South Africa’s largest private hospital group Netcare Limited released its interim results for the six months to March 2008 this week. Despite operating in a challenging economic environment the company achieved moderate improvements on both the financial and business front. Group revenues were up 16% on the back of a 17.1% surge in local revenues (to R4.907bn) and a 14.5% improvement (to R5 436m) from UK operations.
Netcare’s operating profit increased by 9.7% to R1.584bn largely thanks to the performance from UK operations. The UK business contributed R933m, well in excess of 50% of the total and an increase of some 10.7% on the previous period. These results confirm the shift to offshore operations as South Africa’s listed healthcare companies try to secure revenue and profit going forward.
Local operations going strong, but...
Locally, Netcare recorded patient day growth of 4.7% in the last six months. The average patient stay remained unchanged while total occupancy at the group’s hospitals increased slightly. And although the South African government is doing everything in its power to derail private healthcare in this country it seems the Lesotho government has other plans. Netcare “has been selected by the Lesotho government as preferred bidder on a private-public partnership to build a 390-bed hospital in Maseru, refurbish three primary care clinics and provide clinical services.” Progress has also been made in building and extending Netcare’s primary healthcare network in South Africa. The company says it has increased the number of doctors participating in this scheme to 3 565. The group’s 100 Medicross and Prime Cure facilities showed a 5.6% growth in visits to GP’s and dentists.
The report includes a rosy review of South African operations; but we couldn’t help feeling things could have been so much better. Regular FAnews Online readers might recall that at the beginning of this year the Council for Medical Schemes (CMS) and Department of Health were ganging up on private hospitals – accusing them of unethical price practices and driving medical aid increases. Whether these allegations are true or not remains to be seen. At least the group is taking steps to address some of these pricing concerns. Netcare reveals that “in January 2008 they fundamentally changed their billing methodology within their hospital division and contained annual average tariff increases for wards and theatres to significantly below consumer price inflation resulting in an average price increase per admission of 6.2%!”
But there are some early warning signs. Top among these is that despite a 17.1% improvement in domestic revenue, operating profit from domestic activities improved only 3.4% to R636m. The group attributes this poor performance to squeezed margins caused by “non-recurring costs of R10 million relating to restructuring and the losses arising from power cuts, the increased contribution from primary care (at lower margin), the under recovery on the sub-inflation tariff increase, increased labour cost due to skill shortages and other cost pressures.” This means the group is not coping too well with the general inflation in the medical environment – and not passing these fees on to its clients. What should worry government is that capital expenditure in the South African operation is 17.8% down on the previous period to a trifling R314m. We certainly don’t want this to become a trend.
Mounting challenges in South Africa
Netcare identified a number of challenges in the domestic operating environment. Among these are skills shortages and “the issue of substantially improving access and affordability of healthcare in South Africa.” The group remains “fully supportive of the ANC’s Social Transformation Agenda, which includes improving the provision of housing, education and healthcare.” A great deal has to be done to make this vision a reality. Netcare’s management believes that a National Health Insurance framework and “a review of the public sector delivery model” will be essential if the private healthcare sector is to play its role in extending healthcare on a universal basis.
It seems strange that private healthcare companies are increasingly expected to carry the state’s burden in the provision of basic healthcare services. The Department of Health has intervened in medical aids and pharmacies in recent years – and now seems intent on bringing private hospitals to their knees too. We believe private healthcare fills a niche for those who can afford ‘premium’ services while the public healthcare sector provides a safety net for those who cannot. And FAnews Online hopes that government and the private sector find a way to work together in fulfilling the country’s long-term healthcare requirements.
If not, every South African citizen will suffer. We recently heard an analyst suggest that the best thing Netcare and Mediclinic could do for their shareholders is to convert their hospitals into hotels in the run up to the 2010 Soccer World Cup. And that’s a sad reflection of the business environment that private hospital groups are currently operating in.
Editor’s thoughts:
Despite an impressive performance from its South African operations, Netcare has warned investors of the challenges posed by “increased cost and regulatory pressures.” Given recent statements by the Minister of Health, do you think Netcare will be able to repeat this performance in coming periods? Send your comments to gareth@fanews.co.za, or add them below.
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Added by FINANCIAL ADVISOR, 20 May 2008