to pay contributions of retirees to medical schemes.
3. Permitting medical schemes to apply discretion as to application of a discounted rate for retirees (as provided in the proposed amendment) opens new avenues for indirect discrimination, in the sense that it is possible that the non-application of such discounted premiums to certain persons could be used to discriminate against people with poor risk profiles.
4. The financial implications of this proposal for medical schemes and the industry as a whole have not been assessed, but could potentially be significant. For example, it could result in further inflation of contribution rates for younger people, which could lead to lower enrolment of young persons and increased drop-out of younger members from medical schemes. This could result in destabilization of the environment, as the potential for cross-subsidisation (crucial for the stability of medical schemes) could be undermined.
8. Nevertheless, the identified issue of declining provision for post-retirement medical expenses of employees is critical - and it may be appropriate to suggest a joint process between Health and Labour to identify potential solutions to this problem, including possible amendment to legislation concerning employee benefits.

I trust that this will be of assistance to you.

Kind regards

Stephen Harrison

HEAD: RESEARCH AND MONITORING