Medical aid administration takes center stage as health care gains importance

03 June 2013 Michelle David, Melissa Cogger, Norton Rose South Africa

With the impending National Health Plan being solidified by government, members of the public are increasingly turning towards medical aid schemes to assist in ensuring that the best health care is available to the widest population sector. However, a poorly managed medical aid scheme can be detrimental to the industry.

Medical scheme trustees are obliged to ensure that the interests of members of the scheme are protected. The proper administration of the scheme is instrumental in satisfying this obligation and it is important for boards to understand their role in the appointment of an administrator.

Legal framework

According to the ‘Declaration of Undesirable Business Practice in terms of Section 61(1) GG 26516 of 30 June 2004’ it is an undesirable business practice for a ‘medical scheme to award a contract for administration services without engaging in fair and reasonable processes.’ This includes evaluating a range of potential administrators to select an administrator best suited to the needs of the medical scheme, taking into account considerations such as: cost, capacity, experience in administration, and financial soundness to ensure a transparent, objective and an open process that protects the best interests of the members.

This ensures healthy competition and limits the costs of administration services. The Council for Medical Schemes (CMS) has previously removed three trustees from the board of the Medshield Medical Scheme when they failed to comply with the requisite tender process when appointing a new administrator.

Legal leniency

The undesirable business practice declaration does not, however, apply to the renewal of an administration contract of an existing administrator of a medical scheme. The effect of this is that a medical scheme can perpetually renew an administration contract without tendering for new administration services.
The requirement to tender is only triggered when the current administration contract terminates, and a new administration service is sought. This may be due to the cost and time needed to change administrators and the logistical difficulties that arise when a new administrator is appointed. 

However, the continuous renewal of administration contracts may fall foul of good corporate governance because the principles of openness and transparency of a tender process are not being followed.

Moreover, the effect of a monopoly power by a single administration service for a medical scheme avoids transparency and competitive pricing structures. If this issue is considered by a court it could be found, that the practice subverts the statutory objective.
Corrective measures

Boards must ensure that the re-appointment of the administrator is in the best interest of the scheme and its members. That is, a board cannot approve a re-appointment without giving consideration to the interest of the members.

CMS considers good governance to be non-negotiable as was highlighted in recent decisions. The decisions show the continued need for medical schemes to ensure compliance with corporate governance principles as prescribed in the MSA and the King III Report on corporate governance.

In The Registrar of Medical Schemes v Medshield Medical Scheme, the high court found that the improper appointment of members to the board of trustees had ignored the principles of good governance and that the interests of the beneficiaries were not adequately protected.

Similarly, the high court in the Registrar of Medical Schemes and Sizwe Medical fund found that there was a void in the medical scheme’s governance due to the lack of a validly constituted board of trustees.
The board of trustees should have oversight of the activities of third party administrators to ensure compliance with its service level agreement. The board must always be aware that the scheme is a separate entity from its administrator and should make governance decisions in the interests of its members and should not be persuaded by the commercial interest of its administrators.

It is the board of trustees’ duty to assume responsibility for the medical scheme and to take corrective actions against the persistent renewal of administration contracts where no consideration has been given to the scheme or members interests. High administration fees may not be in the best interests of a ‘not for profit’ medical scheme where the renewal does not result in satisfactory service.
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