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 Overview of the Council for Medical SchemesOverview of the Council for Medical Schemes Our regulatory approachOur regulatory approach Trends in the environmentTrends in the environment Update on key legislative issuesUpdate on key legislative issues Emerging opportunitiesEmerging opportunities Presentation Outline

3. 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 Overview of the CMS

4. 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 Overview of the CMS

5. 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 Overview of the CMS

6. Our 7 Strategic Aims  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 Overview of the CMS

7. The Industry (as at end 2001) 146 not-for-profit registered medical schemes146 not-for-profit registered medical schemes Numerous for-profit intermediariesNumerous for-profit intermediaries –Administrators –Brokers –Managed care companies –Reinsurance companies 7.02 million covered lives7.02 million covered lives Annual gross contribution income: R37 billionAnnual gross contribution income: R37 billion Overview of the CMS

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

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

10. Committees of Council Council comprises of the following committees: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:The following specialist sub-committees have been established to aid Council in the fulfillment of its complex mandate: AppealsAppeals Human ResourcesHuman Resources AuditAudit Research & MonitoringResearch & Monitoring Registration and AccreditationRegistration and Accreditation Internal FinanceInternal Finance LegalLegal Financial SupervisionFinancial Supervision Overview of the CMS

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

12. Registration and Accreditation: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:Complaints: –Investigates and resolves complaints lodged by members, providers and other stakeholders Internal Finance:Internal Finance: –Maintains an effective system of internal financial management Information Technology:Information Technology: –Implements IT initiatives that improve cost effectiveness, service quality and business development.

13. Staffing of the Office CEO & Registrar: Patrick MasobeCEO & Registrar: Patrick Masobe Head of Financial Supervision and CFO: Fikile MothobiHead of Financial Supervision and CFO: 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.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. Overview of the CMS

14. 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 deficienciesFor 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 environmentOur 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 tenetsThis approach is based upon 7 key tenets

15. 7 Tenets of Our Regulatory Approach Anticipative Regulation Thematic Regulation Risk Based Regulation Research Based Regulation Participative Regulation Develop- mental Regulation Enforcement Based Regulation Our Regulatory Approach

16. Anticipative Regulation A proactive approach to regulating as opposed to a passive approach leaving the industry to vagaries of the market, economy, and disease patternsA 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: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 Our Regulatory Approach

17. Risk Based Regulation Focuses on identifying risks and solving associated problems which are most critical to achieving our statutory objectivesFocuses 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 environmentSchemes 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 schemeRisk 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 visitsCompliance 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 resourcesThis enables proactive management of risks before problems materialize, and allows for effective prioritization of resources Our Regulatory Approach

18. RISK BASED OPERATING FRAMEWORK Environmental Assessment Regulatory Risk assessment Of schemes Strategic aims Strategic Outcomes Priorities & allocation Of resources Regulatory Response Performance Evaluation & Report CMS Statutory Objectives Risks & opportunities in the external environment. Describe what we are seeking to achieve, and drive our priorities & allocation of resources

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

20. 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 developmentsRegulatory 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 analysisResearch 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 benefitsRecent 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 internationallyEndeavours 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 Our Regulatory Approach

21. Participative Regulation We are committed to optimal transparency in regulatory approachesWe 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 interestWe 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 discussionsConsultative 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: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 Our Regulatory Approach

22. 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: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 reformtrustee 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 Actworkshops with consumer organizations and trade unions in respect of responsible consumer behavior and rights and responsibilities in terms of the Medical Schemes Act Our Regulatory Approach

23. Compliance Based Regulation Persistent non-compliance with regulatory requirements demands, on occasion, tough enforcement actions, which we do through: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: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 Our Regulatory Approach

24. Underlying Principles In executing the above Regulatory Approaches we adopt the following principles of good regulation: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 respectActing 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;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 SchemesProportionate regulation, recognizing the responsibilities of members of Boards of Trustees of Medical Schemes Not unduly impeding innovation, while facilitating fair competitionNot unduly impeding innovation, while facilitating fair competition Our Regulatory Approach

25. Trends in the Environment Demographic TrendsDemographic Trends Financial TrendsFinancial Trends Contribution ChangesContribution Changes Trends in the Environment

26. 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 schemesSince 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 2002Unaudited figures suggest that this trend has continued during 2002 This can be attributed inter alia to: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 Trends in the Environment

