Our value creation

Life Healthcare creates sustainable value for our stakeholders through the following activities:

Patients

  • Providing quality, patient-centred healthcare and related medical services to a broad spectrum of patients
  • Operating with a level of process quality and outcomes efficiency that differentiates Life Healthcare from our competitors

Shareholders, investors and financiers

  • Providing quality, patient-centred healthcare and related medical services to a broad spectrum of patients
  • Operating with a level of process quality and outcomes efficiency that differentiates Life Healthcare from our competitors

Doctors and consultants

  • Forming and developing long-term partnerships with doctors and other healthcare professionals

Government

  • Providing a pipeline of skilled nurses for South Africa
  • Responsibly investing in community health
  • Striving to be a responsible corporate citizen

Medical healthcare funders

  • Developing and sustaining collaborative relationships

Government as a customer

  • Partnering with government through PPPs

Industry and regulatory bodies

  • Supporting industry-wide initiatives and providing input into proposed legislation and regulations

Employees

  • Focusing on employee wellness and development

quick fact

Our associated doctors and specialists in southern Africa increased to 2 934 (2016: 2 850)

Suppliers

  • Fair and transparent procurement activities
  • Investing in enterprise development initiatives

Statement of financial value add

  2017
R’m
2016
R’m
2015
R’m
       
Revenue 20 797 16 404 14 647
Less: Purchased cost of goods and services (10 309) (6 971) (6 015)
Financial value added 10 488 9 433 8 632
Other income 110 158 163
Financial wealth created 10 598 9 591 8 795
Employees 5 443 5 094 4 599
Providers of equity 1 478 1 662 1 522
Providers of funding1 1 216 509 404
Government 976 972 997
Maintenance and expansion of capital2 1 410 675 572
Reinvestment in the Group3 75 679 701
Financial wealth distributed 10 598 9 591 8 795
Average number of employees 20 499 19 026 16 472
Financial wealth created per employee (R’000) 504 504 534
Weighted average number of shares (million) 1 310 1 121 1 115
Financial wealth created per share (R) 7.89 8.56 7.89
1 Includes R778 million of funding costs for acquisitions in 2017, of which R427 million is non-recurring due to the settlement of a portion of the bridge funding via the rights offer.
2 In 2017 the amortisation charge increased by R292 million, resulting from the fair value uplift of intangible assets from the Alliance Medical acquisition.
3 Includes the impairment of the investment in Poland of R167 million and R370 million in 2017 and 2016 respectively.

The Group has undertaken a strategy of international growth and diversification to support the longer-term growth of the private healthcare market, this has resulted in a number of non-recurring costs, including transactions costs and increased acquisition funding costs.

Excluding these non-recurring items the financial wealth created per employee would be R556 905 (2016: R524 177 and 2015: R534 847), and the financial wealth created per share would be R8.72 (2016: R8.90 and 2015: R7.90).

External environment

The information that follows provides an overview of the various environments we operate in, and the likely impacts these have on Life Healthcare. These elements are discussed throughout this report, including the Chairman’s and Group Chief Executive Officer’s reviews, and they carry a close correlation with our material matters.

Southern Africa

Operating context in general

  • Growth rate: In South Africa, political and economic uncertainty has led to a more difficult operating environment. Demand for healthcare services remain high, however, affordability in the market is adversely affected by the economic environment. Gross domestic product (GDP) reduced to 0.7%1 in 2017 (2016: 0.3%)1.
  • Infrastructure challenges: Despite adequate support and back-up structures, prolonged electricity and water shortages have the potential to cause disruptions to our service.
  • Exchange rate: Medical equipment and medical consumables purchased are impacted by exchange rate movements.
Currency ZAR rate to foreign
currency as at
30 September 2017
ZAR rate to foreign
currency at interim period,
31 March 2017
ZAR rate to foreign
currency as at
30 September 2016
       
USD 0.074 0.075 0.073
1 International Monetary Fund (IMF) data.

Healthcare market

  • Competition Commission’s Healthcare Market Inquiry (HMI): The HMI was launched on 6 January 2014 and currently intends to publish a provisional report on findings and recommendations by April 2018. The Group completed a profitability analysis and provided an assessment of the nature of our relationships with supporting doctors and specialists. Various third-party providers were appointed by the HMI to engage with submitted data. Life Healthcare continues to engage extensively with the Competition Commission when data is made available for review and analysis.
  • National Health Insurance (NHI): The South African government intends to introduce a NHI system over the next 13 years. The NHI’s objective is to provide access to quality, affordable healthcare services for all South Africans, based on their health needs, irrespective of their socio-economic status. Regulatory implications may materialise as part of this process. Investigations are ongoing, and a White Paper was gazetted on 28 June 2017 through consultation with various hospital and government entities. Life Healthcare actively engages with government-established implementation committees, through the Hospital Association of South Africa (HASA).
  • Bed licences: Provincial Department of Health offices issue bed licences for present and future facilities – the turnaround speed and efficiency of applications impact the Group’s rate of growth. Annual inspections of facilities and legislated changes in compliance requirements may result in alterations to Group facilities with associated costs.
  • Employing doctors: According to the regulatory limitation in terms of the Ethical Rules of the Health Professions Council of South Africa (HPCSA), doctors cannot be employed by the Group in any clinical practice roles. The doctors work on an associative basis in Life Healthcare’s structures. In July 2017, an exception was granted to employ medical officers for our ICU, maternity and accident and emergency units subject to strict conditions.
  • Wage increases: Employee cost is a key cost of care driver and constitutes the highest operating expense across the Group. The public healthcare salaries paid continue to exceed inflation. The public sector is the largest employer of nurses and also employs large numbers of pharmacists. The salary increase practices within the public sector directly impact the cost of acquiring clinical skills and our ability to attract and retain, among others, scarce nursing skills. Ultimately, the high wage increases affect the affordability of healthcare, and the shortage of skilled employees affects the quality of care.
  • Competition: Life Healthcare is one of the largest private hospital groups in South Africa competing for a limited and shrinking number of medically insured lives, patients, doctors, nurses and pharmacists, as well as preferred network contracts with medical healthcare funders. The Group’s competitors include Netcare and Mediclinic International, independent hospitals, medical service providers, healthcare service providers and day clinics.
  • Other factors: The Group’s growth rate and profitability are impacted by the:

