The Registrar says goodbye Our case study – external ... News/CMS... · experts to wave their magic wands at the pages of CMS News. But first, a little more on the spell that brought

March 2009 SPECIAL EDITION

In the name of a healthy medical schemesindustry – how we put beneficiaries first

The Registrar says goodbyeOur case study – external stakeholders speak out

CMSnews

Pers

pect

ive

Contents

In this issue of CMS News we decided to tr y something new and

different.

So we had our financial wizards cook up a fictional medical scheme

(see p. 2-3). They named it Get-Well Medical Scheme. Get-Well is not well.We

want it to get better. We then asked you – a few external experts on private

health insurance – to wave your magic wands and tell us how to make this

happen. Assuming, of course, that the scheme can be restored to health in the

first place …

Our sincere thanks to each and every one of you for making this the most

rewarding issue of CMS News that we have published in this financial year.

His legacy lives on: the Registrar says goodbye 1

Break the spell: our case study 2

Consider the evolving health policy framework 4

Ensure independence 6

Prioritise critical areas 7

Change service providers 8

Focus on governance 10

Target non-health expenditure first 11

Clarify the purpose and take action 12

Decide where the problem lies 14

Place the scheme under curatorship:the CMS comments 16

Ours is to protect:the Financial Supervision Unit 18

PublisherCouncil for Medical Schemes

Editorial CommitteeAlex van den Heever

Aleksandra SerwaPhumla Khanyile

EditorAleksandra Serwa

ContributorsAleksandra Serwa

Alex van den HeeverCharles Harebottle

Christoff RaathFinancial Supervision Unit

Haroon WadeeJonathan Broomberg

Lebo MarooMalcolm BrownMichael Schultz

Phumla Khanyile

AddressCouncil for Medical Schemes

Block EHadefields Office Park1267 Pretorius Street

HatfieldPretoria

Copyright: CMS News is published quar-terly by the Council for Medical Schemes

(CMS). All material published is copy-righted and cannot be used without thewritten permission of the publisher. The

views expressed by external stakeholdersin CMS News do not necessarily reflect

the views of the CMS.

Editorial Committee

CMS News March 2009 1

Now we try to put into words feelings thatwords cannot express. And there are more

of us than meets the eye.Patrick has made the medical schemes industry

what it is today. Trueto the values of socialjustice andequality, he dedi-cated the lastnine years of hislife to makingsure thatmembers ofm e d i c a lschemes aretreated fairlyand that more

South Africans enjoy access to healthcare.It’s thanks to him that the Council has blos-somed into the organisation it is today. It’sthanks to him that beneficiaries can sleep atnight, safe in the knowledge there issomeone out there looking after their inter-ests and protecting their rights. It’s thanks toPatrick that South Africa can take pride ina stable and sustainable private health insur-ance industry.

But why now?“Nine years is a long time,” Patrick told

CMS News. “Having achieved much of whatI set out to do,it is time for me tomove on.”

“I have thoroughlyenjoyed these pastnine years at theCouncil,” he addedafter a while. He wasnever one to makerash decisions. “This isan organisation I wasproud to lead. And Iam proud that weachieved success notby giving up on ourvalues, but by havingthe courage to be trueto them.”

Since its inceptionin 2000, the Council has led the efforts to improvethe financial solvency of schemes, the manner inwhich they are governed, and the benefits which

they offer their members.“We have travelled an extraordinary journey

of progress together,” Patrick told staff on the dayhe announced his resignation. “But now it is rightthat I leave. Know that I’m always with you. Headand heart.” ■

His legacy lives onMany hearts skipped a beat when the Registrar of Medical Schemes T. Patrick Masobe announced that he was leaving the Council for MedicalSchemes at the end of February. The industry sat up and took notice.What now?

The Minister ofHealth, after consul-

tation with theCouncil, appointed

Patrick Matshidze asActing Registrar ofMedical Schemeswith effect from

27 February 2009.He will remain

Acting Registraruntil a permanent

Registrar isappointed.

Take it from the(former) Registrar

• Continue to put benefi-ciaries and the publicbefore self.

• Keep reaching out notjust to those in power,but to those in needalso.

• Keep treating everyonewith respect and in themanner you would wantto be treated.

• Keep learning, forlearning is the onlysource of future success.

Stephen Harrison, our Senior Specialist in Strategy– and a member of the Editorial Committee of thispublication – left the Council in January. He madetime in his busy schedule to speak with CMS News.

“After almost nine years at the Council, Irealised it was time to move on to other challenges

– and a position at theTreatment Action Campaignhas provided me opportu-nity to contribute to the health system in anew way. I have really appreciated the oppor-tunity to work with so many people in theprivate health sector over the years. Ultimately,fixing the problems in our health system willrequire a concerted effort by all of us ingovernment, the private sector and civil society.Thank you for the active engagement and Iwish you well in the dynamic environment inwhich you work.”

“Stephen hasbeen a

remarkableservant to theCouncil, to thepublic, to this

country.”Patrick Masobe,former Registrar

of MedicalSchemes

By AleksandraSerwaCOMMUNICATIONS

MANAGER

Mr Masobe is a man of his word – a man of impeccable integrity who clearlyunderstands corporate governance. A veryhumble yet tough person. A very humaneperson, a selfless individual. A truevisionary. A strategic thinker who knowshow to play his tactics.

– Daniel Lehutjo, Chief Financial Officer

What makes Mr Masobe a great leader? It is not his charisma, oratory skills,business savvy or political connections.It is his unshakeable moral integrity andfaith in his cause.

– Bessie Molomo, Senior Call Centre Agent

“

”

Break the spellOur financial wizards got together the other day to take yet another

look at the numbers. After they had parted ways and the smoke hadsubsided, Get-Well Medical Scheme* appeared out of nowhere.Magically enough, it was the picture of financial distress all too

real for an increasing number of schemes in the world of private health insurance currently facing very real challenges. What kind of magiccould save this scheme from disappearing? We approached industry

experts to wave their magic wands at the pages of CMS News. But first,a little more on the spell that brought Get-Well into being.

* Not a real scheme.The purpose of theexercise was to extracta variety of views toexplore the complexityof the issue.

companies. Get-Well is the only open schemeadministered by Bloggs but Bloggs administers anumber of restricted schemes.

The scheme uses the FSG broker networkexclusively. This includes “tied” brokers as well asindependents. The FSG charges a “distribution fee”for managing the brokers. Get-Well has enteredinto a capitation contract with MCO (Pty) Ltd. Itis, however, still experiencing increasing claimscosts.

The employees of FSG and its subsidiaries aremembers of the scheme. Half of the trustees aresenior employees of FSG and its group. The prin-cipal officer is employed by the scheme and hasno prior connections with the group. The trusteesdo not hold regular Board meetings. In the lasttwo years, they have met only twice.

The scheme is incurring a steadily increasingmarketing bill. It has high chronic claims, resultingin a high claims ratio. Average contributions arehigher than the industry average for open schemes.Get-Well also has higher than average non-healthexpenditure, both per average beneficiary permonth (pabpm) and as a percentage of its GrossContribution Income (GCI). This is largely due tothe inappropriate contracts that the scheme hasentered into.

Get-Well Medical Scheme is an open schemethat was registered in 1998. Its membership

has fallen by 25% and the demographic profile hasbeen deteriorating over the last few years. Itsmembers are ageing and the scheme is strugglingto attract sufficient younger members.Furthermore, the scheme is losing membersbelonging to groups and is left with a highpercentage of individuals.

