| Fri 5 Oct 2001, 0:00 | | Discovery Health Announcement |
|
DISCOVERY HOLDINGS LIMITED
PRESS RELEASE
(Registration Number: 1999/007789/06)
Share Code: DSY
ISIN Code: ZAE000022331
The following two press releases and the accompanying chronology include the
following:
Press release on legal action instituted by Discovery Health against the
Medical Schemes Council to compel the Council to release its KPMG-authored
report clearing and supporting Discovery's use of reinsurance.
Press release on legal action instituted by Discovery Health against the
Medical Schemes Council to compel the Council to end unnecessary and
damaging delays in making a decision on Discovery's technical solvency
levels.
A chronology of events leading up to the aforementioned two separate legal
actions, outlining a history of the relationship between Discovery Health
and the Medical Schemes Council.
PLEASE NOTE: All the above are supported by legal documentation and official
correspondence between the parties which are available on request.
Contact: Shaun Matisonn, Principal Officer, Discovery Health Medical Scheme
Tel: 011 529 2865
Fax: 011 5295503
Email: shaunm@discoveryhealth.co.za
Cell: 082 606 2865
Friday 5 October
DISCOVERY HEALTH INITIATES LEGAL ACTION AGAINST THE MEDICAL SCHEMES COUNCIL
TO RELEASE THE KPMG REPORT CLEARING THE SCHEME'S NAME
Discovery Health Medical Scheme (DHMS) has been forced to initiate a legal
action to compel the Medical Schemes Council (the Council) to publish its
report into the use of reinsurance by the scheme, in a bid to correct
damaging allegations made by the Council.
Following a well published "raid" into DHMS in October 2000, initially
conducted by a competitor of DHMS, the Council appointed the auditing firm
KPMG in January 2001 to conduct an investigation into DHMS, with a specific
mandate to assess its use of reinsurance as part of its business model. In
March this year, KPMG presented its findings to the Council, which cleared
DHMS of any abuse of reinsurance as alleged by the Council, and in fact
supported its continued use of the practice.
Despite being in possession of the report since March, the Council has
repeatedly refused to disclose the KPMG's findings in respect of reinsurance
supporting DHMS.
Other technical issues, outside of the mandate of the investigation, were
raised in the report. Despite this, DHMS was comfortable with these
findings, and used them to make improvements to its operations.
Repeated efforts to have the report published to clear DHMS' reputation and
bring closure to the investigations have been thwarted by the Council. The
situation was recently exacerbated by the Council's media statement in
September. Its press release outlined the Council's industry review in which
the Council alleged that there had been an abuse of reinsurance practices
and insinuated that DHMS had abused reinsurance practices.
Following this media statement, DHMS once again asked the Council for the
report to be published to clear its name and restore its standing as a
scheme operating wholly within the spirit and letter of the law.
The Council has yet again denied the request, claiming that the report is
not "relevant" to its industry review on reinsurance "abuses", and remains
confidential, even though the Council itself has made a number of unlawful
public references to the report in the media.
DHMS - to protect the wellbeing of its one million members and stakeholders
- has with its legal advisors taken the view that the only remedy now
available to it is to approach the courts to compel the Council to publish
the KPMG report, and correct the misperception created by the council that
DHMS is acting outside the law.
In terms of the current legal action, DHMS gave the Council an ultimatum to
do the necessary to have the report made public. The Council has so far
declined to comply with the request and has not met the deadline instituted
by the DHMS, and thus DHMS may be left with no other choice but to proceed
to court on its own to ensure the publication of the report.
Shaun Matisonn, principal officer of DHMS, says that the scheme has
attempted to find a satisfactory solution to the protracted dispute with the
Council. "Unfortunately, we believe that all our goodwill in attempting to
resolve this matter, despite the reputational damage we have incurred as a
result of the Council's unsubstantiated actions and comments, has
unfortunately not been reciprocated.
"DHMS has a responsibility to its members and its shareholders, all of whom
have been prejudiced by the inexplicable failure of the Council to correct
its own inaccurate and damaging allegations, despite being in possession of
the correct information since March." In his view both of these
requirements have been abused by the Council.
