The South African economy continued to struggle in 2017, entering its first recession since 2008 – 2009. Key negative outcomes of the poorly performing economy are lack of employment growth, a decreasing number of active workforce participants and increasing unemployment. This in turn adversely impacts the number of people who can afford private health insurance. Over the last three years the private health insurance market has shown no growth, stabilising at around 8.9 million lives. Access to affordable healthcare services continues to be a challenge for most South Africans and is considered a financial burden at lower income levels. Over the same period, the hospital industry has continued to add hospitals and beds to the market, putting pressure on occupancies.
Exacerbating the environment are the increased levels of consolidation shown by the medical healthcare funder market, making pricing negotiations more challenging. This is reflected in the number of privately insured lives covered by Discovery Health, MMI Holdings and Medscheme, which now cover more than 75% of the patients we interact with annually. A number of the medical healthcare funders increased their managed care activities and focused on reducing healthcare utilisation after a steep increase in 2016. This has impacted the private hospital industry as a whole with most providers having lower growth or even a decline in volumes.
Despite the challenges in our operating environment, we are proud to note that our complementary services in southern Africa continue to develop well. We opened an oncology facility at Life Eugene Marais Hospital and increased our stake in the Free State Oncology Trust to a controlling stake. A new mental health facility was opened at Life Carstenview in Gauteng, providing an additional 60 beds.
Through the Alliance Medial operations, we have experienced good demand for diagnostic and molecular imaging services in the UK and Europe. In the UK the business has experienced some pricing pressure within the mobile section of its business.
Operations in Poland became more aligned to the Group standards during the regulatory uncertainty that prevailed in the country during the previous year. The establishment of more concrete regulatory changes in 2017, and a clearer assessment of tariff impacts have allowed for improved planning. Poland’s operating environment remains strict and bound to government tariffs and contracts, yet opportunities to develop business continue when combined with strategic cost savings.
From a territory perspective, 23.6% of our revenue (2016: 7.2%) was derived from the international business and 27.6% of our activities (2016: 11.0%) are now in non-acute activities, against a five-year target of between 40% and 50%.
The Group’s leaders, employees and I were deeply troubled by the deaths of our former patients who were transferred from Life Esidimeni facilities to non-governmental organisations by the Gauteng provincial health department between April and June 2016. The investigation by the Office of the Health Ombud confirmed no wrongdoing by the Group and confirmed that many of the non-governmental organisations were not adequately equipped to manage and treat the complex mental and physical health conditions of these patients. We acknowledge the patients and families of this tragedy and share our heartfelt condolences. The Group has since renegotiated with the provincial department to restore operations in Gauteng and has resumed care for approximately 460 patients, out of the total 700 patients who will return to Life Esidimeni.
The Group’s vision refers to Life Healthcare being a market leading, international, diversified healthcare provider. We have made significant progress in delivering on our vision this year, primarily in diversification. This diversification refers not only to geographic diversification but also to diversification though our lines of business and associated service offerings. In this regard, the acquisition of Alliance Medical in November 2016 helped us to further enhance the Group’s service offering by entering the diagnostic imaging market.
2017 in review
To reflect strategic alignment and continuity, my review is structured according to the board focus areas outlined in our 2016 integrated report.
Delivery of affordable healthcare
Medical healthcare funders continue to be significant cost of care influencers by applying pressure on our business through stringent network agreements or contracts. Engagements continue with medical healthcare funders to develop mutually beneficial clinical services, systems and approaches to patient care in South Africa.
Although progress was made in the employment of doctors under strict conditions in South Africa, we still operate in an environment with critical skills scarcity for professional clinical positions including nurses, pharmacists and radiographers. Competitive wages and salaries are South Africa’s core challenge as government continues to provide above-inflation salary increases to government employees, drawing skilled resources from the private sector. The Life College of Learning is one of the Group’s initiatives to address skills shortages and has 1 358 students registered in various nursing programmes. This is supported by sponsorships for 327 students to complete nursing specialist courses at the Life College of Learning and various South African universities. Once these students graduate, they will be integrated into our network of hospitals. Commitment to investment in future capacity is evident in the Group funding the training of specialists through the Public Health Enhancement Fund (PHEF) and Colleges of Medicine South Africa (CMSA) at a cost of R16 million. Life Healthcare is engaging with government to explore possible partnerships and improvements for the provision of affordable healthcare.