Get-Well is third-party administered by Bloggs(Pty) Ltd. Bloggs is a subsidiary of a large FinancialServices Group (FSG), as are the managed care

2 CMS News March 2009 CMS News March 2009 3

Membership profileDistribution of members

Gauteng 30%Other 6%KZN 12%

Western Cape 20%Northern Province 10%Free State 12%

Eastern Cape 10%

Financial highlights 20.7%

0

10

20

30

4035.5%

25.9%

Year 1 Year 3Year 2

%

YR 1 YR 2 YR 3

Principal members 25 300 23 600 19 600

Beneficiaries 57 200 52 800 42 700

Average age of beneficiaries (years) 39.5 40.7 41.6

Pensioner ratio 14.9% 15.6% 16.9%

Open scheme average age of

beneficiaries (years) 31.5 31.5 31.9

Open scheme average pensioner ratio 5.9% 5.9% 6.3%

YR 1 YR 2 YR 3

R’000 R’000 R’000

Gross contributions 520 600 500 900 512 100

Net (risk) contribution income 467 700 464 500 476 800

Net relevant healthcare expenditure 432 100 459 000 450 800

Gross healthcare result 35 600 5 500 26 000

Non-health costs 80 100 80 700 74 500

Managed care management fees 10 900 10 500 10 500

Administration costs 59 600 61 400 55 000

Net healthcare result (44 500) (75 200) (48 500)

Surplus/(deficit) for the year (25 800) (55 600) (23 728)

Average risk contributions per beneficiary R703 R716 R930

Open scheme average R580 R607 R674

Average net healthcare expense

per beneficiary R650 R722 R880


Average non-health costs

per beneficiary R121 R126 R143


Non-healthcare % of gross contributions 15.4% 16.1% 14.5%

Open scheme average 16.1% 16.2% 15.7%

Net claims ratio 92.4% 98.8% 94.5%

Open scheme average 82.0% 85.0% 84.0%

Distribution and marketing 6 000 9 100 1 700

Per option results for the current year (YR 3)

Pensioner ratio

A

C B

D

E12%

47%

17%6%

18%

A CB D E

42.2

32.2

52.646.4

39.4

0

10

20

30

40

50

60

3

A

C

B

D

E

22.7%10.1%

31.0%23.5%

15.4%

A CB D E

5

-8

- 21

- 3

- 17-20

-15

-10

-5

0

5

10

-25

Average age of beneficiaries (years)% of members

KeyA: Capitated hospital benefits B: Capitated primary care C: Traditional, no limts, 300% NHRPLD: Traditional, with limits, 100% NHRPL E: Hospital plan

Net healtcare result % of net contributions

Solvency ratio

Consider the evolvinghealth policy frameworkGet-Well Medical Scheme faces serious challenges on a number of fronts.However, Get-Well is certainly not unique; several schemes in South Africatoday will, on some level, associate with the issues presented in this case study.

Get-Well has incurred losses on the back ofhigh non-health expenditure (NHE) and a

deteriorating membership profile.What is partic-ularly concerning is that Get-Well’s solvencymargin has reduced even though the scheme islosing members.

Under normal circumstances, a scheme’ssolvency would increase if its membership declined(because departingmembers do not taketheir reserves withthem). The fact that theopposite is true for Get-Well suggests that themembers which recentlyleft the scheme weresignificantly healthierthan their remainingpeers. Not only doesGet-Well need to clampits loss-making position;it also needs to rebuildits reserves to meetstatutory requirements.

The relationshipbetween Get-Well, Bloggs and FSG could beindicative of potentially severe governance short-comings on the scheme’s part. Proper governanceis non-negotiable and has to be addressed regard-less of the scheme’s circumstances. Clearly thescheme’s Board needs to be more active andaggressively evaluate the appropriateness of itsservice provider contracts.

A crude analysis suggests that if Get-Well couldreduce its NHE to the industry average by theproverbial stroke of a pen, it would be back in asurplus-making position. Whether such a changeis feasible or appropriate is hard to say: Get-Wellneeds to assess not only what it is paying, but alsothe value for money that it is deriving in return.It could be that Get-Well’s unique circumstancesare more (or less) demanding than that of theindustry average to which it is being compared.

For example, on the back of member lossesit will be difficult for any Board to justify cuts inmarketing expenditure; indeed, the scheme mayeven opt to increase it. A reduction in NHE willassist Get-Well, but it is unlikely to be sufficient toachieve a sustainable turnaround.

Get-Well could also consider contributionincreases, benefit reductions and related restruc-turing of its product offering. These (admittedly

unpopular) rule changes, if executed carefully, couldcertainly assist Get-Well to curb its losses in theshort term – but not without introducing someadditional complexities.

A contribution increase would lead to a corre-sponding increase in Get-Well’s statutory solvencyrequirements, moving the statutory minimum goal-post even further out. The scope of potential

benefit reductions is limited by the legislativeminimum benefit requirements (especially for Get-Well’s capitated and hospital plans) to the extentthat severe benefit reductions may make it diffi-cult for Get-Well to maintain a sufficient level ofdifferentiation between its options.

There is a lot to be said on this subject ofcontribution and benefit changes but I’ll refrainfrom going into more detail here as I believe thatthe core issue we are facing lies on a deeper level.I consider these interventions to be rather super-ficial – like taking a painkiller to treat a fracturedlimb. Get-Well can expect immediate relief but, aswe will see below, in the longer term these inter-ventions may even serve to exacerbate thescheme’s situation.

My main concern for Get-Well revolvesaround its deteriorating membership profile. Therecent exodus of healthy members has initiated aprocess that some industry stakeholders havecoined the “spiral of death”. This rather ominouslynamed phenomenon is set in motion when ascheme loses young and healthy members and isforced to respond by increasing contributions orreducing benefits which, in turn, prompts moreyoung and healthy members to reconsider theirmembership. Older and unhealthier members tend


to be more reluctant to change schemes (poten-tially being subjected to waiting periods and/orchronic registration processes), and hence the cyclecontinues.

Can this process bestopped?

The answer is as simpleto understand as it is diffi-cult to execute: Get-Wellmust attract young andhealthy members.Furthermore, these newmembers have to selectbenefit options where theywill be paying significantlymore than they will claim. Ingeneral, these tend not tobe the so-called low-costoptions that were, ironically,designed for the young andhealthy. In our already satu-rated commercial schememarket where competition for healthy membersis rife this is no easy feat.

If Get-Well’s condition continues to deterio-rate it could look for a large commercial schemethat is willing to absorb its members through anamalgamation. This will effectively be the end ofGet-Well and, importantly, this seems to be a routethat our regulators are supporting for schemes inGet-Well’s position.

I am of the view that anamalgamation of this naturedoes not solve Get-Well’sproblem: it merely movesthe problem to a different(albeit larger) environmentwhere it is bound to re-emerge in a similar guise atsome point in the future.Ultimately, the problem is asmuch an industry-wide oneas it is scheme-specific.

But all is not lost. Thecomponents that formedpart of South Africa’s SocialHealth Insurance (SHI) framework were carefullydesigned to address the very issues that we aredealing with here. Since 1999, medical schemeshave been operating under the principles ofcommunity rating (i.e. schemes have to charge thesame premium to all members of a benefit option,

regardless of their state of health) and open enrol-ment (i.e. commercial schemes may not refusemembership to any applicant). These two pieces

of the SHI puzzle,implemented in isola-tion, presently form astructure throughwhich the “spiral ofdeath” phenomenon isinevitable. However, theSHI framework wasnot intended to belimited to only thesetwo pieces. Furthercomponents like riskequalisation, incomecross-subsidies, benefitrestructuring andcompulsory participa-tion were designed toclose the loop andcreate a structure

through which uncovered young and healthy liveswould be able to enter (or re-enter) the medicalschemes environment. The implementation ofthese final steps has been delayed for variousreasons, and on a policy-making level the SHImodel has subsequently been superseded by themore recent emergence of the debate aroundNational Health Insurance (NHI).

These challengesand their potentialsolutions are complexand will re-emerge insome form through theNHI debates that arecurrently playing out.Get-Well and itscompeting commercialschemes can and willimplement the short-term changes requiredto tread water in theforeseeable future –and this is perhaps therealistic route to take

while contributing to the NHI debates and lookinginto the structural changes that would be requiredto keep private healthcare financing sustainableand commensurate with the government’s broadersocial objectives. ■

“Proper governance isnon-negotiable and hasto be addressedregardless of thescheme’s circumstances.

