Implementation of Medical Schemes Act

Meeting report

HEALTH PORTFOLIO COMMITTEE
12 September 2000
IMPLEMENTATION OF MEDICAL SCHEMES ACT

Relevant Documents:
Slide Presentation by Medical Schemes Council [See Appendix 1 for text outline]
Medical Schemes Act, No. 131 of 1998

SUMMARY
Representatives of the Medical Schemes Council appeared before the Committee to give a report on its activities to date. It outlined its responsibilities, vision and approach, structure and strategic objectives with a slide presentation. It gave special attention to the problem area of "re-insurance", in which a first insurer passes off part of the risk it has taken on to a second insurer. Such contracts can be fraudulent and financially manipulative of the second insurer.

Questions dealing with the complaints process, corruption, public education, the number of medical schemes and the re-insurance problem were answered.

MINUTES
Professor Nick Padayachee, Chairperson of the Medical Schemes Council (MSC), introduced his team and commented that, although the Medical Schemes Act of 1998 was a transitional act and passed very rapidly through Parliament, it was now seen to be an extremely well-written piece of legislation. He noted that it is gender sensitive as well as being sensitive to the geographic distribution of the South African population.

The presentation was delivered by Mr Pat Masobe, First Chief Executive of the Council. He reported on the MSC's key responsibilities, its vision and approach, its structure and its strategic objectives (these are outlined in the attached presentation).

The bottom line is that the MSC seeks to ensure that no insurer can do the business of a medical scheme without complying with the legislation. This leads, obviously, to a complicated debate around how to define the business of a medical scheme, known as the "demarcation debate".

Mr Masobe also discussed the issue of "re-insurance", when the first insurer passes some of the risk to a second insurer. In such an instance, the second insurer can be manipulated financially and many such contracts are not in the best interests of medical scheme members as they can be used to strip profits. The transactions are often not made at "arm's length" and there is a great deal of potential for conflict of interest ie an entity can even enter into a contract with itself(!) The MSC has identified some medical schemes as problematic and these are now under review.

Mr Masobe identified one of the MSC's challenges for the future as revising the prescribed minimum benefits to eliminate discrimination on chronic benefits. This can impact heavily on people who are elderly. The MSC also seeks to introduce risk equalisation to eliminate "cream skimming" and manage incentives to achieve sustainable cost reductions in medical schemes.

Discussion
Dr Jassat (ANC) asked what disciplinary body the MSC had established to deal with corruption from members and service providers. He also asked who deals with complaints.

Ms Baloyi (ANC) asked how many medical schemes are in existence. She also asked the MSC's approach to public education and how new medical schemes are oriented. Finally, she asked for more information on re-insurance, saying it looked like open fraud to her.

Mr Masobe replied there were now 160 schemes operating. In addition, there are 40 previously-exempted schemes that now must come within the ambit of the Medical Schemes Act, which will give a total of 200 schemes under the Act.

As to who will deal with complaints, Mr Masobe said that the MSC had taken a strategic view. They had looked at the complaints they receive and saw that these were mostly from people who had been previously excluded from medical coverage. The MSC uses a sophisticated database for the day-to-day monitoring of complaints.

Dr Siva Pillay of the MSC reminded the Committee that, in terms of complaints, the MSC can only exercise the powers conferred on it by the Act. He underlined that the demarcation debate is important in that the passing of risk by a first insurer to a second insurer can result in discrimination toward sick people. For example, an insurer can try to profit by insuring only people who are young and healthy, and pass off clients who are older or ill to a second insurer.

Ms Esann de Kock, MSC's Communications Manager, spoke to the questions on communication and public education by listing the various ways the MSC looks at public education. She asserted that the MSC has good relationships with media and stressed that this is an important avenue for public education. She said they also have meetings and on-going contact with stakeholders, such as unions and consumer organisations. The MSC keeps a database of principal officers and trustees of medical schemes. It also has a comprehensive website and distributes a quarterly newsletter to all stakeholders. In addition, the MSC subscribes to a media monitoring service, so it is very aware of the portrayal of medical schemes in the media.

