The medical schemes industry: regulatory approach, trends, challenges & opportunities

1. The medical schemes industry: regulatory approach, trends, challenges & opportunities Briefing to the Portfolio Committee of Health COUNCIL FOR MEDICAL SCHEMES 20 May 2003

2. Presentation Outline Presentation Outline • Overview of the Council for Medical Schemes • Our regulatory approach • Trends in the environment • Update on key legislative issues • Emerging opportunities

3. Overview of the CMS An Overview of the Council for Medical Schemes Objectives of the Act Our Vision The Industry Accountability Structures Composition of the Council Office Organogram Divisions of the Office Staffing

4. Overview of the CMS Medical Schemes Act, 131 of 1998:the enabling Act The Council for Medical Schemes was established in terms of the Medical Schemes Act, key policy objectives of which include to: • Promote non-discriminatory access to privately funded health care • Reduce unnecessary financial burden on the public sector • Improve governance of medical schemes in the interests of members • Promote greater financial stability in the industry • Improve consumer protection through enhanced governmental oversight

5. Overview of the CMS Our Vision A medical schemes industry which is regulated to protect the interests of members and to promote fair and equitable access to private health financing in order to maximize the health of South Africans

6. Our 7 Strategic Aims Overview of the CMS • Secure an appropriate level of protection for beneficiaries of medical schemes and the public by authorizing the conduct of medical schemes business and monitoring the financial performance and soundness of schemes • Provide support and guidance to trustees and promote understanding of the medical schemes environment by trustees, beneficiaries and the public • Foster compliance with the Act by medical schemes, administrators and brokers and initiate enforcement action where required • Investigate and resolve complaints raised by beneficiaries and the public • Monitor the impact of the Act, research developments and recommend policy options to improve the regulatory environment • Foster the continued development of the CMS as an employer of choice • Develop strategic alliances nationally, regionally and internationally

7. Overview of the CMS The Industry (as at end 2001) • 146 not-for-profit registered medical schemes • Numerous for-profit intermediaries • Administrators • Brokers • Managed care companies • Reinsurance companies • 7.02 million covered lives • Annual gross contribution income: R37 billion

8. Overview of the CMS CMS Accountability Structures MINISTER OF HEALTH Dr Manto Tshabalala-Msimang COUNCIL 15 Members CEO & REGISTRAR Patrick Masobe

9. Overview of the CMS Composition of the Council • Consists of executive Chairman, Deputy Chairman and 13 members, appointed by the Minister of Health • Chairman – Prof Nicky Padayachee • Deputy Chair – Ms Nomgando Matyumza • The Council comprises a broad spectrum of highly skilled senior people which include the Director-General of Health, actuaries, lawyers, medical specialists and general practitioners

10. Overview of the CMS Committees of Council • Council comprises of the following committees: • EXCO • Council • The following specialist sub-committees have been established to aid Council in the fulfillment of its complex mandate: • Appeals • Human Resources • Audit • Research & Monitoring • Registration and Accreditation • Internal Finance • Legal • Financial Supervision

11. Overview of the CMS Office Organogram CEO & Registrar Compliance Legal Services Communications Complaints Chief Operations Officer Financial Supervision Registration & Accreditation Research & Monitoring IT Finance

12. Overview of the CMS Divisions of the Office • Legal Services: • Facilitates judicial process in enforcement of the Medical Schemes Act & provision of sound legal advice • Compliance: • Ensures compliance with the Medical Schemes Act • Communication & Education: • Promotes stakeholder understanding of the medical schemes environment and builds appropriate image and understanding of CMS • Financial Supervision: • Monitors the solvency and financial soundness of medical schemes • Research & Monitoring: • Researches trends in private health financing and monitors the impact of policy and regulatory developments

13. Registration and Accreditation: • Ensures proper registration of medical schemes, approval of scheme rules, and accreditation of healthcare brokers, brokerage houses, managed care organizations and administrators • Complaints: • Investigates and resolves complaints lodged by members, providers and other stakeholders • Internal Finance: • Maintains an effective system of internal financial management • Information Technology: • Implements IT initiatives that improve cost effectiveness, service quality and business development.

14. Overview of the CMS Staffing of the Office • CEO & Registrar: Patrick Masobe • Chief Operations Officer: Fikile Mothobi • The Council for Medical Schemes comprises a highly specialized team of multidisciplinary professionals. Together the members of the team of 55 combine expertise in medical and nursing care, law, epidemiology, public health, accounting, economics, information management and administration.

