Group Chief Executive Officer’s review

Pieter van der Westhuizen

Acting Group Chief Executive Officer

The year in numbers

Group revenue increased by 26.8% to R20.8 billion, with 76.4% revenue from southern Africa and 23.6% from international territories

Group EBITDA increased by 15.9% to R5.0 billion

Normalised EPS decreased by 44.6% to 93.9 cents

Distribution of 80 cps paid to shareholders

Southern Africa performance

PPDs decreased by 1.7%
Healthcare associated infections (HAIs):
0.42 per 1 000 PPDs

Recommend score increased by 0.6% to 70.0%

Alliance Medical performance

Revenue contribution of R3 812 million
Normalised EBITDA margin: 23.8%

Poland performance

Revenue decreased by 6.7% to R1 095 million
Normalised EBITDA margin: 4.0%

Refer to the Group Chief Financial Officer’s review for the financial performance of the year.

2017 was marked by challenging conditions in South Africa and Poland. However, the Group weathered these difficult conditions and is well placed within these territories going forward. The acquisition of Alliance Medical will allow the Group to grow its diagnostics business in the UK and Europe, and although Max Healthcare experienced challenges due to regulatory impacts, we are optimistic about the future opportunities that India offers.

The year in review

This review is provided according to our material matters.

Cost of care

The increase in healthcare demand across the world due to the growing disease burden and ageing population, has resulted in governments and medical healthcare funders increasing their focus on trying to manage the cost of care. This is done through a combination of managing the cost or price of the event and/or managing the utilisation. Across our different territories we have experienced a combination of these measures. In Poland, we had tariff decreases mainly affecting the cardiology division of our business, and in the Alliance Medical business, there is constant pressure on the price of diagnostics. In South Africa, in the effort to reduce the cost of the event, medical healthcare funders are increasing their focus on managing hospital utilisation through more aggressive managed care techniques and preferred network agreements.

Our approach remains one of driving efficiencies, where possible, to help reduce cost of care, while maintaining quality of care levels and engaging with stakeholders to find alternative solutions to traditional problems. The use of IT to drive standardisation, lessen the administrative burden and to explore innovative solutions, is an opportunity that continues to receive significant attention in our efforts to drive down the cost of care. Going forward, we will collaborate with our doctors to introduce clinical pathways which improve the quality of care and the efficiency of delivery. We will continue to try and find ways to enhance our overall engagement and relationship with medical healthcare funders. We trust that this improved interaction will further develop our partnership for the benefit of all South Africans.

Specialised skills shortages

Due to the niche nature of the market we operate in, obtaining and retaining clinical professionals, remains a challenge. The Group recently obtained special dispensation from the HPCSA to recruit doctors for our ICU, maternity and accident and emergency units in South Africa. Although this dispensation has strict conditions, we will be able to improve the overall level of care provided to our patients through aligning clinical quality and efficiency programmes.

We operate various training programmes and activities, and are engaging with the South African government to secure more partnership-driven approaches to training and development for mutual benefit.

Government relationships

Aside from setting regulation and policy, government entities are significant customers in all our territories. As such, we continuously seek to maintain and enhance our relationships with government.

In South Africa, we look to build relationships with the national and regional departments of health. However, 2017 was a difficult year, particularly with regards to the Life Esidimeni tragedy involving the Gauteng Department of Health. We express our heartfelt condolences to the families of the patients involved. We are hopeful that going forward, what transpired will never be allowed to happen again, and we look forward to proactively working with the Gauteng Department of Health in facilitating treatment of patients in the care of Life Esidimeni.

Life Healthcare will work with government and other private healthcare players in the development of the NHI, ensuring that the model that is introduced enables South Africa to achieve the universal healthcare goals as stipulated by the World Health Organization.

Alliance Medical has a 25-year track record of successfully working in partnership with public health bodies. This was traditionally in the form of relatively short-term service contracts that are becoming increasingly long-term in nature, primarily through formal partnership agreements. This was evidenced by the recent 10-year agreement for the provision of all PET-CT services for over 50% of England’s population. All publicly provided budgets were renewed successfully in Italy and the business’s other geographies.

In Poland, the Group secured NFZ contracting with two multi-specialist hospitals and five cathlabs being granted four-year contracts. A tender process is underway for units outside the network. The Group has to date secured contracts for 85% of the business and is confident that the remaining contracts will be secured by the first half of 2018.

