Wait-and-see regulator strands 1000s of medical aid members
If you interrogate South Africa’s financial services regulators about their narrow and near-obsessive focus on capital adequacy, they would perhaps counter that their oversight and corrective actions are carried out ‘within the ambit of the prevailing legislation’ and that the ultimate aim of any intervention is to protect consumers. Ironically, by the time the dust settles on the latest Council for Medical Schemes (CMS) intervention in the medical schemes environment, we could have 20 000 odd medical aid members without a home.
To liquidate, or trade insolvently?
Getting up to speed on the relationship between the CMS and Health Squared Medical Schemes (HSMS) is as easy as eight, nine, 10 … or, more accurately, reading CMS Media Release 8, 9 and 10 of 2022. On 23 August 2022, in the first of three public statements discussing developments, the CMS said that it was “in the process of migrating HSMS members” due to the scheme being on the brink of collapse. The regulator’s undertaking was accompanied by the formal announcement of the pending winding up of HSMS in terms of Section 53 of the Medical Schemes Act (MSA). The scheme, which remained adamant that it was too late for a curator to fix things, approached the High Court on 18 August 2022 “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”.
Brokers who operate in the medical schemes environment will know that shifting a member from one scheme to another is not a simple task. There are numerous administrative requirements that must be met, and members will inevitably be exposed to the financial risks of being off cover for the duration of the new scheme’s general and condition-specific waiting periods. Despite this reality, CMS Media Release 8 of 2022 was quite upbeat about the outlook for HSMS members… They seemed confident that they could get other medical schemes to onboard all HSMS members despite less than two weeks remaining before the wind-up D-Day of 1 September.
Members exposed to significant risk
“In protecting members’ interests, the CMS has engaged seven medical schemes to move current HSMS members to those schemes; the medical schemes are in discussions with CMS to consider options for HSMS members while ensuring their members are not unduly disadvantaged,” the regulator wrote. The medical schemes regulator also made an impassioned plea to affected HSMS members and their brokers “not to panic”. But with hindsight, panic was the only rational response to the dire situation the winding up of the scheme would put members in. The CMS’ undertaking to “continue to exercise statutory oversight on the affairs of medical schemes, in general, to ensure that members’ interests are protected at all times” rings hollow given the tremendous risks members ended up being exposed to.
We have it on good authority that healthcare brokers had warned the CMS that it would be impossible for schemes to agree onboarding terms within the existing timeframes, if at all, and that members would likely be left ‘high and dry’ following the winding up. CMS Media Release Nine of 2022, issued just three days later, threw more light on the matter. Firstly, the CMS confirmed that it was opposing the liquidation or winding up application. They also maintained that their efforts to rehouse the affected HSMS members were on track, and that “it was hoped that the seven identified medical schemes would be able to absorb the risk [posed by HSMS members] and dilute it with their demographics [by sharing] the risk equitably”.
The apparent naivete of the regulator was on naked display in the CMS’ suggestion that 20 000 plus medical schemes members could be moved from one scheme to seven others within just three working days, despite no agreement having yet been reached. And the task was made more complex by the regulator’s desire to have these members onboarded with no strings attached: “we aim to conclude a concession that will allow HSMS members to join these schemes without the conditions of reinsurance and waiting periods to guarantee members’ financial protection”.
Forcing schemes to onboard all comers…
It appears that the regulator intended riding roughshod over the seven ‘targeted’ medical schemes to force them to absorb high risk members, potentially introducing their scheme members to cost escalations and capital reserve erosion over the long term. But the schemes were not having it! The bottom line is that there were good reasons for HSMS’ financial woes: the scheme’s average age was 47.1 years, 32.7% higher than the 2021 open schemes industry average of 35.5 years; and its pensioner ratio stood at 25.9%, far above the industry average of 11.0%. Schemes with higher ages, on average, experience higher hospital admission rates and higher costs when members are admitted.
Few were surprised when CMS Media Release 10 of 2022 confirmed that the regulator’s plans had unravelled. The headline says it all: “Migration dispensation for HSMS members collapses”. The CMS announced that it had been unable to agree terms for the seven ‘targeted’ schemes to onboard HSMS members “without the conditions of underwriting and waiting periods”. As a result, healthcare brokers will be left to negotiate new medical cover for these members on a case-by-case basis. All that the regulator could do to ensure the fair treatment of these members was to reiterate the overarching tenets of the MSA under the headings open enrolment; waiting periods; and condition-specific waiting periods.
Was the regulator too involved, or not involved enough?
There was plenty of back and forth between the CMS and HSMS on aspects of running the medical schemes business, going back to its establishment in 2018. This included the scheme having to submit detailed business plans explaining on how it intended rebuilding its statutory reserves. The CMS alleges that HSMS management resisted many of the regulator’s interventions during 2019-2021, including “refusing to allow the appointed statutory manager to commence work, stating that it was too late and proposing that the scheme be liquidated”. HSMS wanted to shut up shop end-December 2021 already, but the CMS rejected this suggestion.
The scheme’s solvency was 15.42% at the end of December 2019; improved slightly to 17.32% by the end of 2020; but plummeted to just 6% by December 2021. Through all this, the scheme continued to bleed members. “The scheme’s age profile continued to deteriorate with the continued loss of membership; as the scheme lost its younger and healthier membership [it entered into] a death spiral,” writes the CMS. Given this trajectory, and the ongoing decline in membership numbers and increase in average member age, the scheme’s statutory capital reserve was forecast to dip into the negative by year-end 2022. It was this projection that forced HSMS’ hand in applying for the scheme’s voluntary winding up.
Counterintuitive opposition to liquidation
The irony is that the CMS took steps to oppose the liquidation “to protect members”, despite the controlled and timely winding up of the scheme being the only way to protect members over the long term. Is it possible that the CMS prefers members to have protection in a non-compliant and clearly unsustainable scheme over acting against that scheme? There are so many questions that need answers following the unsuccessful four-year-long struggle to salvage this scheme. First, should the CMS not have taken stronger action to appoint a curator at an earlier stage; second, should the CMS have opposed the voluntary winding up order given the financial situation the scheme finds itself in today; and third, how was the scheme allowed to trade so recklessly for so many years?