In Poland, there has been a rationalisation of operations to further drive efficiencies, centralising shared services to effectively utilise available resources.
Competition Commission’s Healthcare Market Inquiry and National Health Insurance
Internationally, healthcare regulation is growing in line with cost pressures on government and increasing demands for healthcare. Globally, demand for healthcare services is driven by increased disease burden and ageing populations. However, the increased demand increases the cost of healthcare and governments worldwide are increasing regulations to mitigate this.
In South Africa, we remain supportive of the core aim of the HMI which is to assist in understanding how it will promote competition in the healthcare sector in South Africa. Life Healthcare continues to provide submissions and input to the Commission upon request. The revised timetable now indicates that a provisional report is due to be released by April 2018.
We continue to monitor developments of the NHI and contribute positively to the process when called upon. The Minister of Health approved the NHI White Paper six years after the publication of the NHI Green paper. NHI aims to try and address the three objectives of universal healthcare as defined by the World Health Organization (WHO):
- Equity in access
- Adequate quality of healthcare services
- Protection from financial harm
The Group supports the principles outlined by the WHO. However, we are concerned that the model proposed within the NHI White Paper will not enable the achievement of these objectives. Life Healthcare remains concerned about the lack of detail regarding the implementation of NHI and the financing thereof. We remain committed to working with government on NHI in order to ensure that, as a country, we improve the access, quality and affordability of healthcare for all citizens. We believe that there are numerous opportunities for Life Healthcare to assist government in this regard and remain positive and open to engagements.
Brexit has created some political uncertainty, however, the Group only expects an impact on the free movement of clinical expertise. We continue to monitor developments closely.
In Poland, the Group had to absorb an additional 11% tariff decrease to its cardiology business, in January 2017, following the 17% tariff decrease in July 2016. Scanmed has renewed contracts and also received contract extensions with the NFZ.
In India, Max Healthcare experienced some regulatory headwinds with regulations impacting disposables, cardiac stents and maternity leave.
Life Healthcare’s approach to quality remains stringent, as service quality and clinical outcomes are directly related to the health of our patients, sustainability and efficiency. To reflect this, we established a clinical governance, quality and safety sub-committee of the board with a mandate to oversee and monitor clinical and quality indicators throughout the Group. Prof Marian Jacobs assumed the role of Chairman for the newly established committee.
The committee will examine local and international best practice to ensure high-calibre oversight for clinical outcome matters. We are confident that our close collaboration with doctors will lead to safe, effective care delivery at a lower cost, with improved clinical outcomes.
We are committed to reflecting the demographics in South Africa. We successfully increased African, Coloured and Indian representation by 0.4% across our southern Africa business. In addition to the diversity policy used for recruitment, Life Healthcare provides skills development activities and effective succession planning to ensure that demographic improvements are not short-lived. An example is the Life Healthcare Nursing Education Trust established in June 2017. The Trust will provide nursing bursaries to people from disadvantaged backgrounds. In 2017, the Group invested R81 million in B-BBEE related activities.
63% (2016: 58%) of our executives and mangers (middle management and above) are female.
Our transformation efforts are yet to materially reflect in the Group’s B-BBEE scorecard. Some of the challenges of the new Codes adopted under the B-BBEE Act remain skills development and procurement spend on products through international suppliers who no longer use local agencies. This negatively affected our score, and the Group is reviewing alternative approaches and procedures to address this issue. We are striving to achieve improved ratings, with the current year’s measures achieving a level 7 rating based on internal assessments, which are currently in the process of being verified externally. Refer to our B-BBEE recovery forecast.
On 21 November 2016, Life Healthcare completed the acquisition of Alliance Medical with an enterprise value of R13.9 billion. Alliance Medical is Europe’s leading independent provider of imaging services. The acquisition further diversified the Group’s international revenue, and we expect solid underlying growth for MRI, CT and PET-CT across Europe.
A rights offer of R9 billion was successfully concluded in April 2017 to partly fund the Alliance Medical acquisition. The majority of our employees participated in the rights offer through the employee share schemes.
