Medical Schemes Amendment Bill: hearings

Meeting report

HEALTH PORTFOLIO COMMITTEE
19 October 2001
PUBLIC SUBMISSIONS ON THE MEDICAL AMENDMENT BILL

Chairperson: Dr A S Nkomo

Relevant Documents:
Submissions by the Board of Health Care Funders
Healthcare Security in the New Economy (BHF Conference) [please email [email protected] for a copy]
Submission by Medscheme (Pty) Ltd (Appendix 1)
Submission by the Life Offices Association of South Africa (LOA)
Submission by the National Education Health & Allied Workers Union (NEHAWU) (Appendix 2)

SUMMARY
Stakeholders in the Medical Schemes industry were critical of the Bill. They noted that several amendments to the Medical Schemes Act would have the effect of replacing specific, unambiguous provisions, with vague and subjective clauses. These give rise to the concern that the Regulations are imprecise and behave as blunt instruments in an industry where surgical precision is necessary to mange vast amounts of capital.

The stakeholders expressed concern that the Department has issued the Bill with no prior warning and insufficient explanation to allow for comprehensive comment on a measure that is a great departure from past practices. It seems the Bill will now be introduced without significant changes yet claim that industry wide consultations had taken place, which was not the case.

The industry were united in their view that the Medical Scheme Act (the Act) was predicated on the understanding that it would represent the first step in policy flow ending in Social Health Insurance mandatory environment, where principles of community rating work best. They lamented that the movement to Social Health Insurance has been delayed indefinitely which has effectively left the industry in regulatory limbo

Board of Health Care Founders of South Africa (BHF)
Dr Aslam Dasoo, the Chief Executive Officer of BHF, explained that in acknowledging the Department of Health’s intentions, medical schemes have adopted the approach of "regulating for abuse". This is the tendency to issue a welter of Regulations to curtail behaviour by a minority of parties, which is deemed inappropriate. This invests the entire industry with the same onerous burden.

He cautioned that too frequent regulatory intervention, coupled with perceptions of stern and unyielding regulatory authority, runs the risk of contributing to a debilitating operating environment. While the effect of these changes cannot be accurately measured at this time the prospects for such measurement are further hindered by the proliferation of newer regulations.

Dr Dasoo noted, however, that it must be recognised 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. As a consequence, therefore, he added, it was BHF’s view that deeper, rather than distant, engagement of the industry in developing new regulatory instrument was desirable. Any notion that such deeper engagement would tend to thwart the development of regulation consistent with health policy, because of perceived negativity from industry to the overall policy is unsustainable.

He added that it was necessary, for the interest of all founders and their agents that a smart regulatory environment, which incentives non-discriminatory access to funding is established. This would make the industry a positive, if self-interested, agent in the ongoing transformation of the regulatory framework. In these premises he dismissed the concerns of ‘regulatory capture’ as unwarranted and the same should play no role in the development of health policy enriched by a shared analysis.

Dr Dasoo noted with concern that there appears to be 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.

He warned that unless the industry is able to debate the regulatory future of the industry in a collegial fashion, there is scant possibility of gaining sufficient consensus in the industry in support of even these regulatory proposals. In which case he welcomed the idea of a National Health Summit that is to be held in November.

There appears to be an alarming degree of divergence with the assertion of the Registrar’s Interim Report as published three weeks ago from several quarters. While it is conceded the Report is still subject to final publication, it is clear that any fine-tuning will not materially change the Registrar’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 BHF’s view, of an evidently statistically perilous modelling of the data.

ince the interpretation of the data underpinning the registrar’s Report is in dispute, it follows that the definition, and the veracity of the regulatory provisions underpinned by such interpretation is equally in dispute.

The assertions made in the Registrar’s Report to the effect that the industry is in good shape are incorrect. If the assertions 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, ministration of the Regulator.

Dr Dasoo noted that several amendments to the Medical Schemes Act contained in the current Bill have the effect of replacing specific, unambiguous provisions, with vague and subjective clauses. These give rise to the concern that the Regulations are imprecise and behave as blunt instruments in an industry where surgical precision is necessary to mange vast amounts of capital.

The overall effect of current regulation 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 reduce unfounded dependency on the state.

He expressed the view that regulating for this eventuality should be the centre occupation of the Regulator while the pursuit of abuse by the minority should be a matter of law enforcement. The conflation of policy making and legislation writing on the one hand and law enforcement and too-stringent focus on abuse on the other hobbles regulation and cripples enforcement.

The Medical Scheme Act was predicated on the understanding that it would represent the first step in policy flow ending in Social Health Insurance mandatory environment, where principles of community rating work best. The movement to Social Health Insurance has been delayed indefinitely which has effectively left the industry in regulatory limbo.

He submitted that the current scenario is highly prejudicial to the management of the prudential risk of the schemes. Either a definite program for implementing Social Health Insurance is presented, or effective risk management by Schemes to deal with real problems of anti-selection and opportunistic behaviour is allowed until the environment of compulsory cover is introduced.

With respect to the specific provisions of the Bill, Dr Dasoo said that the substitution of the terms "dependant/member" by the word "beneficiary" in Section 1 may be problematic in respect of the existing contractual relationship between the scheme and the member with specific reference to S7 and 28 of the Act. He proposed that a clear legal expression with specific reference to contracts be obtained and considered.

On Section 20(3) he said that the approval of contracts would now reside within the regulatory ambit. He added that 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. He said that the interference of a third party, such as the Registrar, would conflict with such fiduciary responsibilities.