15. Our Regulatory Approach • For the first couple of years of operation of the Council for Medical Schemes and office of the Registrar, in terms of the Medical Schemes Act, 1998, our focus was largely on understanding the environment, identifying and curbing blatant abuses, and further developing the legislative framework to deal with emerging deficiencies • Our focus has now evolved to one less reliant on “fire-fighting” and more focused on prioritising strategic interventions with greatest impact on the stability and sustainability of the environment • This approach is based upon 7 key tenets

16. Our Regulatory Approach

17. Our Regulatory Approach Anticipative Regulation • A proactive approach to regulating as opposed to a passive approach leaving the industry to vagaries of the market, economy, and disease patterns • It involves imagining a medical schemes industry which accords with a shared vision, and anticipating what will be needed to bridge the gap from that visionary future to the present. It entails: • Visioning the future of the industry and the regulator, and generating strategic dialogue within government and industry around that vision • Developing a shared understanding of strategic regulatory priorities for the short, medium and long term that will underpin that future • Reviewing our broad strategic goals in light of that vision • Selecting strategic factors and assessing their impact • Focusing on strategic themes and factors with highest impact in the short, medium and long term toward closing the gap between what we aspire for and current reality of the organization • Developing action plans that capture identified strategic priorities, and moving to implementation

18. Our Regulatory Approach Risk Based Regulation • Focuses on identifying risks and solving associated problems which are most critical to achieving our statutory objectives • Schemes are categorized into high, medium and low impact schemes in terms of the extent to which their operation, and potential failure, may impact on the medical schemes environment • Risk assessments will be conducted for each high impact scheme, and individualized risk mitigation plans developed for each such scheme • Compliance with risk mitigation plans will be carefully monitored through frequent reporting, market intelligence and on-site visits • This enables proactive management of risks before problems materialize, and allows for effective prioritization of resources

19. RISK BASED OPERATING FRAMEWORK Risks & opportunities in the external environment. Describe what we are seeking to achieve, and drive our priorities & allocation of resources

20. Our Regulatory Approach Thematic Regulation • Activities of Council are increasingly integrated in “theme projects” whose results have greatest impact on our regulatory objectives • For 2003/4, the theme projects are: • Fair Treatment of Beneficiaries and the Public, which involves: • Developing an understanding of practices of medical schemes and intermediaries which might cause unfairness • Assessing the extent to which this unfairness is already satisfactorily addressed • Developing strategies to improve protection of consumers where safeguards are inadequate • Developing the Risk-Based Regulatory approach, focusing on: • Criteria for allocating schemes to impact bands • Risk assessment plans and risk mitigation plans for high impact schemes • Regulatory tools as part of the risk mitigation plan • Managed Health Care and Risk Transfer, to: • Review current capitation contracts • Assess the appropriateness of forms of risk transfer • Propose mechanisms to ensure the appropriateness of risk transfer

21. Our Regulatory Approach Research Based Regulation • Regulatory approaches are based, as far as possible, on sound research into trends in private health financing and the impact of policy and regulatory developments • Research activities include a combination of literature reviews, consultative processes, surveys, statistical methods, and data analysis • Recent research outputs have included: Annual Reports of the Registrar, a stakeholder analysis, a study of governance structures in medical schemes, an assessment of contribution increases, and a study on the costing of prescribed minimum benefits • Endeavours are made to promote international best practice through study visits and hosting of counterpart regulators. Consideration is also being given to a staff exchange programme with comparable regulators internationally

22. Our Regulatory Approach Participative Regulation • We are committed to optimal transparency in regulatory approaches • We strive to inform our activities as far as possible with stakeholder input and opinion, without succumbing to regulatory capture by entities with vested interest • Consultative processes include: establishment of advisory committees; invitations for comment on discussion documents; road shows and consultative workshops; and focus group discussions • Major consultative processes currently underway include: • Invitation for comment on a financial soundness discussion paper, outlining alternative regulatory approaches to prudential regulation • An industry representative advisory committee on treatment algorithms for the Chronic Disease List in the prescribed minimum benefits, plus distribution of draft algorithms for comment • Invitation for comment on the criteria for allocation of schemes into high, medium and low impact bands • Invitation for industry responses on the Treatment Action Campaign’s complaint of alleged coverage of substandard treatment of HIV benefits

23. Our Regulatory Approach Developmental Regulation • This entails developing knowledge, skills and abilities of key decision makers in relation to scheme governance and enhancing consumer awareness of rights and responsibilities. This is done through inter alia: • trustee training programmes with basic curriculae on issues of governance and administration, and more advanced modules on issues of financial management, clinical governance and health policy reform • workshops with consumer organizations and trade unions in respect of responsible consumer behavior and rights and responsibilities in terms of the Medical Schemes Act

