The number of medical scheme members has stayed nearly constant at 9m over the past decade, according to Sanlam Private Wealth (SPW), which says while the ageing scheme population will provide long-term support for private healthcare, the current situation is unsustainable.
The wealth manager, which has more than R200bn in assets under management, said the performance of the private healthcare sector hinged on economic growth and demand, reports BusinessLIVE.
“In terms of economic growth, there is also low-hanging fruit. The Bureau for Economic Research estimates that if only the structural reforms currently in progress (for example, rail and electricity) are completed, GDP growth can lift from about 1% currently to closer to 3.5%. This would make a meaningful difference to employment as well as to medical aid membership,” SPW investment analyst Christiaan Bothma said.
“An additional supportive trend for hospitals is the ageing medical aid population. Although scheme membership is not growing, the existing pool is expected to use more healthcare services over time as they age.”
SPW picks Netcare as one company it expects to do well.
Most private healthcare stakeholders are anxious about the impending National Health Insurance (NHI), and concern about how private healthcare and medical schemes will fit into the system, and Bothma said while the prospect of a single buyer of healthcare services could increase patient volumes for private hospitals, the pricing power of a single buyer is likely to ultimately have a negative effect.
“While we are cognisant of the risks of NHI to our investment case for Netcare, we still believe not much is likely to change for at least the next decade. NHI faces severe funding constraints, not to mention legal pushback against many of its clauses, including those setting out where medical professionals should work and disallowing private medical schemes entirely for services already covered by NHI.”
Additionally, the primary focus will be on clinics and primary healthcare, which will not have a direct effect on private hospitals. In the short term, the most significant effect could be the potential emigration of medical practitioners due to concerns about future developments.
By the end of 2015, hospital groups were highly valued in investment portfolios, having greatly outperformed the market over the previous 15 years thanks to the rapid growth of the private medical sector.
The decline in performance over the past decade is mainly due to a stagnant medical scheme pool, as the economy did not expand its formal sector employment. The number of scheme members has stayed nearly constant at 9m over the past 10 years, resulting in an excess of hospital beds, allowing medical schemes to gain more bargaining power and secure network deals at much lower prices than the market rate.
SPW deems the current situation unsustainable – either demand for private healthcare needs to pick up or supply must be rationalised, with Bothma saying, “… we estimate that the hospital groups have market values worth only 50% of the replacement cost of their entire hospital portfolios”.
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