Best-laid plans for SAs private hospital groups

Best-laid plans for SAs private hospital groups

The Covid-19 pandemic has not evolved as initially expected and the impact on the South African private healthcare sector has been complex. We investigate the potential longer-term implications of the pandemic’s fallout on the operations of South Africa’s big three hospital groups: Life Healthcare, Netcare and Mediclinic.

Preparing to peak
The lockdown measures that were introduced in March 2020 impacted admissions to private hospitals on multiple levels:
Social distancing practices greatly reduced the seasonal spread of flu and other viruses, thereby reducing the number of medical cases admitted to hospital. The left chart below contrasts the proportion of Ampath’s respiratory viral cases that tested positive in April 2020 relative to the prior year.

Restrictions on alcohol sales in lockdown levels five and four, coupled with fewer cars on the road, materially reduced trauma case volumes. The right chart below indicates the dramatic decline in weekly deaths from unnatural causes in April and May relative to expectations based on historical data from 2018 and 2019.

Freeing up hospital capacity for the imminent arrival of Covid-19 patients led to a widespread delay in surgical cases.

The lockdown restrictions resulted in an almost 3-month delay in the influx of Covid-19 patients relative to earlier forecasts. Therefore, despite hospitals remaining open throughout lockdown, occupancy levels were significantly down over the period compared to prior years.

Over half of a hospital’s operating costs are fixed or staff-related, limiting the opportunity to adapt the cost base to reductions in hospital utilisation over the short term. Consequently, all three listed hospital groups made deep losses for April, while level five lockdown measures were in place. Patient volumes began to rise gradually in May as regulations eased and pent-up demand for urgent surgical procedures started to manifest.

Which way will the pendulum swing?
While the peak of the pandemic in South Africa was expected sometime between July and September, its potential size and intensity was unknown and the possibility of further waves remains as such. In the lead up to the peak, private hospitals continued to operate at sub-optimal capacity utilisation levels with empty beds reserved for Covid-19 patients.

Over the peak, higher occupancy levels are expected to have led to a more efficient use of hospital assets, which should have restored profitability to some extent – even where public patients were treated on a cost recovery basis. However, where Covid-19 cases replaced more lucrative surgical procedures, or where medical admissions covered by private medical aid were replaced by government patients treated at cost, the net impact on profit margins is expected to have been negative.

To date, South African public sector hospitals have managed remarkably well with limited assistance from the private sector. The number of provinces experiencing their peak simultaneously would have limited the degree to which government was able to shift public sector medical staff between provinces to meet demand. Despite this, only a limited number of public sector Covid-19 cases have ultimately been treated in the private sector.

A snapshot of hospital assets
The charts below illustrate the provincial split of beds among the big three hospital operators. Private hospital operators with a higher proportion of their total beds in provinces that experienced a more intense peak, or where government facilities were under more pressure, are expected to have had a greater proportion of Covid-19 patients in their overall mix (for example Netcare’s greater exposure to Gauteng). Provinces that peaked first will likely have seen a faster return to normality with non-Covid cases coming back sooner. Mediclinic’s greater exposure to the Western Cape may, therefore, have allowed for a faster recovery in non-Covid-19 patient volumes versus other operators.

A bumpy road to recovery
Post the peak, urgent surgical procedures are likely to normalise rapidly as the risk of potential infection during recovery is outweighed by the negative consequences of further delay. The upturn in elective surgeries may be delayed if patients choose to avoid hospitals until a vaccine becomes available. The loss of medical admissions, particularly those related to viral infections, are generally more permanent and may also remain structurally below previous levels as new norms in distancing behaviour continue to dampen the spread of other viruses in years to come.

The portion of the population that is typically responsible for the greatest proportion of healthcare spend, namely those aged over 65 and those with lifestyle diseases, are also most at risk of adverse outcomes should they become infected by Covid-19. These patients are more likely to stay away from hospitals for as long as possible. Once a vaccine is approved it could take up to 18 months to become widely available due to high global demand, further impacting the normalisation of patient volumes – with some patients potentially only returning to hospitals post 2021.

The prevalence of co-payments – where doctors charge above medical aid rates – is also likely to have an impact on elective procedures going forward. In households where at least one breadwinner has suffered a loss of income or a material decline in their retirement savings, elective surgeries risk being deferred or cancelled altogether in favour of cheaper alternative treatment paths because of the unaffordability of the co-payments.

In April 2020, National Treasury estimated that pandemic related domestic job losses could be over the three million mark. Coupled with the potential implications of a planned R160 billion reduction in the public sector wage bill over the next three years, there is a significant risk to the overall size of the medical aid base. While the threat of infection lingers, there is an incentive for individuals to try and retain their medical aid cover, reducing the expected reduction in medical aid coverage over the near term.

The gradual shift to lower cost “network” medical aid arrangements has been an enduring trend over the past few years. Network plans limit a patient’s choice to a prescribed list of designated healthcare service providers. This is expected to continue, particularly as above-inflation medical aid fee increases have led to an incrementally larger share of disposable income being consumed by health insurance. The negative impact of the pandemic-led economic crisis on disposable incomes is likely to accelerate this trend towards more affordable plans. Bargaining power in tariff negotiations on network deals tends to favour medical aids over hospital operators, as more expensive hospitals are excluded from the networks. Of the three listed players, Life Healthcare is currently the lowest cost operator, therefore appearing best placed to adapt to this environment. Netcare’s larger proportion of ICU beds relative to competitors could prove to be a disadvantage in tariff negotiations as these beds are more expensive to operate, leading to a higher average cost per bed.

Medical aid funders are also hoping to fast-track the shift away from more expensive in-hospital care to managed care at home and telemedicine. Historically, these sorts of initiatives have met with resistance from both doctors and patients, however, fears around Covid-19 are changing that. If successful, these efforts would likely have a negative longer-term impact on hospital admissions and length-of-stay.

Beyond Covid-19
The economic crisis brought about by the pandemic has accelerated long-term affordability headwinds for private healthcare. While the long-term outlook for South African hospital operators remains relatively unchanged, the short- to medium-term prospects have deteriorated significantly. Operators that prove themselves to be the most adaptable and cost efficient will be best positioned. We remain cautious on the recovery path of the South African operations across all three hospital groups, however, we see value based on where they are currently trading. Consequently, we have retained some exposure in our clients’ portfolios.

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