He recommended that reinsurance contracts should fall within the purview of the Board of Trustees, who after all, must account for the funds and its management very vigorously in terms of the Trust law and other financial statutes.

Regarding "marketing material" in the new S21A, the Bill risks extending superfluous regulatory control where it already exists in the Act, by trying to regulate the conditions in which medical scheme membership can be obtained. He added that the proposed changes fail to recognise that the conditionality of membership in a closed scheme is employment/union or bargaining council membership and that the proposed amendment will render it illegal to promote such schemes.

On waiting periods at S29 (3)(c) Dr Dasoo pointed out that the amendment removes one of the discretionary barriers to joining a scheme which is the waiting period. He said it removes from the Act the ability of the scheme to provide for waiting periods in its rules by stating that "A scheme shall not provide in its rule…for the imposition of waiting periods".

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 long term members.

On "financial statements" at S37 (6) and 44(4), Dr Dasoo said that 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 Regulator’s interests. The existing legislation provides ample power to the Office of the Registrar to conduct financial or other inspections to ensure compliance. In his view this provision is unnecessary.

Regarding S57 (a) on the eligibility of the Principal Officer, Dr Dasoo said that whilst it is acknowledged that potential conflict of interest may exist in the current Principal Officer arrangements with schemes, concern was expressed in respect of the cost implication of this provision on smaller schemes.

He recommended that an administrator-sourced Principal Officer might well be better suited to schemes in certain instances. He added that proper governance criteria would offer a better solution to any potential conflict in the event of such a situation arising. He also said that the duties of the Principal Officer should be properly defined.

Dr Dasoo concluded that a central feature of the promulgation of the Medical Schemes Amendment Bill was that it represented a critical milestone in the reorganising of the industry, a policy flow logically extending to the establishment of the Social Health Insurance. He said that the indefinite delay in achieving this goal was regrettable.

The key principle of the Act, which is good governance, non-discriminatory access and minimal benefits, are reaffirmed by BHF. He added that the regulatory extensions of the Act, however, tend to distort, rather than entrench these principles. He said that BHF looks to the legislator to objectively interrogate the propositions it has presented with a view to guiding the Regulator and strengthening its ability to fulfil the regulatory mandate presented by the Act and the Constitution.

Discussion
Dr Rabinowitz (IFP) asked Dr Dasoo to further enlighten the Committee on the role of the registrar in the financial matters of medical schemes since it seems to be a contentious issue.

Dr Dasoo said he could not speak for the registrar and that the question is better handled by the registrar’s office.

Dr Cwele said that Dr Dasoo seems to have dwelt on concerns regarding reinsurance without touching on another related matter dealing with member’s interest which the Act aims to address.

Dr Dasoo said that reinsurance appears to be the touchstone on which the amendments are based. In his view reinsurance is a legitimate tool of insurance management but it is true that it may be exposed to abuse. In such an event, he suggested that the Board of Trustees should act within their mandate.

Ms Dudley (ACDP) sought more insights on the contentious issue of waiting periods.

The Chair intervened at this juncture and directed that the question posed by Ms Dudley be answered in writing or through e-mail.

Life Offices Association of South Africa (LOA)
Gerhard Joubert (Executive Director: LOA) said that his organisation and its members represent millions of policyholders in South Africa. In order to assess the impact of the proposed amendments and offer constructive comments, LOA had garnered opinions from wide-ranging sources. These were within the medical schemes, long-term reinsurance, short-term insurance and other stakeholders within the industry.

He noted the emerging consensus that the wording of the Bill is unclear in many respects and in addition there are aspects that cannot be properly assessed since they depend on additional regulation as yet to be disclosed. Another unknown feature, he said, was the direction of the Minister of Health through policy regulations.

Whilst it is practical for Parliament to confer particular powers on a functionary in the proposed manner, the method in which those powers are to be exercised must be entrenched in Legislation along with appropriate guidelines. Crucial guidelines were absented from the Act in general and from the proposed Bill in particular.

LOA’s concern was mainly that the Department has issued the Bill with no prior warning and insufficient explanation to allow for comprehensive comment, which is a great departure from past practices. It seems the Bill will now be introduced without significant changes yet the Department claims that industry wide consultations had taken place, which was not the case.

The Bill is presented on the premise that the Act is achieving the policy of broadening access and reducing the cost of private healthcare. He noted that this was incorrect and the reality is that most medical scheme members are seeing cost of coverage increase significantly above the growth in their salaries and that consumer inflation had forced many to reduce their level of medical scheme coverage.

The Bill proposes to replace the definition of ‘complain’ in a manner which is not clear as to whose activities are to be regulated or what the intention is behind the altered definition. Professional persons such as doctors, auditors and actuaries are already bound by codes of conduct in their profession and the Act does not aim to regulate their professional activities. He said brokers fall into the category of people required to be accredited yet their activities are also regulated separately.

With regard to S21A (2) and (3), Mr Joubert said that this attempt to outlaw conditional selling of non-medical scheme products in this regard is inappropriate legislative change. In so doing, certain wording is too vague to ensure compliance.

Mr Joubert proposed that S29 (1)(s) and (t) be amended to remove the provision which allows for conditions for continuation of membership to be prescribed by way of regulation. The regulation at present allows a scheme to specify a qualifying period of up to five years before a member who retires or a dependent of a deceased member may qualify for continuation membership.

