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Date: 22/10/2002
Source: Ministry of Health
Title: The Medical Schemes Amendment Bill


SPEECH BY THE MINISTER OF HEALTH DURING THE SECOND READING DEBATE ON THE MEDICAL SCHEMES AMENDMENT BILL

Madame Speaker, Honourable Members.

The Medical Schemes Amendment Bill, 2002, is a small yet critically important piece of legislation from a health policy perspective.

It signifies our determination to systematically break the barriers to access to affordable care.

It demonstrates that we shall be resolute in picking up conduct and behaviour that threatens to re-introduce the perversities that have led us to a dangerous and unsustainable cost spiral.

But in doing so, we shall combine ruthless determination with wisdom and judgement, which derives from the knowledge that to deal with the specific, you need to also understand the general.

We are consciously aware that the Medical Schemes Act regulates a multi-billion rand industry. This is not an insignificant part of our economy.

We also are painfully aware that there are many inter-linkages in what constitutes our financial services sector, and so an intervention in one area may have ramifications well beyond a particular sector.

It is this understanding and logic that informed our painstaking engagement with my colleague - the Minister of Finance, in defining the parameters of this piece of legislation.

Together with amendments that were made to the Financial Advisory and Intermediary Services Bill (commonly referred to as the FAIS Bill), this Bill creates a basis for the development of a sound regulatory framework for health brokers.

We share the concern of the Ministry of Finance that consumers will be best protected if minimum standards of conduct apply to financial advisors across all sectors, including health advisors.

We therefore fully endorse the need for health brokers to be subject to a common code of conduct applicable to other financial advisors, and hence the Medical Schemes Amendment Bill deletes reference to a specific code of conduct for health brokers to be promulgated under the Medical Schemes Act.

Similarly, we fully endorse changes to the FAIS Bill, whereby health brokers, once accredited under the Medical Schemes Act, will be regarded as licensed under the FAIS Bill and will also be subject to the provisions of that legislation.

At the same time, the conduct of health brokers is an issue of considerable significance from a health policy perspective.

The capacity to effectively regulate this sector of the private health financing industry is an essential component of ensuring that health policy objectives underpinning the Medical Schemes Act are met.

Some of the major objectives of the Medical Schemes Act include:

* Promoting non-discriminatory access to private health care;
* Improving governance of medical schemes in the interests of members;
* Ensuring greater financial strength in the medical schemes industry;
* Protecting medical schemes and members against abusive and unlawful practices; and
* Bringing greater stability to a historically under-regulated environment.

Health brokers have the potential to significantly contribute towards these health policy objectives through:

* Providing independent, best advice to members or potential members of medical schemes, thereby guiding them to make the best possible decisions to meet their health care needs;
* Growing the total number of beneficiaries of medical schemes, and thereby reducing unnecessary burden on the public health sector, through focusing their activities on the employed but currently uninsured market;
* Contributing to the stability of risk pools by advising against unnecessary fragmentation of employer groups; and
* Resisting and reporting discriminatory and unlawful practices which threaten to undermine the policy intentions of the Medical Schemes Act.

On the other hand, health policy objectives could be severely jeopardized if even a small proportion of the 7000 or so brokers operating in the health care environment failed to act in a manner consistent with the implementation of health policy.

Two examples will suffice.

a. First, the greatest barrier to entry to the medical schemes environment is the rapidly escalating cost of medical scheme contributions. The high cost of medical scheme coverage not only results in differential access to private health care based upon income, but also on related issues such as health status. The Registrar of Medical Schemes, in his Annual Report of 2001, again identifies non-medical costs as being a significant driver of the inflation of contributions.

b. A progressively smaller percentage of member contributions is being spent on purchasing medical care, while an increasing proportion of contributions is being spent on non-medical items. This trend cannot be allowed to continue.

Clearly, there are many components of this non-health care expenditure, and we are looking critically at each of them. One component, however, is amounts paid to brokers, either directly by medical schemes as commission or indirectly through the payment to brokers of so-called co-administration fees by administrators, and that figure is difficult to attempt to quantify. It is therefore worth noting that R290 million was spent on broker commission in 2001.