Matisonn points out that according to the Constitution of South Africa, the
Council, as an organ of state, is required under section195(1)(d) to act
"impartially, equitably and without bias". It is also required to provide
the public with information that is "accurate".
"The Council's continued allegations that DHMS has abused reinsurance in
circumstances where the Council refuses to publish the KPMG report
exonerating the schemes of all allegations of abuse, implies that the
Council is in breach of its Constitutional responsibilities. It is neither
"impartial" nor "fair" and the information it has released to the public is
clearly inaccurate.
"DHMS, in the interests of an equitable and flourishing private healthcare
sector, maintains its commitment to finding a solution to the differences of
opinion with the Council, but in the interim, finds it has no other choice
but to approach the courts to publish the facts that have been in the
Council's possession since March."
Friday 5 October 2001
DISCOVERY HEALTH LAUNCHES LEGAL ACTION AGAINST THE MEDICAL SCHEMES COUNCIL
TO END UNNECESSSARY DELAYS ON DECISIONS RELATED TO THE SCHEME'S TECHNICAL
SOLVENCY LEVELS
Discovery Health Medical Scheme (DHMS) has launched a separate legal action
against the Medical Schemes Council (the Council) to force the regulator to
clarify the ongoing issues surrounding the solvency of the scheme.
DHMS principal officer Shaun Matisonn says that the inexplicable delays
experienced at the hands of the Council regarding clarification of the
solvency issue have fuelled the damage to DHMS' reputation by making
unsubstantiated and inaccurate allegations about its solvency, despite the
fact that the scheme has received the highest possible credit rating
available to a medical scheme from Global Credit Ratings, an independent
credit rating agency.
"The Council, as the industry regulator, is bound by a duty to ensure the
continued well-being of the sector. Yet it appears to be acting contrary to
its mandate by continually perpetuating a climate of uncertainty around DHMS
- the largest open medical scheme in South Africa.
In its year-to 31 December 2000 financial accounts, published in June, DHMS
stated that it was operating at a solvency ratio of 10,15% of total
premiums, comfortably meeting the statutory requirement of 10%.
However, DHMS' financial accounts were unilaterally rejected by the Council,
and this decision - without further discussion with DHMS - appeared in the
media.
After repeated attempts at resolution of what amounts to an accounting
debate, DHMS was forced to lodge a formal appeal on 6 August 2001 against
the Council's decision to reject its accounts, pending ongoing discussions
to resolve the issue. The delay in the appeal process has been caused by
the Council not having constituted an appeal board as required by the
Medical Schemes Act.
Despite agreeing on a negotiating process to resolve this difference of
opinion pending the appeal, and not to go to the media, the Council
unilaterally published a press release last month stating unequivocally that
DHMS had a solvency ratio of 1,7%, well below the statutory requirement of
10%. The implication of the Council's statement is that DHMS is technically
insolvent. Despite the Council's own legal advice to advise the public that
DHMS was appealing this view, the Council deliberately omitted this
information.
DHMS was prompted to issue the Council with an ultimatum last week to
correct its press statement, or face an urgent interdict against the
publication of the industry review. The Council withdrew its allegation,
confirming that DHMS had calculated its solvency at 10,15% and noted that
DHMS had lodged a formal appeal against the Council's opposing view. The
Council however has not yet released this information to the public.
To meet its future statutory requirements, DHMS sought and received a
standard five year R750 million subordinated loan from Discovery Holdings, a
company listed on the JSE and a subsidiary of FirstRand. DHMS then entered
into a number of protracted negotiations with the Council to secure approval
for the R750 million loan. The Council responded only with a number of
onerous and commercial unviable qualifications for approval of the loan.
Despite repeated requests for urgent clarification, the Council maintained a
silence on the loan.
The Council continues to delay a final decision on the subordinated loan,
placing unnecessary reputational pressure on the scheme through the endless
delays. Matisonn says that the actions of the Council appear to be in direct
contravention of fair administrative action required in terms of the
Administrative Justice Act * .
On Thursday 4 October DHMS sent a final letter to the Council requesting
urgent action on the loan, failing which legal action would be instituted to
ensure that available capital can be placed into the scheme.