24. Our Regulatory Approach Compliance Based Regulation • Persistent non-compliance with regulatory requirements demands, on occasion, tough enforcement actions, which we do through: • Conducting scheduled and unscheduled inspections • Investigating, warning and prosecuting offenders • Instituting disciplinary proceedings • Collaborating with specialized law enforcement agencies, such as the Office for Serious Economic Offences and the Specialized Commercial crimes Court • Recent enforcement actions have included: • Curatorships of KwaZulu-Natal Medical Scheme, Medicover 2000 and Telemed relating to problems with scheme governance • Suspension of 11 of the 15 trustees of ProSano medical scheme, for alleged financial irregularities in the use of scheme funds • Collaboration with criminal authorities on the institution of criminal proceedings against an unregistered operation, Africa Health

25. Our Regulatory Approach Underlying Principles • In executing the above Regulatory Approaches we adopt the following principles of good regulation: • Acting in an administratively fair and transparent manner, with integrity, professionalism and respect • Being conscious of the need to be cost-effective in the use of resources of the Council and those of the regulated entities; • Proportionate regulation, recognizing the responsibilities of members of Boards of Trustees of Medical Schemes • Not unduly impeding innovation, while facilitating fair competition

26. Trends in the Environment Trends in the Environment • Demographic Trends • Financial Trends • Contribution Changes

27. Trends in the Environment Demographic Trends • Since the mid-1990’s there has been little overall growth in number of covered lives, although there has been significant member movement between medical schemes • Unaudited figures suggest that this trend has continued during 2002 • This can be attributed inter alia to: • cost escalation • indirect discouragement of unhealthy lives from joining or remaining on schemes • limited innovation in the creation of low cost medical schemes • insufficient incentives for brokers to target the emerging market as opposed to existing members

28. Trends in the Environment Membership 2000/2001

29. Trends in the Environment Membership Trends in the Last Decade Annual Report of Registrar, 2001

30. Trends in the Environment Pensioner Ratio

31. Trends in the Environment Financial Trends • Average solvency industry-wide has remained relatively stable since 2000, with unaudited results showing some overall improvement during 2002 • Operating results have improved dramatically since 2000 • There has been significant improvement in accumulated funds, continuing in 2002 • Exponential increases have been seen in non-health care expenditure since the mid 1990s, although unaudited results for 2002 suggest that the rate of increase may be slowing down • Expenditure on health care benefits continues to rise above the rate of normal inflation

32. Trends in the Environment Please Note: All financial results for 2002 are based on unaudited management accounts, and are therefore subject to change in the analysis of the audited annual 2002 statutory returns

33. Trends in the Environment *** Based on unaudited returns

34. Trends in the Environment Accumulated Funds and Operating Results • Minimum accumulated funds grew by 21,3% to R7,4 bn in 2001, and to R8.9 bn in 2002 (a further growth of 19.58%)*** • Net assets increased by 27.5% to R8,3bn in 2001, and to R10 bn in 2002 (a further growth of 21.3%)*** • Compared to a loss of R1 bn in 2000, schemes showed profits from operations of R 278m in 2001, increasing to R1,5bn when investment income is taken into account, and R2.25 bn in 2002 (a further growth of 46.5%)*** ***2002 figures are based on unaudited results

35. Trends in the Environment Annual Report of Registrar, 2001

36. Trends in the Environment Expenditure Trends • Increase in expenditure on health care benefits has continued to outstrip normal inflation since implementation of the Medical Schemes Act, with the major contributors being private hospitals, medicines and specialists • Dramatic increases in non-healthcare expenditure have been seen in recent years, including inter alia administration expenditure, managed care fees, reinsurance losses, and broker fees • This is illustrated in a decrease in claims ratios (% of contributions spent on health care benefits) from 89.3% in 2000 to 83.1% in 2001

37. Trends in the Environment Annual Report of Registrar, 2001

38. Trends in the Environment Annual Report of Registrar, 2001

39. Trends in the Environment Annual Report of Registrar, 2001

40. Trends in the Environment • Unaudited results for 2002 suggest – • total benefits paid increased by 10.59% in 2002 (as opposed to an increase of 13.7% in 2001) • overall gross administration costs increased by 11.58% (as opposed to an increase of 41.7% in 2001): • in open schemes the increase was 9.18% (as opposed to an increase of 52.7% in 2001) • expenditure on managed care administration decreased by 7.14% (as opposed to an increase of 11.4% in 2001) • reinsurance losses in open schemes decreased by 7.14% (as opposed to an increase of 61% in 2001) • broker fees paid by medical schemes increased by 45.06% (as opposed to an increase of 26.09% in 2001) • overall non-health expenditure increased by 8.70% in 2002.