The impact of this proposal is that restricted membership schemes will not be allowed to stipulate conditions for continuation. They would, in effect, have to comply with the same provisions as an open scheme. If the intention is to force closed schemes to offer continuation, then this would mean, by implication, that employers would have to account for this post retirement provision. The logical upshot of this is a straightforward disincentive to employers to offer medical scheme coverage even for active employees.

Section 29 (3)(c) of the Act allows the schemes to impose waiting periods to applicants who have not been members of another medical scheme for a continuation period of at least two years prior to application. The Bill proposes instead that a medical scheme may not impose any waiting period except as may be prescribed by way of regulation. Given the track record of the Department in this regard, the suggestion that the right to regulate in this fashion be gained in regulation would not be supported in anyway.

Mr Joubert noted that S36 (2) of the Act makes the appointment of an auditor subject to the approval of the Registrar but the Bill proposes that this appointment be extended further to allow the Registrar to prescribe conditions as he may deem fit. Given the potential consequences of any wilful misconduct or misrepresentation, such restrictions are patently unnecessary.

The Bill provides for the insertion of subsection (6) to S37 of the Act. He said it is impossible to provide appropriate comment as it is not known what is intended in this amendment. The proposed changes do have the potential to significantly increase the administrative burden on schemes and administrators, which will certainly push up the said costs.

Mr Joubert noted that the Bill proposes to extend the restriction in S57 (3) as to who may be a member of a board of trustees. He pointed out that these persons are already governed by the existing conditions within the Act. He added that 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.

The Bill introduces subsection (7) under S59 of the Act which provides that no person may be principal officer of the medical scheme if such a person is associated in any way with the administrator or is a broker.

In the final analysis the principal officer is accountable to the trustees and therefore it is the duty of the trustees to ensure that he fulfils his duties accordingly and without conflict of interest. He said that if the trustees are not able to or fail to fulfil their duty, the Act already provides for a number of ways by which to address the problem.

Mr Joubert noted that the definition of a broker refers only to a person who provides "a service to advice in respect of the introduction of prospective members." The definition does not recognise that brokers also provide service and advice to existing members. To deliver on the intention in the long title, he suggested that the definition be extended to include persons providing service and advice in respect of existing members.

Financing for health care, 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 Financial Services Board.

He noted that the Bill proposes that requirements for managed health-care contracts be prescribed by regulation which appears to legitimise the current regulation that already contain provisions relating to the requirement for managed health care contracts.

The proposed amendment will remove the decision-making power relating to managed care arrangement from the trustees and bestow it on the Registrar who has no fiduciary duties to members of medical schemes.

On penalties, Mr Joubert noted that the Bill proposes to empower the Minister to make regulations relating to penalties that would be applicable to an administrator who fails to pay any benefits as provided for in S59 (2) of the Act.

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

On the contentious issue of reinsurance, Mr Joubert strongly disagreed with the principles underpinning the proposed regulation in this area. He said the regulations are unworkable and highly unlikely to achieve their stated aim. The medical scheme environment is unstable and many medical schemes are facing uncertain futures. The financial muscle of the reinsurance sector is available to provide financial certainty to these schemes. He said the Bill would lead to the withdrawal of significant reinsurance capacity from the medical schemes marketplace. This situation, he warned, can only lead to further deterioration of the ability of the medical schemes industry to provide healthcare benefits at an affordable and predictable price.

Mr Joubert said that the principle of granting regulatory powers to the Registrar in reinsurance matters would result in duplication of regulation. He pointed out that the reinsurance schemes are already subject to the regulation of the Financial Services Board (FSB). The infrastructure to regulate financial services companies already exist within the FSB and that therefore the Bill should not factor in such control.

He noted that S20 (5)(b)(i) conflicts with S20 (5)(b) (ii) to (v). The intention of this clause is to ensure the independence of any expert opinion on the appropriateness of a reinsurance contract.

He observed further that S20 (7) effectively declares all reinsurance contracts to be inappropriate, which scenario is unlikely to have been the intention of the Bill.

In conclusion, Mr Joubert pointed out that given the current status of the medical scheme environment, and the fact that the Act is not meeting its stated policy objectives, the LOA strongly recommends that the Department enters into dialogue with all stakeholders in a transparent and collaborative spirit. This would achieve the aim of increased access and reduced costs of medical scheme coverage.

Discussion
Ms Kalyan (DP) asked what the role of the registrar was in the framework of the regulation of the Bill and the reinsurance coverage.

Mr Joubert replied that LOA was opposed to the registrar usurping the role of the FSB who, in any case, have the necessary expertise to regulator financial instruments.

M/s Kalyan (DP) asked whether there could not be some compromise on the length of the waiting period in respect of continued membership.

Mr Joubert replied that the issue of the waiting period sits well in the regulatory framework but not the Act. It is impractical to impose a waiting period since the scheme has no choice whenever one decides to move to another scheme.

Ms Baloyi (ANC) noted that she believed the regulatory framework was an essential monitoring tool since reinsurance schemes make huge profits from medical schemes that were not for profit.

Mr Joubert replied that he was not against any form of regulation provided the trustees for the schemes are allowed the independence to manage according to their contractual fiduciary obligations. What are required are checks and balances that are already built into the current framework.

Ms Baloyi (ANC) asked why reinsurance was necessary when the medical schemes were non-profit making entities.

Mr Joubert explained that reinsurance was necessitated by the normal risk factors when unimaginable catastrophe occurs and the scheme may not have build enough reserves to remedy such a huge capital outlet. Such risk is then transferred to the reinsurance scheme, which has enormous reserves to cover that kind of risk factors.