Our international operations in Scanmed and equity investment in Max Healthcare face unique challenges and opportunities of their own. Scanmed revenue decreased by 6.7% to R1 095 million, and we continue to monitor government-instituted tariff changes that had a significant impact on the business, resulting in a R167 million impairment in the current year. Scanmed operations are well positioned to remain profitable and effective. Significant NFZ contracts are being secured, rationalisation processes are underway, and strategy revisions are taking place in the business.
Our share of Max Healthcare’s net loss after tax was R27 million. The operating environment has been challenging due to regulatory changes and a weaker dengue fever season compared to last year. The management team has implemented plans to mitigate the impact of these challenges. We increased our shareholding in Max Healthcare to 49.7% following the exit of the International Finance Corporation (IFC) (2016: 45.95%), maintaining equal shareholding with our joint venture partner, Max India.
We look towards improving our operational efficiency in each geographic area to reduce operational costs and improve patient outcomes. The bedding down of approaches, transferring of skills and sharing of best practice will facilitate this.
Governance and leadership
We continuously look to develop our governance and reflect an ethical and accountable leadership focused on genuine value creation for all stakeholders. We welcome the introduction of King IV, which we believe to be a more practical and applicable code of governance than King III. We will align our practices and disclosure to King IV to ensure our governance culture and processes support our value-creation activities in the years to come.
The board, together with André Meyer, decided he would step down as Group Chief Executive Officer and as a member of the board, effective 30 June 2017. The board would like to thank André for his contributions to Life Healthcare, and we wish him well in his future endeavours.
The Group’s nominations committee contracted a reputable international agency to find a suitable candidate with relevant experience and skills to fill the role of Group Chief Executive Officer. In the interim period, Pieter van der Westhuizen, the Group Chief Financial Officer, was the acting Group Chief Executive Officer. We thank Pieter for capably stepping in during this period. Dr Shrey Viranna was appointed as the new Group Chief Executive Officer, effective 1 February 2018. We welcome Shrey to the Group and believe that his medical background and industry-related experience will prove invaluable in leading Life Healthcare.
Louisa Mojela resigned as a non-executive director with effect from 25 January 2017. She was a board member from June 2010. The board thanks Louisa for her valuable contribution during her tenure. Adv Mahlape Sello and Audrey Mothupi were appointed as independent non-executive directors of Life Healthcare with effect from 3 July 2017. They bring legal, strategy and IT skills as well as a wealth of experience to the board, and we look forward to their respective contributions.
These two appointments were made after the board evaluation in 2016 identified legal and IT skills as skills to be enhanced at board level. We are satisfied with our board expertise and structure at present and are assessing the need to bring more international experience to the board given our international aspirations.
Board focus areas for 2018
Our key focus areas from a board perspective will be:
- effective on-boarding of the new Group Chief Executive Officer;
- approval and implementation of the revised strategy;
- monitoring delivery against the agreed strategic objectives;
- monitoring and contributing to the HMI process and our response to its possible findings and recommendations;
- NHI development and its impact on our southern Africa business;
- delivery of the strategy that will result in shareholder value accretion;
- monitoring the growth delivery within Alliance Medical
- monitoring the management and execution of the Poland turnaround process.
Other areas that will receive attention are appropriately addressing medical healthcare funder pressure (including assessing prominent contracts) and improving our B-BBEE performance and score.
My thanks to our patients, doctors, nurses and employees for your continued support. Your integral roles in our business make Life Healthcare what it is today, and drive our potential to be better tomorrow. To our management and executive teams who add significant value to our strategic and operational efforts, your commitment shapes our performance. Thank you for carrying out your duties responsibly and diligently while leading by example.
Thank you to our shareholders for your continued support. We note your clear vote of confidence through the full subscription in the R9 billion rights offer. We believe the acquisition will enhance shareholder value in the long term.
I can say with confidence that throughout our progression this year, I had the committed support of a skilled board. Your inputs ensured the Group’s continued alignment to strategy to meet our ultimate objectives and, where necessary, the revision of our strategic focus. Thank you for leveraging your skills and providing valuable insights.