* Section 1 of the Administrative Justice Act relates to :-
the making, suspending, or refusing to make an order or determination;
and/or the giving or refusing to give approval, consent or permission;
and/or the imposition of a condition or restriction; and/or a declaration,
demand or requirement; and/or retaining, or refusing to deliver up, an
article; and/or doing or refusing to do any other act or thing of an
administrative nature, and a reference to a failure to take a decision is
construed accordingly.
According to section 3 of the Administrative Justice Act in order to give
effect to the right to procedurally fair administrative action, an
administrator must give inter alia :-
adequate notice of the nature and purpose of the proposed administrative
action;
a clear statement of the administrative action;
adequate notice of any right of review or internal appeal, where applicable;
and
adequate notice of the right to request reasons in terms of section 5.
CHRONOLOGY OF EVENTS WHICH GIVE A BRIEF OUTLINE OF EVIDENCE OF A SUSTAINED
CAMPAIGN BY THE MEDICAL SCHEMES COUNCIL TO DISCREDIT DISCOVERY HEALTH
MEDICAL SCHEME
(Note: All this information can be fully substantiated in letters of
correspondence from the MSC to DHMS, press articles, legal documents, and
official investigation documents. The full text of all this information is
available at our office on request.)
OCTOBER 1999
Ahead of the listing of Discovery Holdings (DH), Discovery Health Medical
Scheme (DHMS) seeks and receives verbal permission from then MSC Registrar,
Mr D Kolver, for the launch of its product, now known informally as `Apollo
I'. Two days before Discovery Holdings is listed on the JSE Securities
Exchange (21 October 1999), Patrick Masobe (the current MSC Registrar) calls
in to a radio programme, and states that Apollo I "was contrary to the
legislation". This is almost two weeks after the product is launched, and
yet it is the first indication that the MSC has objections to the product,
as there has been no formal notification issued.
On the day before the listing, a daily newspaper runs a report alleging that
government had "warned" Discovery Health to stop marketing Apollo I.
NOVEMBER/DECEMBER 1999
DHMS/DH enters into discussions with the MSC regarding changes to Apollo I
to satisfy the MSC's demands. These changes (Apollo II) are discussed with
the MSC representations and tacit approval is given for the launch of Apollo
II. On the last working day before the Millennium Weekend - i.e. 28
December 1999 - the MSC issues DHMS/DH with a letter rejecting the amended
Apollo II product and simultaneously this confidential information
prominently appears in the media.
Originally DHMS is given 14 days to respond, this deadline is extended and
on 2 February 2000 Apollo III is approved and registered.
JUNE 2000
DHMS/DH is summoned to a meeting with the MSC which presents them with a
range of damning allegations about its use of reinsurance. DHMS/DH is told
it had 30 days to respond, but the following day the MSC releases its
(unsubstantiated and later proved incorrect) view to the media, without
giving DHMS/DH an opportunity to respond.
OCTOBER 2000
Comments are made by executives of DHMS/DH regarding the potential damage to
the private healthcare sector as a result of government's new Medical
Schemes Act No 131 of 1998, authored by representatives of MSC.
MSC Registrar calls DHMS principal officer Shaun Matisonn, and threatens to
approach the media with allegations that DHMS did not comply with the Act if
DHMS continues with its comments about the new Act. DHMS denies the
allegations but continues to maintain that provisions in the new Act were
responsible for premium increases in the industry.
MSC Registrar then informs DHMS that he has appointed an investigator to
inspect the scheme. The investigator then conducts "a raid" on the scheme,
demanding a wide range of documentation. The MSC releases a statement to the
media about the "raid", containing a number of unsubstantiated and
defamatory allegations. Despite the impression created that the "raid" was
an urgent matter, designed to create the impression that speedy action was
needed to secure documentation, the MSC only launches its formal
investigation in January 2001. The original investigator is revealed to be a
competitor to DHMS/DH, and only after a formal complaint is raised, is the
investigator replaced with KPMG.
JANUARY 2001
KPMG begins its investigation. The firm confirms that, as is normal in any
audit situation, DHMS/DH will be permitted to see a copy of the report prior
to finalisation to ensure factual accuracy.
