Supply Chain Management Regulations under MFMA: Draft Amendment; Regulations on demarcation between health insurance and medical schemes: National Treasury briefings

NCOP Finance

15 February 2017
Chairperson: Mr C De Beer (ANC, Northern Cape)
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Meeting Summary

The National Treasury briefed the Committee on the Amendment to Supply Management Regulations under the Municipal Finance Management Act. Two amendments were made – to the definitions, and to regulation 44 that relates to the awarding of tenders by municipalities. The latter regulation said that the Supply Chain Management policy of a municipality must state that no tender may be awarded to a person who is in the service of the state. This had formerly been defined to include a member of the accounting authority of any national or provincial public entity. However, the inclusion in that definition of a non-executive director of a national or provincial public entity had been challenged in the matter of Schneider Electric (Pty) Ltd v Minister of Finance & Others. It was decided that there was no rational reason for prohibiting a person who holds a non-executive director post from participating in municipal tenders as it was highly unlikely that they could influence the tender process. The Committee was satisfied that the draft amendment was in order and would recommend its approval.

The second discussion related to the regulations giving effect to the demarcation between health insurance and medical schemes. No decision was required since the Committee was still waiting for a reply from the Minister of Finance on issues raised by Day1 Medical Insurance. It was explained that the demarcation regulations were necessary to address the various challenges within the medical schemes and health insurance regulatory environment. This was to be done mainly through clearly demarcating the responsibilities of medical schemes and insurance products, and by ensuring that health insurance products do not undermine the social solidarity principles inherent in medical schemes. The new regulations also seek to address market conduct abuses to ensure affordability and accessibility of medical cover especially by vulnerable groups in society. They essentially covered three categories of health insurance: medical expense shortfall policies, non-medical expenses cover as a result of hospital policies (Hospital cash plans) and primary healthcare insurance policies, generally offered as part of employee groups or bargaining councils. Some other types of insurance products were briefly outlined. It was stressed that social solidarity was important to ensure that medical schemes will survive. Health insurance on a large scale requires cross-subsidisation, where the young subsidise the old and the healthy subsidise the sick. If this does not happen, a situation may ensue whereby the young do not join up until they get old and the healthy do not join up until they get sick, which will run the risk that insurance companies may go out of business. Late-joiner penalties serve as a deterrent against this situation. Some of the challenges were described and it was noted that National Treasury supported the Competition Commission inquiry into private healthcare costs. The regulations were expected to come into effect on 1 April. New contracts would have to be immediately compliant, but existing policies would have to comply on the date of their renewal or variance. Questions by Members emphasised the need for communication, whose responsibility if would be to carry out the education function, how this was likely to affect voluntary joining of medical schemes, the high costs, which the medical schemes had to absorb, and whether the imposition of late-joiner penalties was fair. The need for a national health scheme to meet the affordability challenge was stressed, and Members asked if retirees would still need to contribute to their funds. The Parliamentary Legal Advisor noted that Parliament’s role with regards to the Long and Short Term Insurance Act regulations was to scrutinise, but not approve and to report back to the House, which would be expedited.

 

Meeting report

Amendment to Supply Chain Management Regulations in terms of Municipal Finance Management Act (MFMA): National Treasury briefing
Advocate Empie van Schoor, Chief Director: Legislation, National Treasury, took the Committee through the presentation on the Amendment to Supply Chain Management Regulations under the Municipal Finance Management Act. She noted that two amendments were made. These were the definitions, and regulation 44 that relates to the awarding of tenders by municipalities.

Regulation 44 of Municipal Finance Management Act dealt with the Supply Chain Management Regulations of 2005. The Supply Chain Management policy of a municipality must state that no tender may be awarded to a person who is in the service of the state.

Regulation 1 defines “in the service of the state” to include a member of the accounting authority of any national or provincial public entity

She explained the reason for the amendment now to be made. The inclusion in that definition of a non-executive director of a national or provincial public entity had been challenged in court, in the matter of Schneider Electric (Pty) Ltd v Minister of Finance & Others. At that time, regulation 44 had prohibited the director of the company, who was at the time also a non-executive director of a national public entity, to tender for the work of a municipality.

Adv van Schoor stated that Senior Counsel advised that there is no rational reason for prohibiting a person who holds a non-executive director post from participating in municipal tenders. Thereafter National Treasury decided to initiate a process to amend the definition “in the service of the state” to specifically exclude this requirement in relation to non-executive directors of national/provincial entities, with the Minister of Finance’s approval.

