Discovery in spotlight on soaring medical aid costs and its ‘nasty habits’

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The Financial Mail’s Rob Rose and Katharine Child question CEO Adrian Gore about perceptions that Discovery, a model of corporate innovation, has beome ‘too powerful’ in the private medical aid market, about ‘a growing chorus of allegations’ that it is fleecing medical members to profit its JSE-listed company, and using ‘nasty tactics’ to keep secret a damning Council for Medical Schemes report.

They say that to some, Discovery has become too powerful. It controls 52% of the private medical aid market. And it has been accused of throwing its weight around. Dr Jeff King, a specialist physician cardiologist at Sunninghill Hospital, for example, says it used to be that doctors decided how a patient should be treated, and the medical aid covered the bill. But Discovery has become so powerful that it can override the doctor’s judgment on how people are being treated.

"I see it with my patients. Discovery ends up denying medication to people which they’re obliged to pay under the law, and only paying for the bare minimum. They should be held accountable by the Council for Medical Schemes (CMS), but that’s not happening," King says. (Discovery says it has its own boards of doctors who give advice on which drugs should be covered. And though doctors may resent Discovery’s influence, the administrator tries to include them in its decisions.)

Rose and Child write that patients are also bristling at having to dip deeper into their own pockets despite having pricey medical aid cover. And many just don’t understand how the system works. As one person complained on consumer website Hellopeter: "I am highly disappointed that I get bills for co-payments when I am on the Comprehensive cover which is 100% cover for all my dependants."

They writes that the fact is Discovery does pay for many high-cost drugs like biologicals that other medical aids don’t cover. And while some feel they don’t get value, other people are taking more than their pound of flesh from the scheme. Last year, for example, 89 medical aid members claimed more than R1.22m each just on medicines. Considering Discovery’s medical aid contributions average less than R40,000 per year, this equation is clearly working for some.

"When you’ve got this many members, you’re guaranteed not to make everyone happy. You’re guaranteed to make mistakes," said Michael van der Nest, chair of Discovery Health Medical Scheme, is quoted in the report as saying. Last year, 738 members officially complained about how they were treated. "This is an issue for us," says van der Nest – but since Discovery processed 43m claims last year the complaints represent "an infinitesimal number".

Gore’s apologists will argue that this heat is being applied only because the company is so successful. And even his harshest critics will concede that Discovery is one of SA’s greatest entrepreneurial stories. But, Rose and Child ask, is Discovery abusing its power?

They write that with medical costs soaring, Discovery is facing a growing chorus of allegations that it is fleecing medical aid members to make profits for the JSE-listed company. In theory, there are safeguards to ensure this doesn’t happen. Medical aids are meant to be independent, not-for-profit medical schemes run by an independent board of trustees. The medical aid then hires a third-party administrator to run the scheme (and to provide "managed care" services). In theory this means the Discovery Health medical scheme should be separate from Gore’s company, which only provides "administration" for a fee and which can be "fired" with just 90 days’ notice.

But in practice, say critics (like commodities trader Jonathan Egdes), the medical aid isn’t truly independent of its administrator, and this cozy relationship has allowed the medical aid fees to rocket. To put it in today’s parlance, the medical aid has been "captured" by the administrator. It doesn’t help that both entities share the Discovery name, which adds to the confusion.

Rose and Child write that to Discovery, this is off the mark. Gore says contributions "have increased by less than the industry average or any other open medical scheme over the past five years". He adds that the administration fee is in the "lowest quartile" of medical schemes – 17th lowest out of 23 schemes.

Still, rumblings of discontent were evident at the Discovery Health Medical Scheme AGM last month, where 870 people packed the Sandton Hilton hotel boardroom. Rose and Child write that it was a lively three-hour affair, with medical aid members having come from as far afield as Kuruman in the Northern Cape to ask questions, find out what their fees were buying, and elect a new board of trustees to look after their interests.

"Medical aid is becoming less and less affordable," said one woman, adding this was clearly why many people were downgrading their health-care plans. Egdes added to this sentiment, saying that Gore’s administration company is sucking up huge fees from the medical aid members. "We bear all the risk, yet they manage to double the amount set aside for fees in a few years. Are we going to allow this to persist, that the administrator benefits from my funds?" he asked.

