04 - Medical Schemes (Brokers/Intermediaries/Advisers)

Question 1

What is the definition of a broker?

Answer 1

The Act defines a broker as a person whose business or part thereof entails providing broker services but does not include:

• An employer or employer representative who provides service or advice exclusively to the employees of that employer;
• A trade union or trade union representative who provides service or advice exclusively to members of that trade union;
• A person who provides service or advice exclusively for the purposes of performing his or her normal functions as a trustee, Principal Officer, employee or administrator of a medical scheme, unless a person referred to in subparagraph (i), (ii) or (iii) elects to be accredited as a broker, or actively markets or canvasses for membership of a medical scheme;
• Franchises that are contracted to medical schemes for the purpose of providing training to brokers.

Question 2

What is the definition of broker services?

Answer 2

“the provision of services or advice in respect of the INTRODUCTION or ADMISSION of members to a medical scheme;

or the on-going provision of services or advice in respect of access to, or benefits or services offered by a medical scheme.”

Question 3

How are medical scheme brokers regulated?

Answer 3

Medical scheme brokers are regulated by both:

• The Medical Schemes Act;
• The Financial Advisory and Intermediary Services Act (FAIS Act).

Section 7(1) of the FAIS Act provides that no person may act as a financial services provider unless the registrar of Financial Services has licensed that person to do so.

Jointly regulated:

• Council for Medical Schemes;
• Financial Services Board.

Question 4

How are brokers accredited according to the Medical Schemes Act?

Answer 4

In order to do the business as a broker, a broker must comply with the provisions of the Act
- section 1 and 65
- and Regulations 28 and 31
that requires a broker to be accredited

• Application to Council of Medical Schemes
• Recognised educational qualifications and appropriate experience
• Documentary evidence of having passed or current enrolment in a relevant course of study recognised by the Council
• Registration fees paid (R1000.00 non refundable application fee)
• Granted for 24 months
• Subject to provisions of FAIS

Question 5

What are broker organisations and how are they accredited?

Answer 5

CC, Company or any legal entity with a contract to provide broker services to medical schemes

Need to be accredited as a brokerage

Every broker within that entity need to be accredited individually

Question 6

What is the renewal process for broker accreditation?

Answer 6

Reg. 28 B (9)
CMS will notify 4 months in advance of expiry
- Ensure correct contact details

Renewal at least 3 months prior to expiry

Question 7

How are brokers compensated?

Answer 7

Regulated by Section 59. of the MSA

Fees payable to brokers only when broker has written agreement with Scheme

Set by Minister of Health (effective 1 January, 2016)

• R80.00 + VAT; or
• 3% + VAT of member’s contribution
• Whichever is the lesser.

Paid on an on-going basis

Paid monthly

Question 8

What are the minimum requirements of an agreement between a scheme and a broker?

Answer 8

General

• Parties to the Agreement
• Effective date

Broker

• Scope of duties of the broker
• The basis on and timeframes within which the broker will be remunerated
• Service level agreement
• Confidentiality undertaking by the broker in terms of the scheme and client information

Disputes and Termination

• Manner of settling disputes
• Termination of agreement with time frames
• Termination of agreement in instances of breach

Question 9

What are the responsibilities of the broker?

Answer 9

1. Always act in best interests of beneficiaries.
2. Obtain duly signed appointment letter from beneficiary.
3. Obtain all information to be able to properly assess needs and affordability of beneficiary, and advise him/her accordingly.
4. Ensure beneficiary is well-informed about scheme and its rules.
5. Do not make promises to the beneficiary on matters over which the scheme decides, e.g. waiting periods, late-joiner penalties, date of admission.
6. Clarify which services are excluded, e.g. submitting claims, handling enquiries, administration.
7. Keep up to date with developments in the industry, including the financial soundness of schemes, changes to benefits and contributions, and any factors which influence the relationship of the beneficiary with the scheme.

Question 10

What does the medical schemes act say about compensation for brokers?

Answer 10

Compensation discontinued if member of scheme/employer notifies scheme that it no longer requires services

May also receive compensation from a member/prospective member or employer of such member.

Scheme may not compensate more than 1 broker at time for a specific member

Scheme may not differentiate compensation based on age, health status or anticipated claims experience.

Scheme may differentiate compensation based on size of group.

Scheme cannot prevent member from applying without a broker.

Question 11

What are additional considerations for broker appointment and remuneration?