Ms Rajoo (IFP) said that the issue of commissions was one of great concern. She said commissions dramatically push the cost of insurance up and asked whether this result was desirable.

Mr Joubert replied that a commission was an appropriate fee that was provided for and covered in the law. What was needed was tighter regulation to check abuse of this facility for exploitative purposes.

Dr Luthuli (ANC) said that many schemes have gone under which brings great suffering to members. She asked where reinsurance factors in this common place scenario.

Mr Joubert said the claim that billions are lost to reinsurance schemes is incorrect. Reinsurance firms assume big risks on payment of a small premium and they have settled billions in claims. They have also promised to make the supporting data available to the Committee at a later stage.

Dr Cwele (ANC) said that Mr Joubert had pointed out in his presentation that abuse in the industry was in fact very minimal. He requested that relevant statistic be availed to the Committee to support this view. Mr Joubert undertook to provide the statistics at the earliest convenient time.

Dr Rabinowitz (IFP) asked why members are penalised on the basis of age.

Mr Joubert replied that the penalty is a deliberate policy incentive to encourage people to join schemes while still young so that they can help built good reserves to sustain the scheme.

National Education Health & Allied Workers Union (NEHAWU)
Mr Mark Sweet (Parliamentary Officer: NEHAWU) said that private health care industry is designed with the primary purpose of providing health care on a profit making basis. In this country the market is particularly targeted at middle strata minority who can afford its highly priced fees.

There are those private health care activities where the primary purpose of providing a service is not profit but need. These included state-aided institutions, which rely almost completely on government funding for their existence.

The crisis that has engulfed the private health industry has impacted more acutely on workers in the industry and consumers in the medical schemes. This has resulted in consolidation affiliations within the industry, company acquisitions, mergers and establishment of alliances.

Mr Sweet said that the introduction of the Bill must be considered in the context of the broader restructuring of the health sector and the ten-point plan of the Department of Health.

The policy measure will have a profound impact upon the private health industry, which cannot be seen as some separate entity operating in a vacuum for profit. The fact that the private health care has targeted those who have wealth in the country, to the exclusion of the majority who do not, is an undeniable fact. In doing so the schemes have equally drawn huge resources out of the state funding.

Mr Sweet pointed out that the Bill has risen out of necessity. The private health industry needs fundamental transformation, which calls for more government policy, legislation and regulation.

In all these policy decisions, the road towards a National Health Insurance is one which has to be planned. policy transformation must be seen in the light of the search for a comprehensive social security system in the country. In this vein, he said, NEHAWU supports the proposed amendments in the Bill.

Mr Sweet said that Nehawu wishes to explicitly welcome tighter regulation of inappropriate reinsurance that is so widespread and one that has resulted in schemes being stripped of their reserves without the knowledge of the members.

He added that the independence of the Trustees is fundamental as this has been widely abused and the intent of S26 that prohibits this practice is good law. He also said he fully supports the introduction of S25 and 27, which regulates the conduct of brokers since unions have long been the targets of a number of unscrupulous brokers.

Under the principal Act, and in the case of restricted schemes, when a worker is retrenched, the worker and their dependants lose their membership of the scheme. He said it does not protect the workers who have to give up their jobs in order to relocate with their families or leave their job for another reason. He proposed that the Bill be amended to allow workers who loose their jobs for whatever reason the option to continue in the restricted medical aid scheme. This until they find employment that makes a medical aid scheme available to them or until they enrol in open scheme whichever occurs first.

Discussion
With regard to the proposal for the retention of the retrenched worker in a scheme, Dr Gous who should pay for the subsidy?

Mr Sweet replied that the remaining members of the scheme would square the bill.

Dr Cwele asked how many of Nehawu members have so far been affected by these measures.

Mr Sweet replied that from 1995 many members were affected and retrenched. He could make the figures available at a given time.

M/s Rabinowitz (IFP) said that the waiting period appeared to contribute to adverse selection and asked whether Nehawu had any thoughts on the way forward.

Mr Sweet replied that in his view the only way out of this conundrum was the introduction of a National Health Insurance Fund. The time to lay the ground for this future goal is now.

Medscheme (Pty) Ltd.
Gary Taylor (General Manager, Group Services Division) said that his company is largely supportive of the objectives of the amendments. However he had some reservations with the added powers given to the regulator at the expense of the trustees and the ever-growing power of the Council/Registrar to regulate.

Trustees are meant to be accountable subject to the fiduciary duties for the governance of their fund hence it was inappropriate to reduce their discretion to manage the scheme under this mandate.

With regard to Clause 5 Mr Taylor acknowledged the fact that in some cases reinsurance has been open to abuse where profits have been extracted for third parties at the expense of members of the scheme. He however argued that the Registrar already has enough powers to reign in on this malpractice.

As for Clause 6 Mr Taylor said that the current wording would prevent the marketing of the union-based restricted membership scheme which seeks to make union membership a precondition of joining the scheme. Such a result is undesirable.

In Clause 9, regarding waiting periods, Mr Taylor said that the industry is concerned about the uncertainty created by deferring the detail relating to waiting periods to future regulation.

As for Clause 22 Mr Taylor said that the Act correctly stipulates that trustees should be "fit and proper" persons to hold office and the ideal qualification/expertise areas are clearly set out thereunder.

He said that the realities about trustees is that they are, at best, part-time experts, while the only full-time dedicated stakeholders with day to day industry knowledge are the very brokers and administrators. These people are precluded from being elected by members as trustees or appointed by the elected trustees as a Principal Officer.