Commission paid to brokers is a legitimate medical scheme expense, but there needs to be an appropriate regulatory framework to ensure that there is not uncontrolled expenditure on brokers contributing to the spiral of non-health care expenditure of schemes and that compensation is appropriate for genuine value added by brokers to medical schemes. Within the context of the medical schemes environment at present, this is an important regulatory objective.

Secondly, I have already said that brokers have the potential to significantly contribute to a more stable medical schemes environment, and to expand medical scheme coverage to previously uncovered individuals. However, if motivated by perverse financial incentives rather than the best interests of members and the medical schemes environment as a whole, health brokers can potentially significantly contribute to the instability of the environment.

For example, while advising members or employer groups to move from one medical scheme to another may be the best advice in particular circumstances, if motivated purely by financial incentive, it could contribute to large-scale churning in the medical schemes environment which significantly undermines administration process and adds to administrative cost for medical schemes.

Clearly this is a concern especially in an environment where that has been very minimal growth in overall number of beneficiaries since 1996.

It can also exacerbate the concerning trend which has developed since 1994 of a shift of members out of the more protected restricted medical schemes environment into the open schemes environment. This is of concern because the risk pool and the future claims experience in a restricted scheme are more predictable. This is demonstrated by the overall solvency ratios of restricted schemes that are considerably higher than that of open schemes.

Again, without the capacity to regulate broker conduct in a manner consistent with the development of health policy, our capacity to realize the crucial health policy objective of ensuring stability and sustainability in the medical schemes environment would be compromised.

The importance of regulatory oversight of health brokers, from a health policy perspective, resulted in the important function of accreditation of health brokers remaining a function of the Council for Medical Schemes, and retention in the Medical Schemes Act of the provision for the Health Minister to make regulations regarding broker remuneration and the conditions under which a broker may provide advice and other services.

Clearly, regulatory interventions from a health perspective, over and above the common framework provided by FAIS, will be exercised only in so far as such additional intervention is necessary and appropriate for the implementation of health policy.

An important change introduced by the Amendment Bill, however, is that, for the first time, the Medical Schemes Act will provide explicit recognition to the role of health brokers in providing ongoing service and advice to members of medical schemes - as opposed to existing wording in the Act being restricted to services relating to introduction of members.

This was a necessary amendment to prevent regulatory arbitrage of brokers between the Council for Medical Schemes and the Financial Services Bill, in light of provisions in the FAIS Bill, which included ongoing advice in respect of health products as a function of financial service providers in terms of that Bill.

In the absence of this amendment to the Medical Schemes Act, with the implementation of the FAIS Bill, brokers would effectively have been able to "opt out" of the regulatory jurisdiction of the Medical Schemes Act by structuring their service in such a way to exclude so-called introductory services and provide only ongoing services.

Explicit recognition in the Bill of the role of brokers in providing ongoing services, as reflected in the expanded definition of a 'broker,' has been welcomed by industry stakeholders, and particularly by organizations representing health brokers.

In its presentation to the Portfolio Committee in public hearings on the Bill, the Financial Planning Institute, for example, indicated its support for the Amendment Bill in general and welcomed the recognition of the ongoing role of the broker in the industry.

They, and other commentators, have urged that the statutory recognition for the role of brokers in providing ongoing services to members should also be reflected in the regulations under the Medical Schemes Act, in so far as those regulations provide a framework for the regulation of remuneration of health brokers.

These comments have been taken into account in the reformulation of the amendments to the regulations under the Medical Schemes Act, which are due to be promulgated shortly.

I believe that the debate on the appropriate regulatory jurisdiction for health brokers, which surrounded the passage through Parliament of the FAIS Bill, and has given rise to this Amendment Bill, was a necessary and fruitful debate and has given rise to an optimal framework for the regulation of health brokers.

In the implementation of this framework, I look forward to healthy cooperation between the Council for Medical Schemes and the Financial Services Board - which will result in an environment in which consumers are optimally protected.

In conclusion, let me express my infinite gratitude to the Portfolio Committee for the work they did on this Bill, and again, for reaching unanimous consensus on the amendments to be made to this Bill.

This is getting too much for me. I don't know whether it has anything to do with the floor-crossing legislation that was recently given the thumbs-up by the Constitutional court.

I Thank You

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