MARCH 2001
KPMG completes its report. DHMS/DH is prevented from seeing a copy of the
report before finalisation by a MSC order to KPMG. The report - mandated to
investigate the scheme's use of reinsurance - vindicates the DHMS/DH
position on reinsurance and supports its continued use of the practice.
Other technical issues, outside of the mandate of the investigation, were
raised in the report. DHMS is only made aware of these after it threatens
legal action to secure a copy of the report from the MSC. Despite this, DHMS
is comfortable with these criticisms, and uses them to make improvements to
its operations - and could have resolved them prior to the publication of a
final report.
KPMG informs the MSC that an amended report should be published, or at
least, DHMS/DH should be afforded the opportunity to present its comments
alongside the report. This is denied by the MSC. Despite repeated requests
by DHMS/DH to the MSC to make the report public, it refuses.
DHMS/DH once again formally raises concerns with the MSC about lack of due
process, and actions that have broader consequences for the entire
healthcare sector.
APRIL 2001
Following the KPMG report, the MSC sends DHMS/DH a list of questions to be
answered about a wide range of business operations, including in some cases,
individual member details. These requests fall outside the narrow scope of
the reinsurance investigation, nonetheless, DHMS/DH complies with the
requests, and invites the MSC to access its computer databases at any time
it wishes. Before making a response to DHMS/DH's answers to the list of
questions, the MSC again makes a statement to the media, saying it has
"substantial concerns".
JUNE 2001
DHMS/DH requests a meeting with the MSC, which agrees but adds that it plans
to reject the scheme's financial results for the year to December 31 2000 on
alleged solvency issues. The rejection of the accounts again appears in the
media by the MSC, despite being confidential information.
JULY 2001
The MSC finally after various investigations, acknowledges that it cannot
fault reinsurance, but then insists that the trustees of the scheme ensure
that they are comfortable with the practice - which they do following a
number of presentations.
Having been forced to walk away from the reinsurance debate, the MSC then
raises four additional points with DHMS/DH, including insisting that the
scheme adds the words "medical scheme" in certain places on its application
form.
The remaining, unresolved issue, is the issue of the MSC rejection of the
scheme's accounts, based on the MSC's view of its solvency. DHMS/DH secures
an opinion from both Arthur Anderson and Deloitte & Touche. But this is not
approved by the MSC, so in return DHMS suggests that it takes out a five-
year subordinated R750 million loan from DH to satisfy the solvency debate.
MSC, quoting "expert opinion" which it has refused to share with DHMS, says
it will only approve the loan if it is interest free. DHMS objects and the
MSC responds saying that interest may only be paid on a R300 million
portion, and if the entire loan is not repaid within 18 months the lender
(i.e. the shareholders of JSE-listed Discovery Holdings) must forfeit the
capital.
At the end July, DHMS writes to the MSC asking for a final decision on the
loan, on
commercial terms.
AUGUST 2001
DHMS/DH launches a formal appeal against the MSC decision to reject the
financial statements for year to 31 December 2001.
Following the launch of the appeal, DHMS/DH makes yet another approach to
the MSC to enter into mutually beneficial discussions to resolve the ongoing
dispute. Despite an agreement being reached as to the term of the
subordinated loan, attempts to finalise the matter and sign a memo of
understanding regarding these issues are delayed by the MSC.
SEPTEMBER 2001
Despite both parties agreeing to cordial discussions, the MSC publishes a
media release, ahead of the full details of its industry review, alleging
that DHMS is in contravention of statutory solvency requirements, without
publishing the fact that DHMS/DH had appealed this decision. This
unqualified media release is in contravention of the MSC's own legal
counsel's advice to publish the DHMS/DH appeal. After legal wranglings the
Council agrees to provide the correct solvency information in a yet to be
published industry review. Further, the media release continues to discuss
abuse of reinsurance despite the finding of the KPMG report.
OCTOBER 2001
After two years of failing to find some solution to the MSC's ongoing
campaign against DHMS/DH, and the MSC's failure prove any legal violations
by DHMS/DH, DHMS/DH instruct their lawyers to seek appropriate relief
through the courts to release the report clearing Discovery's name. Further
legal proceedings may be initiated to obtain a final decision with regard to
the subordinated loan.