”“The recent exodus of healthy membershas initiated a process that someindustry stakeholders have coined the ‘spiral of death’.

”“Get-Well must attractyoung and healthymembers.

”

By ChristoffRaathTHE HEALTH

MONITOR COMPANY

Christoff has spent mostof his career working inthe private sector healthcare financingarena. He joined theHealth Monitor Companyin 2001, heading up thetechnical development of the Health Monitormodel, a computerisedrisk management modeldesigned specifically formedical schemes.Christoff qualified as anactuary in 2003 and hasinteracted with severalstakeholders in SouthAfrica’s healthcareindustry over the pasteight years. He wasappointed Chief ExecutiveOfficer of the HealthMonitor Company in 2007.

4 CMS News March 2009

Opi

nion

It is important to note that the interventionsbelow are not in any specific order of impor-

tance or priority.Get-Well has too many options, some of them

catering for the same population and/or incomecategory groups. Having so many options tomanage may prove to be anadministrative nightmare andalso very confusing to themembers.

The scheme needs toreview its current benefitoptions, and limit them to twoor three simple offerings.There needs to be a cleardistinction between offerings.To this effect, the scheme mayconsider the merging of similarofferings, i.e. merge the twocapitated options into oneoffering and the two full-benefit options into another;it may also be a good idea toconsider terminating the hospital plan. Full coverhas to be provided for out-of-hospital prescribedminimum benefit (PMB) conditions anyway. Eitherthat or substitute the latter with a comprehensivesavings type option; this will enable exposure to adifferent target group.

Given its high pensioner and claims ratio, thescheme should consider entering into risk-sharingagreements and designated service provider (DSP)arrangements. There is also the option of negoti-ating and contracting with service providers forpreferential rates without a DSP arrangement.Where preferential rates could not be achieved,the scheme should reimburse at NHRPL (NationalHealth Reference Price List) tariffs. Evidence-basedand clinical managementprogrammes must be accord-ingly implemented. Memberswill also benefit from anintroduction of screening,wellness and disease manage-ment programmes.

Get-Well MedicalScheme should review itsgrowth strategy to include,among others, the use of anational footprint of accred-ited brokers who will be paida regulated fee for their serv-

ices, excluding the current additional “distributionfee”. Marketing efforts should be focused attargeted populations and the marketing budgetmust be adhered to.

It is clear that there are serious governanceissues within Get-Well Medical Scheme. An urgent

AGM must be scheduledwithin an acceptableperiod of time wherescheme members mustelect at least 50% of theirown representatives tothe Board. All newtrustees should beappointed on merit.Training must be organ-ised for all new trusteesto enable them to func-tion adequately in theirduty of representing theneeds of their members.The current Boardmembers should be held

accountable for losses incurred, and for notconducting themselves nor managing the affairs ofthe scheme in line with the Medical Schemes Act.The perverse relationship between the schemeand FSG and its group must be terminated as amatter of urgency.

The current contracts with MCO (Pty) Ltd.,Bloggs and FSG must be reviewed. As a capitatedprovider, MCO should take on either partial orfull risk of Get-Well to ensure adequate riskmanagement. New broker contacts need to bedrawn to encourage an open network of brokers.All contracts must be monitored with service levelagreements.

Clear timelines must be defined and a projectplan drawn to enable theimplementation of all ofthe above. Critical areasmust be identified andgiven priority for imple-mentation. The principalofficer must take respon-sibility for ensuring theimplementation of goalsand adherence to time-lines. S/he must also takeresponsibility formanaging the affairs ofthe scheme. ■

Ensure independenceGet-Well Medical Scheme is an open scheme which is steadily losing ground as experienced in loss of members and reduction in reserve levels.

Prioritise critical areasA combination of interventions is required to turn Get-Well Medical Schemearound, most of which should and can be simultaneously implemented.

In terms of the Medical Schemes Act and accept-able standards of governance, a medical scheme

should operate as an independent organisation.The structures of Get-Well indicate that thescheme does not necessarily practice independ-ence as envisaged in corporate governancestandards.

Whilst the principal officer is independent, wefind that 50% of the Board of Trustees is appointedor elected from employees of the FinancialServices Group (FSG). FSG in turn own andcontrol the administrator, the managed carecontracted companies and the broker company.This leads to the direction and operation of thescheme’s affairs being in favour of the FSG busi-ness units and the FSG employees to thedetriment of the other members, which may beunintentional.

The contribution and benefitstructures of the scheme and itsnon-healthcare costs are notdesigned to comply with therequirements of the Act regarding“financial soundness”. This isevident from the high net claimsratio and the incurred deficit overthe three-year history.

The reserve ratio of thescheme indicates that it will beable to fund a turnaround strategy.

The three major stepsrequired to turn the schemearound are:1 Restructure the Board of Trustees.2 Restructure the benefit and contribution rates

to be competitive in the marketplace.3 Review the broker arrangements, opening the

network to independent brokers.

The trustees of an open scheme should be electedby the members of the scheme and not appointedby the sponsors, who in this case are FSG. Any

inclusion in the rulesthat FSG appoints 50%of the Board should beremoved. Secondly,there should be provi-sion in the schemerules for the electedtrustees to appoint twoadditional independenttrustees who will bring

industry, financial and legal skills to the Board.Strategically, the scheme should develop a

benefit and contribution structure that wouldproduce a claims loss ratio that covers all non-healthcare costs. In order to achieve this balance,the Board would need to appoint actuaries toestablish claiming patterns, estimate furtherclaiming patterns and costs, and determine theappropriate contribution rates. The resulting struc-ture would then be evaluated against open schemeproducts available in the market to ensure compet-itive positioning. Benefit and contribution rateswould then be amended to ensure that theproduct is competitive and acceptable to bothbrokers and their prospective clients.

In determining the contribution rates, theactuary would have to take into account any

strategic increase to the reserveratio that is not covered by invest-ment income.

The broker network should beopened to independent brokers.The marketing strategy needs tobe designed to encourageincreased membership. The devel-opment of the product needs tobe carried out in consultation withthe broader broker network inorder to obtain broker buy-in tothe product. Existing broker-member relationships may have tobe retained as service fees arepayable.

In order to achieve the above, the presentBoard has to amend the scheme rules to giveeffect to the revised Board of Trustee structure.Either the Annual General Meeting or a SpecialGeneral Meeting should be called to appoint anew Board of Trustees.

In the interim period, actuaries need to beappointed to prepare the new benefit and contri-bution structure. If there is a major differencebetween the current and new contribution rates,it may be necessary to obtain member approvalas required in terms of the Act.

The principal officer should immediately nego-tiate with FSG for the right to appoint independentbrokers and proceed with appointing them.

The new Board of Trustees is to carry out aperformance appraisal of the principal officer witha view to reviewing his/her continued employ-ment. ■

CMS News March 2009 76 CMS News March 2009

A medical schemeshould operate asan independentorganisation.“

”Get-Well MedicalScheme should reviewits growth strategy.“

”

Critical areas must be identified and givenpriority forimplementation.“

”By MalcolmBrownSAICA

Malcolm was a partner inErnst & Young from 1962to 1996. After retiring hebecame involved in thehealthcare industry,focusing on medicalschemes. During hisretirement he has been a trustee of an openscheme, a member of 20 audit committees,Chairman of the SAICA(South African Institutefor CharteredAccountants) MedicalSchemes Project Groupresponsible for theAccounting Guide, arepresentative of SAICAon ASSA (ActuarialSociety of South Africa)and RETAP (RiskEqualisation TechnicalAdvisory Panel), andChairman of the GautengHealth Department AuditCommittee. He isconsulting to hospitals,medical schemes andprovider groups.

Do this to turn the scheme around:

1 Restructure the Board of Trustees.2 Restructure the benefit and contribution

rates to be competitive in the marketplace.3 Review the broker arrangements, opening

the network to independent brokers.