Mr Taylor said that since the draft Bill selectively highlights only some stakeholders as biased, legislation could be relaxed to the equivalent of the Pension Fund Act whereby the involvement of "executive" trustees in managed schemes is acceptable.

Alternatively the same wording used to preclude administrators from serving as trustees or principal officers should then be consistently extended to apply also to consultancies and a host of other service providers.

In Clause 25, on broker commission, while the current Act and Regulations have been largely unsuccessful in achieving their intention, the draft bill does not give greater clarity either.

He said that although an opportunity to correct this anomaly exists in the forthcoming regulations, consensus is unlikely in a hostile climate.

Mr Taylor concluded his presentation by pointing out that the ongoing demarcation battle between the Council for Medical Schemes and the FSB remains confusing and unsettling for all parties. He hoped that, for the sake of stability, the dispute between the two regulatory authorities should be resolved at a higher level.

Discussion
Dr Rabinowitz (IFP) asked whether Mr Taylor had a problem with the registrar’s powers to regulate.

Mr Taylor said that in term of the current Act he had no problem with the registrar’s powers. He said that the increased powers in the Bill tend to undermine the powers of the trustees who have a fiduciary obligation to members.

Dr Cwele (ANC) said that one of the perennial complaints about medical schemes is delayed settlement of claims and asked what Mr Taylor’s view was on that.

Mr Taylor replied that there is a long debate around delayed payments. Around 78% of their claims are settled within 38 days of the treatment day. Some of the factors that contribute to delay in some cases are delayed submission of the doctor’s fees, investigations and indeed some delays are attributable to the scheme’s administrative bureaucracy. The answer to some of these problems lay in investing in new technology, which most firms are pursuing at present.

Ms Baloyi (ANC) asked why brokers must be entitled to commissions, which encourages them to engage in crooked practices in order to claim commissions.

Mr Taylor replied that brokers regulate themselves and that was as expected in every profession where they operate on specific guidelines.

Ms Mnumzana (ANC) said that Mr Taylor had acknowledged limited abuse of the reinsurance scheme and asked why any abuse, however limited, should be tolerated at all.

Mr Taylor replied that most reinsurance schemes are quite acceptable and operate above board. This is why wholesale condemnation is unfair but those who are wayward must be rooted out for the good of the industry.

Dr Rabinowitz (IFP) asked whether, if at all, the Bill would bring down general costs.

Mr Taylor replied that the question of costs lies with the trustees. He said that the trustees are empowered to change schemes to suit their costing budget.

Dr Rabinowitz sought Mr Taylor’s comment on the contentious issue of waiting periods.

Mr Taylor said that the Bill was silent on the issue of the waiting period. He added that it was his understanding that this item would be covered in the regulations.

Dr Luthuli (ANC) asked why Mr Taylor objected to the registrar’s role and yet it was essentially meant to pre-empt situations of improper conduct.

Mr Taylor said that administrators would argue convincingly that the Registrar lacks fiduciary obligations to take such decisions. He said the crisp question was "can we pre-empt better than the registrar" and the answer is in the affirmative.

He added that there are many ways of looking at the legislation but that all he was saying is that the Trustees should not be dis-empowered in the process of empowering the registrar. There should be a proper and mutually acceptable balance in between.

Dr Jassat (ANC) suggested that since Medscheme has a 45% share in the market and is therefore a major player in the industry, it should help in preparing the brochures for members.

Mr Taylor replied that various schemes undertake the preparation of the brochures.

The meeting was adjourned.

Appendix 1:
Submission by Medscheme (Pty) Ltd on Health on Medical Schemes Amendment Bill, 2001

Medscheme is largely supportive of the objectives of the revised Bill. From our experience in administering over 40 schemes, we offer the following comments relating to the practical impact of the Bill:

1. We have some concerns with the added powers given to the regulator at the expense of trustees and the ever-growing power of the Council/Registrar to regulate. If trustees are meant to be accountable, subject to fiduciary duties, for the governance of their fund, is it appropriate to reduce their discretion to:

design benefits?
enter into reinsurance/administration contracts?
appoint auditors/the principal officer?

We would argue that the entire issue of governance be re-examined, not just from an academic viewpoint, but also to ensure practicality, objectivity, transparency and to reduce undue gain by trustees.

2. Clause 5 – Section 20(3). Reinsurance Contracts

It is acknowledged that Reinsurance has been used, in some cases, as a vehicle to extract profit from the scheme for a third party. At the same time, there is general acknowledgement of the positive value of legitimate reinsurance.

We would argue that the Registrar already has the power to act against the minority of inappropriate aberrations, and that this remedy should be preferred above the broad-brush approach in the Bill, which would require the added costs of an independent evaluation in all cases.

3. Clause 6 - Section 21A. Conditional Selling

We would argue that the current wording would prevent the marketing of a union-based restricted membership scheme which seeks to make joining the scheme preconditional upon having union membership. This should surely not be the intention of the bill, and we propose that the wording be amended to permit a linking to membership of a bona fide organization, or to make this clause applicable only to non-restricted membership schemes.

4. Clause 9 – Section 29(3)(c). Waiting Periods

It would appear that the draft Bill intends deferring the detail relating to Waiting Periods to future regulation. The industry is concerned about such uncertainty, and we would suggest that the wording in the current Act be retained, unless there is a clear statement of intent from the Registrar to retain in Regulation no less than the prevailing protection against anti-selection.

