Medical scheme placed under statutory management as reserves plummet

Healthcare brokers have been urged to avoid “any drastic actions” that could harm Sizwe Hosmed Medical Fund and its members, following the announcement that the open medical scheme has been placed under statutory management.

In a joint statement released yesterday, the Council for Medical Schemes (CMS) and the Sizwe Hosmed board of trustees said the decision to place the scheme under statutory management was driven by “the deterioration of financial reserves”.

In terms of regulation 29(2) of the Medical Schemes Act (MSA), a medical scheme must at any time maintain accumulated funds, expressed as a percentage of gross annual contributions, of at least 25%.

In November 2021, the merger of Sizwe Medical Fund and Hosmed Medical Scheme initially left the newly formed entity with combined reserves of R1.4 billion and a solvency level of 49.4%. However, just one year later, the scheme’s solvency ratio had dropped to 25.45%. The joint statement attributed the decline to “benefit under-pricing and historically unreliable budgetary and forecasting processes”, which continue to erode the scheme’s reserves.

The CMS emphasised that this process is not a curatorship, where a curator solely manages the scheme’s affairs. Instead, it is a statutory management intervention in which the CMS and the board of trustees will jointly run the scheme. The aim is for “the two parties to work together to stabilise the scheme, ensure its sustainability, and protect the interests of Sizwe Hosmed beneficiaries”.

Where did the reserves go?

The CMS 2022 Industry Report, released last December, ranked Sizwe Hosmed as the sixth-largest open medical scheme and the tenth largest overall in South Africa. With 3Sixty Health as its administrator, the scheme serves 63 577 members and 152 421 beneficiaries.

The CMS urged members to remain with the scheme as the regulatory intervention steers the scheme back into complying with the minimum statutory solvency requirements, stating that the scheme has “a solid and good member profile, many of whom are young”.

So, given all the scheme’s advantages, how did its solvency ratio decline by nearly 24% in just one year?

The first public indication of trouble came when the Industry Report showed that the scheme had recorded the fourth-highest operating deficit for 2022.

At the time, the CMS attributed the decline in solvency partly to the November 2021 merger with Hosmed, which resulted in a significant increase in annualised contributions – the key factor in the solvency calculation – in 2022.

“It is, however, of concern that the scheme incurred the fourth-highest operating deficit, given its low solvency level. This seems to suggest that the scheme has experienced much worse claims than anticipated at its pricing for its 2022 benefits.”

Read: All open medical schemes – except one – have solvency ratios far above the required minimum

The claims ratio is a key financial metric that measures the percentage of a medical scheme’s income (or contributions) spent on paying out claims. The open scheme industry average in 2022 was 93.11%. The Industry Report showed that Sizwe Hosmed had a 99.02% claims ratio in 2022 compared to 95.28% in 2021.

“It is interesting to note that of the eight schemes whose claims ratio exceeds the open scheme industry average of 93.11%, only Sizwe Hosmed Medical Funds’ average age is younger than that of the industry (33.13 years compared to 35.81 years),” the CMS said.

The report noted several higher-than-the-norm expenditures by Sizwe Hosmed that year.

Sizwe Hosmed was listed among the 10 open schemes with the highest net healthcare expenditure per average beneficiary per month (PABPM).

The average healthcare expenditure for open schemes was R1 860.68 PABPM, whereas Sizwe Hosmed’s was R2 232.22. This was despite the scheme having a below-average demographic profile. In addition to the young average age of its beneficiaries, the scheme’s pensioner ratio was 7.62%, compared to the industry average of 11.33%.

In 2022, the industry average for non-healthcare expenditure was R229.60 per average beneficiary per month (PABPM).

Sizwe Hosmed’s PABPM was R268.57.

Non-healthcare expenditure generally includes costs that are not directly related to the provision of medical services or benefits to members, such as administrative costs, broker fees and distribution costs, net impairment losses (trade and other receivables), and net income/expenses on commercial reinsurance.

A pie chart published in the Industry Report shows Sizwe Hosmed’s administration expenditure represented 84.08% of its non-healthcare expenditure.

The report states that when adjusted for lives, the administration expenditure of R225.81 PABPM exceeds the open scheme industry average of R182.75. The report states that schemes need to operate with a certain number of lives for average operational costs to be lower and make the business more profitable and sustainable over the long term.

When comparing its marketing and advertising expenditure, the R120.84 per active member per month (PAMPM) exceeds the industry spend of R32.40 PAMPM, which is 273% more than the industry average.

Trustees at Sizwe Hosmed, of which there were 18 in 2022, also seem to be exceptionally well paid. The scheme’s average fee per trustee of R658 000 far exceeds the industry average of R398 000. And despite being the tenth-largest scheme in South Africa, it is ranked third when schemes with the highest trustee fees are compared.

The principal officer at Sizwe Hosmed also saw a substantial 20.23% pay rise in 2022, with the annual salary climbing from R3 415 000 in 2021 to R4 106 000.

But wait, there’s more

The scheme’s name again popped up in January when the CMS published a new research report titled “Annual General Meetings of Medical Schemes: Importance and Challenges Associated with Limited Member Participation”.

The research found that of the 71 registered medical schemes in South Africa, 33 incurred AGM-related expenses totalling R29.2 million in 2022. The CMS deemed this spending pattern “worrisome”.

Five medical schemes exhibited significantly higher spending than other schemes bearing a substantially higher proportion of the total AGM expenditure.

These schemes included Sizwe Hosmed, Medipos Medical Scheme, Engen Medical Benefit Fund, Motohealth Care, and Foodmed Medical Scheme.

The graph illustrates expenditure relative to the number of lives covered, revealing a pattern where some schemes exhibited significantly higher spending than others.

“Notably, Sizwe Medical Fund had an extreme value with a relative ratio of 46, a substantial deviation from the benchmark value of 4,” the research report read.

Read: Medical schemes regulator flags ‘extravagant’ AGM expenses

New man in charge

To get the scheme back on track, the CMS and the board of trustees have appointed Joe Seoloane as the scheme’s statutory manager with immediate effect.

With more than 30 years of experience, the healthcare business rescue specialist is known for his expertise in healthcare governance and ethics. Other medical schemes where he plied his skills in the past include KeyHealth, SAMWUMED, Sizwe, ProSano, POLMED, and Medicover 2000.

Seoloane, who is already working with the board of trustees on a turnaround strategy, will now assume a more pivotal role at Sizwe Hosmed.

Under section 5A(5) of the Financial Institutions Act, Seoloane must advise the Registrar’s office on the steps necessary to ensure the scheme’s legal compliance, financial soundness, and proper administration.

His responsibilities include helping the scheme comply with regulation 29 of the MSA, which involves measures to reconstitute its board of trustees according to the MSA and the scheme’s rules. Additionally, Seoloane will investigate and report on all circumstances that led to the non-compliance with regulation 29 to the Office of the Registrar.