By Dr LeboMarooGEN-HEALTH

MEDICAL SCHEME

Dr Maroo qualified as a medical practitioner inCuba in 1989. She holdscertificates in HIV/AIDScounselling skills andreproductive health. Shehas worked in paediatricsobstetrics, casualties andpaediatric surgery. DrMaroo has held seniormanagement positions atMx Health and SechabaMedical Solutions. She iscurrently the Head ofRisk Management andStrategy at Gen-HealthMedical Scheme.

Opi

nion

Opinion

expenses, all otherthings being equal. Asexplained abovethough, high contribu-tion increases typicallylead to adversemembership move-ments, and it istherefore not a goodstrategy on its own.

Clearly the mosteffective strategy would have been to reduceclaims by 10% in year 1. Even if claims inflationwas then at the samelevel as in the basescenario thereafter, thescheme would still haveended up with solvencyabove 46% in year 3, allother things being equal.

The scheme wouldhave had much morefreedom in years 2and 3 to impose lowercontribution increases,and the adversemembership movementscould have been avoided.

Such a reduction inclaims costs could havebeen achieved by one orboth of the followingoptions:• option 1: moving the

scheme to an admin-istrator and/or managed care organisation thatis able to obtain significantly better tariffs inthe market (savings of more than 10% areavailable in the currentmarket, and this couldhave accounted for thefull claims savingsrequired), and is alsoable to implement state-of-the-art risk analysisand risk managementtechniques. Again, savingsof the magnituderequired have beenachieved in the currentmarket; and/or

• option 2: redesigning the benefits. For a scheme

of this size, five benefitoptions are probablynot justified, and a“300% plan” in partic-ular is not affordable.

Members wouldexperience the mostdisruption or dissatis-faction with option 2above – which may

again lead to adverse member movements. Evenso, it may still be necessary to rationalise benefit

options. But clearly itwould work better if, atthe same time, option 1were implemented.

The preferred routeis therefore, without adoubt, option 1, as thiswould improve thescheme’s finances imme-diately without having anegative impact onmembers.

However, this schemeis already in a precarioussituation, and it is also notclear whether it has thecredibility to recoverfrom this situation, even ifthese actions are taken. Insuch a case, the schemewould have no option butto seek a merger and,

failing that, go into liquidation.Before getting to this point though, Get-Well

should first try to achieve a step change saving inclaims costs, preferablythrough obtaining betterservice provider tariffs andimmediately improving riskmanagement.

This could probably bestbe achieved by moving toan administrator and/ormanaged care organisationthat could offer this.

Once again, a well-func-tioning governance structure,

with no conflicts of interest, would facilitate a deci-sion of this kind by the Board. ■


Change service providersGet-Well Medical Scheme is clearly in a very difficult situation: it has rapidlyfalling membership, underwriting losses, and its claims costs are increasing at an alarming rate. The net effect has been that the scheme’s solvency hasfallen from 35.5% to 20.7% over three years.

The drop in membership appears to be due tothe very high contribution increase in year 3,

of 26.4%. This appears to have been a reaction toan expectation of a high increase at the time ofpricing.

The actual claims increase was 21.4% fromyear 2 to year 3, which came on top of the signif-icant deficit arising in year 2.

Nevertheless, by simplyimposing a very high contri-bution increase, the schemeaffected its membershipadversely, leading to a signif-icant loss in members – andit was probably the youngerand healthier that left in year3, thus aggravating the “actu-arial death spiral” of everhigher claims costs in rela-tion to premium income.

It would now be verydifficult to get thesemembers to join thescheme again, or to attractother members, as brokerswould have noticed thisvulnerability and potentialfailure of Get-Well andwould not recommend thattheir clients join this scheme.

There also seem to be corporate governancefailures – notably the fact that some of the trusteesare employed by the holding company of theadministrator, which is against the law. This clearlyhas to be rectified. The trustees would no doubtfind it easier to question the role of the adminis-trator if the members of the Board did not havesuch conflicts of interest.

On a simple analysis, non-healthcare costsappear high, although it is hard to tell whether thefees are unreasonable without having any infor-mation on the range and quality of services offered

to the scheme. While a reduction in these costswould improve the financial position of thescheme, this change would not, in and of itself,save the scheme.

To illustrate this point, consider four scenariosin solvency: the base scenario, a scenario of having10% lower administration and managed care feesin each year (scenario 1), a scenario of having 10%

higher risk contributions ineach year (scenario 2), and ascenario of having 10% lowerclaims in each year (scenario3) (see table below).

If, for each of these, weassume that the change isimplemented in year 1, thesolvency would have devel-oped as indicated in the tableover the three years.

Under both the basescenario and scenario 1,solvency falls below 25% byyear 3.

However, under scenario1, the solvency result is closeto the regulatory minimum.But had the scheme imple-mented 10% highercontributions in year 1 andthen simply maintained the

subsequent increases that it implemented underthe base scenario, it would have maintainedsolvency of more than 48%.

This is only illustrative because this would havecome at considerable pain to members, and theadverse membership movements may then haveoccurred earlier. Also, the scheme would not havehad to impose such a high contribution increasegoing from year 2 to 3.

However, the table does illustrate how highercontribution increases have a far more significanteffect on outcomes than lower non-health


It is not clearwhether thescheme has thecredibility torecover from this precarioussituation.

“”

The trustees would nodoubt find it easier toquestion the role of theadministrator if themembers of the Boarddid not have suchconflicts of interest.

“”

To reduce claims costs:

1 Move the scheme to an administrator and/ormanaged care organisation that can obtainsignificantly better tariffs in the market andcan also implement state-of-the-art riskanalysis and risk management techniques;and/or

2 redesign the benefits.

What to do?

• Improve risk management.• Obtain better service provider

tariffs.• Revisit the scheme’s governance

structure.• Failing the above, merge or go

into liquidation.

The four scenarios in solvency

Year 1 Year 2 Year 3% % %

Base 35.50 25.90 20.70Scenario 1 36.85 28.64 24.66 10% lower admin and managed care feesScenario 2 44.48 44.41 48.11 10% higher risk contributionsScenario 3 43.80 43.59 46.80 10% lower claims

By Dr JonathanBroombergDISCOVERY

HEALTH (PTY) LTD.

Dr Broomberg is amedical doctor andhealth economist,and the Head of Strategyand Risk Management atDiscovery Health (Pty)Ltd. He has spent most of his professional careerworking in healtheconomics and finance,both in the public andprivate sectors. In 1994he co-chaired theCommittee of Inquiryappointed by the Ministerof Health to proposereforms to the fundingand delivery of healthcarein South Africa. In 2005and 2006 Dr Broombergwas appointed by theMinisterial Task Team onSocial Health Insuranceto coordinate aconsultative investigationinto low-income medicalschemes. He also servedas a member of theTechnical Review Panel of the Global Fund tofight AIDS,TB andmalaria for five years,including two years asChair, and is currently a Board member of the Alliance for HealthSystems and PolicyResearch, which is basedat the WHO in Geneva.

Opi

nion

Non-healthcare costs

There is a need for improved and tighter corpo-rate governance.

Half (50%) of the trusteesare senior employees of theFinancial Services Group (FSG)and its group. But section 57(2)of the Medical Schemes Act131 of 1998 prescribes that atleast 50% of the members ofthe Board of Trustees shall beelected from amongstmembers. Section 57(3) of theAct stipulates that a personwho is a director or anemployee of an administratorof a medical scheme shall notbe a member of the Board ofsuch a scheme.

There is a clear conflict ofinterest here. And perhaps a start would be totackle the factors influencing non-healthcareexpenditure.

The current corporate governance arrange-ments are not amenable totackling the current administra-tion expenditure, and in facttransfer more power – or atleast the potential transfer ofpower – into the hands of theadministrator and the managedcare organisation.