5. Clause 22 – Section 57. Trustees, Principal Officers

The intention of the Bill in this section to improve the integrity of governance is sound. The assumption, however, that the independence of trustees from any influence by brokers or administrators will improve the quality of decision-making is flawed. Furthermore, if a broker or administrator is too biased to serve as an officer of a scheme because they benefit from the scheme, could a trustee not be equally biased in determining scheme benefits and contributions when that same trustee benefits from these decisions in his capacity as a member?

The Act stipulates (correctly) that trustees should be "fit and proper" to hold office, and the ideal qualification/expertise areas are set out. The reality with trustees is that:

they are never elected to represent a "skills" portfolio, but mostly to represent constituencies. How then does a board of trustees acquire the skills set required in the Act?

They are, at best, part-time experts, while the only full-time dedicated stakeholders with day-to-day industry knowledge are the very brokers and administrators who are precluded from being elected by members as trustees or appointed by the elected trustees as a Principal Officer.

We draw attention to governance structures in two other areas, for reference purposes:

i In companies, boards are run by a balance of executive and non-executive directors, as foreseen in the King Code (versions 1 and 2). Arguably, brokers and administrators are the equivalent of the executive director, and should be permitted to comprise up to 50% of trustees. Bear in mind that they would still be subject to member accountability, fiduciary duties and the Registrar’s scrutiny. Even non-executive directors in companies are chosen for their skill, not their constituency.

ii In the Pension Funds Act, 50% of trustees may be from brokers or the administrator and the other 50% elected. The Principal Officer may be an official of the administrator, and no unmanageable conflict of interests is pre-empted by that Act, nor encountered in practice.
3.

One of the flaws in the Draft Bill (if the intention is to eliminate bias) is that a trustee or principal officer may still be:

- an employee of a managed care company
- a provider of service
- a director of a hospital group
- an in-house administrator
- an employee of a Consultancy which has a broking division

This begs the question "if we were to preclude all of the above from serving as a trustee or principal officer because of vested interest, who in this small industry is left as truly independent?"

In addition, there are a number of practical issues associated with the envisaged concept of an independent principal officer:

- there is now an additional infrastructural cost to the scheme of the Principal Officer plus space, secretarial support, etc. This is entirely unjustified for smaller schemes;

- it introduces a new stakeholder with their own vested interests e.g. perpetuating/increasing an income stream, etc;

- the accessibility of the Principal Officer is now reduced, inhibiting certain administrative functions;

- arguably, this added bureaucracy could require accreditation as a co-administrator, seeing that this would now become enforced outsourcing.

As we believe that the draft Bill selectively highlights only some stakeholders as biased, we propose one of two ways forward:

Option 1 – Relaxation

The legislation could be relaxed to the equivalent of the Pension Funds Act, whereby the involvement of "executive" trustees is managed acceptably. Trustees would be empowered to appoint their own principal officer, and the Registrar retains his powers to address abuse. This view was supported by BHF (representing schemes) in its submission on the first draft of the Bill.

Option 2 – Further Regulation

The same wording used to preclude administrators from serving as trustees or principal officers should then be consistently extended to apply also to consultancies, providers, suppliers, managed care companies, IT switching companies, or any other possible vested interest, to preclude their serving as trustees or principal officers.
Finally, an area of concern relating to governance is the omission in the current Act and Regulations of any meaningful requirements for transparency and a "declaration of interests" by trustees. While abuse is not a widespread phenomenon, we feel that the legislator should be aware of practices by some trustees to:

pay themselves significant retainers or per meeting fees;
hold meetings in hotels, organize social functions, etc.;
fly business class and to attend overseas conferences;
instruct the administrator to use "preferred" travel agents, printers, suppliers, etc. where there is evidence of higher charges.

These expenses are then hidden as administration costs (whose escalation is blamed on administrators) where the now-disempowered administrator risks his contract in exposing abuses. We recommend that Regulations be issued to ensure full per-trustee disclosure (of payments/reimbursements/interests) to AGMs and in financial reporting to the Registrar.

6. Clause 25 – Section 65 – 67. Broker Commission

While the current Act and Regulations have been largely unsuccessful in achieving their intention, the draft Bill does not give greater clarity. The opportunity for this exists in forthcoming regulations, although consensus is unlikely in a hostile climate.

In addition, the ongoing demarcation battle between the Council for Medical Schemes and the FSB remains confusing and unsettling for all parties. It is hoped that, for the sake of stability, this be resolved between the two regulatory authorities or at a higher level.

In trying to resolve an acceptable solution for the broker remuneration issue, we would offer the following principles:

- incentivise the desired behaviours in preference to punishing the undesired (e.g. twice the rate of commission for previously uncovered members);

- ensure greater transparency in broker remuneration, such as getting the beneficiary of the broker’s service to pay for the added value.

- the Council for Medical Schemes should actively facilitate mechanisms of self-regulation among brokers.

We thank the Portfolio Committee for the opportunity to comment on the draft legislation.

GARY TAYLOR
MD: Group Services Division
Medscheme (Pty) Ltd

Appendix 2:

National Health and Allied Workers Union
NEHAWU
SUBMISSION ON THE MEDICAL SCHEMES AMENDMENT BILL (B80 - 2001)

(Nehawu represents 13,500 workers in the Private Health Industry, employed in the medical scheme companies, insurance companies, private hospitals, clinics and home nursing.)

