The dirty war being fought for medical aid rands

A dirty war, including claims of a R1,8-million pay off to the chairperson of a medical scheme and counterclaims of a vendetta against a medical scheme administrator, is being fought within South Africa’s R85-billion-a-year health insurance industry.

The alleged pay off offer is contained in court documents that set out attempts by the head of a large health solutions company, Liberty Health Holdings (LHH), to facilitate the merger of two medical schemes.

The court papers suggest the merger’s ultimate aim was to create a medical “super-scheme”. The alleged pay off has not succeeded in that the merger it was apparently intended to facilitate has been aborted.

But insiders have told the Mail & Guardian that this particular merger was a small battle in a bigger war: large life insurers see super-schemes as their way to rival healthcare market leader Discovery.

Discovery controls about 30% of the medical scheme industry, which has 3,5-million principal members and 8,1-million beneficiaries.

Insiders also say the losers in the dirty war will be ordinary members, who will suffer if decisions are made on the basis of trustees’ private benefit rather than the best interests of all members.

The alleged pay off
The alleged offer of a R1,8-million pay off is contained in court papers in the M&G‘s possession.

The papers include letters from LHH’s chief executive Peter Botha to the chairperson of Liberty Medical Scheme (LMS), Larry Jacques, that appear to offer Jacques R1,8-million in benefits in the event of a merger between Spectramed medical scheme and LMS.

Both Spectramed and LMS are administered by V-Medical Administrators — a subsidiary of LHH. Despite sharing the name “Liberty”, LHH and LMS are separate companies with no proprietary relationship.

This week Botha denied his letters to Jacques offered him any pay off. He said the letters reflected merely a severance package negotiation with Jacques, in case his job as chairperson and trustee of LMS became redundant because of the proposed merger between LMS and Spectramed.

“The merged scheme would have paid the severance benefits [of R1,8-million],” said Botha.

But industry insiders have frequently expressed scepticism about offers of money or the promise of future job opportunities being used to incentivise trustees to collude with administrators when mergers are being pursued or schemes are looking to change their administrator.

If a medical scheme’s board of trustees decides that the scheme should change administrators, current legislation stipulates that the scheme must go out to tender. However, pay offs could be used to manipulate tender outcomes, insiders say.

The alleged pay off letters are in an annexure to an affidavit by Jacques in a legal dispute between his company, LMS, and V-Medical Administrators.

In a letter from Botha to Jacques dated May 8 2010, Botha says that if Jacques loses his position as chairperson in the merged entity he will be paid R1,25-million on the successful completion of the merger. He would also receive “a monthly remuneration post-merger for consulting fees”.

In a second communication, an email dated May 9, Botha increases the figure to R1,8-million for “managing the scheme merger process until January 2011, if you relinquish the chair”.

The same email promises Jacques a further R800 000 if the merger happens and he stays on as a trustee.

These letters are “evidence of extortion and indicate that Botha has no compunction to act unlawfully with the view of achieving his aim at any cost”, Jacques says in a supplementary affidavit.

Botha denies this, telling the M&G that any suggestion that there was anything untoward about the letters was a “distortion of the facts”.

The medical schemes registrar said it had “no knowledge of the letters [between Botha and Jacques]”. However, if the allegations the M&G summarised “were indeed factually correct, this would on the face of it be inappropriate behaviour and warrant further investigation by this office”, it said.

In the end, LMS’s board of trustees voted on June 15 not to pursue the proposed merger.

Jacques maintained in his court affidavit that he “never accepted” the pay off offer and “it was for this reason that Botha felt especially aggrieved as a result of the decision not to proceed with the merger … I have requested the National Prosecuting Authority to fully investigate Botha’s conduct in this regard.”

The high court application
The court papers containing the alleged pay off offer were put before the South Gauteng High Court in November.

V-Medical Administrators and its parent company LHH asked the court to interdict Jacques and fellow LMS trustee Dan Pienaar from attending any LMS board meetings discussing the scheme’s contracts with V-Medical.

In these papers, Botha argued that:

• Pienaar and Jacques had a conflict of interest, in that he (Botha) had lodged a complaint with the registrar’s office on October 1. The complaint was that Pienaar and Jacques had attempted to become shareholders in a marketing company that was being set up to offer services to LMS and that would have constituted a conflict of interest for the two;
• Pienaar and Jacques would work to get V-Medical’s administration contracts cancelled because he had laid the complaint with the registrar; and
• Pienaar and Jacques made threats of physical harm against him. (Pienaar and Jacques both denied the allegation in their affidavits.)