With respect to thenumber of Board meetings,there are far too few to ensureadequate levels of control overthe financial dealings of thescheme. The Board has onlymet twice in two years. As perthe Council for MedicalSchemes (CMS) guidelines ongovernance, Boards shouldschedule at least four meetingsannually.

Therefore, with moreregular meetings, the schemewill be able to monitor itsperformance with properaccountability and lines ofaccountability and responsibility.

The Audit Committee, for example, should

hold no fewer than three meetings a year, thedates of which should fall within the financial andaudit reporting cycle.

There also needs to be strin-gent application of guidelines onfit and proper trustees and prin-ciple officer, as per CMS criteria,to avoid the shortcomings expe-rienced by this scheme.

With the efficiency gainsfrom improved corporate gover-nance and reduced non-healthcare expenditure, thescheme would be better placedto employ marketing agents tostrengthen the membership pooland the overall performance ofthe scheme.

Healthcare costsThe scheme should seriously consider streamliningthe number of benefit options. This will translateinto more effective risk-pooling with enhancedlevels of cross-subsidy.

The fragmentation thatcomes with multiple risk poolswith little or no cross-subsidybetween them poses a risk tothose risk pools with higherhealth burdens, older populationmembers and fewer members. Itcould be that these are themembers that are losing out andthat they could be moving toother schemes that offer lowerpremiums and perhaps greaterlevels of benefits.

Last resort

As a last resort the schemeshould consider a consolidationwith a larger scheme so as notto compromise the interests ofits existing membership.

This case study points to theneed for mandatory cover, clarityon guidelines for the minimumpackage of benefits, and incomecross-subsidisation. ■

Target non-healthexpenditure firstJust looking at the overview of Get-Well Medical Scheme, the key areas thatneed to be considered include non-healthcare costs and healthcare costs.


Focus on governanceThe first step to turn around Get-Well Medical Scheme would be to apply to the High Court to place the scheme under judicial management due togovernance irregularities.

The scheme has an illegally constituted Boardof Trustees for the following reasons:

• The administrator Bloggs (Pty) Ltd. and themanaged care company are subsidiaries of theFinancial Services Group (FSG). All theemployees of FSG and its subsidiaries aremembers of the scheme. Half of the trusteesare senior employees of FSG and its group.

• Clause 57(3)(a) of the Medical Schemes Act131 of 1998 (Act) clearly stipulates who is noteligible to serve on a Board of Trustees: “anemployee, director, officer, consultant orcontractor of the administrator of the medicalscheme concerned, or of the holding company,subsidiary, joint venture or associate of thatadministrator”.

For the trustees to carry out their fiduciaryresponsibilities, the model rules of the Council forMedical Schemes (CMS) propose as a guidelinethat the trustees should meet at least every twomonths. By meeting only twice in two years theydid not take all the reasonable steps to ensurethat the interests of beneficiaries in terms of therules of the scheme and the provisions of the Actwere protected at all times.

The trustees did not adequately apply theirminds and address the non-compliance of the four

loss-making options.And the capitation agree-

ment does not meet therequirements of Regulation 15(f)of the Act. It is not in the bestinterest of members and doesnot embody genuine transfer ofrisk if the scheme is still experi-encing increasing claims costs.

The second step would beto address the financial perform-ance of the scheme.

The scheme is in a financialdeath spiral due to losingmembers, a drop in solvencyratio, an increase in average age,and an increase in operatingdeficits of four benefit options.

Non-healthcareissuesAlthough as a percentage ofGross Contribution Income

By HaroonWadeeBHF

Haroon is the Head of Health Systems and Policy at the Board of Healthcare Funders of Southern Africa (BHF).He has nearly 10 yearsexperience in healthsystems analysis,specialising primarily in healthcare financingreform and healtheconomics. His areas of work include Socialand National HealthInsurance, exploring costdrivers in the healthsystem, and unpackingthe key challenges forhealthcare financingreform. But his majorinterest lies in public-private interactions in the health system.

(GCI) the scheme compares well with the averageof open schemes, the average non-healthcare costper beneficiary in the third year was 20% higherthan the average for open schemes. This is dueto the fact that the average contribution of thescheme is much higher than the industry average.

To address the non-healthcare costs, the distri-bution contract needs to be reviewed. The schemecannot survive by paying distribution fees andexperience increased marketing costs whilst themembership is falling by 25% over a three-yearperiod.

The fact that broker commissions did notreduce much over the last three years while themembership dropped by 25% needs to be inves-tigated.

Judging from the claims ratio of 90% plus, itdoes not seem that the managed care companyis adding any value in retaining claims costs.

The current administration cost of R234 permember per month is too high compared to theindustry averages. Despite the scheme’s unsatis-factory performance, the administration feesincreased by 8-11% over the period under review.

Product issuesIt needs to be investigated why there are two capi-tation options and, as indicated above, the existinginappropriate capitation arrangement needs to belooked at as it seems that it does not meet therequirements of the Act.

It could be an option to merge options C andD and scrap the 300% benefit whilst providing fora revision of the current limit structures and atten-dant protocols. With the claims ratio above 90%the pricing philosophy of the scheme must bereviewed.

Proper and adequate managed care initiativesneed to be implemented to contain costs.

Create an option that would attract youngermembers, particularly those entering the labourmarket.

Marketing and distributionFocus marketing on employer groups rather thanindividuals.

Appoint an independent distribution network.Develop all-embracing research-based

marketing, communication and member growthand retention strategies. ■

This case studypoints to the needfor mandatorycover, clarity onguidelines for theminimum packageof benefits, andincome cross-subsidisation.

“

”

There is a needfor improved andtighter corporategovernance.“”


In a nutshell

The following steps need to betaken to turn the scheme around:• Place the scheme under cura-

torship.• Reconstitute the Board of

Trustees.• Revise all contracts.• Put the administration,

managed care and capitationcontracts out on tender.

• Develop a proper businessplan.

• Investigate broker commissionpaid.

• Revise products and pricingphilosophy.

• Determine proper marketingand communication strategies.

• Create a core managementstructure to look after theinterests of the scheme.

By MichaelSchultzLA-HEALTH

MEDICAL SCHEME

Michael has been atrustee of LAMAF/LA-Health Medical Schemefor 40 years. He has beentheir Chairperson since1994, and a Director at the BHF (Board of Healthcare Funders of Southern Africa) since2002. Michael is anactive member of thePublic Private HealthForum and the privatehealthcare sectorrepresentative at theProvincial Health Councilin the Western Cape.

Opi

nion

Opinion

management performance than just on the costof the service.

I have seen several studies with hard data thatshow that the risk management performancedifferential can be as high as 18%. This wouldsuggest that the scheme could potentially reduceits average net healthcareexpense by R158 per benefi-ciary if its risk management wasoptimised. This is more than theentire non-healthcare cost. Thedifferential to the open schemeaverage for healthcare expensesuggests that it could beachieved.

An improvement of thismagnitude will clearly not beachieved by a single action. It willneed significant change acrossthe entire risk managementspectrum, from benefit designto utilisation management andprovider relations. It will almostcertainly take longer than a yearand will encounter resistancefrom all manner of vestedinterest but I know from experience that it canbe achieved and is worth attempting.

I have not allowed myself to be sidetracked

into debate about the relationship between thescheme, its administrator and the Financial ServicesGroup (FSG). While these relationships can beopen to abuse with the blurring of interests of thescheme and the company, there could equally bea greater incentive for FSG to support the schemein every way possible to protect their businessinterests. What is critical here is for the trusteesto recognise that they have a real responsibility tomembers completely independent of their respon-sibility to FSG, even if they are employees of FSG.Every decision they take must be in the bestinterest of members, even if it is not necessarilyin the best interest of FSG.

It has been my recent experience that, with arecognition of the seriousness of their fiduciaryduty, a growing number of Boards of Trustees arebeginning to act in this way. ■


Clarify the purpose and take actionThe picture for Get-Well is not a pretty one. It would appear as if all the cardsare stacked against this scheme but it has been my experience that thesituation for the scheme can be turned around.

