The trustees of the board of Health Squared Medical Scheme, now in liquidation, may still face sanctions for the alleged maladministration of the scheme and other irregularities that led to its financial ruin.

Its collapse in August 2022 left Heath Squared’s about 13 000 members scrambling for alternative medical aid cover.

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The Council for Medical Schemes (CMS), the industry regulator, was coy last week in its response to a Moneyweb question about what action has been taken, or is planned, by the CMS against any Health Squared trustees and consultants for the alleged maladministration of the scheme and alleged irregular actions to outmanoeuvre the Registrar of Medical Schemes.

The alleged maladministration and irregularities were highlighted last year in a provisional report compiled by provisional curator of scheme Johannes Seoloane and affidavits made in support of high court applications by the CMS.

Stephen Monamodi, CMS senior manager of communication, marketing and stakeholder relations, said on Friday the curator was replaced by liquidators, who have the power to take appropriate action against any person who committed misconduct in the affairs of the scheme.

“The liquidation proceedings are still underway. Important to note is that during this undertaking, the CMS cannot interfere in any work of the liquidators,” said Monamodi.

He added that the CMS would be guided by the final report of the liquidators to determine the appropriate action, pointing out that the scheme remains under a liquidation order by the high court.

History

Health Squared was formed in 2018 through the amalgamation of two long-standing medical aid providers, Resolution Health and Spectramed.

The whole of the business of Health Squared was placed in final liquidation by the High Court in Johannesburg in February.

Monamodi said any action taken by the CMS against any trustees or consultants to Health Squared is pending “until the liquidators have completed their mandate”.

CMS Registrar Dr Sipho Kabane revealed in an affidavit in support of a high court application that was heard in September 2022 that the provisional report by the scheme’s provisional curator found that maladministration, coupled with the effects of Covid-19, may have been the real cause of the financial decay at the scheme.

Read: Maladministration may have been a main cause of Health Squared’s ‘financial ruin’

He said Section 57 of the Medical Schemes Act provides that every medical scheme shall have a board of trustees consisting of “persons who are fit and proper to manage the business contemplated by the medical scheme”.

Kabane said once the scheme is liquidated, nothing prevents the current trustees from being nominated as trustees of other medical aid schemes.

“The current investigation [by the provisional curator] is necessary to help the CMS, first to understand what went wrong, secondly, to help council make the determination, when the time comes, about the fitness of these persons to hold office in other medical schemes.”

Financial ill health

The report by Seoloane found the scheme’s solvency ratio was 0.5% in August 2022 and the scheme only had 307 members by September 2022.

Medical schemes are required to maintain their solvency ratio at or above 25%, the minimum statutory prescribed level in the Medical Schemes Act.

Read: Another SA medical scheme is facing solvency issues

The CMS claimed in November 2022 the board of trustees and consultants of Health Squared devised a scheme to outmanoeuvre the Registrar of Medical Schemes’s plan to apply to place the scheme under curatorship by bringing an urgent application to voluntarily liquidate the scheme.

The CMS had cautioned Health Squared in November 2020 for non-compliance with the approved 2020 business plan.

This was because the scheme’s:

• 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 of R200 per average beneficiary per month budget was exceeded by R89 in October 2020, four months before the end of the year.

Kabane said in the affidavit it appeared from Seoloane’s provisional report that Health Squared spent on average R80 million a year on administration, management and marketing fees at a time when the scheme was “bleeding members”.

Questionable moves

The term of office of the trustees of Health Squared ended in December 2021 and they were meant to call an AGM at that time.

Kabane said the trustees applied and were granted an exemption to stay in office until the end of June 2022, at which time they were meant to hold an AGM.

He said the trustees then changed the rules of the scheme to allow them to stay on as trustees until 30 September 2022.

Kabane said this coincided with the timing of Health Squared’s urgent application in August 2022 for the winding up of the scheme.

He stated in his affidavit it would seem the trustees were intent on seeing the scheme wound up before their term of office expired.

“This also has to be viewed in light of the fact that I had advised the scheme that I intended to appoint a statutory manager to oversee the operations of the scheme and that the judicial manager would commence work on 1 July 2022.

“My efforts were frustrated by the scheme, and in an effort to prevent my regulatory intervention, the scheme rushed this [winding-up] application to court,” he said.

Kabane said Health Squared thought the registrar would have no grounds to oppose the application because he did not have an actuarial report.

Although no name was put forward as the liquidator, evidence obtained by the statutory manager showed that a character close to one of the consultants and close to the process was put forward and agreed to by the board.

Kabane said a further point of concern raised by the provisional curator is that it appears that during August 2022, the trustees only made part payments to themselves and did not draw their complete fees.

“This means once the scheme is wound up, they [would] be the scheme’s creditors and have an influence in the choice of liquidator.”

Read: Did Health Squared orchestrate its own liquidation?

The plan also allegedly involved one of the consultants submitting two invoices, but only one of the invoices was to be paid, to ensure they could remain a creditor to the scheme and the liquidation proceeds according to plan.

‘Legal ploy’

Health Squared’s lawyers were also allegedly authorised in advance to challenge anything and everything that stood in the way of the liquidation plan and “a legal ploy” was mentioned to ensure the liquidation would go ahead as planned, according to Kabane’s affidavit.

The CMS said last year the provisional curator’s preliminary report also highlighted governance issues that warrant further investigation.

These included that Health Squared had since 2019 paid about R90 million to Agility for marketing services despite the scheme not only failing to gain membership but failing to retain its membership, with it losing about 30% of its members between December 2019 and August 2022.

It said no evidence was found that the scheme ever imposed any penalties on Agility for its failure to grow the scheme or to maintain its membership.

The CMS further stated 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 of trustees inserted himself in committees where he was not required, and drew fees for this.

In addition, it said at no point did the board of trustees decide to review its own remuneration fees and instead stopped holding its meeting in its offices and held meetings 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.