Rose and Child write that Egdes is right that the fees are monstrous. Last year, the Discovery Scheme paid R5.1bn to Gore’s Discovery Holdings in fees – R3.8bn in "administration fees" and another R1.3bn for "managed care services". This was 8.2% more than it was paid the previous year. Van der Nest replied: "It is a lot, of course it’s a lot, but we are satisfied that we’re getting value for our members."

Given that Discovery has far more members than everyone else, they write that surely it should be able to push fees lower than its rivals, through economies of scale? After all, for every R1 a Discovery member pays in medical aid contributions, 14c doesn’t go to paying for health care at all, but to "non-health care expenses". This includes administration costs, managed care costs and brokers’ fees.

Dr Jonathan Broomberg, Discovery Health CEO, said the administrator was doing its best to keep a lid on costs in a world where medical costs are spiralling out of control. "Discovery’s administration fees, once inflation is stripped out, actually fell 8% (between) 2010 and 2016, while (those of rival schemes) are up 9%," he said.

Still, this fee has been a bone of contention for years, with sceptics saying the notionally "independent scheme" is a piggy bank for Gore’s expansion plans. Gore’s company is clearly making plenty of profit from the scheme. Discovery’s most recent full-year financials, to June last year, show the SA health business made R1.47bn in profit. That works out to a handy margin of 30.1%. Van der Nest said the independent trustees had had many robust meetings with Gore’s company and managed to wrestle down the fees. "(The fees) have had an effective decrease of CPI minus 1% over the past three years," he said.

Rose and Child write that it’s true the administration fee has dropped. But it might not have were it not for the intense pressure put on Discovery by the public. Noel Graves, a trustee of the scheme, spoke up at the AGM, saying all the negotiations over fees with Discovery Holdings are "tough". "I’m no-one’s puppet. I do not bow to Johnny Broomberg and neither would he expect it," he said.

But, say Rose and Child, some don’t buy that. Stan Eiser, an independent medical consultant, says "a not-for-profit medical scheme has been turned upside down and is being milked for every last drop Discovery can get its hands on, including direct formal interference in quality of care." Eiser says many people don’t take issue with this because they think Discovery owns the medical aid. In fact, the members own it.

Gore says he has no problem with people questioning the fees. "We have many fierce critics and we’ve always listened. I don’t take it personally, even when some of it is absolute nonsense. If it’s about the interests of policy members, then it’s valid and fair." Some companies don’t like scrutiny but Gore says it’s needed. "Look at what happened to some of the institutions that went unchecked. It’s a dangerous slope when you don’t engage with criticism."

Rose and Child write that it’s a noble sentiment, but undercut by a recent case in which Discovery employed some nasty tactics to muzzle one such critic. It hauled in the legal hotshots to bully Mario Compagnoni in a bid to keep a damning Council for Medical Schemes report secret.

The story dates back to 2013 when Compagnoni, a retired Italian-born South African businessman, was one of a group of medical aid members who asked the CMS to investigate whether Discovery had "rigged" the election of trustees of the medical scheme.

The allegation which the regulator was probing was whether Discovery Holdings had coerced any of its 3,800 staff or associates to vote for specific trustees at the medical scheme’s AGM – people who, presumably, would be more amenable to the demands of the administrator. It’s a big deal because if Discovery’s medical scheme were to have a less than "independent" board of trustees made up of the administrator’s chosen nominees, they’d feel more comfortable that their fee might not be scrutinised as vigorously as otherwise. (Discovery is adamant that while it encourages its staff to vote at the AGM, "we do not force employees to attend nor to vote in any particular way").

Rose and Childs write that the council provided a draft report with directives, which Discovery challenged, miring it in red tape. After more than a year of waiting, Compagnoni lodged an access to information request with the CMS for the report in 2015 – and was given it.

Fearing the findings would leak out, Discovery sprang into action, threatening Compagnoni with fines and up to five years in jail. Discovery’s lawyers, Knowles Husain Lindsay, sent a letter to Compagnoni saying the report is "under appeal at the CMS". "Possession of documents connected to an inquiry or investigation under the Medical Schemes Act constitutes being party to a criminal offence," the lawyers wrote.

Rose and Child write that all Compagnoni had wanted was that the medical scheme present a brief summary of the findings at the AGM. Determined to ensure that didn’t happen, Discovery rolled out the big guns. Knowles Husain Lindsay threatened Compagnoni, saying it appears he "fails to understand the gravity of your position". "Having been notified of the criminal sanctions, you are legally obliged not to disseminate these documents on pain of criminal sanctions against you personally," it said.