1. Introduction

Our submission is prefaced by the fact that the private health care industry is a profit driven sector comprising of a web of relationships among funders or insurers, purchasers (members of the medical aid schemes) and providers, consumers and workers. Their interactions – competitive and co-operative – drive the private health care development in our country.

The private health care industry is therefore designed with the primary purpose of providing health care on a profit-making basis. In our country the market is particularly targeted at a middle strata minority who can afford its highly priced or commodified services.

Access to the private health industry remains, decades after its introduction, based on the discriminatory and means tested principle of ability to pay. This industry relies heavily upon government funding to carry out these practices.

At the same time there are those private health care activities where the primary purpose of providing a service is not profit but need. These include "state-aided" institutions, which rely almost completely on government funding for their existence.

1.2 Boundaries of the private health industry

The growth or decline of the private health care industry is mainly dependent upon the funding component through medical insurance. Without this market the private health care industry has no future.

The national market boundaries of this private health sector, or customer base of companies, can assist one to assess its likely evolution. Specifically defined provincial markets indicate where the concentration of the operations of this industry are based. Particular provinces and particular regions within those provinces indicate a highly fragmented distribution of this industry. This sector demarcates their regional markets within provinces not based upon need but upon income.

Geographic spread of insured by medical schemes

Source: health system trust (1999)

The picture that emerges is one of a highly fragmented industry, concentrated in those provinces whose contribution to the wealth of the country is higher, yet highly fragmented within those provinces as well, and thus further entrenching an urban rural divide.

The private health industry places directly upon the inequalities in income and poverty across the provinces and within the provinces as well.

(HASA)

1.4 Private Hospital Companies

The growth during the 1990’s of private hospitals has been as a result of fierce competition among private companies to lower costs and to shift to managed health care. Private hospital companies cannot survive this competition as independent entity’s and in order to maintain a consumer base, they have linked up with physician groups, insurers and hospital companies. This has resulted in three companies dominating the private health industry, (Netcare, Afrox and Medi-Clinic), who together represent 70% of the private health market (HASA annual report 2000).

2. Restructuring in the Private Health Industry

The crisis that has engulfed the private health industry has impacted more acutely on workers in the industry and consumers in the medical schemes.

This has resulted in consolidations, affiliations within the industry, company acquisition, mergers and establishment of alliances.

Conditions influencing the pace and nature of changes in the private health industry are:-

• Regulation of medical aid insurance, which has led to high levels of competition between medical aid schemes and service providers and a reduced medical cover for a wide range of risks.

• The degree of concentration of capital in the sector where three companies dominate the sector

• Introduction of the managed health care system into the industry, the origins of which can be traced back to the failing USA managed health care system.

• Changes in institutional composition, with the gradual fading of non-governmental (non-profit) institutions and weakening of the public health system through reduction in spending in real terms. This process has been exacerbated by privatisation in the public sector.

• Demographics. A minority who have access to medical aid insurance and experience the high costs of admissions since these services are concentrated in particular city’s, and are marked by racial realities.

The results of this restructuring is what has become know as the crises in the private health industry:-

• Private health care workers have faced increasing retrenchments. outsourcing and other workplace changes. Simultaneously, employers are constantly changing hospitals and insurers, whilst doctors continue to merge and affiliate.

• Consumers of the medical schemes are confronted by cutbacks in the availability and quality of health care. The number of insured remains small at 7 million with 33,6 million not covered. Employer provided cover is declining in terms of retirees and most coverage excludes long term care. This reality mirrors the broader social problem of growing inequality and poverty among the majority of our people.

2. What is driving these changes

In the 1990’s public and government attention focussed on the spiralling costs of private health care. Double- digit price rises has been a constant feature, far outstripping the consumer price index, by an average of 4%.

This has taken place despite the introduction of "managed care", which was meant to cut the cost of private health care. The % price rises in South Africa in the private health care industry are even higher than in the USA, whose average is some 2,5% above the rate of inflation. Preliminary data shows that the percentage difference with inflation is in fact increasing.

This whilst employers are moderating their premiums and workers are bearing the rapidly increasing costs.

Managed care was conceived in the USA some 15 years ago as a response to contain the costs of private health care and was imported to South Africa for the same reasons. Mounting evidence in the USA shows that managed care has been unable to address the issues of costs and quality, given that its principle remains profit motive.

What managed health care has done has been to change the way in which health care providers make money. Managed care companies do not use the fee-for service formula, but rather capitation "per head" system. Providers receive a fixed payment for all the services they provide to each covered individual. Here money is made in a managed health care system by minimising services, and cut costs wherever possible.

Organised funders and providers compete for power to set the price or rate for private health care. In this contest what size and what influence you have determines the setting of the price. Manages health care is about spreading the risk and cutting the costs, size being important to negotiate the price of services.

3. Objective context for the introduction of the Medical Schemes Amendment Bill

The introduction of the Medical Schemes Amendment Bill must be taken in the context of the broader restructuring of the Health Sector and the ten-point plan of the department of Health.

This therefore must have a fundamental impact upon the Private Health Industry, and they cannot be seen to be seen as some separate entity operating in a vacuum for profit. That the private health industry has targeted those who have wealth in the country, to the exclusion of the majority who do not is an undeniable fact.

That in doing so, they have equally drawn huge resources out of state funding. For the current budget, the private health care system is sponsored to the amount of R7,8 Billion. This is higher that the budget for the Public Health Sector, R6,6 Billion 2001/2. Yet the private health care industry only caters for 7 million and excludes 33,6 million. This situation is clearly immoral for a state whose objectives must be to service the infrastructural backlogs, meet constitutional responsibilities and try to address the shortages in state health system.

