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Strategic Report:

Divisional Review
Southern Africa

CEO’s statement

“Mediclinic Southern Africa delivered good operational and financial results for the period under review with relatively weak patient volumes. We have continued to make good progress with the rollout of further strategic initiatives to improve the value proposition that we offer to our patients, focusing on patient safety initiatives, improving patient experience and initiatives to improve collaboration with our supporting medical practitioners. We have continued to invest in the maintenance and upgrade of our facilities and will add six new day case clinics to our portfolio in the next two financial years to provide the most appropriate range of care for our patients in the future. We continued to address a number of matters in the wider business environment, specifically the Health Market Inquiry and National Health Insurace developments.”

Koert Pretorius
Chief Executive Officer: Mediclinic Southern Africa

52

NUMBER OF HOSPITALS

8

NUMBER OF DAY CASE CLINICS

5

NUMBER OF SUB-ACUTE HOSPITALS

8 517

NUMBER OF BEDS

296

NUMBER OF THEATRES

+5%

REVENUE R15 960M

+4%

ADJUSTED EBITDA R3 385M

+0.6%

BED DAYS SOLD

82.2%

PATIENT EXPERIENCE INDEX

15 804

NUMBER OF EMPLOYEES

3.94

EMPLOYMENT ENGAGEMENT

(grand mean score based on a 1–5 rating scale)

+4.3%

AVERAGE REVENUE PER BED DAY

69.2%

BED OCCUPANCY

financial REVIEW

In Southern Africa (including South Africa and Namibia), as at the end of the reporting period, Mediclinic operated 52 hospitals, five sub-acute hospitals and eight day case clinics with a total of 8 517 beds and 15 804 employees (19 646 full-time equivalents). Mediclinic Southern Africa is the third largest private healthcare provider in Southern Africa by number of licensed beds. Mediclinic Southern Africa accounted for 30% of the Group’s revenue (FY18: 31%) and 38% of its adjusted EBITDA (FY18: 37%).

Revenue increased by 5% to ZAR15 960m (FY18: ZAR15 204m) with a continued weak macroeconomic environment and flat private medical insurance membership. Bed days sold increased by 0.6% and average revenue per bed day increased by 4.3%. The number of admissions remained unchanged. The average length of stay increased by 0.7% while occupancy rates were 69.2% (FY18: 69.7%).

The revenue contribution in FY19 from the majority investment in the Intercare group of four day case clinics, four sub-acute hospitals and one specialist hospital since 1 December 2018 was ZAR60m (FY18: nil). Underlying bed days sold (excluding Intercare) were down 0.1% on the prior year.

Adjusted EBITDA increased by 4% to ZAR3 385m (FY18: ZAR3 245m), resulting in the adjusted EBITDA margin decreasing to 21.2% from 21.3% as lower patient volumes were offset by cost-management and efficiency initiatives.

Depreciation and amortisation increased by 12% to ZAR556m (FY18: ZAR495m), mainly resulting from recent major facility upgrades. Operating profit increased by 3% to ZAR2 829m (FY18: ZAR2 749m).

Net finance costs decreased by 2% to ZAR513m (FY18: ZAR526m), supported by lower interest rates and interest received on cash balances. Mediclinic Southern Africa contributed £72m to the Group’s adjusted earnings (representing 36%), compared to £72m (representing 33%) in the comparative period.

The division converted 96% (FY18: 103%) of adjusted EBITDA into cash generated from operations.

investing to support long-term growth

Mediclinic Southern Africa invested ZAR506m on expansion capital projects and new equipment at existing hospitals, ZAR107m on acquisitions and ZAR672m on the replacement of existing equipment and upgrade projects. Expansion at existing hospitals included expansion at Mediclinic Potchefstroom, Mediclinic Medforum, Mediclinic Legae, Mediclinic Klein Karoo and the establishment of a new day case clinic at Mediclinic Newcastle. Furthermore, the Welkom Medical Centre and Intercare group were acquired, while Mediclinic Barberton was sold. The total number of licensed beds increased during the year to 8 517 (FY18: 8 131).

In August 2017, Mediclinic Southern Africa announced it had agreed to an investment in Intercare. The Intercare group was founded in 2000 and currently manages 21 multi-disciplinary outpatient clinics (which includes 15 dental centres), as well as four day case clinics, four sub-acute hospitals and the Medfem fertility hospital in Sandton. The investment in Intercare comprises: a minority shareholding in the multi-disciplinary outpatient clinics which was completed in October 2017; and a controlling shareholding in the day case clinics, sub-acute hospitals and Medfem fertility hospital which received Competition Commission approval in August 2018 and was completed in November 2018. Intercare will continue to manage all its facilities under the Intercare brand.

In FY20, Mediclinic Southern Africa expects to invest ZAR562m and ZAR727m on expansion and maintenance capex respectively. Several existing hospital and day case clinic projects are due for completion in FY20 and FY21, which are expected to add some 162 additional operational beds. In line with its commitment to provide quality clinical care, Mediclinic Southern Africa expects to invest in additional resources to deliver further improvements across the division during the year.

