It’s not just the uncertainty about National Health Insurance (NHI) that is weighing on South Africa’s health-care sector. The scourge of emigration is also taking a toll — particularly on listed hospital groups.
Uncertainty in the sector is clear from private hospital stock prices: Netcare is down 10.8% since the beginning of 2022 and Life Healthcare has shed 28%. That’s against the FTSE/JSE all share index’s 0.8% gain.
Faced with this outlook, medical aid schemes and private hospital groups such as Netcare and Life Healthcare are adjusting their business models. The medical aid schemes are trying to lure lower-income members to their ranks; the hospital groups are on a drive to capture the entire health-care value chain.
The re-engineering of medical offerings is perhaps necessary, given South Africa’s ageing population and high burden of disease.
According to Stats SA’s 2022 midyear population estimate, the overall fertility rate in the country declined from 2.62 births per woman in 2009 to 2.31 this year. And over the past nine years the proportion of the population older than 60 has increased from 7.8% (4.15-million people) to 9.2% (5.59-million).
As the population ages — meaning there’s a greater need for health care and other care services — South Africa continues to battle the HIV pandemic, TB and high levels of diabetes and cerebrovascular illnesses.
Against this backdrop, skilled South Africans are leaving the country — and many are higher-earning individuals who are members of medical aid schemes.
“Immigration is an important factor for growth momentum in the private health-care sector in future,” Ninety One portfolio manager Samantha Hartard tells the FM. Still, she adds, there is “some resilience” in medical aid membership.
This is the result of two factors. First, the number of people insured by the Government Employees Medical Scheme (Gems) has grown, even through the Covid pandemic. “Second, medical aid schemes [have] introduced more and more hospital plans targeting low-income earners and combining these with network plans,” says Hartard.
Hospital plans are cheaper than traditional medical aid options, and cover expenses for members who are hospitalised. Networked plans, in restricting care to specific, contracted health-care providers, allow medical aid members to avoid co-payments for medical procedures.
If you take Gems out of the equation, however, the number of people covered by medical aid schemes is lower than it was in 2019, says Hartard. That’s largely indicative of the state of the economy: “There is very little scope for growth in insured lives without growth in GDP,” she says.
While medical aid schemes are trying to swell their ranks, and increase their bargaining power, by recruiting lower-income earners, private hospital groups are on a drive to capture the entire health-care chain
— What it means:
The dire economic situation is creating some structural shifts in the medical aid sector. For example, it’s not just new members with lower incomes who are driving an uptick in demand for hospital/networked plans. Many of those on traditional, more expensive plans are also turning to more affordable options.
“People have been moving away from expensive medical aid packages to cheaper ones due to affordability issues,” Ndumiso Ndebele, equity analyst at Matrix Fund Managers, tells the FM. “This trend started a decade ago and has led to a rise in network hospitals.”
There’s a shift in relations within the health-care sector too.
The bulk of private health-care providers’ income derives from medical aid benefits. With the move to cheaper network plans, private hospitals, pharmacies and specialists are under pressure to be a part of those networks. As a result, it seems medical aid schemes are in a better position to negotiate lower price increases with private providers who want access to their members.
At the same time, muted growth in the overall number of insured lives has also increased medical aid schemes’ bargaining power. It’s meant the tariff increases negotiated between hospitals and funders have “come down from CPI-plus to CPI-minus in the past few years”, says Mazi Capital equity analyst Mbasa Mrwetyana.
The days of incremental charges for services — charging individually, say, for drawing blood, administering an injection and the like — are long gone too. Instead, medical aid schemes are looking to pay a set rate for treating a particular condition — with additional pressure for positive outcomes.
“In the past few years, medical aid funders have put pressure on hospital admissions through case management, and we think this is likely to continue given muted growth in the pool of medically insured lives,” Mrwetyana tells the FM.
She believes the combination of case management and CPI-minus tariff increases could up competition between hospital groups as they chase volume when negotiating network agreements.
“This may also change the existing reimbursement models for health-care services,” she says.