In the first of two affidavits, Jacques stated that V-Medical’s entire application was based on “fabricated” evidence and was motivated by the ulterior motive of taking control of LMS’s board of trustees.

Jacques said in his papers that:

• Botha’s application arose from LMS’s rejection of the merger with Spectramed;
• Botha backdated a letter to Jacques and Van Rensburg to implicate them in the setting up of the marketing company;
• Botha had a substantial financial interest in the merger and was “intent on procuring a merger of the two medical schemes at all costs”; and
• When he told Botha of the board’s decision not to pursue the merger, Botha told him that it was a “major setback” to his achieving his performance bonus and would probably result in him losing his job.

But Botha said the proposed merger had no bearing on the application in the South Gauteng High Court.

On December 9, Judge CJ Classen dismissed V-Medical’s application.

“Even if it is accepted that Jacques and Pienaar are unhappy about Botha’s conduct in laying a complaint against them … such circumstances do not lead to an entitlement to interfere with the functioning of the board of trustees,” Classen’s judgment said.

V-Medical was attempting to prevent LMS from terminating the contracts lawfully by way of an interdict, Classen ruled. He made no findings on the corruption allegations made by both sides.

Alleged collusion
The same court papers allege that V-Medical’s managing director, Patrick Masobe — a former medical schemes registrar — still has significant influence in the registrar’s office and used it to the benefit of V-Medical and LHH.

This allegation was made by businessman Daan van Rensburg, whom Botha accused of concocting the scheme with Pienaar and Jacques to include them as shareholders in the marketing company. Van Rensburg filed an affidavit denying Botha’s accusation and stating that Botha had spoken to him of his intention to build a “super-scheme”.

“During the course of the discussion Botha suggested that he did not perceive the creation of a new super-scheme to be a major problem for the regulators and indicated that Masobe, the managing director of the first applicant [V-Medical] has run the office of the Registrar of Medical Schemes for a number of years and had a huge influence in that office still,” Van Rensburg said in his affidavit. Botha denied making this statement to Van Rensburg.

Masobe denied any impropriety. “The allegations about collusion with the staff of the registrar have no merit,” he said. “I have no influence with the registrar’s staff.”

The registrar’s office said Van Rensburg’s allegation was “baseless and unfounded”.

Van Rensburg’s affidavit said that after LMS’s board voted not to pursue the merger, Botha threatened to “liquidate” the scheme or alternatively to “place it under curatorship”.

The court papers also contain various allegations that Masobe and Botha held “inappropriate” meetings with at least four LMS trustees to discuss the proposed merger between Spectramed and LMS.

In an affidavit, Liberty Medical Schemes vice-chairperson Christine Kinsman said: “It is inappropriate for Masobe to approach individual trustees of the board of trustees in such a manner when he knows that the board of trustees unanimously voted to discontinue the amalgamation discussions … These approaches are nothing less than active attempts to undermine the functioning and good corporate governance of the Liberty Medical Scheme’s board of trustees.”

Masobe and Botha said the meetings were not improper and that as the administrator of the schemes they had to meet with trustees in the ordinary course of business.

“All meetings with trustees have been openly scheduled and there is nothing improper about them,” said Botha and Masobe.

Pienaar and Jacques this week declined to comment. Van Rensburg said: “We are delighted with the court’s decision. It seems from the affidavits filed that Dr Botha and his colleagues are the culprits with unlawful attempts to influence the board of trustees to further their commercial interest to the detriment of the members of Liberty Medical Scheme.”

Inappropriate meetings
Affidavits filed in response to V-Medical’s application to the South Gauteng High Court referred to meetings between the chief executive officer of Liberty Health Holdings, Peter Botha, V-Medical managing director Patrick Masobe and four board members of Liberty Medical Scheme.

LMS chairperson Larry Jacques and vice-chairperson Christine Kinsman said in their affidavits that Botha and Masobe had ‘irregularly” approached four of the eight LMS trustees to discuss the merger with Spectramed. The four had provided details of these meetings in an LMS board meeting on July 1 2010.

These affidavits said:

• Masobe invited one trustee, Mike Mohohlo, to a 2010 Soccer World Cup game to discuss the merger between the Spectramed and Liberty medical schemes;
• Another trustee, Catherine Zazela, was flown to East London for a meeting at V-Medical’s expense (Zazela denied this); and
• Trustees Boyce Mkhize and Terence Murasiki attended meetings with Masobe and Botha but deny anything improper about the meetings.

“Botha and Mosobe acting on behalf of the administrator of the third respondent [Liberty Medical Scheme] were clearly interfering in the affairs of the medical scheme,” stated Jacques.

