Hosmed faces R350 000 penalty for not submitting information to regulator

Hosmed Medical Scheme is likely to pay a penalty of R350 000 for failing to submit information to the Council for Medical Schemes after the North Gauteng High Court dismissed its objections to a claim for the penalty.

The council imposed the penalty after Hosmed ran into administrative difficulties in 2011 and failed to submit to the regulator updates on the implementation of a business plan aimed at returning the scheme’s reserves to the level required by law.

Hosmed, three of its former trustees and the scheme’s principal officer objected to the penalty, and the council took its claim to court. Late last month, the High Court dismissed the objection and awarded costs against the former trustees and the principal officer.

Dawid van Zyl, Hosmed’s principal officer, told Personal Finance that the scheme failed to submit the information because of difficulties in compiling it after Hosmed changed its administrator.

Hosmed moved its administration contract from Thebe Ya Bophelo to Allcare in 2004 and then back to Thebe Ya Bophelo in 2011.

Van Zyl says that, after the 2011 handover to Thebe, Hosmed discovered that Allcare had problems with its administration system, which made it difficult for Thebe to compile the scheme’s financial statements, as well as the other information required by the Council for Medical Schemes.

The council was made aware of this, and a penalty was not imposed for the scheme’s failure to submit its 2011 financial statements on time.

Van Zyl says that Hosmed is now liable to pay the penalty, but it will institute a process to claim back the money from Allcare, because Allcare had a contractual agreement with the scheme to provide it with the information.

He told Personal Finance that Hosmed had retained some monies owed to Allcare in trust, which could be used to pay the penalty.

At the behest of the Registrar of Medical Schemes and the chief executive of the council, Dr Monwabisi Gantsho, Hosmed was subject to a forensic investigation that has resulted in claims being lodged against, in the main, individuals associated with Allcare.

Hosmed is currently subject to an investigation – also at the behest of the registrar – into the fitness and propriety of its trustees.

LOW RESERVES

The origin of the court case dates back to 2010, when Hosmed was under the administration of Allcare and the scheme’s reserves as a percentage of its contribution income, or its solvency ratio, were at nine percent, well below the legally required 25 percent of reserves.

Hosmed submitted to the Council for Medical Schemes a business plan to return the reserves to the required level. The council approved the business plan.

According to the High Court judgment, the council asked the scheme to submit monthly management accounts, to indicate how Hosmed was performing relative to the business plan, and asked the trustees to attend quarterly meetings with the council.

The scheme did not comply with these requests, and in December 2011 the regulator informed each trustee and the principal officer that they were liable for penalties as a result of their non-compliance.

Hosmed, its former trustees – Solomon Sello Bodiba, Thomas Baloyi and Takalani Kwinda – and Van Zyl objected to the claim.

According to the judgment, they said Hosmed had not been given proper notice of the penalties, because only the former trustees and the principal officer had been notified of them. But Judge CH Nicholls dismissed this, saying it is clear from the Medical Schemes Act that notice to the principal officer amounts to notice to the scheme.

The former trustees and Van Zyl also argued that the scheme is obliged to submit a business plan only and cannot be directed to submit monthly management accounts.

Judge Nicholls said the Registrar of Medical Schemes has the right to request further information from schemes, and he could ask for monthly management accounts in order to obtain further information about a scheme.

The former trustees and Van Zyl said the scheme could not be penalised for the failure of its office-bearers to attend meetings.

But the judge said there was no merit in this objection, because the council’s claim was based primarily on the scheme’s failure to provide further information.

Judge Nicholls also dismissed an objection that only the trustees could be liable for a failure to provide quarterly financial statements and not the scheme or Van Zyl. He said the Medical Schemes Act makes it clear that any liability of the trustees is that of the scheme and its principal officer.

“All the exceptions raised by the defendants are premised on applying artificial separations between the scheme, the board of trustees and the principal officers.”

Judge Nicholls said the Act imposes certain obligations on medical schemes through their trustees and principal officers.

“If these are not complied with timeously, the Act entitles the [council] to impose daily penalties. This is presumably to enforce good governance and to ensure that a scheme is encouraged to delay as little as possible in complying with its obligations,” he said.

‘VALUABLE LESSON’

Gantsho welcomed the judgment and said his office would enforce it.

“This is a welcome breakthrough in the long battle with schemes such as this one, and the judgment will also serve as a valuable lesson and guidance to other schemes that may be of the view that they can willynilly ignore the directives issued by this office under the Medical Schemes Act,” he says.

Van Zyl says that Hosmed’s legal advisers are reviewing the judgment, because it holds him, the three trustees and the scheme liable, without taking into account the circumstantial evidence.

Although the judgment might not be in the interests of the medical scheme industry, Hosmed will take legal advice on whether challenging the judgment will be in the interest of its members, he says.

Van Zyl says that forensic auditors Ligwa Advisory Services had, at the beginning of 2011, published a report into their investigation. As a result of their findings, Hosmed instituted several civil claims, mainly against individuals associated with Allcare. A criminal case was also registered.

Hosmed recovered R6.5 million plus interest from a service provider for a loyalty programme that was deemed improper by the council, Van Zyl says.

In October this year, the registrar instituted an investigation to ascertain if the trustees of the scheme are fit and proper.

Van Zyl says that Hosmed has raised its solvency ratio from nine percent in 2010 to 23.1 percent in November 2013, and it expects to reach the required 25 percent by the end of this year.