Adrian Gore, the man who started South Africa's largest open medical scheme, Discovery, is demonised by some of his critics, but almost idolised by his supporters. Whatever side you take, you have to concede that he has revolutionised healthcare financing in this country.
Adrian Gore was recently left standing in a passageway at Johannesburg International Airport outside a meeting between Discovery Health Medical Scheme (DHMS) and the Council for Medical Schemes. Gore had been asked to stand outside because he is not a trustee of the scheme, but is the chief executive of Discovery Health, the company that administers DHMS.
That was the level to which relations between the council and Discovery had sunk. If the intention was to get Gore uptight, it failed. He has a reputation for keeping his temper at all times.
This is not to say that there were no volatile meetings between the two sides in the two-year dispute. There was at least one head-to-head exchange between Paul Harris, who is a trustee of the Discovery scheme and a senior executive of the FirstRand Group, the ultimate holding company of Discovery Health Limited, and Patrick Masobe, the Registrar of Medical Schemes. Gore had also threatened publicly to take the council and Masobe to court on a number of issues.
So it would be a mistake for anyone to assume that Gore's quiet demeanour is a sign of weakness. It is not. When he has convinced himself of an issue, he is prepared to argue long and hard.
However, both Gore and Masobe kept their cool when they were brought together at a private meeting in May in Swakopmond, Namibia, where the Board of Healthcare Funders was having its annual conference. At that meeting Gore and Masobe managed to lay the basis for an agreement.
For most people the issues in the dispute seem a bit blurry and very complex. And there were hawks on both sides fuelling the fire: from one side, they saw uncompromising, exploitative capitalists; from the other, ideologues who should have passed into history with the demise of the Soviet Union, and whose only intention was to destroy the entrepreneurial spirit.
It boiled down to the fact that the Council for Medical Schemes set levels of reserves for all medical schemes using a defined methodology based on a percentage of member contributions. Any scheme that doesn't have the required reserves will have to ask current members to pay more so that they can build the reserves up.
Growing schemes, such as Discovery, have been hit the hardest, with required reserves rising as rapidly as membership. All along, Discovery was determined not to raise membership fees to meet reserve levels.
When the Council for Medical Schemes and Discovery smoked the peace pipe, most people viewed it as Discovery backing down and supplying both the pipe and the tobacco. Judging by the drop in the share price of Discovery Holdings, shareholders see the settlement in the same light. This is hardly surprising as the settlement includes an agreement that the administration company will reduce its fees to allow the scheme to build up reserves and this translates into lower profits for shareholders.
Does the agreement mean that too much money was being creamed off all along by the administration company (as was claimed by some members of the Council for Medical Schemes)?
Absolutely not, Gore says. The administration fee reduction comes about as a direct result of our desire not to increase member contributions, even at the expense of company profitability.
The administration fees were benchmarked against international levels and analysed by consultants locally on behalf of the trustees. The analyses all confirmed that the fees were appropriate for the services obtained. Discovery Health Medical Scheme now receives these premium services at a discount.
No one should see the agreement as the final word in the medical schemes debate over the role of the private sector and the regulator. It is far from over, Gore says.
Certainly, the life assurance industry is still seething over the way the council shut down what was a burgeoning market for them: profit-making medical insurance, mainly for hospitalisation.
Gore has a list of things in the current regulatory environment that, if he could, he would change - and some of them are the council's holy cows. He wants to:
- Drop the restriction that limits payments to medical savings accounts to 25 percent of contributions. Savings accounts are the major Discovery innovation to keep down costs by allowing members to make their own decisions on day-to-day medical spending. The council, which initially wanted to outlaw the saving account innovation, wants all medical schemes to provide the same minimum benefits, leaving little choice to individuals.
- Allow schemes to use re-insurance and make loans to meet reserve requirements instead of actually having cash in the bank. This was Discovery's major area of dispute with the council. So, although Gore agreed not to use these methods for reserves, he still thinks they are valid.
- Increase administrator accountability. In other words, give the administrator a bigger say in running the scheme.
- Allow more risk rating - in effect, throwing compulsory community rating out of the window. Community rating means that everyone pays the same contributions for the same cover, and schemes can only use two criteria, the number of dependants and level of income, to influence the level of contributions. Gore regards this as a major danger to schemes, as high-risk members are allowed to join and they have to be cross-subsidised by low-claiming members.
- Introduce for-profit medical schemes - a proposal sure to have the ideologues at the council frothing in delirium. Gore regards the current system of non-profit schemes and for-profit administrators as an unacceptable hybrid, and believes that it creates perverse incentives.
