A feature of the South African private medical aid legislation (the Medical Schemes Act 131 of 1998 ("MSA") specifically) is a legislated prescribed scope and level of minimum benefits for members of medical schemes. In terms of the said legislation (and specifically the Regulations promulgated in relation thereof) any benefit option that is offered by a medical scheme, must pay in full without co-payment or the use of deductions the diagnosis, treatment and care costs of the prescribed minimum benefits ("PMBs"). PMBs include certain chronic conditions.

Recognising the financial implications that the PMB arrangement necessarily has for medical schemes, the same Regulations explicitly provide for the appointment by medical schemes of a Designated Service Provider ("DSP") and for the imposition of a co-payment or other form of contribution by a member of a medical scheme who chooses not to make use of the services of the appointed DSP.

Medical aid schemes are at liberty to contract with the DSP of their choice, subject to their subsequent rules (which reflect the choice of DSP) being approved and registered by the Registrar of Medical Schemes. By and large, medical schemes contract with DSPs for the private sector. Although certain medical schemes have in the past designated the public sector (i.e. public hospitals) as the DSP for the dispensing of chronic medicines to members, the Registrar has indicated previously that it is unreasonable to expect members to forfeit a day’s income or to take annual leave to spend a day as outpatients in a public hospital, with a view to obtaining chronic medication, when the alternative suppliers are available to dispense the chronic medication.

The DSP arrangement accordingly has a recognised a dual advantage in that is creates accessibility for members, and ensures effective delivery of medication to the beneficiaries of a scheme.

Recently, a DSP agreement was the subject of judicial challenge in two matters wherein ENS acted for a medical aid scheme, in opposing two applications brought in the High Court, in the first instance by a beneficiary of a medical scheme, and thereafter a pharmacy. Both applications were successfully defended by ENS.

In essence, in both applications the applicants sought to declare the DSP agreement between the medical aid scheme concerned and the DSP of its choice (in the form of a chain of pharmacies) to be an incentive scheme alternatively a rebate system and therefore in contravention of section 18A of the Medicines and Related Substances Control Act 1010 of 1965 ("the Medicines Act").

Section 18A of the Medicines Act provides that "no person shall supply any medicine according to a bonus scheme, rebate system or any other incentive scheme".

ENS contended on behalf of the medical scheme, that a proper interpretation of section 18A of the Medicines Act would recognise that the section prohibits discounts and subsequent mark-ups of medicines by suppliers of medicine. Also, taking into account the legislative scheme of which the section forms part and the context of its origin, section 18A is clearly aimed at ensuring that the market for medicines is not affected by discount or reward schemes that would lead to retailers or wholesalers artificially hiking the price of medicines. In stark contrast, a DSP is a statutory mechanism to compel medical schemes to fund certain medication in full when it is supplied through a DSP and the effect is the provision of certain medicine at no cost to certain members (rather than leading to an increase in the cost of medication).

In retort, the argument proffered on behalf of the pharmacy was that a member who purchases certain medication from a pharmacy other than a DSP is required to pay a co-payment and that, conversely, a member purchasing certain medication from a DSP is not obliged to make the co-payment. The argument was therefore that, in levying a co-payment, the medical aid scheme is supplying medication pursuant to an incentive scheme. Accordingly, the funding of the medical aid scheme amounts to an incentive scheme in contravention of s18A of the Medicines Act.

Notwithstanding the above, ENS further contended that even if the DSP arrangement amounted to an incentive scheme as alleged (which was denied), the DSP arrangement is expressly provided for in terms of the MSA and the regulations thereto both of which prevail in the event of inconsistency with the Medicines Act.

In this regard, the pharmacy maintained that the fact that the regulations to the MSA allow for a creation of the DSP does not mean that the regulations are in opposition to section 18A of Medicines Act because when applied the regulations reduce the price of medicine, being the very aim of section 18A. However, in applying the regulations the DSP does not result in cheaper medicine and the rationale for the section is not complied with.

ENS maintained that the pharmacy’s argument was incorrect because the cost of medicine dealt with in terms of section 18A of the Medicine Act is distinct from the cost of medical aid per se, and the funding by a medical aid scheme on a selective exemption basis is regulated by the regulations to the MSA and not the Medicines Act. One must differentiate between the price at which medicine is sold and the compensation of who is paying for the medicine eventually.

The court of first instance found (in the application made by the pharmacy) in favour of the arguments proffered by ENS on behalf of the medical aid scheme. The court stated that the supply of medicine by an appropriate service provider is covered by the MSA and not by section 18A of the Medicines Act. Regulation 8 of the MSA approves of the DSP whereby chronic medication can be obtained by members from approved service providers without paying a 40% co-payment. The court dismissed the application and later dismissed an application by the pharmacy for leave to appeal. The pharmacy is approaching the Supreme Court of Appeal for leave to appeal against the decision. ENS remains on brief and a follow up article will be published, to inform readers of the outcome thereof.