Onerous and increasing regulations

In southern Africa, we maintain our licence to operate by complying with the various policies and regulations such as the Health Act, Regulation R158 and R187 – Control of Private Hospitals. The new B-BBEE codes have provided a significant challenge for compliance; however, adequate policies and procedures are in place to improve our performance in the long term. Based on internal assessments, the Group will achieve a level 7 rating for the 2017 financial year, this is currently in the process of external verification.

The possible impacts of the NHI are becoming clearer with the publication of the White Paper on 28 June 2017. We continue to monitor developments and consider response strategies to mitigate negative impacts and pursue potential opportunities.

While the Brexit decision led to political uncertainty throughout Europe, each of our Alliance Medical operations operates within its own country borders with limited cross-border activity. Although some uncertainty remains as to the cross-border movement of people and the impact on currencies, the in-country impacts of Brexit on Alliance Medical appear to be negligible – outside of the broader macro challenges faced.

Poland’s regulatory market was initially challenging as two tariff reductions adversely affected the businesses’ cardiology segment. The ultimate result of the healthcare reform in 2017 has further provided opportunities through four-year public financing contracts for the business.

Quality of care standards

Delivering high quality care while controlling and reducing costs is a global concern and a key focus area. In southern Africa, additional categories and sub-categories were added to our incident reporting metrics as we enhance our systems year-on-year. Some quality and clinical indicators increased due to this intensified risk focus. In general, there is more attention on patient rights, ensuring high quality care and patient safety in our healthcare facilities.

We appointed an additional five regional clinical managers in South Africa to enhance doctor collaboration and partnerships, particularly around designing and implementing new care delivery models. The Group now employs 33 clinicians, in southern Africa, on a permanent basis to assist in the delivery of high quality care.

Alliance Medical’s corporate and clinical governance processes will be retained and integrated appropriately with existing Group practices to achieve synergies. The quality metrics of both Scanmed and Max Healthcare were reviewed. Each territory operates under different accreditation bodies with different outcome measures. Although it is not feasible to integrate the southern Africa measures into these territories, oversight and revision of all quality activities will be spearheaded by the board’s clinical governance, quality and safety committee established on 11 May 2017. The objectives of this committee are as follows:

  • Monitor and manage the clinical performance across all clinical service providers associated with our services
  • Constantly evaluate the effectiveness of our:
    • quality systems (improvement and assurance);
    • patient and employee safety systems; and
    • infection prevention strategies.
  • Simplify and attain uniform standards where possible to ensure compliance with:
    • clinical care standards (doctors, nurses, pharmacists, paramedics and radiologists);
    • clinical governance;
    • accreditation; and
    • country-specific regulations including licensing, registration and validation.

Labour relations and employee retention

The cost of labour is our biggest expenditure, at R6 957 million (2016: R5 598 million). Over the past three years, we implemented a number of targeted interventions including benefit improvements, a targeted clinical allowance structure and improved development opportunities to address the retention of employees. Our employee turnover rate in South Africa is 10.6% (2016: 14.1%), the lowest that the Company has ever attained. However, retention of scarce clinical skills remains difficult in a salary and benefit-driven market, especially when government institutions provide above inflation increases.

Medical healthcare funders

Medical healthcare funders are key stakeholders who provide 95% of the hospital division revenue in southern Africa. Therefore, maintaining and improving relationships with them is becoming increasingly important. Government Employees Medical Scheme (GEMS) and Discovery Health represent 53% of southern Africa’s hospital division revenue. There has been a steady increase in preferred networks in South Africa over the last few years, a trend which is not unexpected. Life Healthcare is a significant participant in the preferred networks despite the three-year exclusion of 14 Group hospitals from the Bonitas Medical Fund network in 2017. We are a key participant in the new GEMS network and the two Discovery Health networks Keycare and Delta. The Discovery Health contracts for Keycare and Delta networks were concluded for a further three years at acceptable terms, to 2021.

We continue to engage with the medical healthcare funders on various opportunities to improve the efficiency and quality of care provided in our hospitals and complementary service businesses.

For a territory-based performance synopsis from each of our business’s chief executive officers, refer to southern Africa, Alliance Medical and Poland respectively.

Alliance Medical acquisition

We completed the acquisition of Alliance Medical in November 2016, and funded it through a combination of debt and equity. Alliance Medical’s business supports our core business activities as set out in the table below.

