South Africa’s listed hospitals have seen steep declines in their share prices. What is the outlook for them as the coronavirus rips through the country?
The outlook for South Africa’s three largest listed private hospital stocks is dimming as elective surgeries get postponed, patients fear the risk of contracting the coronavirus when visiting hospitals, and hospitals struggle to recoup operational costs.
One ray of hope is that medical aid schemes’ memberships remain stable as consumers try to ensure getting better healthcare services through the private sector rather than having to rely on public hospitals. This amid a very bleak economic outlook, increased job losses and a slump in consumer confidence, which have put strain on the finances of many who can afford private medical care and insurance.
As the coronavirus pandemic cuts its way through SA, news of insufficient capacity to house and treat the sick in public hospitals has become the norm. This even as government imposed a hard lockdown at the end of March, which curtailed the civil liberties ofSouth Africans to prepare for the“surge” in the pandemic.The surge has arrived, but government preparations have fallen short. Private hospitals, which have been enlisted to accept public patients at a rate where their costs are covered, haven’t experienced the brunt yet.
“In recent weeks the surge in Covid-19 cases has also led to an uptick in hospitalisations, although almost no private hospitals are actually full (despite what recent fake news has suggested),” Mark Wadley, a fund manager at Vision Fund Management, tells finweek.
Early in the lockdown
The implementation of the lockdown – regulated by “lockdown minister” Dr Nkosazana Dlamini-Zuma, who oversees the country’s floundering municipalities and traditional leaders – and the concomitant ban on alcohol sales, proved to hurt private hospitals.
During the initial lockdown period in SA the private hospitals were hit by several unusual events, says Wadley. “Their usual patient load from car accidents, sports injuries, infectious diseases like pneumonia, and so forth decreased because of the lockdown, curfews and reduced alcohol availability,” he says.
Of interest, says Wayne McCurrie, a portfolio manager at FNB Wealth and Investments, is that “prior to the surge, the lockdown restrictions have also resulted in fewer ‘winter’ illnesses and the resultant lower doctor and hospital visits”.
In addition, fear took its toll on hospitals. “The overriding factor that has severely impacted hospitals’ activity levels has been that of fear,” Carmen Mpelwane, a senior equity analyst at Absa Asset Management, tells finweek. This resulted in many elective surgeries, which aren’t deemed emergencies, being cancelled during the lockdown period or postponed until patients feel comfortable entering a hospital, she says.
“For hospitals, these are the most profitable operations to perform,” says Mpelwane.
“Doctors across the country have reiterated the pressure on their ability to generate income due to very low consultations, especially plastic surgeons and ophthalmologists.”
This drop in trauma cases, elective surgeries and the fear of infection, together with the initial low prevalence of coronavirus cases at the end of March and duringApril and May, have hit private hospitals’ profitability hard.
“This was probably an ‘Armageddon’ scenario for a hospital group, and this saw
hospital occupancies fall well below 50%,” Charl de Villiers, a portfolio manager and equity analyst at Sanlam Investments, tells finweek. “Earnings before interest, tax, depreciation and amortisation (ebitda) generated during these hard lockdown periods actually went negative in some instances.”
As the economy opened from June, and the coronavirus infection rate started accelerating across SA, activity levels in private hospitals have started to pick up, although from a low base in April, says De Villiers.
The level-3 lockdown restrictions, supposedly less imposing on civil liberties than the original hard lockdown level-5 impediments, have led to greater freedom of movement, alcohol sales (before the newly-announced ban) and more businesses, including personal care enterprises such as beauty salons and hairdressers, opening to the public. This might have seen a change in the situation for hospitals, although detailed guidance hasn’t been given at the time of writing this article.
“This is because as we moved to lockdown level 3 (with people moving around again, socialising and drinking etc.), the hospital groups started actively introducing more elective surgical work, while also seeing an uptick in urgent medical care from car accidents and the like,” says Wadley.
“In due course, the hospitals may reach full occupancy (in intensive care units and general wards) if Covid-19 cases continue to grow,” he says. “This may lead to better profitability levels, but it has to be remembered that the hospitals are also incurring additional expenses in terms of personal protective equipment, sterilisation, sanitisation and equipment – provision of oxygen requires lots of consumables, while ventilated patients require drugs for sedation, for example.”
