Medical scheme trustees, the guardians of members' funds, have an unenviable job. Usually being a trustee is a part-time, poorly remunerated job, yet trustees operate in a highly technical and increasingly regulated environment.
They are not experts themselves, so they have to rely on the advice of schemes' principal officers, advisers and often the administrators to inform their decisions. However, if they get it wrong, they can be held personally financially liable. Unsurprisingly, it's hard to find good people.
Three years ago, health minister Manto Tshabalala-Msimang introduced the Medical Schemes Amendment Act, which placed special emphasis on sound governance and fair administration.
It was not merely a case of seeking to promote good governance for its own sake, but in response to the belief that the escalating cost of private health care was at least partly attributable to the lack of member representation on schemes and the poor governance by some boards of trustees.
The act introduced the principle of independence for principal officers, trustees and auditors of medical schemes. It did this by prohibiting any broker or person employed by the administrator of a scheme from taking on a key role in the governance of that scheme.
(Medical aid administrators administer schemes for profit on the basis of annual contracts awarded by schemes' trustees. Boards of trustees' primary concern is members' interests and, unlike administrators, they are not governed by the profit motive. Government felt it was in the interests of good corporate governance to prevent administrators from also governing the schemes they administered, given the potential conflict of interest.)
The act further promoted transparency and ensured the independence of trustees by requiring that they disclose any remuneration or benefits accruing to them on an annual basis. The aim was to prevent administrators or other parties from controlling trustees.
Trustees must ensure their scheme operates prudently and within a strict legal framework. They must also keep abreast of industry trends and assist with the pricing and design of benefit structures and the marketing of a scheme, while ensuring that the financial and legal obligations of the scheme are met.
In mid-April, Mx Health, the medical aid administration and managed-care company, convened a panel of prominent industry players under the auspices of its of Quarterly Healthcare Review to answer the following questions:
- "Is the vision embodied in the Medical Schemes Act of 1998 and the Medical Schemes Amendment Act of 2001 being realised?
- "Have trustees become the guardians of medical scheme members?
- "How well equipped are they to fulfil this important task? and
- "How independent are they of brokers and administrators?"
Before 2000, conflicts of interest were rife, explained panelist Alex van den Heever, one of the architects of the act and an adviser to the Registrar of Medical Schemes. Then it was common practice for directors of administration companies to be also trustees of the medical schemes they were administering for profit, making decisions about monies that didn't belong to them. It was not uncommon for all the directors of a third-party administration company to double as a scheme's trustees, making the scheme a front-end of the administration company.
"The issue we faced was how to implement a step-by-step process to reduce the potential for conflicts of interest and to raise the responsibilities of trustees," he said. "Most important was the need to make it clear that trustees were to act as agents of scheme members and of no other body or person."
There was general agreement among the panelists that this has largely been achieved and that trustees have begun to act independently and to use their powers.
"The industry has shifted," said Hosmed chairman Kirsten Nematandani. "More trustees are making decisions, acting fearlessly and challenging the status quo."
However, Van den Heever feels there are still some issues that need attention. He would give the transformation that has occurred so far a score of only five out of 10.
"We still come across significant conflicts of interest and there are still examples of weak democratisation in schemes, just as there are in companies. We need to ask if this is as a result of structural issues that could be addressed in terms of a framework which would, say, remove certain obvious obstacles in the way of member participation."
For instance, it is not uncommon for a scheme's AGM to be held at an inaccessible venue, at a time when it is hard for members to attend, and with inadequate notice. Van den Heever mentioned cases where some members were notified of an AGM by e-mail, while the rest were sent notifications by post.
He also expressed concern about the potential for staged voting in which biased boards are elected to serve the interests of one group at the expense of others.
The Council for Medical Schemes has conducted a review of the extent to which the medical schemes environment is compliant with the governance aspects of the act. It has found that problems still persist and that schemes are failing to implement all that is required of them.
