Health Squared medical scheme seeks voluntary liquidation

A small medical scheme called Health Squared has applied to the high court in Johannesburg for voluntary liquidation after its efforts to merge with bigger and more financially stable schemes failed, leaving its members scrambling to find alternative cover.

Liquidations are rare in the medical schemes industry, but the circumstances surrounding this one are particularly unusual because there is no formal arrangement in place to transfer members to another scheme without a break in cover.

Health Squared’s demise is unusual too because it blames the Covid-19 pandemic for the deterioration in its financial position, while most medical schemes saw their finances improve despite the cost of Covid-related claims, because so many of their members deferred non-urgent care.

In a letter sent to members on Friday, Health Squared said it was in such a precarious financial position that it aimed to wind up its affairs by August 31, leaving them just eight working days to join another scheme.

In 2017, by contrast, Community Medical Scheme’s 11,000 members were taken on by Bonitas and in 2010, Gen-Health’s members went to Medshield without beneficiaries facing waiting periods before their claims were covered.

The Medical Schemes Act says medical schemes must accept anyone who can afford their premiums, but allows them to impose waiting periods on new members depending on their circumstances.

For those who belong to a medical scheme in the 90 days before signing up, such as Health Squared’s 23,000 beneficiaries, pre-existing conditions will be covered, but there is a three-month waiting period for some new ailments. During this time, they would pay contributions but their claims are limited to a defined basket of care — the prescribed minimum benefits.

At issue now for Health Squared members is whether the medical schemes they seek to join will impose these underwriting measures. “The moral position is that none of these members should be underwritten on transfer as they cannot be regarded as engaging in anti-selection against the scheme to which they are moving,” said governance expert at Wits Alex van den Heever. “There is not a scheme unable to carry the risk of these members,” he said.

Health Squared approached six medical schemes with merger proposals since January, but without success, it said in court papers. These were Bestmed, Medihelp, Medshield, Sizwe, Bonitas and Discovery.

“Prospective amalgamation partners have all expressed concern at the scheme’s risk profile as well as its low reserves as being prohibitive of possible amalgamation,” Health Squared’s principal officer, Elias Mabena, said in a letter sent to members on Friday. He advised members to take steps to secure membership of another scheme by September 1.

Coronavirus pandemic

Health Squared says in court papers that its financial position deteriorated dramatically during the coronavirus pandemic, as its older age profile saw a rise in claims for both Covid-19 and non-Covid expenditure. Its average beneficiary age is 49.7 years, compared with the industry average of 33.6 years, it says.

Health Squared’s solvency ratio, a key measure of its ability to pay claims, fell from 17.3% at the end of 2020 to 6.04% at the end of 2021 and by June 2022, stood at just 3.79%. The act requires schemes to maintain a minimum solvency level of 25%, effectively ensuring schemes keep at least three months’ contribution income in reserve as a buffer against an unexpected surge in claims.

Most medical schemes have reported that the cost of Covid-19 claims was more than offset by a sharp reduction in non-Covid expenditure as members deferred non-urgent care, leaving many schemes with such deep reserves that they kept contribution increases for the past two years to historically low levels.

The scheme’s application for leave to file a winding-up application was launched on August 18 and will be heard in the high court on August 30.

Health Squared said it was unable to answer Business Day’s questions before deadline.

The Council for Medical Schemes, the statutory body charged with overseeing the medical schemes industry and safeguarding members’ interests, said it would respond to the queries on Monday. Health Squared’s administrator, Agility Health, said it became aware of the liquidation application only on Friday and was still studying the court papers.

kahnt@businesslive.co.za