CMS says Health Squared didn’t stick to business plans designed to address problem areas

The Council for Medical Schemes (CMS) has published its version of the sequence of events that resulted in Health Squared’s finances deteriorating to the extent that it will apply for voluntary liquidation this week.

As Moonstone has previously reported, Health Squared and the CMS have not always seen eye to eye on how to address the scheme’s financial problems.

The regulator of medical schemes has already announced that it will oppose Health Squared’s application to the High Court to be wound-up.

Read: CMS to oppose Health Squared’s bid for voluntary liquidation

In a statement on Friday, the CMS also reiterated its warning for Health Squared members “to avoid panic-inspired movements that might leave them worse off” but to wait for an announcement that the CMS expected to make “in due course” about the outcome of its discussions with seven medical schemes.

The CMS said it was aiming to secure a concession that will allow Health Squared members to join these schemes without the conditions of reinsurance and waiting periods.

“Health Squared members who join other schemes may not qualify to be part of the dispensation, should the migration concession be successful.”

It said the seven schemes have more than 100 000 members and solvency ratios above 25%.

“It is hoped that the schemes will be able to absorb the risk and dilute it with their demographics if the risk is shared equitably.”

The CMS said the discussions with the schemes “continue with due consideration to the urgency of the situation”, because Health Squared members need to find alternative cover by 1 September.

Merger was subject to conditions

In the same statement, the CMS detailed its view of what led up to Health Squared finding itself in a precarious financial situation.

Health Squared came into existence on 1 January 2019 through the merger of Spectramed and Resolution Health.

The CMS said it approved the amalgamation on condition that the scheme took the following steps to protect its members’ interests:

• The scheme was required to consolidate its benefit options by 1 January 2020 to increase the value of the guarantee provided to a poor risk and demographic profile. The CMS instructed the scheme, within six months, to issue a tender to procure managed healthcare services.
• The scheme was required to submit a business plan setting out how and when it would reach 25% solvency. Regulation 29(4) of the Medical Schemes Act requires a scheme that does not meet the prescribed solvency level to submit a business plan to the CMS on the action being taken to comply. The CMS monitors such schemes to check their performance against the business plan.
• From 1 January 2019, the scheme was required to limit non-healthcare expenditure (NHE) to R200 per average beneficiary per month or lower, and within six months, from 1 January 2019, to issue tenders for administration, marketing and distribution services.
• The scheme was required to implement all the findings and recommendations of the inspection report into Resolution Health dated September 2018.

The CMS said it rejected Health Squared’s 2019 business plan on 29 July 2019, because it did not meet the conditions to raise its solvency ratio.

“Health Squared then appealed against the conditions imposed on the approval of the amalgamation, resulting in the conditions remaining suspended pending the hearing,” it said. The Appeals Committee later set aside the conditions mentioned above.

By December 2019, the scheme’s solvency was 15.42%.

Business plans were supposed to turn things around

In early 2020, Health Squared submitted its five-year business plan, which the CMS approved on the basis that the scheme would improve its solvency to 18.1% by 31 December 2020, reduce its NHE and consolidate its benefit options.

The CMS said it cautioned Health Squared in late 2020 for non-compliance with the approved 2020 business plan because the scheme’s marketing fees, NHE and administration exceeded the agreed budget, with four months of the year remaining.

The scheme’s solvency reached 17.32% by the end of December 2020.

The regulator said Health Squared projected its solvency ratio would be 17.9% by December 2021, according to its 2021 business plan submitted to the CMS. The CMS said it approved the business plan, warning the scheme to abide by its NHE budget.

However, the solvency ratio fell to 6.04% by end of last year.

Statutory manager and curatorship

As a result, the CMS said it agreed with Health Squared to appoint a statutory manager to turn around the fortunes of the scheme.

“As the statutory manager was supposed to take office with the scheme’s solvency at 5.03%, the CMS uncovered that this figure was overstated, and that the solvency was actually 3%.

“Health Squared refused to allow the appointed statutory manager to commence work, stating that it was too late and proposed that the scheme be liquidated. The CMS rejected the proposal to liquidate the scheme.

“Moreover, the CMS discovered that Health Squared had postponed its annual general meeting from June to August, then from August to September 2022, raising concerns about the legitimacy of the board of trustees,” it said.

The CMS said it engaged the trustees on this and planned to place the scheme under curatorship.

As the CMS was identifying a suitable curator, it said Health Squared approached the High Court for leave to apply for the voluntary winding up of the scheme.

The CMS said it placed Thebemed under curatorship in August 2019, when its solvency ratio was about 4%, following the failure of close monitoring interventions. It said Thebemed was turned around, resulting in the lifting of the curatorship in May this year and the appointment of a new board of trustees and principal officer.