The findings and recommendations are being put into a discussion document, which is set to be released later this month. It is intended to stimulate debate and serve as a prelude to further regulation of the sector, according to Van den Heever.
He says it is likely to extend the criteria of what it takes to be a fit and proper trustee beyond the minimal list laid down in the act. It could also require that AGMs achieve a minimum level of participation and clarify the sorts of decisions that can be made at AGMs. Another area of concern to the council, he says, is that many schemes have no proper internal executive structure. They often comprise a principal officer and a personal assistant, with the entire executive outsourced to a contracted third party.
"It's not appropriate that the chief financial officer or the legal adviser of an organisation be outsourced," says Van den Heever. "It wouldn't happen in other industries, but in medical schemes it does and it is of great concern to the council."
Van den Heever believes further regulation is required to improve scheme governance beyond the five out of 10 score the industry has achieved.
"The discussion document will be contentious," he admits. "It think it will be closely examined but it won't go into legislation until there's been proper discussion and debate."
Schemes and their administrators are constantly under fire for poor transparency, responds Mx Health general manager (business development) Susan Mynhardt. "But as with any industry, there will always be a group who operate at this level. Those who are known to practice poor corporate governance should be managed as individual culprits but let's not treat the whole environment as a group of disorderly practitioners who only do what's right when forced to do so via regulations, threats or some other form of punishment.
"It's unfair to place an even heavier regulatory burden on the large group of schemes and administrators that have striven towards creating informed, empowered and independent boards of trustees."
During the panel discussion, Charles Wells, deputy chairman of the Bankmed board of trustees, said that the 50/50 scenario laid out in the act, which required that 50% of the board be elected from members, was inadequate. He argued that in closed schemes (where membership is restricted to one employer or industry) and where employers are not subsidising 50% of contributions anymore, representation should be 50% plus one to give members the casting vote.
"Medical aid is a grudge purchase," he said, "so it is unfair that the members don't have final say on benefits and premium increases, especially where compulsory membership of a specific medical scheme is required."
The panel felt strongly that improved member participation was one way to reduce the bias on boards and to ensure that members' interests remained paramount. However, encouraging member participation was easier said than done.
Fedhealth chief executive officer Jeremy Yatt said that often, even when adequately informed, the only members who attended AGMs were pensioners because they had the time to do so. The danger then arises that the vote falls in line with the interests of pensioners rather than the interests of the member body as a whole.
In some cases, members were largely illiterate workers for whom the annual report and scheme issues tended to be opaque, so there was no incentive to attend or get involved in any way, said Jimmy Mahlala, a Bonitas Medical Scheme trustee. He warned that electing trustees from a group with so little understanding of, or exposure to, the industry could result in a board without the appropriate skills and competencies .
Wells, however, stressed the importance of getting new blood onto boards, "lest one get old boys' clubs developing, which have unwarranted power and clout due to years of interaction with administrators, employers and each other". He suggested that trustees should be required to "take a breather" after a few years.
The panel agreed that checks and balances should be built into every stage of the system to ensure that no party became too powerful, acted without adequate supervision or was able to manipulate decisions of the board.
It was also agreed that attention should be paid to how trustees were selected to ensure that they had appropriate skills and that they should also be empowered with mandatory training.
Trustees had a different role to a board of directors, explained Emile Stipp of Deloitte Actuarial Consulting. "They have to rely on the principal officer and their advisers to inform their decisions and they can never be sure if the advice they are given is appropriate. They are operating in an environment where technical issues have expanded enormously (for example, dealing with Prescribed Minimum Benefits and other legislative demands) and their personal fortune is on the line if they get things wrong.
Yet there is pressure to keep their remuneration down, so it is hard to attract good people. They are actually in quite an unenviable position."
Van den Heever said it was important to ask if a would-be trustee had the right skills, experience and qualifications, but it was equally important to be sure that they were honest and independent.