41. Trends in the Environment Contribution Increases • The overall average increase in contributions from January 2002 to January 2003 was 14.1% for members, 15.9% for adult dependants and 15.1% for child dependants • Increases were slightly higher in open schemes than in restricted schemes • Overall the rate of contribution increases were lower than in the previous year • Nevertheless, although lower, contribution increases were still high in relation to both medical inflation and the consumer price index • Contribution increases are driven, inter alia, by consumer preference, supplier induced demand, the fee for service model of reimbursement, new technology and increasing non-health costs

42. Trends in the Environment Contribution increases by type of medical scheme 2002/2003

43. Key Regulatory Issues An Update on Key Regulatory Issues • Governance • Financial Soundness • Benefit Structure • PMB’s • HIV • Demarcation • Intermediaries • Reinsurance contracts • Brokers • Managed health care organisations • Administrators • Tariff setting

44. Key Regulatory Issues Governance • To a large extent, boards of trustees are exercising independent decision-making in the interests of beneficiaries, and compare well to international experience on a number of key indicators • A study conducted for Council showed, however, that while many boards are stable and strategically focused, others are still geared toward crisis management • Repetition of serious alleged irregularities, as with the recent example of ProSano medical scheme, will compel a critical review of aspects of the governance model enshrined in the Medical Schemes Act

45. Key Regulatory Issues Financial Soundness • Experience in regulating has convinced us that the approach to prudential regulation in the Medical Schemes Act is fundamentally sound, but that improvements can be made over time • Where problems have been encountered in relation to financial soundness of schemes, these have typically been caused by: inappropriate contracts with third parties; inadequate contribution setting and lack of professional guidance; inaccurate estimation of incurred but not recorded claims (IBNR); and unwise investments • Consultation is currently underway on a discussion document, inviting comments on a range of issues, including: • Requirements for professional supervision of contribution-setting • Calculation of IBNR • Inclusion of considerations of risk transfer in solvency assessment • Risk-based capital approaches to solvency regulation

46. Key Regulatory Issues Benefits: Delivery of Prescribed Minimum Benefits • Medical schemes responded to implementation of PMBs by amending rules to say PMBs would be covered only in public hospitals • In general – • administrative systems were not configured to identify PMBs, with the result that there was little impact on benefit protection • additionally, no arrangements were made with public hospitals to accommodate patients • in some cases where members relied on PMB protection, medical schemes denied coverage where public hospitals could not accommodate them • As of 1 January 2004, medical schemes will be incentivised to specifically contract with the public sector or other low cost providers to deliver PMBs, because they will be liable through regulation to cover the benefits in an alternative provider if the provider of the scheme’s choice is not reasonably available

47. Key Regulatory Issues Benefits:PMB Chronic Disease List • Since implementation of the Medical Schemes Act, there has been an industry-wide trend to reduce coverage for chronic disease conditions, with the effect that continued membership of chronically ill persons was discouraged • As of 1 January 2004, a set of 25 chronic conditions will be included in the prescribed minimum benefits – requiring full coverage for at least basic defined treatment of these conditions • This should significantly reduce opportunity for indirect discrimination against sufferers of chronic diseases

48. Key Regulatory Issues Benefits: PMB Costing • A recent study found the monthly cost of PMBs (including the chronic disease list) in 2001 prices for a low income family of four to be, on average: • R 640.33 in the private sector • R416.76 in the public sector • The study found that the cost of PMBs does not unduly impact on affordability of low cost medical schemes

49. Key Regulatory Issues Benefits: HIV Coverage • PMBs were expanded in 2003 to include, inter alia, coverage for voluntary counseling and testing, and post-exposure prophylaxis following sexual assault and occupational exposure • It stopped short of including coverage for chronic (ongoing) provision of anti-retroviral therapy (ART) • A study conducted by the Centre for Actuarial Research in 2001 showed nevertheless that while there is reasonably widespread coverage of ART, utilisation of these benefits has been minimal • The Treatment Action Campaign (TAC) has alleged coverage of substandard HIV prophylaxis by some medical schemes • In response to the TAC complaint, the Council has launched an extensive investigation into HIV coverage by medical schemes, with release of results anticipated in September 2003

50. Key Regulatory Issues Benefits: HIV-specific Products • Various for-profit entities have submitted applications for exemption from the Medical Schemes Act for products that offer HIV-only benefits • These entities typically do the business of a medical scheme