The medical schemes regulator is missing in action. Thousands of Health Squared Medical Scheme members are panicking about how to pay their medical bills because the Council for Medical Schemes (CMS) failed to stop its calamitous decline.
The crisis facing Health Squared’s more than 23,000 beneficiaries was precipitated by the scheme’s surprise announcement last week that it had applied to the Johannesburg high court to wind up its business by August 31, giving its members less than a fortnight to find alternative cover.
It is an unprecedented situation that has sent shock waves through the R200bn medical schemes industry. Prior liquidations have been conducted under the guidance of the CMS in an orderly fashion, with members transferred to other schemes without penalty.
But Health Squared members have been left in the lurch, and face an alarming prospect: whichever scheme they join next will impose the underwriting provisions permitted by the Medical Schemes Act. These allow medical schemes to impose waiting periods on new members, during which time they pay contributions but receive only partial cover, except in the case of involuntary transfers due to changes in employment. The act is silent on liquidations, hence Health Squared members’ precarious position.
While the immediate crisis was clearly triggered by Health Squared’s eleventh-hour communication to its members, the roots of its problems lie far deeper.
Health Squared was formed in January 2019 by the amalgamation of Spectramed and Resolution Health. Neither party was in a particularly robust financial position at the time, and the new entity got off to a weak start. Its solvency ratio — a key measure of its ability to settle claims — was just 15.2% at the end of 2019, far short of the statutory 25% threshold.
The CMS placed Health Squared under close monitoring, and required it to submit monthly management accounts.
Then came the pandemic. Contrary to the medical scheme industry’s overall experience, Health Squared says it incurred unusually high Covid expenses without a drop in non-Covid expenditure, draining its reserves. It attributes this scenario to its high pensioner ratio, which stands at 30%, compared with the industry average of 9%.
By contrast, other schemes reported such an improvement in their reserves due to lower-than-expected claims expenditure during the pandemic that many deferred contribution increases. That the Health Squared had apparently bucked the trend should have sent a red flag to the regulator.
The CMS has frequently intervened, sometimes controversially, to place poorly managed medical schemes under curatorship. Yet it remained inexplicably passive as Health Squared’s solvency ratio nosedived. By January this key metric stood at just 6%, and Health Squared was belatedly looking to amalgamate with a stronger player. Unsurprisingly, the six schemes it approached over the course of the following months — Bestmed, Bonitas, Discovery Health Medical Scheme, Medshield, Medihelp and Sizwe-Hosmed — all balked at the prospect. At the end of July Health Squared’s solvency ratio had reached an all-time low of 2%, and its board of trustees decided it was time to wind up its affairs.
The CMS has a legal obligation to safeguard the interests of SA’s 8.9-million medical scheme members. Yet only once the scale of the disaster unfolding at Health Squared became public knowledge did CMS registrar Sipho Kabane step in.
On Monday he called an urgent meeting with seven medical schemes, including the six that had rebuffed Health Squared, and asked them to absorb its members without waiting periods. This is no small request. While a scheme’s board of trustees may well believe waiving its underwriting rules for Health Squared members is the honourable thing to do, they also have a fiduciary duty to protect the interests of current members. Many of the schemes approached by the CMS have indicated the registrar’s proposal will add to future contribution increases.
The lack of a regulatory framework to protect ill and vulnerable medical scheme members who have the bad luck to belong to a scheme that goes to the wall is bad enough. But to ask the industry to now pay the price for the regulator’s failure to intervene timeously is beyond the pale.
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