As is the case in other countries, South Africa is seeing a change in health-care dynamics. And it’s not just the increased burden that comes with an ageing population. Demand for mental health care is also on the increase, says Hartard, as better understanding and diagnosis make for enhanced treatment outcomes.
All in all, given the country’s disease burden — skewed towards HIV, diabetes, TB and strokes — there “will likely be increased utilisation of health-care services by the same pool of people”, she says.
People have been moving away from expensive medical aid packages to cheaper ones due to affordability issues
— Ndumiso Ndebele
So, how are private hospital groups dealing with lower price increases and a stagnant pool of medical aid members?
In Mrwetyana’s view, they need to become “efficient operators in managing the cost base and client outcomes”.
To this end, for example, Netcare has invested heavily in IT services to track the treatment of patients and ensure better health outcomes.
“All three private hospital groups [Netcare, Life Healthcare and Mediclinic] are investing heavily in digitalisation to increase the efficiency of health outcomes,” says Hartard. “This is a direct result of medical aid funders demanding better outcomes for the fees charged by the private hospitals.”
In addition, both Netcare and Life are expanding beyond their traditional hospital business in a bid to rake in revenue by offering complementary health services, such as diagnostics (including radiology, CT and MRI scans), renal dialysis and mental health-care services.
“For example, Life Healthcare is buying the radiological units run by third parties in its own hospitals,” says Hartard, “while Mediclinic is buying mental health facilities”.
The three hospital groups are also making inroads in the day clinic sector. These institutions offer same-day surgical procedures, such as tonsillectomies, wisdom tooth removal and scopes, at far better price points than traditional hospitals.
It’s a shift that befits medical aid schemes. “Private hospitals are pushed by the funders to opt for day clinic services due to the lower fees at these establishments,” Hartard says. “Globally there is a trend to larger utilisation of outpatient [day clinic] services. These procedures are now possible due to advancements in medical technology.”
The shift to complementary services, however, has come at a cost for private hospitals: subdued growth in the number of patients in hospital beds.
“Organic growth, by increasing the number of beds, has been muted in recent years and most of the bed capacity has come from the unlisted players,” says Matrix Fund Managers’ Ndebele.
Despite the headwinds, the outlook for Netcare and Life Healthcare — and for soon to be delisted Mediclinic — seems rosier than a few months ago.
“We will see a recovery in elective procedures,” says Hartard, referring to the many patients who have waited for the worst of the Covid pandemic to pass before venturing into hospitals again. “This will support occupancy rates and help operational leverage among the hospital groups.”
She admits, however, that the recovery in demand for elective procedures (such as knee or hip replacements) has taken a year longer than the market expected.
For Mrwetyana, private hospital groups’ revenue could also be boosted by the contribution of complementary services. And, she says, “innovation to attract [the] uninsured into the private hospital value chain could provide growth opportunities”.
The shadow of NHI, however, continues to loom large.
In some ways, it is uncertainty wrought by the government’s proposal that’s informing the move to complementary health-care offerings, says Mrwetyana.
With centralised provision of health care, medical aids are set to play a much smaller role in the sector. According to the NHI bill, they will “be restricted to providing complementary cover for health-care service benefits that are not purchased by the fund on behalf of users”. Hence the turn to bulking up their complementary offerings now.
“Companies are attempting to evolve their strategies to align with the ideals of the NHI”, says Mrwetyana. “An example of this is Life Healthcare’s focus on investing in complementary services.”
It makes for a mixed prognosis for the listed health-care players.
Says Ndebele: “The uncertainty about NHI remains an overhang on the stocks, as it’s not clear from the NHI Bill what the role of private medical schemes will be, what the impact on private hospitals will be and, most importantly, whether there are both the human and financial resources required to implement it.”
Hartard also acknowledges the overhang. While the idea of affordable universal health insurance isn’t unique to South Africa, it comes with risks, she says. “South Africa cannot afford the proposed NHI.” And, she adds, the country simply “doesn’t have enough skilled staff to implement it”.
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