However, despite the higher costs of caring for patients infected with Covid-19, increased occupancy will ultimately allow private hospitals to better manage operational costs.
“We generate revenue from every patient admitted into our facilities and hence it contributes towards recovering our costs,” Adam Pyle, CEO of hospital group Life Healthcare SA, tells finweek. “The increase in Covid-19 cases needs to be balanced by the drop-off in elective cases. However, with improved occupancies, the group is better able to manage its fixed and variable costs.”
Even as hospitals are filling up with sick patients, the structural issues that pestered private hospitals in the days before the pandemic remain.
First off, there is the stagnant medical schemes market which isn’t experiencing stellar growth in new memberships. These members are the big drivers behind private healthcare in general, and private hospitals in particular. With the costs of healthcare– from drugs and doctor visits to equipment and hospitalisation – escalating for the better part of the past two decades, medical schemes, and even the government, became uneasy.That culminated in the release of the Competition Commission’s inquiry into the sector last year.
Consumers stomached high premium increases from medical aid schemes year after year as the costs of healthcare – much of which is imported and beholden to the rand’s exchange rate idiosyncrasies – outpaced Stats SA’s consumer price index.
And the reliance of private hospital groups on medical schemes’ members can’t be illustrated more clearly than by the following stat: “Approximately 95% of Netcare’s payments are from medical schemes which are dependent on employment in SA,” Tatum Starkey, an equities analyst at Balondolozi Investment Services, tells finweek.
With the economy contracting for three straight quarters through the end of March, and likely also in the three months ending June, job losses are mounting. A recent Nids-Cram study, conducted from a representative sample of 7 000 South Africans, estimates that 3m people lost their jobs in April. The government has warned previously that about 7m people could be unemployed due to the pandemic. That is from a total workforce, as estimated by Stats SA, of 23.4m people at the end of March. If you add the 2.9m discouraged work seekers, those able to work constitutes 26.3m people – less than half of the country’s estimated 59.6m citizens. By the end of the first quarter, 38% of those abled were discouraged to look for a job or looking but not finding one, Stats SA data shows.
Against this job market picture, medical aid schemes need to lure new premium-paying members. Or rather keep those that are paying. The anecdotal evidence is heartening.
“Discovery Health Medical Scheme’s CEO recently made a comment that the scheme’s membership has remained stable thus far,” Lonwabo Maqubela, head of research at Perpetua Investment Managers, tells finweek. “This is consistent with the experience during the Great Financial Crisis when medical scheme membership declined by 1% to 2%.”
Starkey says that expectations based on historical pandemics suggest that medical aid scheme memberships should increase in the future “as people began to re-evaluate the need for medical aid as a necessity given the impact of the pandemic”.
A second pre-pandemic structural change impacting on private hospitals is how medical aid schemes attract new members or keep those that can’t afford the more comprehensive plans they’ve been covered under.
“Existing private medical aid membership has been migrating from open plans into network deals which limits member choice in terms of selecting healthcare providers, but importantly, reduces monthly premiums and improves affordability,” says De Villiers.
This so-called “network migration” effect has meant that private healthcare providers, including private hospitals, in many instances had to do the same work for less income under a new network deal, he explains. At the same time, these providers run the risk of losing significant pockets of market share should a competitor outbid them in one of the handful of large new network tenders, “which are often binary in nature in terms of winners and losers”, he says.
Pyle says that it is too early to comment on “the quantum of a possible decline in membership”. Their experience in the past has been that members will “typically buy down to ensure they remain covered for hospital cover”.
“Information from medical aids to date have not reflected a dramatic drop-off in membership,” he tells finweek. “However, in the current environment we would expect to see some drop-off in membership.”
Finally, regulatory limitations imposed by the government in terms of market share and pricing had forced private hospital groups to seek growth opportunities in new areas.
“Areas such as mental health, day clinics, rehabilitation, primary care, radiology, pathology and so forth are all areas that the incumbents are now looking at in order to drive future top- line growth,” says De Villiers.
This is an extract of the cover story that originally appeared in the 30 July edition of finweek. To read the full story, including share views on SA’s private hospital groups, buy and download the magazine here.