In the months leading up to its demise, troubled medical scheme Health Squared blew millions of rands of members’ contributions on marketing campaigns, exorbitant trustee fees and other non-essential items.
A trove of documents attached in the scheme’s high court application for voluntary liquidation, as well as further documents leaked from the Council for Medical Schemes (CMS), the regulator of the medical aid industry, show that the company had operated in breach of solvency requirements and was consistently overspending on non-healthcare items.
In 2020, the marketing portion of this expenditure exceeded its budget by R20m, documents show, while non-health expenditure was R15.7m over budget.
The scheme was allegedly overpaying its administrator, Agility Health, by about R34.8m, paying R89 more than the R200 monthly average per beneficiary set out in its budget, which had been approved by the regulator at the beginning of 2020.
Health Squared, formed by a merger between Resolution Health and Spectramed in 2019, has applied to the Johannesburg high court for voluntary liquidation due to excessively low solvency levels.
The CMS is in talks with seven of the country’s biggest medical schemes to absorb the company’s 14,000 members and their 23,000 beneficiaries. However, they appear to be reluctant to take on older and ailing members.
Since its formation in 2019, Health Squared has failed to meet the industry’s required 25% solvency ratio — a measure of its ability to pay claims.
The regulator is now accused of acting too softly and ignoring internal advice to investigate the company for possible irregularities. When it did start to act late last year, it moved too slow, documents show.
The law requires that the solvency ratio be ring-fenced to lower the risk of a medical scheme not being able to absorb claims. Those that breach the 25% ratio are closely monitored by the CMS and assisted to get back to safety.
Should a scheme fail to come up with a suitable plan to address the deficiency, the CMS is empowered to appoint a statutory manager, in consultation with the scheme, or even approach the courts to appoint a curator to investigate reasons for poor performance and recommend further action.
In Health Squared’s case, both parties agreed in December last year to appoint a statutory manager, and a service level agreement was signed in June without any further action. Since then the scheme’s solvency ratio has deteriorated from 6% to 2.15% at the beginning of August.
Last month, the regulator resolved to place Health Squared under curatorship, but it appears to have dragged its feet in implementing the decision until the scheme submitted its own application for liquidation.
“Now the CMS wants to intervene and find a solution that will protect the members, but it missed several chances to intervene in the past,” said a source with knowledge of the situation.
The source, an industry insider, cited several internal CMS warnings to registrar Sipho Kabane, as well as occasions when the CMS allowed the scheme to push back when it ought to have acted tougher.
“He was told that the scheme was failing to spend within its budget and there needed to be a line-by-line item check to see what this expenditure was for. [Health Squared was] blowing millions in marketing but no new members were joining,” he said.
“The CMS also opted to go for a statutory manager, which requires permission from the scheme, last December when it was clear the scheme was already in a death spiral, instead of going to curatorship at that time. Now it wants to oppose liquidation to save face,” the source added.
The CMS didn’t respond to detailed questions but said it intended to oppose Health Squared’s application for liquidation when it is made on September 1. It urged members not to act in panic as that would leave them worse off.
“The CMS is on the tail end of discussions with seven medical schemes to consider options for Health Squared members while ensuring their existing membership is not unduly disadvantaged,” it said this week.
“These medical schemes have more than 100,000 members with a solvency ratio above 25%. It is hoped that the schemes will be able to absorb the risk and dilute it with their demographics if the risk is shared equitably.”
The regulator also said its attempts to appoint a statutory manager were thwarted by the scheme.
The Council for Medical Schemesurged members not to act in panic as that would leave them worse off
Health Squared executive principal officer Elias Mabena said he was unable to respond in detail to questions from Business Times as the matter was before the courts.
Health Squared started operating with a solvency ratio of 15.24%, and was given directives by the CMS as a condition of the amalgamation approval, which were aimed at addressing the issue. These included a tender for administration, submitting a business plan for achieving 25% solvency and curbing non-healthcare expenditure to an average of R200 per beneficiary a month or lower.
The scheme ignored these directives, prompting the CMS to reject its business plan in the same year. Health Squared appealed the decision and won two years later.
“These measures were articulated in the amalgamation letter to protect beneficiaries and ensure that the scheme returned to a healthy solvency level,” the regulator said.
“In late 2020, the CMS cautioned Health Squared for noncompliance with the approved 2020 business plan as the scheme’s marketing fees, [non-healthcare expenditure] and administration exceeded the agreed budget with four months remaining.”
While the scheme had a solvency ratio of 17.3% at the beginning of 2021, the second and third waves of Covid decimated its older membership, and solvency levels dipped to 6% at the end of that year.
“The Covid-19 Beta variant wave peaked at the beginning of 2021, and together with the Delta-driven wave in the middle of 2021, significant levels of hospitalisation and, in turn, healthcare costs were experienced ... The scheme ultimately incurred significant Covid-19 costs in 2021 of about R135.5m, which equates to 15% of total risk claims expenditure. These included vaccination-related costs,” Mabena said in court papers filed last week.
At the same time, Health Squared’s assets shrank from R413m in December 2020 to R257m in December last year, yet it continued to exceed its non-health expenditure budget, and spent R24m last year on marketing and communication alone.
Agility CEO Dr Tebogo Phaleng denied they were getting overpaid to administer Health Squared, and said the agreement was negotiated on commercial terms.
“Our administration fee is R247.52 which is below the industry average of R249.17 as per the latest annual report of the CMS.”
The Agility group provides administration, optical benefit management, and integrated managed healthcare services to Health Squared, Phaleng said.
“In both the years mentioned Agility rendered these services at a loss of R4.6m (2020) and R3.6m (2021), respectively, and effectively funded this capacity on behalf of the scheme.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.