Lack of regulation a big problem for HMO sector

(Conclusion)

The warring parties within Caritas Health Shield as well as the government regulator charged with protecting the interests of the public may look like they are poles apart when faced with the financial future of some 600,000 policy holders who have invested their hard-earned money in one of the biggest health management organizations (HMO) in the country.

But all parties involved— the current management of the firm, its former president who owns a fifth of the company and the head of the Insurance Commission—agree that HMO needs fresh capital for it to strengthen its balance sheet.

According to Insurance Commissioner Dennis Funa, Caritas Health Shield needed to raise at least P150 million in fresh capital for it to comply with the prudential standards set last year by regulators.

Indeed, being supervised by a strict watchdog like the Insurance Commission is new for the HMO industry in general.

HMOs in the Philippines used to be supervised by the Department of Health which, Funa said, only had a staff of three to collate annual financial statements submitted by the companies.

The DOH had no expertise to vet the financial stability of these HMOs which, for all intents and purposes, functioned like pre-need firms and, as such, should have been regulated more tightly.

“I asked and learned that [HMOs] just submit annual statements and these were not reviewed,” he told the Inquirer in an interview. “[DOH] just put them in filing cabinets.”

Because of this situation, DOH voluntarily surrendered its supervision powers over the industry and, in 2015, then President Aquino issued an executive order making the IC the official regulator over the HMO industry effective 2016.

The first order of the day for the IC was to get a clear picture of the financial status of the industry, which was virtually left unchecked in previous years.

“The first time we issued a circular [for HMOs] was September of 2016 and no HMO has yet been able to submit audited financial statements,” Funa said. “We required them to submit quarterly. So far, that’s only been two quarters, but those haven’t been consolidated by our statistics division. So we have no complete picture of the whole HMO industry.”

The IC chief explained that current products being sold to clients by HMOs like Caritas Health Shield have not been reviewed or approved by IC precisely because responsibility for the industry has only been transferred to it recently.

“The products in the market now were not approved by us,” Funa said. “These were also not approved by DOH [because there was no regulation]. No approvals were required for products or for [the activities of their] sales force. Zero.”

(Caritas Health Shield president Ronnie Collado told the Inquirer that the company had previously received and complied with a cease-and-desist order from corporate regulators ordering it to stop aggressive selling practices of a third party it hired to sell its policies in shopping malls, amid customer complaints about their credit cards being swiped by the marketing agents.)

In fact, the IC chief said HMOs were now chafing under the new regulations that some have even petitioned President Duterte to overturn the Aquino-era order transferring regulatory responsibilities.

“We’re doing the regulations little by little,” Funa said. “In fact, there’s resistance now because they’re in shock. In fact, they wrote the Office of the President asking that they be returned to the DOH.”

Nonetheless, IC deputy commissioner and financial examination chief Ferdinand Florendo expressed confidence that Caritas Health Shield had the assets to satisfy its liabilities as these came due.

“Based on the numbers, definitely Caritas is a solvent company and it will be able to cover liabilities as of the moment,” he said. “Having said that, we need to develop regulation for them.”

In particular, he said regulators have to double check whether the finances of Caritas Health Shield—indeed the rest of the industry—were stable and secure.

“Even setting up their reserve liability [levels], that is not based on regulations that we made,” Florendo said. “That’s based on whatever their actuary said. Even that needs to be validated.”

More importantly, he pointed out that IC’s actuarial division “discovered that a number of HMOs, particularly Caritas, have quasi-HMO/pre-need products. So even that, we need to study and separate.”

“And the standards for those have yet to be established,” he said.

“That’s the reason why, when they say Caritas has a P7-billion hole, there’s no basis for that based on their unaudited statements,” Florendo said. “But if you look at their specifics, which is what the regulator should be looking at, you have to ask ‘are the reserves enough?’ We’re working on it.”

Based on a circular issued by IC in 2016, HMOs with a paid-up capital of less than P50 million would only be allowed to earn gross membership fees —the total amount of fees arising from healthcare agreements of pre-agreed health services—worth fives times its paid-up capital level.

“Caritas exceeds this,” Florendo said. “It was selling more than the permitted amount. It was selling 10 or 20 times more.”

Regulators gave Caritas Health Shield a choice: Raise fresh capital or reduce sales to levels prescribed in the IC circular.

“They opted to raise capital,” he said, but added that the company could not get the required approval from two-thirds of its stockholders.

Asked what IC can do to protect policyholders in this case, Funa explained that the commission was still studying the issue of how to proceed given that it was still familiarizing itself with the ins and outs of the HMO business.

“We don’t have an answer yet,” he said. “We’re still scratching our heads. There’s no law, no parameters. We’re drafting circulars as we go. We make circulars based on what we think of.”

And perhaps therein lies the problem: There is no law regulating the multibillion-peso HMO industry which, every year, takes in billions of pesos of Filipinos’ hard-earned cash, promising them healthcare in return.

It is another issue that the warring parties within Caritas Health Shield and the Insurance Commission agree on: “We need a law on HMOs,” they all said.