27. Membership 2000/2001 Distribution of Beneficiaries in Medical Schemes Type of Medical Scheme 20012000 % Change Registered 6 757 083 6 729 551 0.41 - Open 4 768 076 4 676 099 1.97 - Restricted 1 989 007 2 053 452 -3.14 Bargaining Council 263 723 275 085 -4.13 Total 7 020 806 7 004 636 0.23 Trends in the Environment

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

29. Pensioner Ratio Pensioner Ratio ( > 65 years): Registered Medical Schemes Scheme Type 20012000Change Registered6.006.25 - 4.00% - Open 5.005.000.00 - Restricted 8.009.00-11.11 Trends in the Environment

30. 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 Trends in the Environment

31. 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 Trends in the Environment

32. SOLVENCY LEVELS: REGISTERED SCHEMES 2000/2001/2002 2002***20012000 Statutory Solvency Requirement 17.5%13.5%10.0% All Registered Schemes 21.06%20.1%20.2% - Open 14.11%13.1%13.3% - Restricted 37.92%36.1%34.2% *** Based on unaudited returns Trends in the Environment

33. 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%)***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%)***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%)***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 Trends in the Environment

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

35. 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 specialistsIncrease 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 feesDramatic 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 2001This 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 Trends in the Environment

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

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

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

39. Unaudited results for 2002 suggest –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)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. Trends in the Environment

40. 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 dependantsThe 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 schemesIncreases were slightly higher in open schemes than in restricted schemes Overall the rate of contribution increases were lower than in the previous yearOverall 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 indexNevertheless, 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 costsContribution 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 Trends in the Environment

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

42. An Update on Key Regulatory Issues GovernanceGovernance Financial SoundnessFinancial Soundness Benefit StructureBenefit Structure PMB’sPMB’s HIVHIV DemarcationDemarcation IntermediariesIntermediaries Reinsurance contractsReinsurance contracts BrokersBrokers Managed health care organisationsManaged health care organisations AdministratorsAdministrators Tariff settingTariff setting Key Regulatory Issues

43. 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 indicatorsTo 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 managementA 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 ActRepetition 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 Key Regulatory Issues

44. 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 timeExperience 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 investmentsWhere 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: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 Key Regulatory Issues

45. 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 hospitalsMedical schemes responded to implementation of PMBs by amending rules to say PMBs would be covered only in public hospitals In general –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 availableAs 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 Key Regulatory Issues

46. 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 discouragedSince 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 conditionsAs 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 diseasesThis should significantly reduce opportunity for indirect discrimination against sufferers of chronic diseases Key Regulatory Issues

47. 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: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 schemesThe study found that the cost of PMBs does not unduly impact on affordability of low cost medical schemes Key Regulatory Issues

48. 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 exposurePMBs 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)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 minimalA 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 schemesThe 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 2003In 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 Key Regulatory Issues

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

50. Medical Scheme Traditional Medical Scheme Arrangement Employer Managed Care Organisation Provider Employee Contributions Contracts Service (PMB + other) Key Regulatory Issues

51. HIV Fund Proposed HIV Carve-Out Arrangement Employer Managed Care Organisation Provider Employee Contributions Contracts Service (HIV only) Key Regulatory Issues

52. While recognising the public health crisis presented by the HIV epidemic, Council has been unable to grant blanket exemptions for applications made thus far, because –While recognising the public health crisis presented by the HIV epidemic, Council has been unable to grant blanket exemptions for applications made thus far, because – –it would result in these products operating in a regulatory vacuum, and consumers would therefore lack protection in an area susceptible to significant abuse –it is Council’s assessment that it would be exceeding its statutory powers to grant these exemptions, and cannot do so in the absence of specific legislative provision for this Circumstances nevertheless exist in which Council is able to provide limited exemptions, and guideline principles for such exemptions are availableCircumstances nevertheless exist in which Council is able to provide limited exemptions, and guideline principles for such exemptions are available Council has also given the go-ahead to certain employer-based HIV programmes (e.g. De Beers) which entail direct funding of HIV- related expenses by the employer in the absence of contributions to an entity in return for liability being incurred, which in our assessment have not conducted the business of a medical scheme and therefore have fallen outside the Medical Schemes ActCouncil has also given the go-ahead to certain employer-based HIV programmes (e.g. De Beers) which entail direct funding of HIV- related expenses by the employer in the absence of contributions to an entity in return for liability being incurred, which in our assessment have not conducted the business of a medical scheme and therefore have fallen outside the Medical Schemes Act Key Regulatory Issues

