Discovery in rude health — but requires checkup

FEW would disagree that Discovery Holdings founder Adrian Gore is among South Africa’s great entrepreneurs, having built an R80-billion company from scratch in 23 years that has breathed new life into the archaic private healthcare market.

Investors such as FirstRand’s GT Ferreira, Paul Harris and Laurie Dippenaar took a R10-million leap of faith on the actuary from Liberty with the ambitious healthcare plan in 1992 and had their faith repaid in bucketloads.

For members of the Discovery Health Medical Scheme, however, the evidence is more mixed.

The way it is meant to work is that the Discovery medical aid is a non-profit entity run by trustees and totally independent from Gore’s company, which simply does “administration” work for the scheme in exchange for a fee.

But for years critics have claimed the medical aid wasn’t truly independent and was too close to the administrator. This is why, they say, the scheme pays immense fees to Gore’s company — and why your medical aid premiums rocket every year.

Last year the medical aid paid a weighty R5.7-billion to Discovery Holdings through a combination of administration fees, managed care and broker fees.

It is a great model for Discovery. You can see why the share price has gone on a tear, rising 144% over the past three years — nearly three times faster than the JSE’s All Share index, which climbed 53%.

But are members paying too much for medical aid?

It is a complicated question because medical aids themselves have had their costs spike by an average 17% a year between 2008 and 2013 as they cover an older, increasingly sicker, population.

But what is also clear is that Discovery Holdings’ South African health business made a R1.86-billion pretax profit for the year to June last year — about 40% of the company’s overall operating profit — partly due to the fees it charges the scheme.

Discovery Holdings collected R4.45-billion in “administration fees”, from which it then deducted costs of just more than R2.6-billion. This is clearly a big margin, the sort of number that fuels critics who claim the trustees don’t push back hard enough on the fees.

Last week, Jonathan Broomberg, CEO of Discovery Health, said the medical aid had an “arm’s-length” relationship with the administrator due to a “robust set of governance measures”, including an independent board of trustees.

Broomberg says that while the fee sounds big, this is just because of the large number of people in the scheme, “which itself is a direct result of [its] sustained excellent performance”.

But if Discovery offers such great value, why is it that it was trumped in all but one of 10 categories by rivals such as Fed- health, CompCare, BestMed and others in GTC’s annual survey of medical aids, released this week?

Not that you can really blame Gore’s company: if the trustees of the scheme reckon they’re getting value for money for those chunky fees, and the regulator is doing its job and policing these agreements, then who can blame the administrator for levying those fees?

So here’s the problem: the regulator, the Council for Medical Schemes, which is meant to police medical aids and ensure consumers don’t get ripped off, is a mess.

It doesn’t even have a full-time leader since registrar Monwabisi Gantsho was suspended over claims he tried to solicit a bribe in April last year.

Gantsho’s case is a nasty, messy disaster playing out in “disciplinary forums” and lawyers’ offices around the country.

Council spokeswoman Elsabe Conradie says that despite this, “operationally, it’s business as usual”. She says that medical schemes “still have to comply with the act” and “all the investigations by the compliance unit are still continuing.” But consider this recent case. Some time back, the council received complaints of “irregularities” at the 2013 annual general meeting of the Discovery Health Medical Scheme.

Quite what these irregularities were, no one is saying. Quite what happened, neither the council nor Discovery will say either, because there is no final outcome.

How is it that an investigation into problems at an AGM two years ago has yet to yield a result?

The scheme has since held its 2014 AGM, where, intriguingly, there were 117 “invalid” proxy forms, including 43 “duplicate” forms. On this point, Broomberg says Discovery has asked PwC, which audited the AGM, to “provide a note on the reasons for the invalid proxies”.

Discovery’s medical scheme is now due to hold its 2015 AGM on June 25 — even though there is no clarity on what happened at that event two years ago.

Conradie argues that this probe has not taken especially long, saying “sometimes [these investigations] do take long, I agree, but it’s a question of resources available and a proper investigation is required”.

Sure, but when consumers spend 9% of their salaries on medical costs — which are rising faster than inflation— you can’t afford a dozy or dysfunctional regulator.