The Council of Medical Schemes (CMS) has stepped in to halt the proposed merger of black-owned Sizwe Medical Aid and Hosmed Medical Scheme, in what may be a serious blow to the much-needed transformation of the sector.
On June 8 the council’s registrar, Sipho Kabane, wrote to the two schemes ordering them to suspend their amalgamation processes, saying he had been presented with the report of an inquiry by the council’s compliance and investigations unit. “Serious findings” were contained in the scheme’s management report for the year ending December 2019.
Kabane said he was applying his mind to the reports, after which he might have to hold further consultations with the council and the schemes.
Should the merger go ahead the new entity, with nearly 78 000 members, would become the eighth-largest open medical scheme in South Africa. It would give black capital a major foothold in an industry seen as largely untransformed.
Kabane’s intervention was criticised by sources in the schemes and the council, who accused him of not following proper procedures.
They argued that he had allowed the schemes to go through the balloting of members — who had approved the merger — and the preparation of exposition documents, which cost them millions of rands each.
They said he should have warned the schemes of possible obstacles before they embarked on the merger process.
Sources at the CMS said that in a series of letters, Kabane had failed to decline, confirm or ask Sizwe to modify the exposition documents, as required in terms of the Medical Schemes Act, and had instead asked the two schemes to halt the merger.
“The registrar is asking the schemes to agree to an unlawful step,” the one CMS source said. “There is no provision for suspension of an amalgamation in the Medical Schemes Act.
“This invites scrutiny of motive and the responsible exercise of supervisory power by a public official.”
In a meeting with the Mail & Guardian, Kabane claimed not to be aware of the suspension letter, and asserted that the merger was ongoing and in line with the processes prescribed in relevant legislation.
He refused to comment in detail on the apparent impasse between the council and the schemes, saying the matter was sub judice because legal letters had been exchanged between the schemes’ lawyers and the CMS.
He denied scuppering the amalgamation, saying that the process was continuing.
“All mergers in the industry are governed by section 63 of the Act, which details how the process should unfold. The merger has not been approved yet, and the registrar has not stopped any part of it from unfolding,” said Kabane.
After Sizwe wrote to Kabane asking for clarity on the suspension, the registrar said in a follow-up letter that the scheme had not disclosed the proposed merger in its 2019 annual financial statements and had failed to tell its members of the amalgamation in its annual financial statements, a “material subsequent event”.
He also said there was an issue with the trustees’ remuneration for training, travel and accommodation and that telephone and other costs “cannot be fully reconciled to the return”.
Another matter Kabane raised regarding the suspension of the merger was that the company’s solvency, as per the annual financial statement (AFS) of 37.6%, was incorrectly calculated and did not agree with the annual return of 36.5%.
“For purposes of calculating the solvency, unrealised gains can be deducted from members’ funds but unrealised losses cannot be added back as per Circular 13 of 2001,” the letter said. “The prior year solvency is also not correctly calculated on the AFS. This was also queried last year and the scheme has continued to calculate it in the same manner on the AFS.
“As a result of the above material issues and the commitment of the scheme to ensure previous concerns have been addressed, the annual financial statements of Sizwe Medical Fund for the year ended 31 December 2019 is rejected.
“The scheme is requested to prepare and submit a new set of … statements to the CMS. Any previous copies issued must be retracted.”
One of the CMS insiders said that if the council had real concerns about the scheme, a merger should have not been allowed in the first place.
“In the past, if a medical scheme was facing an investigation
CMS did not allow schemes to publish the exposition document if it might impact the merger,” the source said.
“Once the exposition is published it is up to the members to vote for or against the merger and to make any representations to the registrar. None of the above has happened.”
The source said Kabane had changed his mind based on “very old information and without considering representations”.
Kabane refused to confirm whether he wrote the suspension letter, saying the scheme wrote many letters to both parties. When given a date of the letter concerned so that he could check his records, he declined to do so.
“On the details, I’m not prepared to comment because there are ongoing engagements between both schemes and their legal representatives. I don’t want to go to the media and start saying things when these discussions have not been completed,” he said.
According to Sizwe’s chief executive officer, Simon Mangcwatywa, the CMS created the impression that the merger would go ahead by accepting its exposition papers and publishing a circular on May 26.
“The exposition document contains everything. When that was approved it meant that CMS had done its own due diligence, looking at everything, and had satisfied itself and were giving the merger its blessing,” he said.
“Then at the end of the process we suddenly get an email saying we need to halt everything without a single reason why.
“We were told to suspend the process because of issues it is looking into, but nothing about which issues or people. This was accompanied by a threat that if you don’t halt this process we are going to take action.”
Mangcwatywa said that neither of the two schemes was facing “insolvency issues”, but they were now unable to plan for 2021.
“When the thing started we asked to meet CMS to say: ‘Look, as the regulator we respect you and we would like you to walk with us through this process so we don’t find documents or hear things in the corridors.’ That meeting never happened.”
Mangcwatywa said that in the sector “there isn’t really a lot of what you can call African-led or African-managed schemes. Having two black-managed giants coming together and forming a much bigger group that will feature in the top 10 medical schemes would be a huge milestone.”
He said the worry has been the fact that previous merger attempts had been scuppered by politics in the CMS and the industry. “There has been a lot of politics that went into stopping the previous mergers. It was not numbers, it was not finances, it was not solvency ratio. It was really politics that came into play.
“I am hoping we will not fall down that hole again of not wanting the scheme to go ahead.”
Hosmed chief executive Malema Pitsoane said he could not comment because the matter was still with the registrar.