Dr Judith Cornell of the MSC team spoke to the question of how medical scheme members are protected. She mentioned the Constitution and governance, noting that the new Medical Schemes Act has stricter rules on governance than in the past as well as tough fiduciary responsibilities. She asserted that trustees must have a proper education since medical schemes are complex and re-iterated that one responsibility of the MSC is to ensure the financial stability of schemes. She remarked that the MSC office used to be small and of a limited capacity and was therefore restricted to a reactive function. Its expanded capacity now allows it to take a more proactive role. She added that the complaints section not only looks at individual complaints but also at the trends that these complaints reveal.

Mr Alex van den Heever, another member of the MSC team, took up the issue of re-insurance. He explained that any contract between a medical scheme and an external party could be re-insurance. If the contract includes collusion, there can be manipulation. Such contracts can range from small ones to corporate strategies in which vast amounts of money are going out and being managed by other entities. These agreements are potentially problematic.

Mr Masobe spoke about accreditation, saying standards will be laid out and followed and that a scheme will have to be accredited before it can be administered.

The meeting had exhausted the time allocated for it and had to be adjourned, although there were still many questions left unanswered.

Appendix 1:

REPORT ON THE ACTIVITIES OF THE COUNCIL FOR MEDICAL SCHEMES - APRIL TO SEPTEMBER 2000

Registrar, Council for Medical Schemes
T. Patrick Masobe

Key responsibilities of the Council
· Protect the interests of members of medical schemes;
· Coordinate functioning of medical schemes in a manner that complements national health policy;
· Monitor the financial soundness and solvency of medical schemes;
· Monitor the impact of the Act and make recommendations for regulatory changes.

The Council for Medical Schemes - A New Vision and Approach
The Vision of Council:
· A medical schemes industry which is regulated in a manner that protects the interests of members and promotes fair and equitable access to private health financing in order to maximize the health status of South Africans.

The Council's Philosophy and Approach
In performing its' functions the Council is committed to:
· Informing members and the public about the rights and obligations in respect of access to medical schemes;
· Ensuring that all entities that do the 'business of a medical scheme' complies with the Act;
· Contributing to the improvement of governance of medical schemes;
· Acting in an administratively fair and transparent manner, and with integrity, professionalism and respect;
· Staff structure of the Council
[PMG note: Structure not included]

The Strategic Objectives of the Council
· Provide guidance and support for Boards, members and others
· Develop benchmarks for scheme performance
· Strengthen co-operation with administrators and others
· Research trends in private healthcare financing
· Monitor and resolve complaints
· Develop standards for registration and accreditation;
· Monitor financial performance and soundness
· Identify non-compliance and institute remedial action
· Monitor the impact of the Act and develop recommendations to improve regulatory work;
· Develop strategic alliances nationally and internationally.

Intention of the Definition of a Medical Scheme
· to ensure that no insurance products can be created
- which directly or indirectly cover,
- in whole or in part,
- the financial losses/costs incurred resulting from medical expenses
- in any environment other than that governed by the Medical Schemes Act.

Health Insurance and Medical Schemes: Annual Premium vs Contributions (review results)
[PMG note: pie diagram not included]

Demarcation Spectrum
[PMG note: diagram not included]

What is reinsurance?
· A primary insurer passes on some of its risk to another secondary insurer (the reinsurer)
· Typically protects small insurers from claims volatility generated by a few large claims
· Can be used to "lend" money to a scheme
· When parties on both sides of the contract collude - can lead to financial manipulation of the primary insurer

Reinsurance Concerns
· Not in the interests of members
· Not to be used to strip profits, assets or interest earnings from a scheme
· Transactions are not arms-length
- Broker
- Administrator
- Reinsurer
· Trustees not always independent

Investigations of existing and past agreements
· Reviewing contracts and financial statements
· Will pursue investigations to their final conclusion

Challenges for the next year
· Revise prescribed minimum benefits to eliminate discrimination on chronic benefits and other important benefits
· Remove perverse incentives in the intermediary market
· Substantially strengthen and support Trustees and member participation in scheme decision-making
· Introduce risk equalisation to finally eliminate the advantages of cream skimming
· Manage incentives to achieve sustainable cost reductions in schemes
· Support the introduction of Social Health Insurance in South Africa