Bathabile Holdings director Jeanne Swarts said it was important to ensure that each board had the bouquet of skills and experience necessary to get the job done. "Every board member does not need to have the same skills, but the sum total of skills should add up to what is necessary."
The act had emphasised a scheme's independence from its administrator or broker, but that alone would not ensure proper corporate governance, she said. "Only when all trustees act with the necessary skills and knowledge of the complicated medical schemes environment will a scheme achieve true independence."
Training for trustees is available from the Council for Medical Schemes, but it is not mandatory. This was a concern among the panelists. The suggestion was made that certain basic training should be compulsory and that training should be continuous rather than a one-off affair.
Concern was also expressed over the fact that trustees invariably had separate, full-time employment and whether this left them with enough time to give adequate attention to scheme matters.
Yatt suggested that to encourage high-calibre candidates, it was necessary to make the environment more rewarding. However, Wells said that no matter how high the calibre of a scheme's trustees, the value for money and quality of care that a scheme was able to provide remained largely a function of its health-care providers.
Despite the strides that have been made in improving the governance and democratisation of schemes, Van den Heever questioned why trustees were still failing to exercise the considerable power now at their disposal.
At Bankmed, the board of trustees had used its power to bring in a corporate governance policy and create transformation, said Wells. However, several other panelists pointed out that it was hard to exercise power when you were new to a role - an intruder in an established group - and up against powerful lobbies or voting groups. Power without expertise was not valuable, said Stipp, underlining the need for the training, support and empowerment of trustees.
"Boards have learnt what their powers are and how great their responsibilities are," said Yatt. "It goes wrong is when there isn't an alignment of interests between the board and the administrator."
Wells, however, remarked that the relationship between administrators and trustees would never be at arm's length. He felt that what should be striven for was rather an "arm-in-arm partnership".
Mx Health MD Joe Seoloane said administrators took the responsibilities placed on them seriously, though they had a profit motive. "Mx Health supports the training and empowerment of the trustees of the schemes we administer because we believe an informed board of trustees will be able to make better strategic decisions."
The bottom line, according to Van den Heever, is that the changes in the industry have facilitated a better balance between the power of trustees and administrators, with the latter no longer having the assurance that they can control the trustees.
Despite the progress that has been made, some panelists felt that the lack of skills and experience among trustees sometimes tipped the balance of power in favour of a scheme's principal officer. This is especially so since many boards consist of only a principal officer and several nonexecutive trustees.
Swarts argued that boards should have an equal number of executive and nonexecutive trustees, just as a company should ideally have a balance between executive and nonexecutive directors, as envisaged in the King 2 report.
"The King 2 principles of good corporate governance should be just as important in the governance of medical schemes as they are in companies," said Swarts. "One of the principles enshrined in King 2 is independence. In the medical schemes environment, this would include the extent to which mechanisms have been put in place to minimise the potential for dominance by a strong principal officer, trustee or large stakeholder."
Mahlala agreed, saying: "The principal officer is often powerful, a top person from finance or the industry, so he may lead the process and exert undue influence on the trustees." He argued for trustees to avail themselves of independent, full-time support to monitor their principal officer.
The panel agreed that principal officers needed to understand that their role was to act as servant of the board and of the members - not as a king in his fiefdom.
"Communication between the principal officer and the trustees should be continuous," Nematandani said. "The principal officer should never move ahead without ensuring that board members are informed. He is the one with the knowledge and expertise to offer the trustees, many of whom will be elected without the necessary skills. He should be leading the process with integrity and the backing of a great deal of research."
Another core King 2 principle relates to the board's responsibility not only to its members, but to all stakeholders and service providers.
Swarts argued that the act failed to focus enough on this aspect of trustees' duties. For instance, it allowed the trustees to terminate an administrator's contract at any time without having to provide any reasons, yet administrators were expected to undertake expensive and continual investments in technology to run schemes cost-effectively. They do so without the assurance that they will be able to make a proper return on their investment.