Answer 11

CMS: Circular No.20, 2010

A member may appoint a new broker in place of a broker previously appointed by the member;

When a member has been admitted to a scheme without the assistance of a broker, no other person or entity is in a position to assume the role of agent representing the member in appointing a broker thereafter.

Scheme or 3rd party administrator may not allocate “orphan members” to a broker

Question 12

How can incentives play a role in biasing a brokers decision to promote one medical scheme above another?

Answer 12

Assumption
“medical schemes and their commercial administrators have an interest in incentivising brokers to provide biased advice in their favour.”

“medical schemes and their administrators are also at risk of being ‘held to’ ransom by brokers who may influence consumers in favour of the medical scheme which pays the highest incentives.”

Two kind of brokers:

• Independent adviser
• Marketing agent of a scheme

Question 13

How has the taxation relief for medical expenditure changed over time?

Answer 13

The National Treasury and SARS reviewed tax treatment effective 1 March 2012.

Conversion of the medical tax deductions to medical tax credits

From March 2012:
The monthly deductions for contributions to medical schemes and for qualifying out-of-pocket medical expenses was converted into tax credits.

• Legacy system reduce taxable income
• The current tax credits reduce tax liability

It provides for more equitable tax relief, as the relative value of the relief does not increase as the marginal tax rate of the individual increases, as is currently the case.

Question 14

What is MSFTC (Medical Scheme Fees Tax Credit)?

Answer 14

Medical Scheme Fees Tax Credit is a rebate which reduces the normal tax a person pays.

This rebate is non-refundable and can’t be carried over to the next year of assessment.

In other words, this rebate will cut your normal tax to a lesser amount or nil, however it can’t create a negative amount.

It applies for years of assessment starting on or after 1 March 2012 (from the 2013 year of assessment).

It seeks to bring about greater fairness and help achieve greater equality in the treatment of medical expenses across all income groups.

Question 15

What categories of medical expenses are there from a tax point of view?

Answer 15

Two distinct categories, namely –

(i) contributions paid to a medical scheme; and
(ii) other qualifying medical expenses (including out-of-pocket expenses).

Question 16

What categories of tax payers are there from a medical expenses point of view?

Answer 16

Applied to all persons under the age of 65 years and who is contributing to a medical scheme since March 2012.

From March 2014 it will also apply to:

• ≥ 65 years
• Younger than 65 years but with immediate family member with a disability

Question 17

What qualifies as a ‘qualified contribution’?

Answer 17

Contributions to a medical scheme registered under the MS Act,

Contributions paid by the taxpayer to any other fund registered under similar provisions in the laws of any other country.

Question 18

Who are qualifying persons?

Answer 18

Only qualifying contributions and expenditure paid by the:

• taxpayer for him or herself,
• his or her spouse,
• his or her child,
• the child of his or her spouse
• and his or her “dependants” as defined in the MS Act or section 18(4A) of the Act

may be considered in the determination of the MTC and allowance.

Question 19

When is a child not considered a child with regard to medically related tax rebates?

Answer 19

A person over the age of 21 is not regarded as a child if that child is liable for income tax.

Medical expenses can be claimed for a child, irrespective of the child’s age, if the child is –

• disabled and, as a result, not in a position to maintain him- or herself;
• admitted as a dependant on the taxpayer’s medical scheme; and
• not liable for the payment of normal tax.

Question 20

What happens to medically related tax rebates when contributions and expenses are paid on behalf of a member of a medical scheme?

Answer 20

Neither the person who paid nor the person that is a member of the medical scheme may claim MTC.

Question 21

What happens when medical expenses are incurred in one year of assessment and paid in the next year of assessment?

Answer 21

It may only be claimed in the the year when it was paid.

Question 22

Can members of of unregistered medical scheme claim tax rebates?

Answer 22

Contribution paid to an unregistered medical scheme are not considered as qualifying contributions.

Question 23

How are contributions to a foreign medical scheme treated from tax point of view?

Answer 23

Contributions paid by the taxpayer to any other fund registered under similar provisions in the laws of any other country.

Question 24

What are qualifying expenditure?

Answer 24

• Medical practitioners, hospitals & nursing homes;
• Pharmacists for prescribed medicine;
• Payment for physical disabilities including remedial teaching
• Expenditure incurred for mentally handicapped persons;
• Payment for the benefits of any dependents

In order for the expenses to be considered deductible, the expense MUST NOT have been recoverable from the taxpayer’s medical scheme.

