1. Council for Medical Schemes ANNUAL REPORT 2006 – 7 AND STRATEGIC OBJECTIVES 2008 – 9 PRESENTATION TO THE HEALTH PORTFOLIO COMMITTEE

2. Council for Medical Schemes Strategic Objectives  Securing an appropriate level of protection of beneficiaries of medical schemes and the public by authorizing the conduct of medical schemes business and monitoring the financial performance of schemes.  Provide support and guidance to trustees and promote understanding of the medical schemes environment by trustees, beneficiaries and the public.  Investigate and resolve complaints raised by beneficiaries and the public  Foster compliance with the Act by medical schemes, administrators and brokers and initiate enforcement action where required.  Monitor the impact of the Act, research developments, and recommend policy options to improve the regulatory environment.

3. Strategic Objectives cont.  Foster the continued development of the CMS as an employer of choice.  Develop strategic alliances nationally, regionally and internationally.

4. Developments in the Regulatory Framework Medical Schemes Amendment Bill  The Bill is awaiting introduction to the National Assembly after the Minister has considered it  It will create the legislative framework for three key regulatory changes: 1.Risk Equalisation Drafting risk equalisation amendments to the Act to:  provide for the submission of beneficiary information needed to calculate transfers and;  specify the estimation and payment methodology.

5.  Strengthen the capacity to manage the required data – the shadow returns  REF Infrastructure for implementation  worked on databases & warehouse for REF information.  REF portal developed to interface with data warehouse. 2.Governance  worked with DOH to draft amendments designed to improve governance 3.Transparency and efficiency of medical schemes’ benefits  change how benefits are designed to improve transparency, further reduce unfair discrimination and to encourage greater efficiency

6. Cost escalation of private health care  Competition Tribunal; Protector Group Medical Services and Medi-Clinic  Tribunal noted its concerns over the uncontrolled escalation of health care expenditure by medical schemes.  Important contributor is absence of meaningful negotiations between health care providers and medical schemes.  Have developed recommendations re: tariffs that will improve the sustainability of schemes.

7. Working to Protect Beneficiaries and the public Approval of benefits and contributions  Criteria for the assessment of contributions and benefits to standardize rule approval processes developed  41% of open schemes’ benefit options were initially rejected due to, for eg: - unfair contribution increases - inadequate provisions for PMBs - financial unsustainability, and - inadequate motivation for the rule changes

8. Analysing the Extent of Contribution and Benefits Changes Benefits  200 benefit options registered for open schemes and 145 for restricted schemes Contributions  Average gross contribution increase for 2007 was 6.5%. (Open 8.1% & restricted 6%)  Contribution increases for open schemes consistently higher than restricted schemes. Improving the application of PMBs  Clarified the application of PMBs in respect of use of designated service providers for PMBs, application of waiting period and the designation of state facilities to provide PMBs.  Started reviewing 9 of therapeutic algorithms for the Chronic Disease List (CDL)

9. Promoting the financial soundness of medical schemes  SAICA audit and accounting guide for medical schemes was revised which resulted in changes to the annual financial returns used by schemes.  Have continued to develop the quarterly online return. The reports were published on the website Compliance with Regulation 29 on solvency  This regulation requires schemes that fall below the minimum solvency requirement for a period of 90 days, to submit a report to the Registrar explaining the deviation and providing an action plan to remedy the situation  We engaged with a number of schemes to agree business plans to restore them to the statutory solvency level.

10. Fostering Compliance with the Act and Initiating Enforcement Action Prosano  Scheme placed under curatorship after evidence of lack of governance, significant financial deterioration and bitter infighting and litigation amongst trustees. Genhealth  Placed under curatorship in November 2005 with a hearing for final order postponed to 23/24 November 2006.  Matter postponed again by scheme Guardrisk  Found that its products were conducting the business of a medical scheme and interdicted from doing so and ordered to pay CMS’ costs.  Judgment widely communicated and reported on  Guardrisk since granted leave to appeal against the judgment on the basis that the matter is of significant public interest.

