The Council for Medical Schemes (CMS) was engaged in discussions with seven schemes to consider options for members of Health Squared, which intends to apply for voluntary liquidation on 1 September.
In a statement on Tuesday, the regulator of medical schemes “encouraged” Health Squared members to avoid “panic-inspired movements that might leave them worse off”.
It said all the parties to the discussions were conscious of the urgency of the matter and will endeavour to assist the regulator in finding a solution that is in the best interests of their respective schemes.
In a letter to members, dated 18 August, Health Squared advised its members “to seriously consider taking steps” to join other schemes from 1 September because the trustees have resolved to apply for the scheme’s voluntary liquidation as a matter of urgency.
On Monday, the CMS filed notice of its intention to oppose Health Squared’s application. This is not surprising, given that the regulator and the scheme have not seen eye-to-eye on how to address Health Square’s problems (see below).
In the letter, the scheme’s principal officer, Elias Mabena, said the trustees’ decision was informed by actuarial and legal advice that Health Squared’s financial position will continue to deteriorate, to the extent that, towards the end of this year, it might not be able to pay members’ claims.
Health Squared was the result of the amalgamation of Spectramed and Resolution Health in 2018. It is administered by Agility Health.
The scheme is currently factually solvent, but it will not be for much longer. If the scheme is allowed to become factually insolvent, it will have a devastating effect on members and beneficiaries, Mabena said in his affidavit.
According to Mabena’s application, Health Squared approached several large medical schemes with merger proposals since January, but without success. Bonitas declined a transfer-of-business proposal in July, and Discovery did so in August.
The main reasons that schemes did not want to merge with Health Squared were its membership profile and low reserves.
Mabena said the “bad news from Discovery” made it immediately apparent that Health Squared could no longer be saved.
Mabena said Health Squared’s application for leave to file a liquidation application will be heard in the High Court in Johannesburg on 30 August. If leave is granted, the application will be launched on 1 September.
Why Health Squared is going under
According to Mabena’s affidavit, high Covid-19-related claims and a membership age profile that was above the industry average have pushed Health Squared to the brink.
At the end of July, the average age of a Health Squared beneficiary was 49.7 years, which was 16.1 years higher than the industry average of 33.6 years.
According to the scheme’s actuaries, 3One, if it had not been for the total Covid-related claims expenditure of R193 million in 2020 and 2021, Health Squared would have ended 2021 with a solvency level of 26%.
Many schemes benefited from reduced non-Covid-related costs in 2020, but this was not the case for Health Squared because of its older age profile, Mabena said. Reductions in non-Covid expenditure were offset by Covid expenditure, so that the scheme’s ultimate financial performance was similar to that budgeted for.
Health Squared also experienced higher-than-expected non-Covid claims in 2021, which was contrary to the claims experience of other schemes.
“The claiming behaviour of the older and poorer risk profile members was largely inelastic to the Covid-19 impact, with members continuing to claim at a level higher than expected,” Mabena said.
He also cited the considerable loss of members as a reason for winding up the scheme.
At the end of January, it had 16 664 principal members and 27 654 beneficiaries; at the end of July, its membership had fallen to 14 228 principal members and 23 785 beneficiaries.
The combined effect of the above factors is that the scheme’s solvency ratio has gone into free-fall, “despite numerous remedial interventions”, Mabena said.
The solvency ratio fell from 17.32% in 2020 to 6.04% at the end of 2021. At the end of July this year, it was about 2.15%. The scheme’s actuaries project it will be between 0.2% and 2.3% at the end of Health Squared’s 2022 financial year.
Disagreement between the registrar and the trustees
The respondents to the application are the Registrar of Medical Schemes, Dr Sipho Kabane, and the CMS.
Based on Mabena’s court papers, it seems Health Squared and Dr Kabane have not always seen eye to eye on how to address the scheme’s financial problems.
In November last year, the registrar sent Health Squared a letter asking it to agree to the immediate appointment of a statutory manager.
The letter included what Mabena described as “a number of unfounded and unsubstantiated allegations of maladministration” against the trustees, essentially accusing the board of being responsible for the scheme’s financial decline.
The trustees informed the registrar that they were favourably disposed towards the appointment of a statutory manager, but subject to certain conditions, including keeping the appointment confidential, because public knowledge of this would affect the scheme adversely.
On 27 June, Dr Kabane advised the trustees that a statutory manager for the scheme had been selected, to be appointed on 1 July.
In his affidavit, Mabena submitted that Health Squared’s financial position had deteriorated markedly since the idea of a statutory manager was first mooted. The scheme was not in a position to agree to appointment of a manager “at such a late stage”, plus it would incur the additional financial burden of paying a manager.
In a letter dated 29 June, the trustees asked for more time to consider the matter.
Dr Kabane informed the trustees on 11 July that unless they agreed to the appointment of a statutory manager, he would have no other alternative but to consider “alternative intervention mechanisms”.
Mabena said this “veiled threat” referred to bringing an ex parte application to place Health Squared under curatorship, whereas “it was abundantly clear from the objective facts” that neither a statutory manager nor curatorship would be able to save the scheme.
“Despite all the interventions that have been implemented in conjunction with the office of the Registrar for a period of more than year, the downward spiral of the scheme has simply continued,” he said.
Implications for members
Health Squared’s announcement left its members with eight working days to find other cover.
In his letter, Mabena said Health Squared has sufficient reserves to meet claims that will have been incurred but not reported on the date of the voluntary liquidation.
“Members will thus be covered for their claims arising from health events which took place up until 31 August 2022, provided that their contributions have been duly paid,” he said.
He said in the course of winding up the scheme, the liquidator will be able to negotiate a group transfer of members to another scheme without the transferee scheme imposing waiting conditions on members.
In terms of the Medical Schemes Act, members who move from one scheme to another if they lose their job or their employer switches schemes are not subject to a three-month waiting period, during which they are covered only for the prescribed minimum benefits. However, it is unclear how this provision applies in the case of scheme liquidations.
Too little too late CMS – yet another scheme where the CMS sat and waited and watched a scheme with no reserves go down the tubes instead of stepping in and putting a curator in to stop the rot. Everyone has known for years they had insufficient reserves, and yet nothing was done by CMS until days after the announcement. CMS should have stepped in when reserves hit 15%! They are supposed to be protecting the members, can’t see that anything was done to protect the Health Squared members, or previously the Renaissance members…
So what happens now? Are we all forced to join Sizwe in a moment of panic, or do we wait for the court ruling?
Not much notice given either.
The CMS advises that members wait for the outcome of agreements it is trying to broker with the seven schemes.
Will CMS provide an alternate medical scheme if HS is liquidated?
I have contacted a few medical schemes and all are imposing a waiting period.
What about the August monthly premium that is already debited from the employee’ salary?
According to Health Squared’s communication to members on 18 August, members are obliged to pay their contributions for August. The scheme exists until the High Court grants the liquidation order.