53. Benefits: Demarcation There are regrettably still certain players in the market who seek to circumvent the provisions of the Medical Schemes Act, relating to open enrollment, community rating etc, by doing the business of a medical scheme under the guise of health insuranceThere are regrettably still certain players in the market who seek to circumvent the provisions of the Medical Schemes Act, relating to open enrollment, community rating etc, by doing the business of a medical scheme under the guise of health insurance Council is working with Senior Counsel and prosecuting authorities to bring a test prosecution case to the courts in the near futureCouncil is working with Senior Counsel and prosecuting authorities to bring a test prosecution case to the courts in the near future Key Regulatory Issues

54. Intermediaries: Reinsurance The Medical Schemes Amendment Act 2001 required medical schemes to obtain independent evaluations of the need for reinsurance, and scrutiny by the Registrar, before entering into reinsurance contractsThe Medical Schemes Amendment Act 2001 required medical schemes to obtain independent evaluations of the need for reinsurance, and scrutiny by the Registrar, before entering into reinsurance contracts Although full implementation of these changes is still in progress, preliminary assessment of the impact of these amendments is favourable:Although full implementation of these changes is still in progress, preliminary assessment of the impact of these amendments is favourable: –unaudited results show a decline in overall reinsurance losses during 2002 –in some cases, dramatic turn-arounds in solvency positions of schemes have been seen following intervention by the Registrar on reinsurance practices –in some cases, large amounts paid in premiums on invalid contracts have been recovered for members –healthy interaction has been generated between schemes and the office of the Registrar in relation to issues of sound financial governance Key Regulatory Issues

55. Intermediaries: Brokers The Medical Schemes Amendment Act, 2002, harmonising the relationship between the Medical Schemes Act and the Financial Advisory and Intermediary Services Act, came into operation on 1 May 2003The Medical Schemes Amendment Act, 2002, harmonising the relationship between the Medical Schemes Act and the Financial Advisory and Intermediary Services Act, came into operation on 1 May 2003 A joint working committee has been established between the Council for Medical Schemes and the Financial Services Board to coordinate effective regulation of health broker activityA joint working committee has been established between the Council for Medical Schemes and the Financial Services Board to coordinate effective regulation of health broker activity Improved regulations on broker conduct and remuneration, and expanding the enforcement powers of the Registrar of Medical Schemes, took effect on 1 January 2003Improved regulations on broker conduct and remuneration, and expanding the enforcement powers of the Registrar of Medical Schemes, took effect on 1 January 2003 Overall, these legislative developments have created an environment in which brokers are more effectively regulated and consumers are better protectedOverall, these legislative developments have created an environment in which brokers are more effectively regulated and consumers are better protected Key Regulatory Issues

56. Intermediaries: Managed Care For the first time, relatively comprehensive regulations regarding the implementation of managed care programmes and the operation of managed care organisations came into effect on 1 January 2003For the first time, relatively comprehensive regulations regarding the implementation of managed care programmes and the operation of managed care organisations came into effect on 1 January 2003 Regulations focused on promoting greater transparency in managed care interventions and improved quality of careRegulations focused on promoting greater transparency in managed care interventions and improved quality of care Council is currently developing a set of accreditation standards for managed care organisations, to be implemented in the second half of this yearCouncil is currently developing a set of accreditation standards for managed care organisations, to be implemented in the second half of this year Key Regulatory Issues

57. Intermediaries: Administrators A consortium, led by KPMG, was appointed to work together with Council in the development of accreditation standards for third party administrators and to conduct evaluations of compliance with those standardsA consortium, led by KPMG, was appointed to work together with Council in the development of accreditation standards for third party administrators and to conduct evaluations of compliance with those standards The process is in an advanced stage, and evaluations of administrators will commence in the near futureThe process is in an advanced stage, and evaluations of administrators will commence in the near future Key Regulatory Issues