Area Alliance Medical’s offering
Enter markets and market segments with higher growth opportunities Alliance Medical has a strong underlying demand driven by demographics, disease burden, advances in medical technology and an increasing focus on early diagnosis. The NHS are forecasting PET-CT growth of approximately 10% per annum over the next seven years. Management anticipate UK MRI activity to be in line with the annual growth over the last five years, being strong single-digit rates. The acquisition of Alliance Medical diversifies Life Healthcare into strategically important and fast growing diagnostics markets. This market generates good cash flow, positive margins and has promising growth prospects.
Continued expansion of the complementary services disciplines

Life Healthcare views the entry into diagnostics as a natural part of our strategy. This acquisition allows us to further our expansion of the complementary services business, adding diagnostics to mental health, acute rehabilitation, renal dialysis and oncology services.

Alliance Medical uses proprietary technology to deliver networked services. The molecular imaging activities of the business are vertically integrated with radiopharmaceutical manufacturing, enhancing its oncology service presence.

Market leadership Alliance Medical has a market-leading position in its core geographies, namely the UK, Ireland and Italy, and it holds a strong presence in a number of other European countries. In addition, the business is a key partner with national, regional and private healthcare providers in the markets in which it operates, an example being the NHS in England.
Experienced and committed management team Alliance Medical has an experienced management team with an average of over 15 years’ experience in the healthcare industry. The management team has been in place for over six years and further demonstrated its commitment to the Group when the senior leadership team co-invested with Life Healthcare into the business acquisition.
Geographic diversification Alliance Medical operates a range of highly complex diagnostic scanning and molecular imaging services from fixed and mobile locations in 10 European countries. Through this investment, Life Healthcare now generates 23.6% of its revenue outside South Africa.

Vision for the future

We refined our strategy in line with attaining our strategic objectives. The most noteworthy change was intensifying our diversification and international revenue target. Our goal is to obtain 50% of our revenue from our international businesses by 2022, compared to the current 23.6%, and to expand our non-acute business to between 40% and 50% of our total business from our current 27.6%. We will specifically target markets and lines of business with good growth characteristics and which complement our existing business.

From an operational perspective, our management teams are working on various cost improvement and efficiency initiatives across the various territories as well as exploring growth opportunities. The difficult trading year necessitated a more clinical focus that will be driven by leveraging our people and assets. This will include skills and knowledge sharing across our territories, enhancing our opportunities to improve performance and ensuring that the Group remains a preferred healthcare services provider.

Leadership changes

The board, together with André Meyer, decided he would step down as Group Chief Executive Officer effective 30 June 2017, and I would like to thank André for the commitment shown to the Group during his tenure. I wish him well.

The board requested that I act as interim Group Chief Executive Officer while the recruitment process is underway. To assist the Group’s leadership during this time of change, I established an operational executive board that is responsible for operational delivery across the Group, and leveraging inter-territorial synergies.

The capable and experienced operational executive board comprises Lourens Bekker (Chief Executive Officer: Southern Africa), Guy Blomfield (Chief Executive Officer: Alliance Medical), Hubert Bojdo (Chief Executive Officer: Scanmed), Adam Pyle (Group Strategy and Investor Relations Executive) and Dr Charles Niehaus (Chief Medical Officer: Alliance Medical).

The Group has since recruited Dr Shrey Viranna as of 1 February 2018, and we welcome him to the Life Healthcare family.

Appreciation

Our board and executives have shown their resilience during the last year, considering the current and future needs of the business in a proactive manner. This includes our non-executive directors who provided positive input into our activities and guidance on Life Healthcare’s path. To Dr Nilesh Patel and Juliet Mhango, who resigned from the executive during the year, I extend my thanks for your counsel and commitment to our business during your time with us.

I officially welcome Alliance Medical’s management and employees to Life Healthcare. We look forward to your valued contribution as we seek to grow the diagnostics component of our business.

To our partners, specifically our doctors, we appreciate your loyalty and commitment to quality that supports the Life Healthcare brand. Your efforts have ensured that the care we provide is of the best possible quality in a highly competitive industry. To every employee in the Group, your support, direct and indirect, to our doctors and nurses as well as your empathy to our patients continues to be exemplary. We could not operate successfully without you, and we appreciate your daily efforts in this regard. I would also like to make special acknowledgment of our Life Esidimeni employees who have had to face a particularly challenging period following the death of many former patients. Many of these employees had a personal connection with the patients formed through years of direct care. You performed admirably and with compassion during a very difficult time, and we commend you.

I extend my thanks to our employees who are the faces, hands and hearts that represent the five Life Healthcare core values to our patients. You personify our passion, our commitment to building a lifetime of partnerships, our focus on performance, and our dedication to quality care. We look forward to another year of value creation by providing quality healthcare to patients in all of our operations.

Pieter van der Westhuizen

Acting Group Chief Executive Officer