Discussion
The Chairperson commended the presentation, noting that it was straightforward. The task ahead for the Committee Members was now to go back to their constituencies and see to it that the amendment is implemented and complied with.

Mr F Essack (DA, Mpumalanga) sought some clarity on Regulation 1 (see presentation). He asked whether the company that does work for a government department can be allowed to tender for work of a municipality.

Adv van Schoor replied that there was no such prohibition. The previous regulation stated that a company with a director (executive or non-executive) who is also a director of a national or provincial public entity was not allowed to tender at municipal level. However this was irrational, as it is difficult to pinpoint how a non-executive director can influence the tender processes at municipal level.

The Chairperson summarised the view of the Committee – that the draft amendment be recommended for approval.

Regulations giving effect to demarcation between health insurance and medical schemes: National Treasury briefing
The Chairperson introduced the second matter, which would speak to the demarcation between health insurance and medical schemes. He noted, however, that the Committee would merely listen to the briefing but no decision was to be made, as the Committee was still waiting for a reply from the Minister of Finance on issues raised by Day1 Medical Insurance.

Dr Reshma Sheoraj, Director: Insurance, National Treasury, and Mr Ismail Momoniat, Head: Tax and Financial Sector Policy, National Treasury, took the Committee through the attached presentation on regulations giving effect to the demarcation between health and medical schemes. They outlined the scope of demarcation regulations and the background to drafting of demarcation regulations.

The demarcation regulations (the Regulations) are intended to balance policy objectives across the medical schemes and the insurance sector and seek to prevent regulatory arbitrage.

The Regulations specify which type of contracts are regulated under the Long-Term Insurance Act (LTIA) and Short-term Insurance Act (STIA), as health policies, and accident and health policies respectively, and accordingly are excluded from the Medical Schemes Act, despite the fact that such contracts do meet the definition of the business of a medical scheme.

The Regulations seek to clearly demarcate the responsibility for supervision of medical schemes and health insurance products, and ensure that health insurance products do not undermine the social solidarity principle inherent in medical schemes.

The Regulations also seek to address market conduct abuses to better protect customers.

Three categories of health insurance products are of particular relevance to the demarcation regulations, namely:

- Medical Expense Shortfall policies (Gap cover plans): these policies cover the shortfall between medical scheme benefits and the rates that private medical service providers may charge.
- Non-medical expenses cover as a result of hospital policies (Hospital cash plans): These policies pay out a stated benefit upon hospitalisation, usually per day spent in hospital. The stated benefit is unrelated to the actual cost of any medical service as it is aimed at covering incidental costs, such as loss of income.
- Primary healthcare insurance policies: these policies provide limited medical service benefits (often to employee groups or bargaining councils) including services such as general practitioner visits, acute and chronic medication, emergency medical care, dentistry and optometry.

Other types of insurance products included: lump sum/income replacement policy; cover for frail care; HIV/AIDS; emergency evacuation or transport, motor car third party liability cover and property third party liability cover; international travel insurance.

Mr Momoniat stated that social solidarity was important to ensure that medical schemes will survive. Health insurance on a large scale requires cross-subsidisation, where the young subsidise the old and the healthy subsidise the sick. If this does not happen, a situation may ensue whereby the young do not join up until they get old and the healthy do not join up until they get sick, which will run the risk that insurance companies may go out of business. Late-joiner penalties serve as a deterrent against this situation.

Dr Sheoraj noted the main challenges in medical schemes (see presentation for full details). The main concerns are the unaffordability to middle income groups and inaccessibility to poor and vulnerable groups. National Treasury supports the Competition Commission inquiry into high private health care costs that is currently under way, as a means of addressing these challenges.

Dr Sheoraj noted that the Medical Schemes Act first came into effect in 1998 and has not been reviewed or amended, and there was now a need for new regulations to keep pace with the changes in the medical schemes environment since then.

Mr Paresh Prema, General Manager: Benefits Management, Council for Medical Schemes, noted the importance of the regulations as they will ensure that consumers are not misled into getting packages that do not give them credible cover. The demarcation regulations define medical schemes and health insurance products clearly.