Rose and Child say not only does this appear to be bullying, but Discovery is relying on a minor clause in the Medical Schemes Act which says that no member of CMS may "disclose any information relating to the affairs of the council".
The Act says: "No person shall, except in the performance of his or her functions or duties under the Act … disclose any information relating to the affairs of any medical scheme, and furnished to, or obtained by him or her in connection with any inquiry or investigation under the act".

But, they write, Compagnoni is not a staff member of the CMS. More importantly, he was given that report as part of an access to information request, governed by the Access to Information Act of 2000. This law expressly trumps any "other legislation that prohibits or restricts the disclosure of a record of a public body or private body, and that is materially inconsistent with an object or specific provision of this act".

Rose and Child quote Dario Milo, a partner at Webber Wentzel, as saying that section of the Medical Schemes Act "cannot be read to criminalise the possession of the report by the person who requested it. At most, it criminalises disclosure by staff of the council, but not the recipient of the report. One assumes the CMS has taken Discovery’s submissions as to the report’s disclosure into account and has nevertheless decided to make it available. Discovery would have had the right to object and, if necessary, litigate before the report was released."

Rose and Child say it’s an unfortunate tactic from Discovery, which ends up looking like the schoolyard bruiser, employing dubious legal tactics to keep a report into its activities secret. But Gore rejects that view. "Bullying is not our style," he says. "The issue is that the report isn’t final. I think you’re right that everything should be public, but the report should be final. Our concern is about putting out something that’s half-baked." In a later e-mail, Discovery added that "the process has not been finalised and as such it is not appropriate for the report to be published".

They write that whatever the merits of the report, it’s Discovery’s strong-arm approach that seems beyond the pale. While Gore might say the right things about accountability, behind the scenes Discovery may be doing the opposite.

Rose and Child say this example shows just how rattled Discovery is by the debate over its fees, and medical costs in general.

Clearly, Discovery is doing its best to keep medical inflation in check – but there’s only so much it can do. So, as Rose and Child ask, what’s driving these cost increases? According to Broomberg: "The real story that we’re working on every day is (higher) utilisation." In short, more people are using medical services. In 2008, Broomberg says, 60% of Discovery’s medical aid members didn’t claim; today, only 49% don’t claim. Add in the fact that medicines and treatments have become exponentially more expensive, and it’s a dangerous mix, he argues. For example, in 2006, an average course of chemotherapy to treat cancer would have cost R65,000. Today it’s R1.4m. Medical costs have, on average, gone up by 4% above inflation every year for the past decade. Allied to that, the average age of members in an open scheme like Discovery has risen from about 32 in 2005 to 33.6.

So does this mean medical aid will just keep rocketing? Rose and Child quote Gore as saying that this is an inevitable consequence of the way in which the medical industry is structured internationally. "Health-care costs across the world, like private education, have been growing at inflation plus 3%-5%. In other industries, technology drives costs down. But with health care, it’s the opposite — biological drugs, personalised medicine and new machines are unbelievably expensive. Add in the fact that doctors are a rare skill and you can see why it’s growing like this."

But how much higher can this go? What’s the endgame? Gore cites a study which says that in the long term, health-care costs don’t drop – they just end up taking a greater share of your wallet at the expense of other things. "You see this in the US, where 20% of people’s costs are health care. I’m not saying it’s acceptable but it is what’s happening."

But write Rose and Child, part of Discovery’s success has also been because it represents an alternative to the public medical sector, which is characterised by too few doctors, medicine shortages, long queues and tumbling-down infrastructure. In no other industry (except perhaps education) is it clearer that SA is a country of opposites. More than half SA’s health spending goes to the private sector, yet only 25% of households went to private hospitals, doctors or clinics, says a recent Stats SA survey. And while 71% of whites have private medical aid, only 6% of blacks do.

Even in this context, can Discovery afford to keep raising medical aid costs when the pool of those who can afford it is shrinking? "No, no, we don’t want to keep hiking fees," Gore says. "We’ve just got to figure out how to be more efficient, and it’s not simple given how few doctors we have. But as long as we keep medical aid increases to between inflation plus 3% to 4%, I think we’ll be OK."

