22 August 2017 Altair Richards HEALTH FUNDERS ASSOCIATION CMS proposed dissolution/consolidation of small medical schemes 22 August 2017 Altair Richards

July Presentation to BHF Conference Acting Registrar of Medical Schemes – 29 medical schemes that do not meet the requirement of 6,000 members will be dissolved by 31 January 2018. Apparently to be done utilising the existing mechanisms in the Medical Schemes Act.

Circular 51 of 2017 What does this mean? “Clarification of process towards consolidating of healthcare risk pools” “It has come to the attention of the Council for Medical Schemes (CMS) that there appears to be a narrative in the industry attributed to the CMS to the effect that the Regulator is going to close down medical schemes that have less than 6000 principal members in terms of Regulation 2(3) read in line with section 24(2) of the Medical Schemes Act, 131 of 1998. This narrative needs to be understood in a broader context…” What does this mean?

Section 24(2) of the MSA “No medical scheme shall be registered under this section unless the Council is satisfied that… the medical scheme has a sufficient number of members who contribute or who are likely to contribute to the medical scheme”. This section, mentioned in Circular 51, does not appear to be relevant to medical schemes that are already registered with the CMS.

Section 27 of the MSA Cancellation and suspension of registration “The Registrar may, with the concurrence of the Council, after investigation and after having afforded the medical scheme, or its legal representative the opportunity of being heard, cancel the registration of a medical scheme… if the medical scheme is unable… to maintain the minimum number of members required for the registration of a medical scheme”.

Regulation 2(3) of the regulations “The minimum number of members required for the registration of a medical scheme established after these regulations have come into operation is 6,000, and this number must be admitted within a period of three months of the registration of the medical scheme”.

Regulation 2(3): Discussion (1) None of the affected 28 medical schemes (WitsMed is currently in the process of amalgamating with DHMS) were established after the regulations under the MSA came into operation but can argue that the wording of section 27(1)(d) still applies, namely that cancellation of registration is possible if a medical scheme has been unable to “maintain the minimum number of members required for the registration of a medical scheme”, namely 6,000 members.

Regulation 2(3): Discussion (2) For 17 years, the CMS has permitted medical schemes to operate below the 6,000 member threshold. All but three of the affected schemes are closed schemes, for the benefit of the employees of specific employers. Generally speaking, restricted employer group schemes subsidise members on low incomes, including pensioners, enabling them to buy cover they could not afford on the open market. All the affected schemes have solvency ratios above the prescribed minimum.

Section 27(1) and the doctrine of legitimate expectation The doctrine of legitimate expectation entails that a reasonable expectation based on a well-established practice or an express promise by an administrator acting lawfully gives rise to legal protection when the practice or promise is clear, unambiguous and unqualified. The legal protection afforded usually (but not always) takes the form of ordering that a fair procedure be followed before a decision is made in respect of the expected conduct. Section 27(1) expressly contains the audi alteram partem principle.

Effect of cancellation of registration If a medical scheme’s registration is cancelled, it can no longer operate the business of a medical scheme and would need to be dissolved. There is a process for dissolution set out in section 64 of the MSA which links to the provisions of the medical scheme’s rules. Generally, a scheme’s rules would provide that every member be provided with a memorandum containing the reasons for the proposed dissolution and setting forth the proposed basis of distribution of the assets in the event of winding up.

Effect of cancellation of registration Creditors would be paid and, presumably, any balance of assets would be distributed to members. So how does this achieve the consolidation contemplated by the Acting Registrar? In terms of legislation currently in force, including the architecture of the MSA, unclear what legal mechanism could be used to force amalgamation/consolidation of small schemes.

Purpose of deregistration In addition, the purpose for which the Acting Registrar is acting will be relevant from an administrative justice perspective. The CMS and the Registrar are creatures of statute and derive their powers from the MSA. They can only operate within the four corners of the MSA and exercise only those authorities and powers expressly or by necessary implication conferred upon them in terms of the MSA. If the purpose for which the Registrar systematically deregisters small schemes is to lay the groundwork for the NHI, then this would fall outside the scope and powers of the Registrar.

Purpose of deregistration Administrative action is subject to review and setting aside under PAJA if such action is taken for a reason not authorised by the empowering provision or for an ulterior purpose or motive. Administrative action which serves an unauthorised purpose is unlawful (ultra vires at common law), no matter how laudable the purpose may be, even where the administrator has acted completely bona fide.

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