“The trustees who had not been approached by representatives of the applicant were astonished at the disclosures made by our fellow trustees at the [July 1 board] meeting. There is no legitimate reason as to why Masobe and Botha would have been approaching the trustees on an individual basis to discuss the Spectramed merger,” Jacques’s affidavit said.

All four of these trustees filed affidavits that appear to support V-Medical’s application against LMS.

Jacques pointed this out in his second affidavit, arguing that the “only plausible explanation” was that the trustees had been ‘induced by the applicant [V-Medical] to support the interests of the applicant above that of the third respondent [Liberty Medical Scheme]”.

Mkhize told the M&G his affidavit did not support V-Medical’s application but merely made a factual representation to the court to aid its judgement. The other three trustees said their affidavits were self-explanatory.

Masobe and Botha denied Jacques’s and Kinsman’s allegations, saying the meetings were not improper and because they were administrators of the schemes they had to meet with trustees in the ordinary course of business.

“All meetings with trustees [were] openly scheduled and there is nothing improper about them,” Masobe and Botha said.

Mkhize told the M&G he was invited to discuss “corporate governance” issues with Masobe and Botha and that there was “nothing improper” in this.

“I was asked at the end of our discussion almost casually as to whether there were any reasons or context, other than those stated in the letter to them, that led to the decision by the scheme to terminate the merger negotiations with Spectramed,” Mkhize said.

“I confirmed the reasons set out in the scheme letter as a basis for our decision and that was the end of the conversation.”

Murasiki said the newspaper’s questions raised some “non-accurate aspects” and refused to answer them. He did not specify what these inaccuracies were.

Zazele said the allegations in the M&G‘s questions were factually incorrect and V-Medical had not paid for her flight to East London.

Moholo said he was not in a position to answer questions and directed the M&G to LMS.

Judge Classen made no ruling on any of these allegations about meetings.

Super-schemes — an insider’s view
By the end of this year, South Africa is expected to have 98 medical schemes — a huge reduction from the 168 registered in 1999, writes an industry insider who prefers to remain unnamed.

This reduction results from the “super-scheme movement” (as it is known in the industry) driven by a few interested parties whose main tools are mergers and acquisitions to effect consolidation.

Consolidation is the response of medical schemes to pressures such as that created by the Government Employees Medical Scheme, which resulted in some people leaving private schemes. The looming introduction of the National Health Insurance (NHI) will also have a huge impact on the private medical scheme industry.

The schemes need to ensure they have sufficient membership numbers and financial strength to remain viable.

Consolidation appears to be driven mainly by the large life insurers, which have become increasingly involved in the industry during the past five years or so through significant investments in administrators, target schemes and mergers and acquisitions. Most of the major life insurers are actively involved in the “super-scheme movement”.

Medical schemes are separate, independent entities, managed by an independent board of trustees. The Medical Schemes Act very stringently ensures that there is a clear delineation of function and responsibility between the scheme and any provider of services, such as an administrator.

The Act also strictly prohibits the meddling in or influencing of scheme or trustee affairs by the administrator. This means that, for the administrator (read life insurer), tenure is limited to the terms of a services contract, with a three-month notice period.

So, the question is: Why would the major life insurers and their associated banking partners be so determined to be a part of this industry? On the face of it, there do not appear to be any compelling reasons to support their involvement.

But look at the future through their eyes. Medical scheme members are a target population for life insurers because they are generally actively employed: if they can afford medical scheme contributions, they are in the right income bracket for life insurance and investment products (and banking products).

There is a view — one actively encouraged by certain parties — that when the compulsory NHI is introduced, the legislation and regulation of medical schemes will relax and this will allow people to choose other (more lucrative) healthcare products over and above the NHI.

The “demarcation” debate that has been simmering for many years revolves around life insurers arguing against restrictions imposed on the sale of long-term health insurance products as alternatives to medical scheme coverage.

Ironically, the NHI could be the catalyst that loosens these restraints on life insurers.

But what would be the impact of this on medical schemes when, inevitably, it would lead to the flight of younger, healthier members to products where they do not have to subsidise the older and less healthy members?

It is no secret that a major rift has occurred at the Board of Healthcare Funders (BHF), the industry body that was established to serve the interests of medical schemes and their members. This was because the administrators — read, in most cases, the life insurers — demanded board-level representation at the BHF; and, as a result, several members of the BHF withdrew. It is also no secret that life insurers prefer trustees who are less independent.

Could it be that the scenario sketched here provides a plausible rationale for the current scramble among the major life insurers to secure a share of what they must regard as a future lucrative market opportunity? If not, what does?