Their failure to service the majority of the population is based upon their clear principles of ability to pay determines whether you receive cover or not.

5. Policy transformation

The medical schemes amendment bill 2001, has arisen out of necessity.

What however confronts the Portfolio Committee is in taking decisions on the clauses of the Bill, what must be the way forward post the passing of the bill. Is it going to be the case that once every three years further amendments will be brought before the Committee, requesting further regulations or does there not need to be a fundamental shift after this bill to a created environment which paves the way for the introduction of a National Health Insurance.

The private health industry needs fundamental transformation. This will need additional government policy, legislation and regulations.

Policy transformation must be seen in the light of the search for a comprehensive social security system in the country. The transformation of the private health industry must fit in with the development and building of a comprehensive social security.

Attempts to entrench and extend a fragmented and highly skewed service that the private health industry currently delivers, is counter to the development of a comprehensive social security.

The vision of where we want to take health care in our country is contained in the department’s 10 point health care plan, but equally what comes up with this is the resourcing of a future health care vision.

Nehawu as part of the People’s budget process, argues for the introduction by government of policy which will allow for the introduction of National Health Insurance(NHI), which will then begin to incorporate health resources into the public sector. We call for a National Health Authority, which would be responsible for allocating budgets. Its funding would be from the existing health budget but in addition a progressive dedicated levy.

The funding of the NHI could also easily be resolved through gradual reductions in the contribution of the state to the GEPF and the gradual replacement of the GEPF with the pay-as-you-go system used in most countries around the world.

With the NHI, by reducing administrative and procurement costs, the cost of health care would ultimately in real terms decline. The structure and financing of the NHI would be self-funding, as monies raised through the levy would be ring-fenced, and used for medical aid for all South Africans.

The road towards a National Health Insurance is one, which has to be planned. The decisions the Portfolio Committee takes over the Medical Schemes Amendment Bill is part of that path. Since the choices we make now determine the objective conditions that we will create in the future in our attempts to build a more equitable health care system form all.

6. Technical Amendments

Firstly Nehawu welcomes and supports the proposed amendments in this Bill. We understand that these have become necessary in order to regulate an industry, which has seen the dislocation and displacement of members and their dependants. Equally, it would be highly irresponsible if government had not stepped in given that they are subsidising the industry more than the public health sector.

In particular we welcome:-

• the clarification that has been introduced with the new definition of a "beneficiary" (s1)

• the prescribing of waiting periods s 29 (3) (c) and the protection of schemes against adverse selection

• better regulated and increased powers of the Registrar (s13, s15, s16)

• the inclusion into the clause preventing discrimination on the grounds of age (s7)

7. Policy Amendments

Here Nehawu wishes to explicitly welcome:-

• In particular the inappropriate reinsurance that is so widespread, and has resulted in schemes being stripped of their reserves without the knowledge of the members, in wholeheartedly supported.

• Likewise the creation of a clause, which makes it an offence to market unregistered products and prohibit conditional selling, will put to a stop a practice that has caused much distress amongst our members. We have in fact had to resort to great lengths in the trade union movement to stop this practice, where unsuspecting members of the union get caught into also sorts of schemes thus weakening their already fragile financial status.

• The independence of trustees is fundamental as this has been widely abused and we welcome (s26) prohibiting this practice.

• With respect to brokers we fully support s 25 and s 27 to regulate the conduct of brokers, since unions have long been the target of a number of unscrupulous brokers seeing a profitable market.

8. Shortcomings of the Amendment Bill

We believe that there are three (3) areas where the bill needs to be strengthened or in some cases is silent.

1. Managed Health Care

After the practice of re-insurance, this is the area where capital accumulation is most widespread. The reality is that we have witnessed the collapse of many of these companies, leading to retrenchments and increasing the cycle of poverty.

Many of these companies are part of the "web or relationships" in the Private Health Sector, and yet are allowed to collapse even though funders, providers and suppliers often are related in one way or the other. Clearly these are judgements based on maximisation of profit and not patient care.

As has already been outlined in this submission, managed health care is about cutting costs, and has been the experience both in USA and South Africa, levels of service drop as well.

Research carried out by the Service Employees International Union in the USA, representing some 1,5 million workers, has shown massive shortcomings in managed health care system.

Proposed amendment

Section 27 (b) of the Amendment Bill.

Insert at the end of line 52 the following:-

and practices. That where these provisions are breached the registrar with the concurrence of the council and minister may invoke section 61 of the principle act.

2. Appeal Board (Section 50 of the Principle Act)

Currently the fee set down in the regulations is R2,000. Whilst this may be affordable to some it can equally be a deterrent to discourage an individual from making use of the appeal board due to lack of financial resources. The regulations should rather give an option to be applied, thus those who can afford pay the amount and with those who cannot, the option is applied.

Proposed Amendment in the Regulations to read:

Insert the following: or a nominal amount to be decided by the Board

3. Protection for workers who are retrenched

Under the principle act, and in the case of restricted schemes, when a worker is retrenched, the worker and their dependants loose membership of the scheme. Neither does it protect those workers who have to give up their jobs in order to relocate with their families or leave their job for another reason.

The amendment bill should be amended to allow workers who loose their jobs for whatever reason the option to continue in the restricted medical aid scheme until they find employment that makes a medical aid scheme available to them or until they enrol in an open scheme, whichever occurs first. Such a provision may need to stipulate a time limit on this continuation of coverage.