58. Tariff Setting Agreement on recommended tariffs between funders and providers was complicated this year by disputes over intellectual property of tariff codes and descriptors, disagreement on appropriate reimbursement levels, and uncertainty over the implications of competition legislationAgreement on recommended tariffs between funders and providers was complicated this year by disputes over intellectual property of tariff codes and descriptors, disagreement on appropriate reimbursement levels, and uncertainty over the implications of competition legislation Deadlock in tariff discussions during December 2002 and January 2003 resulted in severe disruption of payment of member claimsDeadlock in tariff discussions during December 2002 and January 2003 resulted in severe disruption of payment of member claims In response, the Minister of Health appointed a committee to develop and understanding of the problems and to formulate recommendations to prevent a recurrenceIn response, the Minister of Health appointed a committee to develop and understanding of the problems and to formulate recommendations to prevent a recurrence The Council is also in discussions with the Competition Commission in relation to its investigations into collusion and price-setting in the private health sectorThe Council is also in discussions with the Competition Commission in relation to its investigations into collusion and price-setting in the private health sector Key Regulatory Issues

59. Emerging Opportunities Public Servants Medical SchemePublic Servants Medical Scheme Social Health InsuranceSocial Health Insurance Risk EqualizationRisk Equalization Emerging Opportunities

60. Public Servants’ Medical Scheme Open choice of medical scheme for public servants results in:Open choice of medical scheme for public servants results in: –substantial intermediary costs –administrative inefficiencies –fragmentation of risk pools, and loss of economies of scale and purchasing power –inequities in government subsidies resulting in inadequate coverage The proposed public servants’ medical scheme will reduce or eliminate many of these problemsThe proposed public servants’ medical scheme will reduce or eliminate many of these problems If properly managed, it can have substantial industry wide benefit, by:If properly managed, it can have substantial industry wide benefit, by: –stimulating much needed consolidation of small risk pools –consolidating bargaining power in respect of purchase of health services and non-health commodities, thereby reducing overall costs in the industry Emerging Opportunities

61. Social Health Insurance Social health insurance proposals which are currently subject to consultation offer the opportunity to achieve considerably greater equity in access to health care of South AfricansSocial health insurance proposals which are currently subject to consultation offer the opportunity to achieve considerably greater equity in access to health care of South Africans Key proposals around mandatory coverage for people who can afford it, restructuring of the tax subsidy, a Central Equity Fund, and the creation of a low cost State-sponsored medical scheme, create the conditions for long-term sustainability of the public and private health funding environmentsKey proposals around mandatory coverage for people who can afford it, restructuring of the tax subsidy, a Central Equity Fund, and the creation of a low cost State-sponsored medical scheme, create the conditions for long-term sustainability of the public and private health funding environments Emerging Opportunities

62. Risk Equalisation The Taylor Commission recommended that implementation of a risk- equalisation mechanism should be “prioritised for immediate development and implementation”The Taylor Commission recommended that implementation of a risk- equalisation mechanism should be “prioritised for immediate development and implementation” Internationally, risk equalisation is widely regarded as a prerequisite for the successful long-term implementation of open enrolment and community ratingInternationally, risk equalisation is widely regarded as a prerequisite for the successful long-term implementation of open enrolment and community rating In the absence of risk equalisation, variation in risk profile implies substantial cost differences for schemes unrelated to their efficiency in managing costs, whereas risk equalisation promotes competition based on cost, quality of health service and administrative efficienciesIn the absence of risk equalisation, variation in risk profile implies substantial cost differences for schemes unrelated to their efficiency in managing costs, whereas risk equalisation promotes competition based on cost, quality of health service and administrative efficiencies Nevertheless, further work needs to be conducted into the feasibility of implementing risk equalisation in the South African contextNevertheless, further work needs to be conducted into the feasibility of implementing risk equalisation in the South African context Emerging Opportunities

63. Concluding quotation “[Regulatory bodies need to] acknowledge the need to make choices. Make them rationally, analytically and democratically. Take responsibility for the choices you make. Correct, by using your judgment, deficiencies of law. Organize yourself to deliver important results. Choose specific goals of public value and focus on them. Devise methods that are economical with respect to the use of state authority, the resources of the regulated community, and the resources of the agency. And as you carefully pick and choose what to do and how to do it, reconcile your pursuit of effectiveness with the values of justice and equity.” Malcolm Sparrow, The Regulatory Craft