Members of Discovery Health Medical Scheme are demanding an independent review of the fees it pays to its administrator, Discovery Health, and a formal assessment of putting this business out to tender on the open market.

This is a relatively unusual development in the medical schemes industry, which generally enjoys little activism from consumers.

It is also potentially significant for JSE-listed Discovery Holdings, owners of the highly profitable Discovery Health, which generates about 90% of its operating profit from Discovery Health Medical Scheme.

Discovery Health received R3,2bn in administration and managed care fees from the Discovery Health scheme for the year ended June 30 2011, and another R217m from 13 smaller medical schemes it administers, according to its annual report.

During that period, Discovery Health's operating profit was R1,36bn, contributing significantly to the group's overall operating profit of R2,8bn.

Discovery Health Medical Scheme is South Africa's biggest medical scheme, with 2,4-million members, about 30% of the market.

The industry's watchdog, the Council for Medical Schemes, has for years raised a red flag about the proportion of medical scheme funds earmarked for "non-healthcare expenditure" - servicing brokers, administrators and managed care providers - and has put pressure on schemes to negotiate better rates so they could set aside more funds for their members' medical bills.

Discovery Health Medical Scheme's net non-healthcare expenditure was R161 per average beneficiary per month, the sixth-highest among the 33 registered open medical schemes in 2010, according to the council's most recent annual report.

Its administration fees were the second-highest in the country, at R102 per average beneficiary per month.

Although members are encouraged by the Council for Medical Schemes to attend their schemes' annual general meetings and scrutinise the way trustees manage the nonprofit organisations, in reality few do so and it is rare for members to take their trustees to task.

However, at Discovery Health Medical Scheme's annual general meeting in Sandton last month, members passed a resolution asking the scheme's trustees for a targeted reduction in administration fees over the next three years. Members asked to be provided with a detailed breakdown of the R2,8bn spent on administration costs last year. They also instructed the trustees to commission an independent review of the "value for money" provided by Discovery Health.

They resolved to assess the benefits of "regularly placing the administration and managed care contracts of the scheme out for tender in the open market", to gauge the competitiveness of Discovery Health.

Discovery Health Medical Scheme principal officer Milton Streak said he welcomed members' scrutiny. The board of trustees was "strongly of the view" that the scheme and its members were getting "significant value" for the fees paid to Discovery Health, based on their continuing assessments, Mr Streak said.

Nevertheless, the trustees had resolved at a meeting in November to commission an independent review, he said.

Discovery Health CEO Jonathan Broomberg said the company did not believe there had been a material change in the risks it faced due to the planned review, and therefore the results of the annual general meeting had not been communicated to investors.

He said administration and managed care fees accounted for only 11,7% of Discovery Health Medical Scheme's expenditure.

"These costs have been reducing in real terms, while all other costs have been increasing well above CPI (consumer price inflation) each year," Dr Broomberg said yesterday in an e-mailed response to questions.

"Over the past five years, administration and managed care fees have reduced by 4% in real terms, while claims costs have increased by 12% in real terms over the same period."

Dr Broomberg said an agreement between the scheme and the administrator set annual administration fee increases at CPIX (the consumer price index excluding mortgage costs), but trustees had in the past few years negotiated increases below this because of the scheme's strong growth.

Last year, the administration fee increase was reduced from 5% to just 1,1%, equivalent to a R100m reduction, he said.

Council for Medical Schemes registrar Monwabisi Gantsho said he welcomed the activism. "We (have) made progress, through various initiatives and engagements, in encouraging trustees to take a closer look at (non-healthcare) costs and ensure that value for money is obtained," he said.

kahnt@bdfm.co.za