The Medical Schemes Act 131 OF 1998 has undergone many changes and amendments in recent years. One such amendment was published by way of Government Gazette R.1360 on 4 November 2002. The amendment included changes to the reserves that medical aid schemes had to keep. Chapter 8 o the Act deals with Accumulated Funds and Assets. Clause 29 (1) and (2) read:
(1) In this Regulation "accumulated funds" means the net asset value of the medical scheme, excluding funds set aside for specific purposes and unrealised non-distributable reserves.
(2) Subject to sub regulations (3), (3A) and (4), a medical scheme must maintain accumulated funds expressed as a percentage of gross annual contributions for the accounting period under review which may not be less than 25%.
The amendment to the Act also advises on the appropriate action should a scheme fail to maintain this level of solvency.
(4) A medical scheme that for a period of 90 days fails to comply with sub regulations (2), (3) or (3A) must notify the Registrar in writing of such failure, and must provide information relating to:
(a) The nature and causes of the failure, and
(b) The course of action being adopted to ensure compliance therewith.
Has Discovery overstepped the mark?
This quick look at the Medical Schemes Act was prompted by a number of recent newspaper reports which claim that Discovery Medical Health Scheme (DMHS) is in contravention of the 'reserve' requirement of the Act. Discovery is not denying the problem and admits that their current reserve is around 21% or 22%. The group has already communicated this fact to the Council for Medical Schemes, along with a roadmap to ensure the 25% level is reached by the end of 2008.
On 27 June 2007, Bruce Whitfield conducted a radio interview with Discovery Chief Executive, Adrian Gore, for his World at Six report. Gore summarised the situation as follows:
"Firstly I think it is important to talk about the reserve level in Discovery Medical Scheme. From a solvency perspective, the scheme is remarkably strong, the highest rated scheme. What we are dealing with is the technical reserves that need to be held, and the Act requires a 25 % level.
"Having said that, we are pretty confident that we will get to 23% by end of this year and 25% by the end of next year, and in fact, that is what we have agreed with the registrar. So there is a bit of a storm in the teacup. We are very comfortable that we will achieve it and I think our relationship with the regulator is particularly good on this issue."
Despite this good relationship, it appears the Council for Medical Schemes is not entirely happy with Discovery's reserve proposal. The Registrar issued a two-week ultimatum for Discovery to resubmit their proposal with a more acceptable strategy. The registrars office is also in talks with various fund administrators to reduce administration costs. They would like a situation where all schemes bring non-healthcare costs to below 10% per annum. DHMS has relatively high non-healthcare costs of around 15% of member contributions at present.
When a R4 billion reserve is not enough
Gore was quick to point out that Discovery did not fall behind with its reserve account. In effect, changes to legislation have resulted in all medical schemes having to play catch up to get their reserves to the new level.
The question to be asked is whether the 25% reserve requirement should apply to a scheme of Discovery's size. The medical scheme already covers more than two million lives and is adding members at a rate of 1, 000 per day. The Act requires that Discovery adds in the region of R2 million to its reserve account every day. In this sense, Gore believes the group is at the mercy of its strong growth. He further states that a scheme of Discovery's size could operate safely with half of the reserves currently required by law.
Gore says that scheme members have nothing to worry about where solvency is concerned. The group's current reserve account balance stands at more than R4 billion and will top R5 billion by the end of 2008.
Editor's thoughts:
Discovery CEO, Adrian Gore, says that recent speculation about the group's solvency and reserve requirements are nothing more than a 'storm in a tea-cup'. In our view suggestions by the media that the current situation is a threat to the scheme or its members would be wholly inaccurate. The Council for Medical Schemes recently issued a two week deadline for Discovery to submit a more acceptable reserve 'recovery' plan. Do you believe that the Registrar is correct in issuing this ultimatum to Discovery? Send your comments to gareth@fanews.co.za