What is needed to achieve a turnaround forGet-Well is a clear sense of purpose and

the will to take necessary action.For some time I worked closely with Dr Andy

Andrews (Henley Management College) and hewould often start a session with a slide that definedinsanity as “doing the same things while expectinga different result”. He appropriately credited thequote but unfortunately I cannot remember whosaid it.

The quote is, nevertheless, applicable to thissituation. If the fortunes of the scheme are to beturned around, things are going to need to bedone very differently.

In this instance the first thing that will have tochange – and change very dras-tically – is the approach to themanagement of the scheme. Ascheme, even one of this size,is a very big business that needsto be actively managed. Ameeting of the Board ofTrustees only once per year iscertainly not sufficient toactively take charge of thescheme and direct the veryserious plan of action that willneed to be put in place toreturn the scheme to sustain-able long-term health.

What the trigger would beto get the trustees to recognisethe seriousness of their fidu-ciary duty is not clear but I haveexperienced a refreshing newenthusiasm across the full spec-trum of trustees and far moreactive and independent partic-ipation in decision making withrespect to the running of schemes.

Once this change in management approachhas been effected, I believe that the prognosis forthe scheme is actually quite good. I have had directexperience with organisations being turned aroundthat were facing far more serious challenges thanthis scheme. All it took was a recognition thatthings needed to change and the right manage-ment team being put in place.

While the scheme faces the challenges of areducing member base, declining reserve levelsand the ageing of its members, it is still relativelywell resourced. This could provide the space for

By CharlesHarebottleMSO

Charles is a specialist in the field of strategicresponse programmesthat deal with thebusiness challengespresented by rapidchange in the businessand social environment.He has helpedorganisations to capitaliseon the challenges andopportunities broughtabout by sudden change,and with the developmentand implementation ofstrategic responseprogrammes to deal withthe HIV/AIDS epidemic.Charles has also beeninvolved in workplacehealth. He is theManaging Directorof the Medical ServicesOrganisation (MSO).

management to take the required action. Also,almost ironically, some of the scheme’s badnumbers are in fact its opportunity for improve-ment.

In any business turnaround, only one thingneeds to be achieved and then all others fall intoplace: the organisation must be returned to oper-ational profitability. In the case of a medical scheme,the word “profit” is possibly inappropriate but forthe scheme to have a healthy sustainable future itwill need to be brought to the position where itcan deliver an operating surplus on a sustainablebasis.

The profitability equation is a very simple one.Profitability is a function of cost and revenue. Costs

must be kept below revenue.In the case of Get-Well it

will be very difficult toincrease revenue due to bothmarketing and regulatoryforces. The average risk contri-bution is already well abovethe industry average. It will bedifficult to attract and retainmembers if this differential isincreased even further.

Fortunately, the numbersshow that there is consider-able opportunity to improvethe cost side of the equation.With the appropriate focusthere has been on thescheme’s non-healthcare costsover the past few years, it istempting to focus all theattention on this aspect. Amore detailed analysis of thenumbers shows that the newmanagement will fail if this is

the only area concentrated on.To put this into perspective, the scheme will

save R24 per beneficiary if these costs werereduced to the market average but will save R317per beneficiary if the net healthcare expense couldbe reduced to the market average.

This is not to say that the new schememanagement should not take action to reducenon-healthcare costs. The best administration andrisk management services in the market arecertainly not necessarily the most expensive; it isjust that when making this decision, the schemedecision-makers need to focus more on actual risk

If the fortunesof the schemeare to be turnedaround, thingsare going toneed to be donevery differently.

“

”

Once the changein managementapproach has beeneffected, theprognosis for thescheme is actuallyquite good.

“”


A word of advice

One of the approaches that theBoard of any scheme in difficultyshould always explore is the possiblemerger with a healthy scheme.

If the merger partner is chosenproperly, this action provides animmediate solution to the scheme’sdifficulties and should alsostrengthen the scheme into whichthe merger takes place.

If this can be achieved, it can beseen to be in the best interest ofmembers as it could then alsostrengthen the long-term viability ofthe scheme into which the mergerhas taken place.

Opi

nion

conflicted commercial interests may be under pres-sure to rapidly recoup their return on investment,either because of dividend pressures arising fromthe structuring of share-incentive schemes forsenior management and/or because of financialdifficulties within the holding company FSG.

The evidence indicates that the conflictedgovernance arrangements are supporting a short-term view. This would be of significant concernwhere the short-term view is undermining thefinancial viability of the scheme, which suggeststhat the conflicted commercial interests are unableor unwilling to adjust their self-defeating behav-iour.

This scenario is extremely dangerous forscheme members as the commercial interests maybe in some form of a downward spiral that mayresult in increasingly desperate attempts to extractfunds from the scheme without cutting expenses.These increasingly desperate actions will result infaster membership attrition within a financial year,distorting the pricing faster than it can be adjusted.

Broker arrangementsGiven the inherent conflicts of interest embeddedin this scheme, it is reasonable to assume thatbrokers have been over-remunerated to attractmembers at some point. The brokers would there-fore have been party to the consequences of theshort-term strategy of the holding company andin part responsible for the scheme’s decline.

However, once the situation becomes obvi-ously desperate, the broker group is inevitablygoing to disengage from the scheme andencourage the better risk groups to move.

This will only exacerbate the decline of thescheme, causing rapid deterioration from this pointforward.

OverallassessmentThe predicament of Get-Well Medical Schemeappears to derive from theconflicted scheme gover-nance structure where therelevant external commer-cial interests have adopteda short-term view of thescheme.

The consequences for the scheme may beserious as appropriate corrective action is unlikelyto materialise without significant external pressureor intervention.

RecommendationGiven that the problems at Get-Well are relatedto governance, resolving the financial viability ofthe scheme is possible only if unconflicted manage-ment decisions can be implemented timeously.

But correcting a governance problem takestime, which suggests that immediate action shouldbe taken by the regulator to fix non-healthexpenses at a level that can make the scheme

viable again.This should buy

some time to takeaction against conflictedBoard members, and toconsider options such ascuratorship.

W h e r e t h econflicts are extensive,then a period of cura-torship should beconsidered. ■


Decide wherethe problem liesBefore deciding on the most appropriate course of action, the followingquestion needs to be answered: is there a problem with the scheme or with the system?

Schemes operating within the open commer-cial sphere may fall into difficulties for reasons

either within their control or out of their control.The former may involve poorcommercial strategies arisingfrom risky business decisions orconflicts of interest. The lattermay involve systemic demo-graphic changes that ultimatelynarrow the available commercialstrategies.

In performing a scheme diag-nostic it is important to makethis distinction as it could deter-mine specific interventions by theregulator and/or establish a basisfor improvements in the regula-tory framework.

Where the causes aresystemic, amalgamations andrelated measures may proveappropriate. Where, however,mitigating the central challengesfalls within the control of thescheme’s management, schemegovernance may prove to be the factor requiringan urgent remedy.

Ageing membershipThe ageing membership of Get-Well Medical Scheme should notnecessarily cause the scheme tobecome unsustainable or uncom-petitive within the market.

The scheme has five options,ranging from hospital cover tocomprehensive cover, whichshould result in a distribution ofrisk within the scheme, which inturn should not impact on pricing.The older and sicker memberswould reside in the morecomprehensive arrangements,while the younger and healthiermembers would take up themore limited cover options.Competition with other schemeswould involve a degree of cross-subsidisation from the limitedcover options to the morecomprehensive options in order

to attract a reasonable number of good risks tocomprehensive options.

However, if this scheme were facing significantcompetition from single-optionschemes which offer nocomprehensive cover, it wouldbe forced to remove any cross-subsidisation to remainprice-competitive.

Although this would causeharm to those groups no longerable to afford the increased costof comprehensive options, thescheme would neverthelessremain viable. The removal ofthis social harm to high-riskgroups would, however, occurthrough measures such as riskequalisation, which wouldremove health status as a basisfor competition.