Dr Sheoraj highlighted that the regulations will take effect on 1 April 2017.
She explained further that:
- All new health policies (Long-Term Insurance Act) and accident and health (Short-Term Insurance Act) policies written after the Regulations come into operation must comply with the requirements set out in the Regulations.
- Existing health policies (LTIA) will be expected to align to the Regulations as and when such contracts are varied or renewed after the Regulations come into operation.
- Existing accident and health policies (STIA) will be expected to align to the Regulations by 1 January 2018.

Mr Momoniat emphasised the need for communication so that people are aware of what they are covered for in terms of the demarcation between health insurance and medical schemes.

Discussion
The Chairperson asked whose responsibility it was going to be to carry out the education exercise to make the public aware of the demarcation regulations, especially in rural areas.

Mr Momoniat responded that both the health and financial services sectors will have to come together to educate and make the public aware of the new regulations. The Financial Services Board has an education component and the Board will make sure that it is fully functional to carry out its mandate effectively.

Mr T Motlashuping (ANC, North West) commented that the presentation was an eye-opener. However, he wanted to know to what extent the regulations were going to affect voluntary joining of medical schemes.

Mr Momoniat replied that the public may have a limited choice when it comes to joining medical schemes as some schemes are linked to the employer as part of the basic conditions of employment. Some big companies have in-house medical schemes which employees are expected to join upon assuming employment.

Mr O Terblanche (DA, Western Cape) sought clarity on the issue of choice by the public as to whether to join or not join medical schemes. He asked if the Committee and all stakeholders were going to allow overcharging by medical care providers, in some cases up to 400%, and whether this was merely regarded as part of the free-market system or part of choice. 

Dr Prema replied that overcharging is a challenge for medical schemes as well. Medical schemes have to absorb the costs because whatever medical providers charge, medical schemes end up paying for it. Doctors have no strict guidelines in term of their pricing, save for a flexible tariff guideline put in place in 2010. That is why the Competition Commission is currently looking into the escalating cost of private health care and possible solutions.

Mr F Essack (DA, Mpumalanga) questioned the motivation of having late joiner penalties, as part of the social solidarity principle of open enrolment underpinning medical schemes (see presentation). He asked whether this was fair to the majority of the population. He commented that there was need for transparency to address market conduct problems relating to overly complex products with limited comparability.

Mr Momoniat replied that the motivation was to retain young people in medical schemes. Late-joining leads to medical schemes not having the right mix of individuals to ensure cross-subsidisation, thus limiting the viability and affordability of such medical schemes. However, the Council for Medical Schemes would need to look at this issue more closely, because it could be a huge cost to people if they were continually punished for late-joining.

Mr Prema added that late-joiner penalties were meant to curb anti-selection. They were meant to ensure that people join at a younger age, before age 35, and contribute to the fund. They are also meant to avoid a situation whereby people join medical schemes, for instance, when they are already sick as this becomes a risk to the medical insurer.

Mr F Essack (DA, Mpumalanga) commented that it could then be a question of affordability. He questioned on what basis a person should be penalised with a late-joiner fee if he/she could not afford to be a member of a medical aid before the age of 35?

Mr Momoniat replied that there was need for a National Health Scheme to address the affordability challenge. South Africa, by not having a National Health Scheme, is an outlier in the G20. There would be winners and losers to ensure cross-subsidisation. Schemes would get more and more expensive if there were no late joiner fees to discourage wrong incentives.

Mr Prema noted that the issue of affordability was understood by the Council of Medical Schemes which is the reason why the Council is working on the low-cost and exemption framework as a way of providing cover for the low-income market.

The Chairperson asked if there was anything that could be done with regards to the different schemes and benefits, including whether a comparative study could be done. A further question relate to retirement; would a person who retires need to continue paying monthly premiums?

Mr Momoniat replied that the issue of post-retirement medical cover and how much the former employer is expected to continue contributing, is a big issue. However, in general, retirees are expected to continue paying premiums to ensure that they remain covered.

The Chairperson noted that he had informed the Committee about the way forward and asked for input from Advocate Frank Jenkins, Parliamentary Legal Advisor.

Advocate Jenkins commented that Parliament’s role with regards to the LTIA and STIA Regulations was to scrutinise, not to approve or disapprove those regulations. In terms of procedure, the Committee was required to report back to the House.

The Chairperson further commented that the Committee will do its best to expedite the process.

The meeting was adjourned. 

 

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