The entire system should be not-for-profit or for-profit, not a combination. The significant investments made by administrators today - and Discovery alone invests over R100 million a year in technology - would simply not occur in a not-for-profit environment.
The odd man out is the (non-profit-making) medical scheme, as all aspects of the healthcare system, such as hospitals, pharmaceutical companies and service providers, are for profit.
Our recommendation would be to follow the US model, which has for-profit insurers and not-for-profit insurers operating side-by-side. Consumers choose the model that makes the most sense to them. This has already occurred in the insurance industry, which saw the majority of insurers demutualise, he says.
Gore, now 38 (although in recent months he has often looked older), is a born and bred Johannesburg boykie. He matriculated from King David School in 1981 before graduating from the University of the Witwatersrand in 1985 with a BSc (Honours) in actuarial science. In 1990, he was admitted as a Fellow of the Faculty of Actuaries (Edinburgh) and in 1992 as an Associate of the Society of Actuaries (Chicago). He is also a member of the American Academy of Actuaries. Until he started Discovery, he worked for financial services company Liberty.
In the 10 years since the launch of Discovery in 1992, Gore has built a medical scheme with total inflows under management in excess of R7 billion a year and the company now covers over 1.2 million lives within 150 000 companies. It is the biggest scheme in South Africa. In the process Gore has won numerous awards, including Ernst & Young Entrepreneur of the Year on 1998, and the South African Jewish Business Achiever Award in 2000.
People who work with Gore are extremely loyal. His original team - Barry Swartzberg, Stewart Whyte and John Robertson - are still with Discovery and are executive directors of Discovery Holdings.
Employees say he is always challenging them, is rational in his approach to issues, plays the ball and never the person, and is a a man of absolute integrity. While his staff seem to hold him in awe, there is no sychophancy. He expects to be challenged and he is challenged.
So why has Gore acquired some severe critics outside the company who would like nothing more than to see him and Discovery brought to heel?
Whether or not they ever have that pleasure, they have contributed to a more jaundiced view on the part of the public. One competing medical scheme ran extraordinary full-page print advertisements implying that Discovery only stayed ahead of the game by breaking the law.
Gore plays this down. What is often genuine competition and debate can be construed as something more.
Contrary to folklore in the industry, Gore says he didn't leave Liberty because it refused to entertain his ideas on medical schemes, thereby losing out on one of the major financial sector success stories of the nineties. I never made a proposal to Liberty. Liberty was positioned as a leading life assurer. I realised Discovery would require a very different approach and, in fact, Discovery was started without a proper product design.
I approached Rand Merchant Bank with a proposal to utilise their dormant Magnum Life life assurance licence. The proposal was not a traditional business proposal, in so far as there were no financial projections and no product details - it was simply a vision for a company that would be based on a few core principles: sound actuarial principles, service excellence, product innovation, dedication to the client and the highest levels of integrity.
And innovative Discovery was to prove to be. Until then medical schemes were based on members paying contributions and claiming within limits. There was no incentive for members to limit claims or even negotiate rates with healthcare service providers. In fact, there were perverse incentives for members to claim as much as possible. The result was soaring medical costs.
Gore says Discovery has changed the rules of the game through the products it offers.
He lists seven major innovations that set Discovery apart and revolutionised medical cover in South Africa:
- The introduction of medical savings accounts (a trademark of Discovery) which encourage members to limit spending and get the best deal;
- The Destiny Pre-funder, a dedicated vehicle to fund post-retirement medical scheme contributions. More than 60 percent of an individual's health spending occurs in retirement;
- Integrated care, combining the best elements of traditional managed care but leaving members empowered to make choices. Discovery's approach is a Harvard Business School case study;
- The introduction of Vitality, the wellness programme (which has been patented internationally);
- VitalityMed, the first chronic illness management programme based solely on incentives;
- DiscoveryWorld, which offers members, employers and service providers complete online servicing; and
- Discovery Custom, which enables closed medical schemes (normally employer-sponsored schemes) to access all of the benefits of DHMS, giving them the same economies of scale generated by Discovery.
Gore rejects claims by his detractors that smart marketing techniques, rather than content, has put Discovery ahead of its competitors.
Marketing is important in so far as it allows us to communicate the strengths of Discovery and the unique aspects of the products we offer. I would argue that Discovery communicates with its clients and the consumer effectively. This is important, as Discovery's products are marketed solely through independent intermediaries and therefore have to offer greater value than competitive products to differentiate themselves.