    • changing disease burden;
    • ageing profile of medically insured individuals;
    • medical healthcare funder consolidation; and
    • preferred network agreements with medical healthcare funders.

Alliance Medical

Operating context in general

  • Growth rate: GDP growth for western Europe is expected to be 2%1 (2016: 1.8%).
  • Brexit: Uncertainty related to the long-term economic and political impacts. Life Healthcare expects the only impact to be on the free movement of clinical expertise.
  • Exchange rate: Exchange rate movements impact on the translation of financial results into the Group annual financial statements.
Currency GBP rate to foreign
currency as at
30 September 2017
GBP rate to foreign
currency at interim
period, 31 March 2017
GBP rate to foreign
currency as at
21 November 20162
       
EURO 1.141 1.179 1.176
ZAR 18.130 16.808 17.746
1 International Monetary Fund (IMF) expectations.
2 Alliance Medical was acquired on 21 November 2016.

Healthcare market

  • Continued demand: We expect solid underlying growth for MRI, CT and PET-CT across Europe, despite continued pricing pressure. This expectation is informed by population growth, accelerated growth of the ageing population and service demand projections. The European public healthcare system is struggling to accommodate this demand increase. Limited capital expenditure budgets in the public sector and limited capacity to expand existing facilities have contributed to opportunities for private sector medical imaging companies such as Alliance Medical, to work in partnership with public health providers.
  • Competition: Alliance Medical’s key competitors are typically localised to the towns and regions they operate within. Affidea is a pan-European service provider that operates in some of Alliance Medical’s markets.

Poland

Operating context in general

  • Growth rate: Poland’s GDP grew by 3.9%1 year-on-year (2016: 2.8%). Scanmed expects GDP growth of 3.2% – 3.5% for 2018 and 2019 based on information from Fitch ratings agency.
  • Exchange rate: The Polish zloty (PLN) stayed stable against key foreign currencies (USD, EURO and GBP) in 2017. Due to a better-than-expected Polish macroeconomic performance, the PLN has strengthened against these currencies since September 2016. The exchange rates had an impact on the Group results from a financial statement translational perspective when converted to Group reporting currency and from a procurement perspective, specifically for the procurement of medical equipment and consumables from outside the country.
Currency PLN rate to foreign
currency as at
30 September 2017
PLN rate to foreign
currency at interim
period, 31 March 2017
PLN rate to foreign
currency as at
30 September 2016
       
USD 0.273 0.252 0.262
EURO 0.232 0.237 0.233
GBP 0.205 0.201 0.202
ZAR 3.712 3.388 3.586

Healthcare market

  • Contract fees and pricing: Scanmed relies heavily on contracts from the Narodowy Fundusz Zdrowia (NFZ). Regulatory changes have led to tariff reductions, the most material of which were in cardiology. The business is 40% cardiology-based, and tariff changes have driven a circa 28% decline in cardiology revenue year-on-year.
  • New laws: In March 2017, the Polish parliament adopted new laws and a new system for public hospital funding (known as the “countywide hospital network”). In terms of the legislation, 91% of funds for inpatient care will be distributed through budgets, and the remaining portion through NFZ tendering processes. Hospitals within the network will be remunerated based on the budget system, adjusted according to actual performance. Two multi-specialist hospitals and five cathlabs were granted four-year contracts. A few units are awaiting the outcomes of tender processes. Approximately 85% of 2018 budgeted NFZ revenues were secured by 30 September 2017.

India

Operating context in general

  • Growth rate: India’s GDP shrank to 6.7%1 (2016: 7.1%). India is the world’s seventh largest economy and second most populous country, thus the Group expects GDP to grow in line with further industrialisation.
  • Amendment of Maternity Benefit Act: The Maternity Benefit (Amendment) Act, 2017 was enacted on 27 March 2017 increasing maternity leave from 12 weeks to 26 weeks.
  • Exchange rate: The Indian rupee (Rs) was a high performing currency in Asia this year. Its performance was a result of favourable and improving differentials between India and US treasury yields, and lower currency volatility. The exchange rates had an impact on the Group results from a financial statement translational perspective when converted to Group reporting currency and from a procurement perspective, specifically for the procurement of medical equipment and consumables from outside the country.
1 International Monetary Fund (IMF) expectations.
Currency Rs rate to foreign
currency as at
30 September 2017
Rs rate to foreign currency
at interim period –
31 March 2017
Rs rate to foreign
currency as at
30 September 2016
       
USD 0.015 0.015 0.015
ZAR 0.206 0.207 0.206

Healthcare market

  • Stent and knee impact: The National Pharmaceutical Pricing Authority (NPPA) issued an order effective 13 February 2017, which fixed the ceiling prices for coronary stents. All Max Healthcare network hospitals comply with the NPPA order which negatively impacted revenue.

business model