Question 25

What are the tax implications for person with disability or a dependent with disability?

Answer 25

Disability will need to be confirmed by the treating doctor on the appropriate SARS ITR-DD form.

Taxpayers under 65 may claim all qualifying medical expenses where the taxpayer or the taxpayer’s spouse or child is a person with a disability.

Question 26

Are tax credits refundable?

Answer 26

No.

You will only qualify for tax credits to the extent to which you pay tax.

Taxpayers whose earnings are below the tax threshold will therefore not receive any tax credit, as they are not liable for the payment of any tax

Question 27

What is the tax treatment of Personal Savings Accounts?

Answer 27

Benefit payment from medical schemes are not taxable
– traditional and MSA.

Withdrawals for purpose other than “relevant health service” - taxable.

Transfer of funds to member after cancellation of membership of medical scheme - taxable.

Transfer of MSA to other medical scheme / option - not taxable.

Interest received on MSA has tax implications.

Question 28

What does a broker need in order to advise a client?

Answer 28

To understand and know your client’s needs – and make sure that your recommendation meet the needs of the client!!

To understand the provisions of the Medical Schemes Act and the entitlement to benefits for all members;

To continuously evaluate good performing medical schemes and keep track of others.

Question 29

What governs the relationship between a member and the medical scheme?

Answer 29

Remember, when advising a client to join a medical scheme, whether as a member or a dependent, that member enters into a legally binding contract with the medical scheme. In terms of that contract, the following is important:

• The medical scheme is obliged to provide the member with benefits in return for paying a monthly contribution to the scheme;
• The details of this contractual relationship are governed by the rules of each particular scheme;
• Section 32 of the Act makes the rules of the scheme binding on the member, the scheme and its officers.

Question 30

What specifically should a broker find out about his client before advising them?

Answer 30

Where are they in the natural life-cycle?

Self-employed or formally employed

• Employer subsidy
• What can the client afford on an ongoing basis

Medical Scheme history

• History of membership
• Credible coverage
• Waiting periods
• Late joiner penalties

Health status

• Historic spend – acute chronic & emergency
• PMB conditions
• Chronic non-PMB conditions
• Future needs

Risk aversion

1) Is the client willing to self-fund some cost for clinical care of out-of-hospital (ambulatory) services?
- Benefits with regards fees
- Co-payments
- Day-to-day cover
- Optometric services
- Dental services
- Auxiliary support services

2) Is the client willing to be limited in terms of choice of doctor and other providers i.e. access to a list or network of doctors or pharmacies?

Question 31

How should brokers be evaluating medical schemes?

Answer 31

Size

Membership change
- Growth / decline – organic or merger
Average age of beneficiaries (average ±30 years)
Pensioner ratio (average ±6%)

Benefits
Contributions
Limitations & exclusions

Question 32

What role does scheme size play in the evaluation of medical schemes?

Answer 32

Size per se does not represent good.

The number of beneficiaries is however important in terms of the ability to manage risk within the insured population:

• Diversified risk pool
• Stronger capital base

Advantages
Medical schemes with a larger membership base may have greater bargaining power:
- With healthcare service providers like hospitals or doctor groups and should be able to provide more competitive benefits.
- Negotiate competitive administration and managed care contracts.

Question 33

What roles does scheme growth play in the evaluation of medical schemes?

Answer 33

It is important to monitor trends and change in membership size as it will provide the following information:

• Growth is good for clinical risk in the membership but may negatively impact on solvency levels;
• Stagnant may be representing an aging population
• Decline of membership may be an indication poor service or benefits that are not attractive;
• May indicate a consumer perception of poor value.

A medical scheme with a small membership may be:

• New and growing, or
• Member numbers are falling to the extent that it may need to consider merging with another scheme or it could face liquidation.

Question 34

What roles does the average age of beneficiaries play in the evaluation of medical schemes?

Answer 34

The average age of 32.1 of all beneficiaries in the medical scheme market (Council for Medical Scheme Report 2014/15)

• It serves as a useful benchmark.
• Every year above that benchmark
• • increases the burden of disease within the scheme population
• • associated with higher claims
• • and the probability of higher contribution increases.

Question 35

What is the pensioner ratio?

Answer 35

Refers to the number of members in a medical scheme above the age of 65 years.

The reported average is 7,3% of membership.

Question 36

What is the dependant ratio?

Answer 36

Refers to the number of dependants per principle member.