Gore also rejects claims that advertising is the major reason for Discovery's high profile.
It is not correct that a lot of money is spent on advertising. Discovery did not advertise at all for the first seven years.
Apart from product innovation, he puts Discovery's success down to the fact that it is accountable to its clients. Traditionally, medical scheme administrators have been faceless'. Members were largely unaware of them. In the event of scheme or administrative failure, it was the scheme's reputation that was on the line. By contrast, Discovery Limited (the administration company) shares its name and therefore its reputation with the Discovery Health Medical Scheme.
Gore says there is also an absolute focus on long-term sustainability in the form of the lowest annual increases and the highest credit ratings, and service excellence.
When it comes to service, his scheme stands head and shoulders above the others. Over the years, Personal Finance has received fewer complaints about Discovery than any of the other major administrators. In this, its record stands in stark contrast to the disasters that befell Fedhealth and even schemes administered by major life assurers, such as Sanlam.
Gore regards the size of Discovery as an advantage to members, rather than a disadvantage.
Since the introduction of open enrolment and community rating in 2000, medical schemes have been obliged to accept anyone who applies for membership at the average contribution rate and have been unable to protect themselves by charging high-risk members higher rates. According to Gore, this means a scheme's capacity to absorb adverse risks is largely dependant on its size: the larger the scheme, the greater the stability.
Based on the recent history of South African medical schemes, those with 10 000 members or less have an insolvency probability of 61 percent; at 20 000 members the probability drops to 42 percent; at 50 000 to 15.5 percent; and 150 000 members brings the probability down to 1.9 percent.
Gore says Discovery's whole package is geared to reducing risk to the scheme and its members. This includes a comprehensive risk management and a financial protection strategy, including re-insurance.
Gore points out that this combination resulted in DHMS receiving the industry's highest credit rating from Global Credit Ratings, even though the scheme didn't meet the council's reserve requirements.
He rejects arguments that Discovery was designed to attract young and healthy members while using options to push up prices for the sick and elderly.
Discovery has been able to offer all members sustainable, affordable cover as a result of its ability to attract (growth has exceeded 50 percent a year) and retain (lapse rates are less than five percent a year) members by offering products that offer value to both the healthy and the sick.
To protect the sick and ensure ongoing affordability, you need to attract and retain the healthy. This is a critical aspect of ensuring that there are sufficient cross-subsidies to maintain affordable contributions for the sick.
The Discovery pensioner ratio has increased on a year-on-year basis.
Another contentious issue is the introduction of incentives to join Vitality, a healthy lifestyle or wellness programme. These range from cheaper movie tickets to cheaper airline flights.
People want them, Gore says. Vitality is a voluntary product funded entirely by its own revenue. The membership of over 800 000 is a clear indicator that people do perceive the value that Vitality offers.
From a theoretical perspective, it is well-documented that exercise significantly reduces a number of health risks and therefore the return that this offers to DHMS is significant.
Gore says Vitality offers members access to lifestyle benefits at unprecedented prices.
The value created not only exceeds the cost of Vitality to the member, but often exceeds the total cost of the DHMS contribution.
He concedes that the large volumes generated by Vitality members do present a challenge from an operational perspective. For example, over 115 000 members have activated the Ster-Kinekor movie benefit since January this year alone.
However, the high levels of utilisation reflect the value being derived by members and we are happy to manage this, Gore says.
Complaints that flights are often not available are justified, but he says more than 60 percent of booking requests are successful, resulting in over 5 000 Vitality flights a month.
Gore readily admits that there are areas where Discovery could do better. The main one has been the lack of sufficient focus on truly low-cost medical scheme options.
The medical schemes market has grown relatively slowly over the last 10 to 15 years, he says. I believe we are now well-positioned to offer cost-effective products to this market.
Based on the success of Discovery in South Africa, Gore is now taking his ideas to the most competitive market in the world, the United States, under the brand name Destiny. The company is still small, but Gore says it is gaining traction. It currently has about 10 000 lives and is growing by about 1 000 a month. It is bigger than Discovery was at the same stage , but is minute in comparison to other US insurers, which can have millions of members.
With the attention he gives to his job the question is does he have a life outside Discovery?
Gore spends time with Lauren, his wife of 14 years, and their three children Sarah (10), Rebecca (8) and Jake (4); he reads extensively and widely; and keeps fit, mainly by running.
This article was first published in Personal Finance magazine, 3rd Quarter 2001. See what's in our latest issue