But even in the absence ofrisk equalisation, the schemewould still remain viable, evenwith an ageing population,

through option differentiation.The fact that Get-Well is ageing cannot be

seen as a factor causing this scheme to becomeunviable as it has adequatemechanisms within the law tocounter the effects of an ageingmembership profile.

GovernanceThe scheme demonstrates ahighly conflicted governancestructure. Whether or not thisfactor will undermine thecommercial viability of thescheme is dependent predom-inantly on whether theconflicted commercial intereststake a short- or long-term viewof their interest in the scheme.

A long-term view would beconsistent with lower adminis-tration fees and properlyperforming managed care serv-ices – even if conflicted.

Where the view isweighted to the short term, the

Schemes operatingwithin the opencommercial spheremay fall intodifficulties forreasons eitherwithin their controlor out of theircontrol.

“

”

Appropriatecorrective action is unlikely tomaterialise withoutsignificant externalpressure orintervention.

“

”

Where the causes are systemic,amalgamations and relatedmeasures may prove appropriate.Where, however, mitigating the central challenges falls withinthe control of the scheme’smanagement, scheme governancemay prove to be the factorrequiring an urgent remedy.

“

”


By Alex van den HeeverSENIOR ADVISOR

Alex is a senior advisor tothe Office of the Registrarof Medical Schemes forthree days a week. Byprofession he is aneconomist with a Mastersdegree from theUniversity of Cape Town.Outside of the CMS heprovides technical adviceon a consulting basis togovernment and publicentities in the areas ofsocial security, healtheconomics and finance,public finance, and healthsystems.

What should happen?

Resolving the financial viability of thescheme is possible only if unconflictedmanagement decisions can be implementedtimeously. But correcting a governanceproblem takes time, which suggests thatimmediate action should be taken by theregulator to fix non-health expenses at alevel that can make the scheme viable again.

Opi

nion

As already indicated, the association betweenthe scheme, its administrator Bloggs and FSG alsoposes potential issues of conflicts of interest andcauses one to question the extent to which deci-sions taken by the Board areindependent.

FinancesThis scheme is also experi-encing problems on thefinancial front.

Get-Well is currently notmeeting the requirements ofRegulation 29 of the Act whichstipulates that a scheme mustmaintain accumulated fundsamounting to at least 25% ofgross annual contributions.

The reduction in the solvency ratio of thescheme in the last three years appears to be largelydue to high claims costs (as a result of an ageingmembership and high chronicclaims) as well as high non-health expenditure (NHE).Get-Well is spending signifi-cantly more on total NHEthan other open schemes. Thisappears contrary to theexpectation that the larger thescheme, the lower the costper beneficiary should be.

In essence, members ofGet-Well are getting less outof every healthcare Randspent. This results in a furtherdilution of reserves.

Action to takeGiven the challenges that Get-Well is experiencing, the following course of actionshould be undertaken:1 The scheme should be placed under curator-

ship. It is evident that the trustees are not fitand proper to effectively manage the scheme.This would also be an attempt to deal withthe governance problems experienced by thescheme. The governance structures adoptedby the scheme need to be reviewed to ensurethat the interests of its members areprotected.

2 The scheme should submit a business plan tothe Office of the Registrar of Medical Schemesdetailing a turnaround strategy in terms ofsection 35 and Regulation 29(4) of the Act.

This plan should cover,inter alia, how thescheme will reduce itsclaims costs and NHE.Should the scheme fail topropose an appropriateplan in respect of NHE,in particular administra-tion costs, a restrictioncan be imposed on thescheme in terms ofsection 44(8).

3 The prospects of thescheme operating in asustainable manner againappear bleak. This isprimarily because of i t sinabi l i ty to attr actyounger and healthiermembers (and theresulting deterioratingage profile). The schemeshould not be allowed tocontinue operating untilits reserves are com-pletely depleted; allowingit to operate wouldamount to postponing theinevitable. The curator canthus consider amalga-mating Get-Well withanother scheme. Eventhough the scheme hasbeen losing members andreserves, the membershipbase and reser ves a res t i l l b i g enough to

attract a suitable partner to merge with. It is,however, important that the scheme seek apartner that is suitable from a cost and benefitpoint of view. The potential partner shouldhave a risk pool and reserves large enough toabsorb Get-Well without impacting negativelyon the members of the recipient scheme.

4 Should the curator fail to institute an amalga-mation, the scheme should be liquidated interms of its rules. This should happen timeouslylest the members are left out of pocket. ■


Place the scheme undercuratorship*Get-Well Medical Scheme is a large open scheme which is facing seriousdifficulties from various fronts.

Get-Well is currently experiencing memberloss to the tune of 25% for the last couple

of years. This should be viewed against the back-ground of the intensive and aggressive marketingstrategy that the scheme has adopted. Theincreased marketing expenditure and reducedmembership suggests that the scheme is notderiving value for money out of this arrangement.This is an area that needs to be reviewed by theBoard. Furthermore, the fact that the schemeutilises a broker network of its administrator’sholding company poses potential conflict ofinterest.

Managed careOn managed care, Get-Well entered into acapitation contract whichfailed to curb its increasingclaims costs. This againquestions the appropriate-ness of this contract; it is notresulting in expected effi-ciencies for the scheme.This is another area wherethe Board needs to assessthe fees that are being paidin terms of this contractagainst value for moneyderived.

One would expect anappropriate managed carecontract to introduce rele-vant and sufficient riskmanagement strategies thatbring the claims costs down.An increase in claims willresult in added pressure onthe reserves of the scheme.A reduction in claims couldbe achieved by redesigning the benefits; this should,however, be matched against the already higherthan average contributions.

Ageing membership profileThe major long-term issue to be addressed is theageing membership profile. Unless this is done, theclaims ratio will continue to rise despite adjust-ments to the benefits.

As the average contributions are already higher

By the FinancialSupervision Unitof the COUNCIL

FOR MEDICAL

SCHEMES

than the industry average, the reduction of bene-fits will cause more members to leave. These willtend to be groups rather than individuals as thegroups will be able to negotiate favourable under-writing terms with a new scheme. Individuals willbe subjected to waiting periods and possible exclu-sions.

On the other hand, an increase in contribu-tions will also not provide the scheme with anyrelief as this would result in more members leaving,particularly the younger and healthier ones.

The scheme and FSG (the holding companyof the administrator) have attemptedfor a number of years to change themember profile by marketing togroups.

Clearly this has not been successfuland there is no indication that with thecurrent options and pricing they willbe able to attract sufficient numbersof groups to drastically change this situ-ation.

Problems of governanceGet-Well Medical Scheme also facesserious governance problems.

Firstly, the Board of Trustees is notproperly constituted in terms ofsection 57(3)(a) of the MedicalSchemes Act which states that “aperson shall not be a member of theboard of trustees of a medical scheme,if that person is an employee, director,officer, consultant or contractor of theadministrator of the medical schemeconcerned, or of the holding company,subsidiary, joint venture or associate ofthat administrator”.

Proper constitution of the Boardis critical to ensure an appropriate balance ofpower and authority for greater independenceand reduced conflict of interest.

Secondly, the trustees have not held regularBoard meetings in the last two years. This is animportant aspect of the management of thescheme as Board meetings are essential to ensurethat the relevant decisions are taken timeously,and also to monitor the operations of the schemeand ensure that all controls are in place, and func-tioning effectively.

Proper constitutionof the Board iscritical to ensurean appropriatebalance of powerand authority forgreaterindependence and reducedconflict of interest.

“

”

The larger thescheme, the lowerthe non-healthexpenditure perbeneficiary should be.

“”

What needs to happen?

