The medical scheme liquidation dilemma
A couple of days ago I received one of those WTH messages from a financial adviser whom I have known for many years…. “Gareth”, began the brief rant, “Are you aware that Health Squared Medical Scheme (HSMS) is going into voluntary liquidation?” No, I responded, before confessing that I had not been following developments in the healthcare industry in recent months, aside from the occasional incredulous scribblings over the looming National Health Insurance (NHI) project.
Advisers, clients left ‘high and dry’
The adviser in question had just received a notification from the medical scheme that it was winding up its operations, and that healthcare brokers had until the end of the month, around seven days, to move any clients who happened to be members of HSMS to another medical scheme. The expectation that South Africa’s healthcare brokers can simply drop everything to relocate 25 000 odd scheme members is yet another illustration of how intermediaries and their clients are left ‘high and dry’ when things fall apart in the product provider space.
I was quite taken aback by the suddenness of the announcement and must confess to initially thinking that the adviser had missed a communication or two. However, upon further investigation, it seems the announcement had indeed been very last minute. I reached out to the Council for Medical Schemes (CMS) for their take on the matter, but they instead shared a copy of a media release issued the day after the adviser had alerted me to the issue. On 23 August, the CMS published its Press Release 8 of 2022, titled ‘Regulator in the process of migrating Health Squared Medical Scheme members’. Here follows an extract from the release, with additional comment penned by yours truly.
“The CMS hereby informs relevant stakeholders about the pending liquidation of HSMS in terms of Section 53 of the Medical Schemes Act (MSA); HSMS approached the High Court on 18 August, in terms of Section 51 of the MSA, for leave to apply for the voluntary winding up of the scheme in the interest of its members, as contemplated by Sections 51(5)(e) and 53 of the MSA”. Everything legal and above board then, except that in this instance it the treating customers fairly (TCF) principles that are supposedly entrenched in South Africa’s financial services regulation seem to have been abandoned. The winding up application being submitted to the courts on 1 September will protect members while simultaneously causing harm, leaving members without medical cover.
Seven schemes to save us all?
In its media release, the CMS noted that it had approached seven medical schemes to accept current HSMS members. “These medical schemes are in discussions with CMS to consider options for affected members while ensuring their members are not unduly disadvantaged,” they wrote. “Whilst CMS engages with these medical schemes to find a workable solution, HSMS members are encouraged to avoid panic-inspired movements that might leave them worse off”. This, we felt, was an unfortunate plea given the risk to ordinary members of going off medical scheme coverage, even for a short period of time. Also, given the time taken to resolve complex issues, one wonders how the CMS hoped to negotiate a suitable resolution with other schemes given only a handful of days to do so.
As any self-respecting healthcare broker can tell you, moving a medical scheme member from one scheme to another is no simple task. But do not take my word for it, dear reader. The daunting task of finding new cover for the 25 000 or so affected members can be viewed in the context of a communication circulated by the country’s largest open medical schemes, Discovery Health Medical Scheme (DHMS), to its brokers. DHMS noted that while it was “deeply empathetic to the difficult situation that HSMS members were faced with” it was “unable to offer an underwriting concession to these members at an individual level”. In layperson’s terms, any individual HSMS member that wanted to join DHMS would have to go through full underwriting. And there is little doubt that other medical schemes will adopt a similar stance, because the HSMS demographic profile is unfavourable, making its members, on average, riskier to accept.
Erring on the side of caution
“Faced with an unsustainable scheme profile, an average age of 49.7 years, a concession for HSMS members would not be in the best interests of the current DHMS members and place substantial strain on the sustainability of the scheme,” DHMS wrote. There is no faulting the logic here, though it is worth commenting that DHMS is one of the few South African medical schemes that could absorb a significant number of ‘higher risk’ members without endangering its long-term sustainability. To illustrate, if a scheme with a million beneficiaries with an average age of 30 takes on 25 000 members with an average age of 50, the larger scheme’s average age only increases by half-a-year to 30.5 years. DHMS has around three million beneficiaries.
At the other end of the scale, with just 25 000 ageing members, HSMS was on the proverbial hiding to nothing. In communicating its pending voluntary wind-up to members, the scheme said it had suffered significant financial deterioration between 2020 and 2021. “The primary driver of the financial deterioration of the scheme was high COVID-19 claims expenditure [made worse] by the scheme’s age profile,” they wrote. Measured on 31 July 2022, the scheme’s average beneficiary age was 49.7 years versus 33.6 years for the industry. The high average age, coupled with a higher-than-expected claims experience during pandemic, and the ongoing loss of members, meant the scheme was unable to maintain the statutory solvency ratio of 25% of members’ annual premiums. Its solvency ratio fell from 17% at the end of 2020; to 6% at the end of 2021; and just 2% at the end of July this year.
A catch-22 outcome
Although the outcome is not great for individual members, or for the financial advisers who serve them, the HSMS Board should be commended for taking decisive action while the scheme was still able to meet its commitments. They commented that “the scheme would be voluntarily wound up as a solvent business which has assets which presently exceed its liabilities. In addition, “the Board was also advised that the scheme presently had sufficient reserves to meet claims which will have been incurred but not reported on the date of voluntary winding up”.
The question now becomes whether the member protections contained in the MSA will allow for all affected members to be re-housed in other medical schemes. And herein lies the regulatory catch-22… Because in keeping its promise to “continue to exercise statutory oversight on the affairs of medical schemes, in general, to ensure that members’ interests are protected at all times”, the regulator also risks having individual members ‘left out in the cold’, unable to join another medical scheme without underwriting, and potentially being exposed to unnecessary financial risk by spending a period of time or waiting period without medical cover.