The division’s day case clinic rollout is premised on co-locating the facilities with the main hospitals to adapt to the outmigration of care trend in Southern Africa where admissions have been impacted by declining day cases. Mediclinic plans to open six day case clinics during FY20 and FY21 at Mediclinic Nelspruit, Mediclinic Stellenbosch, Mediclinic Pietermaritzburg, Mediclinic Cape Gate, Mediclinic Winelands (also in Stellenbosch) and Mediclinic Bloemfontein, which will add an additional 13 theatres to the Southern African operations.

The proposed acquisition of a controlling shareholding in Matlosana Medical Health Services (Pty) Ltd, based in Klerksdorp in the North West Province of South Africa, was prohibited by the Competition Tribunal. Mediclinic has appealed against this decision and it is expected that the case will be heard by the Competition Appeal Court during the second half of the 2019 calendar year.

CONTINUED FOCUS ON EFFICIENCY AND VALUE

Mediclinic Southern Africa progressed with several improvements to its business processes during the period under review. A particular focus on optimising nurse utilisation without compromising on the quality of care enabled the division to manage nursing cost particularly well during the period under review, especially in light of continued volume pressure.

In addition, through the successful employee engagement strategy, the division further improved its engagement score during the year to 3.94 (2018: 3.85) (the grand mean score based on a 1–5 rating scale).

As part of its commitment to deliver value to patients, the division continued with various initiatives to improve the patient experience, as measured by Press Ganey®. The results this year, which are published online, reported a stable overall mean score of 82.2% (2018: 82.1%).

REGULATORY UPDATE

The Competition Commission is still continuing with a market inquiry into the private healthcare sector in South Africa to understand both whether there are features of the sector that prevent, distort or restrict competition and how competition in the sector can be promoted. The inquiry published its Provisional Findings and Recommendations Report on 5 July 2018. Although the process was set to be finalised during 2018, the Commission extended the timeframe to accommodate further seminars and research. Mediclinic submitted its responses to the provisional report on 15 October 2018 and during April 2019 participated in seminars addressing specific competition topics. An updated timetable advises that further engagements with the inquiry panel may still take place, with the final report now due for publication on 30 September 2019.

The South African Government continues to explore the introduction of a National Health Insurance system. On 21 June 2018, the National Health Insurance Bill (“NHI Bill”) was published for comment by interested stakeholders. Mediclinic submitted comprehensive comments on the NHI Bill. At the same time, there were proposed amendments to the Medical Schemes Act, No. 131 of 1998, which are aimed at amending the functioning of the medical schemes and member benefits. Mediclinic also submitted comments thereon. Mediclinic fully supports the principle of Universal Health Coverage and improving access and affordability of healthcare to all South Africans and will continue to contribute constructively toward achieving these goals. Mediclinic believes that an enhanced healthcare system can be achieved through greater collaboration across the public and private sectors to find common solutions and looks forward to the opportunity to contribute in this regard.

Market overview

The South African private medical insurance market remained stable with continued political uncertainty, low economic growth and high unemployment. The solvency ratios of the schemes remain very sound with the average ratio at 32.2% compared to a required level of 25% in South Africa.

The market offers very limited incremental growth opportunities to expand existing hospitals. A select number of opportunities exist to invest across the continuum of care, including the establishment of day case clinics, given the continued outmigration of care trend. The gradual increase in network arrangements with insurers continues and Mediclinic has been successful in maintaining relationships with many insurers through these arrangements, continuing to provide patients across South Africa with an extensive footprint of available Mediclinic facilities. Mediclinic Southern Africa also seeks to provide care to those without insurance. In February 2019, the division launched a transparent, easy-to-use, fixed fee service that is aimed at providing affordable care across an extensive list of diagnostic and surgical procedures.

Outlook

Mediclinic Southern Africa remains well positioned for future success in the current market and regulatory environment. The private healthcare industry has reached maturity with limited opportunities for material growth in the large multi-disciplinary acute care hospital environment given Mediclinic Southern Africa’s extensive footprint. Future growth will focus more on related business opportunities across the continuum of care and on the ability to manage care across different care settings, supported by an enabling digital platform and the use of technology. A full evaluation of an EHR system will be carried out during 2019.

The focus in the coming year will be on further developing Mediclinic Southern Africa’s strategy to position itself for future value-based contracting opportunities. The division will continue to focus strategically on the value that it delivers to patients, by continuing to improve the safety and quality of its clinical care, the quality of the patient experience, and the cost of care. The division will also continue to focus on opportunities to develop an integrated Southern African private healthcare delivery model through collaboration with medical practitioners. At the same time, Mediclinic Southern Africa remains committed to improving its operational efficiency and to attracting, retaining and engaging qualified employees, especially nursing employees and medical practitioners.

Mediclinic Southern Africa is also committed to embed a transformation strategy that encompasses diversity and inclusivity to meet business imperatives, while ensuring legislative compliance.

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