11. Resolution Health  Inspection focused on high non-healthcare expenditure during 2000 and 2005  Ongoing process re: recovery of monies paid by scheme ito management and reinsurance contracts  Individuals and entities re: fitness and propriety due to conflicts of interest  S46 notices issued to 2 trustees - show cause why they should not be removed on the basis of not being fit and proper  Letters also sent to administrator and managed-care org- show cause why they should not be regarded as not fit and proper for accreditation purposes.  A ceiling placed on the administration fees ito s44(8) of Act

12. Omnihealth  Placed under liquidation in 2005  Liquidators refused to pay members R33m in their medical savings accounts & included it in insolvent estate.  Applied to High Court for declaration of status of medical savings accounts  High Court found in our favour, ordered members be paid & liquidator pay CMS’ costs. Liquidators’ appeals turned down by original court & Supreme Court of Appeal

13. Accreditation of Administrators, Managed Care and Brokers  Standards and criteria for accreditation of administrators were completed  Reviewed contracts and service level agreements to inform the further development of policy and regulatory framework  Dealt with a number of complaints regarding unfair marketing practices in managed care entities  Held a training workshop on accreditation procedures and requirements.  Processed 1293 new broker applications and 2370 renewals.  There were 9742 accredited brokers and 1727 accredited brokerages.  Recommendations were made to Council to withdraw the accreditation of two broker organisations due to some irregularities.

14. Monitoring the Impact of the Act Medical schemes’ expenditure on private hospitals  Focus was on the collection and analysis of medical schemes’ expenditure on private hospitals as part of our intervention in the Competition Tribunal ICD10 Coding Systems  Key activity has been work of the sub-committee looking to develop processes for confidentiality of member information.

15. National Health Reference Price list  In 2006 the responsibility for the compilation of the 2007 NHRPL was handed to the Department of Health (DOH). We’re involved in the NHRPL Review Committee  The 2007 NHRPL publication was stalled by SAMA challenging the process.  SAMA threatened Council with legal action if we published advice to schemes concerning the NHRPL.  Billing chaos was predicted for 2007  In late December 2006 we re-published the 2006 version with an inflator, so as to avert disruption to benefits. Trustee training and consumer education  Trustee training took place in Durban, Midrand, Port Elizabeth and Cape Town on eg clinical governance and PMBs, ethics in healthcare, corporate governance and REF.

16.  Regarding consumer education we held workshops in Cape Town and North West.  We participated in a series of Western Cape Consumer Affairs presentations  We held an exhibition at the KZN International Health Day and attended the National Consumer Education Forum in Bloemfontein.  Participated in various radio interviews.

17. Council as an Employer of Choice Human Resources  Worked on developing an understanding of our key values and attitudes and how they contribute to culture  Our internal team has been engaged with experts in preparation for us to develop career paths for the staff and succession planning.  Cleaned, painted fixed roof, replaced windows, washed clothes, installed mattresses and other furniture at an orphanage occupied by about 60 children on MADD. Internal Finance  Management of our finances is an important part of our functions and have worked to remain fully compliant with the provisions of the PFMA and other legal requirements.  We have continued to ensure that expenditure is in line with our approved operational plans and budget.

18.  The Council has again obtained an unqualified audit report.  Revenue of R48,1m was raised comprising primarily of levies of R32,0m and REF grant of R7,7m  Expenditure of R49,3m incurred resulting in an operating deficit of R1,1m  When interest received is taken into account, ended the year with a surplus of R498 000. REPORT OF THE AUDITOR GENERAL

19. 1.Membership 2.Contributions and Benefits 3.Non-health expenditure 4.Overall Financial Soundness Operational results of medical schemes: some key findings

20.  Number of principal members of schemes increased by 6,2% to 2,98m  Number of dependants increased by 2,9% to 4,14m  Total number of beneficiaries increased by 4,3% to 7,1m Finding 1: Trends in membership

21. Scheme coverage

22. Trend analysis of coverage

23.  Average age decreased to 31,y from 31,7y More males in < 20y age group More females in > 20y age group Female (31,6y) generally older than males (30,9y)  Pensioner ratio decreased to 6,3% from 6.4%  Dependants ratio decreased by 2,9%  By province – Gauteng highest at 36,4%, then Western Cape (16,2%) and KZN (15,3%) Profile of membership

24.  Total contributions increased by 6,2% to R57,6bn  Total claims incurred increased by 12,1% to R51,1bn  On a PABPM level: Contributions grew by 2,6% to R687 from R670 Claims increased by 8,2% to R610 from R563 Finding 2: Total contributions and claims (i.e. benefits)

25.  Largest proportions: Hospital expenditure35,0% Medicines16,9% Med Specialists21,4% GP’s8,6% Benefits paid to providers Benefits paid to providers

