Did Health Squared orchestrate its own liquidation?

The board of trustees and consultants of financially distressed Health Squared Medical Scheme allegedly strategised to outmanoeuvre the Registrar of Medical Schemes’ plan to have it placed under curatorship – by bringing an urgent application for voluntary liquidation.

Information provided by the Council for Medical Schemes (CMS) also reveals further Health Squared governance issues.

It has already emerged that maladministration may have been one of the main causes of the “financial ruin” of Health Squared rather than the Covid-19 pandemic, according to a provisional report by the scheme’s curator.

An actuarial report – compiled once a provisional curator was appointed in September 2022 – found that Covid-19 claims had “close to zero effect” on the scheme’s drop in solvency.

A high court application brought by the board of trustees to voluntarily liquidate Health Squared has now been postponed until next year.

Judge J Wright in the Johannesburg High Court last week also ordered that the provisional curator’s report be submitted to the court by next month.

Wright previously postponed the liquidation application until a number of other high court applications have been finally determined, or the facts and circumstances change sufficiently to warrant the setting down of the liquidation application.

Health Squared’s management lodged the application to liquidate the scheme on 18 August, and advised its members that the voluntary winding up would be effective from 1 September.

However, Health Squared was subsequently placed under provisional curatorship effective from 8 September, following a high court application brought by the CMS, resulting in former Sanlam Health CEO Johannes Seoloane being appointed provisional curator of the scheme.

Legally binding rule ‘ignored’

The CMS has disclosed that Health Squared’s Rule 27 provides that members must be balloted before a decision to liquidate the scheme is taken, but “this was ignored even though scheme rules are legally binding”.

Instead of convening an AGM before the end of June, the Health Squared board postponed it to August and (then) September to ensure the scheme would be liquidated before the AGM “and avoid accountability to members”.

“What has become clear is that the short notice to members was driven by the need to outmanoeuvre the registrar and nothing else,” said the CMS.

“The registrar was then left with no option but to try and intervene to ensure that former members of Health Squared could move to alternative medical schemes without having to deal with waiting periods,” it said.

Read: Regulator engages other schemes to help Health Squared members

CMS cautioned Health Squared in November 2020 for non-compliance with the approved 2020 business plan, because the marketing fees exceeded the R11.9 million budget by R20.3 million, the non-health expenditure budget was exceeded by R15.1 million, and the administration fee budget of R200 per average beneficiary per month was exceeded by R89 in October 2020, four months before the end of the year.

Desire for control

The registrar wrote to Health Squared in November 2021 requesting that it agree to the appointment of a statutory manager.

Health Squared agreed – but provided a list of three candidates for the registrar to choose from.

The CMS said although the law requires agreement between the scheme and the registrar for the appointment of a statutory manager, the responsibility to appoint rests with the registrar.

Using the list provided by Health Squared would have raised questions about the independence and objectivity of the appointed statutory manager.

“Even though it was not spelled out in Health Squared’s agreement to appoint a statutory manager, it was clear that Health Squared wanted to be in control of the process by ensuring that someone it could trust is appointed to the position of statutory manager,” it said.

The scheme’s next move …

Health Squared subsequently rejected the appointment of a statutory manager and, according to the preliminary report and evidence obtained by provisional curator, knew the most logical step for the registrar to take would be to apply to place the scheme under curatorship.

“A plan was devised to outmanoeuvre the registrar by bringing an urgent application for leave to liquidate the scheme voluntarily,” said the CMS.

“Having denied the registrar an opportunity to appoint a statutory manager, it was thought the registrar would have no ground to oppose the application because he [had] no actuarial report [at that time].

“Even though no name was put forward for who will be the liquidator, evidence obtained by the statutory manager shows that a character close to one of the consultants and close to the process was put forward and agreed to by the board.”

The CMS said the Health Squared board and its consultants estimated that the liquidation would cost about R100 million and “devised a plan to ensure the liquidation plan goes accordingly”.

It said this involved making sure that invoices from the scheme’s administrator, Agility Health, were settled in advance to ensure that Agility was not a large creditor when the liquidation process began, and could therefore not scupper the liquidation plan – including the choice of liquidator.

The CMS said the plan also involved one of the consultants submitting two invoices, only one of which was to be paid, to ensure the consultant would remain a creditor and the liquidation would proceed according to plan.

‘Legal ploy’ … and expensive marketing

It said Health Squared’s lawyers were also authorised in advance to challenge anything and everything that stood in the way of the liquidation plan and mentions “a legal ploy” to ensure the liquidation would go ahead as planned.

The CMS said the provisional curator’s preliminary report echoed the findings of the actuarial report, but highlighted governance issues that warrant further investigation.

These include the fact that since 2019, Health Squared has paid about R90 million to Agility for marketing services – despite the scheme failing not only to gain membership but to retain its membership.

The scheme lost about 30% of its members between December 2019 and August 2022.

The CMS further found:

• No evidence that the scheme has ever imposed any penalties on Agility for its failure to grow the scheme or to maintain its membership;
• That despite the dire financial position of the scheme, the board of trustees never considered any austerity measures to mitigate the impending catastrophe and the chair of the board inserted himself in committees where he was not required and drew fees for this; and
• At no point did the board of trustees decide to review its own remuneration fees, and stopped holding its meeting at its offices, instead holding them at the Maslow Hotel in Sandton – where those board members who were flying in from different destinations were presumably booked.

“One would think that for a scheme in dire financial straits, [they] would opt for virtual meetings as the most cost-effective,” it said.

The provisional curator further found that while Agility was required to sign up 2 000 new principal members each year in terms of its five-year agreement with Health Squared – and despite the undertaking in the merger documents that Agility would be penalised for any reduction in membership – this never materialised and was in fact not made part of the agreement.

The agreement also made provisions for termination based on non-compliance but this was never done “until it was clear that the scheme was dead and there was no point to continue paying for marketing services”.

The CMS has learnt some lessons from Health Squared’s failure that will still play out in court, it added.