NAWAAL DEANE and SARAH BULLEN, Johannesburg | Friday
THERE could be a technical knockout this week in the prizefight between Discovery Health and the Council for Medical Aid Schemes, but if the previous match history is anything to go by, this bout could go all 12 rounds.
This week talks are focusing on whether Discovery’s latest business plan will be accepted. The plan is to take out a loan on behalf of members and is the third in a series of solutions the scheme has presented to the council.
Despite the public mud-slinging that has gone on between Discovery CEO Adrian Gore and Patrick Masobe, the registrar of the council, the public seems no less enamoured of the new generation healthcare scheme.
In fact, so appealing is the lifestyle marketing concept and loyalty scheme sweeteners that Discovery membership has actually risen over the past year.
Despite vehement attempts by commentators to convince the public that the scheme is little more than pretty packaging, Discovery is still making inroads into the traditionally staid medical aid market. It has proven time and time again that strong marketing and attractive packaging sell.
This does not mean that consumers are not watching the debate with a close eye. In fact the registrar’s office has had enquiries from Discovery members checking up on the status of the regulation battle.
At the centre of the battle is the issue of a certain minimum prescribed asset base. The Medical Aid Schemes Act of 2000 sets down as 25% the minimum balance (asset base) a medical scheme needs to hold to form a type of surety for its loans.
Before 2000 Discovery had used reinsurance and loans to establish this asset reserve, but the Act no longer permits this. The company needs to meet the requirements with the reserves to be built up from members’ contributions.
And therein lies the row.
Previously Discovery’s use of reinsurance and loans meant that the scheme did not actually hold 25% of the members’ contributions in its vaults but took out a reinsurance policy, essentially insurance on insurance, to cover itself. This set-up sparked allegations of “profit stripping” and “reinsurance abuse”.
Discovery is an administrator earning fees from a service to a medical aid scheme. But it is also a reinsurer to the scheme and benefits when premiums exceed claims.
Gore argues that these practices are legal and to the benefit of its members as medical aid schemes are restricted from borrowing money and could go bankrupt after an unusual claims experience.
The regulator does not want this money floating around, nor the perception that medical schemes are making money off complicated financial manoeuvres.
Discovery likes complicated deals. The council has turned down two previous proposals from Discovery to meet the reserve requirements. The first involved complex insurance structure. The second was that Discovery would take out a subordinated loan from Discovery Holdings.
The third proposal – and the one on the table this week – is that Discovery takes out a loan, on behalf of its members, to cover the mandatory 25%. This means that Discovery will finance the 25% on behalf of its members by taking out a loan of R1,125-billion. It will then recover this from members over the period of membership.
The main concern for members is whether they will have to fork out higher membership fees in the next few years to pay back this loan. Not so, says Shaun Matisonn, principal officer of Discovery. He says that members will not be placed under a large additional financial burden and the repayments will be structured into the membership contributions and will play out over a 10-year period.
“The 2002 contributions that members are paying include an allowance of approximately 3,5% to accumulate the required reserves over the next 10 years. However, since we will be charging the membership fee and the scheme will have the required reserves there is no need for the scheme to charge the 3,5% in future.”
Matisonn says that this means that the money people are currently paying is sufficient to fund their medical scheme benefits and the loan to pay off the membership fee.
“If members leave we write off the loan,” says Matisonn. He says the implications for members are simple.
“The scheme is fully capitalised, members pay no more than they would have paid and have no obligations when they leave.”
Currently, monthly membership fees for 2002 are: Classic Standard Comprehensive for principal, R1 526; Essential Standard Comprehensive, R1 414; Classic Maximum for chronic illness, R2 236 and Essential at R2 124.
Members will not have any extra paperwork as the 3,5% is already built into the membership fees and will automatically be deducted from the loan. This means someone with a Classic Standard Comprehensive is paying R53 a month towards the loan.
Masobe says the proposal is still being considered.
“We have some reservations and requested that they address these issues.” He says the council will have reached a decision by next week.
The best-case scenario is that the council and Discovery reach an agreement on the business plan and the requirements of the law are satisfied.
The worst case would be that the council rejects the plan and again the two would be at loggerheads. This could result in legal action. “The member, however, will be protected by the regulator at all costs and they will not experience any disruption,” says Masobe.
The issue of reinsurance still hangs in the air.
“A survey of administrators showed an increasing use of reinsurance and we were concerned that this could lead to the stripping of the scheme’s profits,” says Masobe.
“A medical scheme should operate as a non-profit organisation and should not incur profits at the expense of the members. The scheme belongs to its members and we are concerned when member funds are utilised for profit.”
The ongoing talks between the two have included the issue of reinsurance, specifically focusing on the use of reinsurance, the type of reinsurance, who profits from it and whether the money is wisely spent.
Both sides are hoping to clear up this matter.
“The regulator is concerned with how the members’ money is leaving the scheme by way of reinsurance,” says Masobe.
Gore says that the way forward is to put the conflict behind them and not to burden members with ideological issues regarding policy. He welcomes the debate between Discovery and the council but says it should be done behind the scenes. He says that the law is binding and even though Discovery has not shied from challenging policies they will abide by the legislation.
Masobe disagrees that the public should be left in the dark. He says that if there are problems, the members have a right to know what is happening in their own scheme.
“[Discovery is] a public company that is accountable to shareholders that are entitled to information.”
But both sides agree that members should feel secure as the philosophical debate and final decision will not significantly impact on the smooth running of the scheme.