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In spite of this, Sanlam has announced that it is acquiring Bestmed's administration and managed healthcare operations, and the group is positive on the outlook for the industry. Mr Patrick Masobe, registrar of medical schemes, is expected to approve the deal in November. By January a new company, Sanlam Healthcare Management, which is being registered at present, should be in business.

Expanding interests
All the major players in the financial services industry, excluding Sanlam, have an interest in the medical fund industry. Momentum, Metropolitan and Old Mutual, for example, own medical scheme administrators, and Liberty Life provides the services of Liberty Health to its clients.

"Next to home loans, medical fund contributions are the largest expenditure of most households and Sanlam is the only major insurer not offering any medical cover or even owning a medical scheme administrator," says Mr Francois Marais, senior manager: Strategic Business Development at Sanlam. The lack of involvement in this area also makes Sanlam's intermediaries more vulnerable, as they could easily lose clients to other intermediaries who do offer these products. So, unless Sanlam goes with the flow, its existing and future operations could be jeopardised.

First attempt
Sanlam was a prominent player in the medical fund industry with various schemes under Sanmed's administration, before it replaced the administration system in the nineties – with disastrous consequences. The new system was a complete failure and the decline of Sanmed, which at one stage boasted 150 000 principal members, was a severe blow to its parent company. It was subsequently decided to sell Sanmed, which was not regarded as part of Sanlam's core business as life insurer.

In 1998 Sanlam made another attempt to enter the medical insurance market with a new Internet-based product, Cura. However, regulations to demarcate the medical and insurance industries resulted in its having to be withdrawn before it even got off the ground. Since the appointment of Dr Johan van Zyl as chief executive, Sanlam has expanded its financial services substantially and renewed its attempts to become a provider of medical services.

At the end of 2005 Sanlam announced that it was to acquire the majority interest in Resolution Health. However, barely nine months later this deal was cancelled after Resolution Health had failed to meet certain requirements. Marais says Sanlam is very positive about the deal with Bestmed and believes that the industry offers good growth opportunities.

However, the recent introduction of the Government Employees Medical Scheme (Gems) is a nightmare for many schemes. According to Marais, most schemes will lose a significant number of members if the government makes Gems the compulsory medical scheme for government employees. This could happen within the next three years.

"Small schemes could lose a large number of members. In addition, they have already lost some of their growth potential as all new government employees are compelled to join Gems. In this environment mergers between small schemes are highly likely and if Bestmed is positioned strategically, Sanlam could benefit. Sanlam could also have a competitive edge over larger schemes, as the small schemes would probably rather merge with other small ones than be swallowed by a large scheme."

Objectives
Marais says Sanlam's first objective will be to replace the 13 000 members that the scheme might to lose to Gems. "With Gems established for its own employee, the government wants to make membership of a medical scheme compulsory for everyone earning above a certain income in the private sector, and the industry will then show strong growth again."

But what does the deal hold for Bestmed? There are currently 47 registered open schemes, 26 of which account for approximately 90% of all premium income in the industry. Discovery has about 40% of these members. Bestmed is the 16th largest scheme with approximately 33 000 members, and covers 88 000 lives. It was one of an increasingly smaller group of schemes with its own administration and no ties with any distribution organisation or financial services group.

Bestmed will now effectively become part of Sanlam, with access to its distribution network and brand benefits. Mr Bernard Slabbert, chairman of Bestmed, says Bestmed's trustees considered the offer very carefully and believe that it holds good long-term benefits.

"We are particularly excited about the possibilities offered by Sanlam's distribution network countrywide and believe the deal will enhance Bestmed's future position in the South African healthcare industry.” About 92% of Bestmed's members voted in favour of the deal.

"Bestmed will retain its name and the Bestmed brand will become a Sanlam product. Marais says Sanlam intends increasing Bestmed's membership by at least 15% a year, which means that the scheme will be twice its current size within five years. "Potential mergers with other schemes could of course accelerate the growth dramatically," he says.

Letitia Watson, Sake Raport

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