27.  In 2006 the expenditure in private hospitals, increased by 8,6% to R17,7bn in real terms  Medical specialists increased by 11,9%  GP’s increased by 12,1%  Medicine increased by 4,0%  Dentists decreased by 3,6% Trends in total benefits paid

29.  Contributions decreased by 2,2%  Claims paid from savings increased by 10,4%  The proportion of claims paid from savings increased to 15,0% from 13,5% Savings contributions and claims

30.  Risk contributions increased by 43,9% and claims have gone up by 39,9% since 1997  Savings contributions increased by 185,6% and claims have gone up by 250,0% since 1997 Trends since introduction of PMSA

31.  Initial decline, but increased to 88,0% from 84,1% in 2005  Expect claims ratio to continue inching upwards given that Reserves for most schemes are at 25%  Thus: more members’ contributions should in future be utilised towards benefits  Trustees should ensure that benefits are not substituted by high levels of non-health expenditure Key trends in claims ratio

32. Key trends in claims ratio after adjusting for inflation

33.  Administration expenditure increased by 7,3% to R5,9bn Open schemes by 9,1% Restricted schemes by 0,9%  Administration expenditure is represented by administration fees of 74,0% Finding 3: Non-health expenditure

34. Administration expenditure > industry averages

36.  Managed care fees increased by 9,6% to R1,4bn from R1,3bn.  The number of members covered by these managed- care interventions increased by 4,1% to 6,7m ( 96,4% of beneficiaries). Expenditure associated with managing of benefits Expenditure associated with managing of benefits

37.  Increased by 7,1% to R982,5m  Have risen sharply over the past few years & their rate of increase exceeds the increase in members  Made up 11,8% of total non-health expenditure. Fees paid to brokers

38.  Total non-health care costs increased by 3,7% to R8,3bn  Since 2000: Administration fees increased by 122,6% Managed care fees increased by 55,2% Broker fees increased by 327,6% TOTAL by 101,7% Total non-health expenditure Total non-health expenditure

39. Trends in contributions, claims and non-health expenditure  Non-health expenditure outpaced both contributions and claims

40. Trends in contributions, claims and non-health expenditure  continued to increase, suggesting member contributions have continued to go principally into financing NH expenditure

41.  The downward trend continued in 2006 with a total deficit of R2,1bn  Net surplus of R1,1bn when investments + other income is added  Net assets rose 6,8% to R24,5bn Finding 4: Overall Financial Soundness

42.  Solvency of all schemes was 37,9% (2005: 39,1%)  Solvency of open schemes was 27,7% (2005: 29,6%)  Solvency of restricted schemes was 64,7% (2005: 63,5%) Solvency at levels greater than 25% Solvency at levels greater than 25%

43.  391 (2005: 412) benefit options Open schemes: 219 options & 5,3 options per scheme with average members of 9 586 Restricted schemes: 172 options & 2,1 options per scheme with average members of 5 152 Too many benefit options Too many benefit options

44.  Of 391, 231 (59,1%) incurred losses  Open schemes had a higher prevalence (61,6%)  More expensive while offering fewer benefits when compared to restricted schemes Loss-making options

45. Conclusion CONCLUSIONS GOVERNMENT POLICY ON MEDICAL SCHEMES IS ACHIEVING ITS STATED GOALS:

46. Conclusion 1. Schemes have become more viable financially Solvency position of schemes has more than doubled

47. Conclusion 2.Access to prescribed minimum benefits is improving  Governance and member involvement in the affairs of the schemes has improved  Rapid progress has been made in securing adequate protection for members of schemes that is proportionate and fair  We have improved our oversight of schemes benefits and contributions

48. Conclusion Challenges that remain include: 1.We need to do more to strengthen the governance of medical schemes and take timely and effective action when there are governance failures. 2.The escalating private specialists and hospital costs. A new framework requiring providers to negotiate tariffs is urgently needed. 3.Continue to pursue fair treatment of members by their medical schemes. 4. The implementation of the risk equalisation fund.

49. Council for Medical Schemes Strategic Objectives 2008/09

50. Improving Governance Containing Costs Protecting Risk-Pooling Why?

51. Improving Governance Containing Costs Protecting Risk-Pooling Monitoring Training Education Research Legislation Accreditation Enforcement How? Communication Benefit Management Adjudication Systems Development

52. Questions