At the AGM, Broomberg attested to just how difficult that will be, given that new hospitals are popping up all over the place. Between 2008 and 2015, 27 new hospitals were built in SA. Hospitals, it turns out, are sucking out most of the money spent by medical schemes. In SA in 2014, medical schemes paid out R124bn, of which 37% (R46.6bn) was to private hospitals, like those run by Mediclinic and Netcare, for ward and theatre fees and other costs.

Referring to two specific hospitals built in KwaZulu Natal, Broomberg says: "we believe that if those hospitals hadn’t opened, we don’t believe any member would have been (worse off)".

Rose and Child write that it’s a frightening scenario: cost increases that threaten to make medical aid unaffordable for younger, healthier people, combined with a situation of those remaining using more just because it’s there.

Discovery’s main ammunition in this battle is its ability to shape people’s behaviour using its Vitality incentive programme. Gore believes in this "shared value" concept. It’s clear that Vitality, initially derided as a marketing gimmick, is working. "Vitality members who engaged in the programme had achieved higher life expectancy, and their health-care costs were 7%-14% lower than those of individuals covered by a Discovery (policy) who were not Vitality members," the study found. Broomberg says: "Vitality saves Discovery more than R1bn in claims, mainly due to the change in behaviour."

Rose and Child write that while Discovery has rubbed a number of people up the wrong way – specifically, medical aid members and doctors it’s a model of SA innovation that has been copied by many.


Jonathan Egdes is not the most obvious man to be tilting at Adrian Gore’s R80bn behemoth, Discovery Holdings, notes a Financial Mail editorial. The 58-year-old Egdes is pretty much your everyday Joe. By day, he works as a maize trader, making a thin margin intermediating between farmers and wholesalers. Tethered to his cellphone in case there’s a maize deal to be cut, Egdes is a father of four who has quietly built a steady career over the past two decades. But this all changed four years ago, when he picked up Discovery’s financials – and his blood boiled.

“I got furious when I saw how much Discovery Health was being paid. Medical schemes are meant to be like mutual societies, run independently for the benefit of their members. But with Discovery, the scheme’s 1.2m members are providing super profits for Gore – and no-one has said enough is enough,” he says.

The report says Egdes isn’t kidding. Last year, the Discovery medical aid scheme paid R3.9bn in “administration fees” and R1.3bn in “managed care” fees to Discovery Holdings, via its subsidiary Discovery Health. For every R1 you pay to the medical aid, 10.4c goes to Gore’s firm for these non-healthcare costs.

The report says few medical aid members query these costs, partly because many don’t know how it’s meant to work – that the medical scheme, overseen by a board of trustees, is meant to be independent of its “administrator”. In theory, if the Discovery medical aid trustees reckon they’re not getting value, they can “terminate” the administration deal with Discovery Health with just 90 days’ notice. But given how the administrator seems to wear the pants, this seems unlikely.

Two years ago, a fired-up Egdes went to the Discovery scheme’s AGM and put the trustees on the spot, asking: how many quotes had they ever got from other administrators to run the scheme? Not a single one, they said. “Can you believe that? I don’t care how good someone is; to do justice to your members, you should always get three quotes. Bidvest might be excellent at cleaning your offices, but that doesn’t mean someone can’t do it better or cheaper,” he says.

So, the report says, Egdes has now decided to stand as a trustee at Discovery medical scheme’s AGM on June 23 at Sandton’s Hilton Hotel. It’s his second stab at it: in 2013, he stood too, but was defeated.

“Look, I don’t expect to be elected. They won’t give me access to their member lists, so I can’t canvas support or ask for votes. But still, I think they should know that not everyone is going to stand by while they glibly tell us no-one else can administer the scheme,” he says.

According to the report, Egdes will tell you he’s not doing this because he despises Discovery either. “I actually think they’re excellent, which is why I have all my business with them – insurance, life products, you name it. But they are making a massive margin for risk-free work,” he says.

Which isn’t to say the medical scheme is deaf to this criticism. The report says two years ago, it hired Deloitte to “benchmark” its costs against other medical aids. Deloitte found that while Discovery charged R11.43/month more for “non-healthcare costs” than other medical aids, it delivered “better performance”.

Not everyone agrees, and in his “manifesto”, Egdes says Discovery’s members should vote for him so he can “ask the difficult questions and ensure the scheme is run for our benefit”.

Full Financial Mail report Full Financial Mail editorial

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