1 Get-Well should be placedunder curatorship.

2 It should submit a detailed busi-ness plan to the CMS.

3 The scheme should attempt tomerge with a suitable partner.

4 Failing a merger, Get-Wellshould be liquidated in goodtime.

* We have given ouropinion withoutreviewing the posi-tions of others. Undernormal circumstances,we would combine avariety of views togenerate a completepicture before deter-mining whatregulatory action isnecessary. Please alsonote that this analysisis not prescriptive andmust not be regardedas setting a prece-dent for any futureinterventions by theOffice of theRegistrar. It should beregarded as anopinion piece only.The Office interactswith medical schemeson a case-by-casebasis, and interven-tions, where indicated,are based on themerits of each partic-ular scheme and itsunique circumstances.


Opi

nion

she worked for a pension fund administrator.She enjoys spending time at home with her

husband James and their two dogs, Klara (a basset)and Mia (a bulldog). And when she’s not buriedunder a pile of quarterly return submissions frommedical schemes, Julindi pursues her book-collecting project, goes horse-riding, plays actionnetball, does mountain biking or attends potteryclasses.

Elizabeth Figueiredo (Senior Financial Analyst)Elizabeth is the latest addition to the FSU team,having joined us in February this year. She worked

as an Audit Manager for one of the big audit firmsin South Africa before she decided to take on thenext challenge.

A qualified Chartered Accountant with anHonours degree in Financial Accounting from theUniversity of Pretoria, Elizabeth feels passionateabout the importance of what she does:“Monitoring the financial performance of medicalschemes is critical to ensuring that schemes arefinancially sound.”

Elizabeth is an avid wine taster who enjoysrelaxing with a stimulating book in hand. She playssquash and enjoys travelling too; she has been tothe USA, Portugal, the UK, France and Tanzania.She got married just 11 months ago; the couplehas recently taken up ballroom dancing.

Lerato Sehularo(Senior Financial Analyst)Lerato’s love for figures dates back to her schooldays. She decided to study accounting instead ofengineering aftershe had foundherself under-ground inworker’s bootsin a mine duringa holiday in herhigh school days.“I decided thereand then torather wearGucci shoes andhave an officeabove theground,” she toldCMS News.

In the sixyears that shehas been withthe CMS, herbelief has notchanged: “Life isthere to be enjoyed. And whatever happens –sweet or sour – happens for a reason.”

Lerato is a wife and a mother to a two-year-old boy, Oratile, and is expecting her second childsoon.“I am always looking forward to going hometo my son. I love motherhood.”

She also enjoys dancing, jogging, reading andlistening to music.


Ours is to protectThe mission of the Financial Supervision Unit (FSU) at the Council for MedicalSchemes (CMS) goes beyond analysing and balancing the financial spreadsheetsof medical schemes.

FSU is an energetic team committed to moni-toring the financial performance of schemes

and so doing its bit to ensuring that no stone isleft unturned in the quest of the CMS to protectthe welfare of members.

Tebogo Maziya(Head of FSU)Having joined the CMS in 2003, Tebogo is one ofthe young professionals who blossomed under theleadership of our former Registrar, Patrick Masobe.She is a strong-willed woman with presence dedi-cated to the mandate of the CMS.

“Being mandated with ensuring the financialhealth of medical schemes is a very big task, onewhich I would not be able to carry out withoutthe support of the great professionals I have onmy team,” she told CMS News.

“The secret to successful leadership lies in howwell you treat the people you lead. To quoteNelson Mandela, a good leader leads from thefront but does not leave their base behind.”

In her spare time, Tebogo enjoys reading,watching movies, spending time with family andfriends, and travelling.

By PhumlaKhanyileCOMMUNICATIONS

OFFICER

Paul Bosch(Senior Financial Analyst)Paul is the babysitter of the team. He is a seasonedprofessional with over 25 years of experience inthe medical schemes industry.

Prior to joining the CMS family in 2002, Paulspent over 18 years at a medical administratororganisation. He admits that being a regulator doeshave its pros and cons.

“The highs of being a regulator are seeingimprovements in the solvency levels of schemes.The lows come when schemes close due to bank-ruptcy and members are left without medicalcover. This is why it’s so important for Boards tohave financial experts and actuarial strength intheir midst to keep an eye on the financial side ofthings and be ready to take proper decisions aschanges take place.”

Paul is also dedicated to his wife, four daugh-ters and four grandchildren. And lawn bowling.

Julindi Scheepers(Senior Financial Analyst)Julindi joined the FSU team two years ago as aqualified Chartered Accountant. Before the CMS


Receptiont: +27 (0)12 431 0500 f: +27 (0)12 430 7644

Call CentreShareCall: 0861 123 CMS (267)

Resource Centret: +27 (0)12 431 0500 f: +27 (0)12 430 7644e: [email protected]

Use our website to:• view lists of registered schemes as well as accredited brokers, managed care

organisations and scheme administrators in South Africa;• download information (forms, the Medical Schemes Act 131 of 1998

and Regulations);• read the latest news, developments and upcoming workshops; and• lodge a complaint online.

Complaintst: +27 (0)12 431 0500 / 0861 123 CMS (267)f: +27 (0)12 431 0560 / +27 (0)12 430 7644e: [email protected]

Complaints procedure• First, complain to your scheme. Phone the scheme or write to the Principal Officer.

Give full details of your complaint and include any supporting documents.• If you are not satisfied with the outcome of your complaint to the scheme, complain

to the Registrar of Medical Schemes (in writing).• If you are aggrieved by the decision of the

Registrar of Medical Schemes or by the decisionof the scheme’s disputes committee or by anyother decision relating to the settlement of yourcomplaint, appeal to the Council.

• If you are aggrieved by the decision of theCouncil, appeal to the Appeal Board.

How to avoid complaints• Make sure you know and understand the

rules of your scheme.• Read all correspondence from your scheme.• Study your benefits guide.• Familiarise yourself with the terms and

conditions of the benefit option that youhave chosen.

• Make sure your contributions are paid infull and on time every month.


Analyst after a stint in the banking industry.His work colleagues know him as a polite

gentleman with exquisite taste in clothing. He hashad the privilege of shopping overseas: in Italy,France, Greece and Turkey.

When he’s not at work, Kabelo is playing golfor squash, or toning his body at the gym.

Glenda Mosley(Personal Assistant)

Glenda is a sassy mother of two who joinedthe CMS three years ago to assume the respon-sibility of being a personal assistant to the FSUcrowd.

She is always happy. “I try not to get upsetover things I have no control over.”

In her spare time Glenda enjoys designing webpages. ■

Molebogeng Molabe(Assistant Senior Financial Analyst)“I am forever chasing after deadlines,” Lebo toldCMS News.“But I stay motivated in the times spentaway from my daughter by remembering that I’m

playing the role of a protector by making sure thatschemes have sufficient reserves to meet thehealthcare needs of their members.”

Lebo plays tennis and enjoys the occasionalLatin American dance. She also enjoys reading,watching movies, aerobics, travelling and exploringextreme adventures like her recent bungee-jumping experience.

“There is never a dull moment at FSU.Accounting can be challenging but it is fun too.”

Kabelo Mahobye(Financial Analyst)Kabelo is tasked with interpreting complex finan-cial statements into understandable informationthat helps members of medical schemes makeinformed decisions.

He joined the CMS in 2004 as a Financial

Reading matterBetween 1 December 2008 and 28 February 2009, we published onour website:• December 2008 edition of CMSNews, our paper-based quarterlyexternal newsletter• 4 issues of CMScript, our monthly

e-newsletter dedicated toprescribed minimum benefits(PMBs)

• 20 documents on the PMB reviewprocess

• 9 Circulars• 5 judgments on appeals• 2 press releases• 2 quarterly reports• 6 guidelines and manualsVisit www.medicalschemes.comfor so much more.

Information directory

Council for Medical Schemes

Private Bag X34Hatfield0028

Block EHadefields Office Park1267 Pretorius StreetHatfieldPretoria

t: +27 (0)12 431 0581f: +27 (0)12 431 0681

The Registrar says goodbye Our case study – external ... News/CMS... · experts to wave their magic wands at the pages of CMS News. But first, a little more on the spell that brought

Documents