|

Strategic Report:

Divisional Review
Switzerland

CEO’s statement

“Over the course of the last 18 months, all Swiss hospital operators have been affected by rapidly implemented regulatory changes related to outpatient tariff reductions and outmigration of care. We took clear steps to improve our performance including accelerated cost-saving initiatives with regard to hospital administration, support processes and driving efficiencies. In addition, Hirslanden has sustainably pursued its growth strategy with the acquisition of Clinique des Grangettes, strengthening our market position in the Geneva area. Supporting our Grow2020 strategy was also the strong attraction and retention of independent medical consultants as partners and key resources to the business, which enables Hirslanden to continue to broaden its service offering. Adapting Hirslanden to the changing healthcare regulatory environment remains a priority. Progress continues on delivering the Hirslanden 2020 strategic project. The focus of this project is to standardise, centralise and simplify the existing operating business, delivering future efficiencies and cost savings in hospital administration and support processes. In addition, the project addresses the day case delivery model in Switzerland to capture the growing requirement for day case procedures in an affordable manner which is expected to support the medium-term performance at Hirslanden.”

Daniel Liedtke
Chief Executive Officer: Hirslanden

18

NUMBER OF HOSPITALS

2

NUMBER OF DAY CASE CLINICS

1 916

NUMBER OF BEDS

112

NUMBER OF THEATRES

+2%

REVENUE CHF1 778M

(10%)

ADJUSTED EBITDA CHF285M

+4%

INPATIENT ADMISSIONS

87.6%

PATIENT EXPERIENCE INDEX

10 442

NUMBER OF EMPLOYEES

4.01

EMPLOYMENT ENGAGEMENT

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

(2.2%)

AVERAGE REVENUE PER INPATIENT CASE

70.4%

BED OCCUPANCY

financial REVIEW

As at the end of the reporting period, Hirslanden operated 18 hospitals, two day case clinics and three outpatient clinics with a total of 1 916 inpatient beds and 10 442 employees (8 303 full-time equivalents). It is the largest private acute care hospital group in Switzerland servicing approximately one third of inpatients treated in Swiss private hospitals. Hirslanden accounted for 47% of the Group’s revenue (FY18: 47%) and 44% of its adjusted EBITDA (FY18: 48%).

The entire Swiss healthcare environment, both public and private, has been affected by a number of regulatory changes over the last 18 months. The greatest impact to Hirslanden’s financial performance resulted from the rapidly implemented TARMED reductions and the outmigration of identified clinical treatments transferring from an inpatient to an outpatient tariff across all cantons. The outmigration of care, which commenced in July 2017, continued to unfold during 2018 and culminated with the Federal list and its more restrictive exclusion criteria being implemented from 1 January 2019. As previously communicated, Hirslanden designed and implemented actions to adapt the business to the new operating environment to mitigate the financial impact of outmigration. These actions helped to moderate the financial impact in the second half of FY19 and, combined with the benefits from the Hirslanden 2020 strategic project, is expected to support Hirslanden’s operating performance over the medium term.

Including the contributions from Klinik Linde (consolidated from 1 July 2017) and Clinique des Grangettes (consolidated from 1 October 2018), Hirslanden revenue increased 2% to CHF1 778m (FY18: CHF1 735m). Inpatient revenue was up 2%. Outpatient revenue, which contributed some 19% to total revenue in the period, was up 7% reflecting the contribution from Clinique des Grangettes and additional cases from the outmigration of certain treatments to an outpatient tariff offset by the TARMED tariff reduction. Inpatient revenue per case was down 2.2% as a result of the less favourable insurance mix (proportion of general insured patients FY19: 48.7% compared to FY18: 47.9%). The average length of stay decreased by 2.4% to 4.5 days while occupancy rates were 70.4% (FY18: 73.3%).

Revenue contribution in FY19 from Klinik Linde and Clinique des Grangettes was CHF127m (FY18: CHF52m). Underlying inpatient admissions at Hirslanden (excluding Klinik Linde and Clinique des Grangettes) were flat on the prior year as the hospitals admitted additional patients to compensate for capacity created by fewer inpatient cases due to the outmigration of care.

With cost savings and efficiency gains, the significant effect of the tariff reductions and less favourable insurance mix resulted in adjusted EBITDA declining 10% to CHF285m (FY18: CHF318m). In line with revised earnings guidance, the FY19 adjusted EBITDA margin was lower at 16.0% (FY18: 18.3%). Given the significant decline in EBITDA margin in the first half of the year to 14.3% (1H18: 17.4%), actions taken moderated the financial impact of the regulatory changes in the second half of the year with the EBITDA margin at 17.6% (2H18: 19.1%).

Adjusted depreciation and amortisation increased by 13% to CHF124m (FY18: CHF110m), reflecting the incorporation of Klinik Linde, Clinique des Grangettes and ongoing fixed asset investments. Adjusted operating profit decreased by 22% to CHF161m (FY18: CHF208m).

Adjusted net finance costs decreased by 11% to CHF51m (FY18: CHF57m). This was mainly as a result of the refinancing, including the redemption of an interest rate swap agreement which was completed in October 2017. An amendment to the financing agreement was entered into in March 2019, adjusting the covenants to reflect the impact of the recent regulatory changes on the profitability of the business. There was no change to the interest margin of the debt facility.

Hirslanden contributed £80m to the Group’s adjusted earnings (representing 40%), compared to £106m (representing 48%) in the prior year.

Hirslanden converted 97% (FY18: 81%) of adjusted EBITDA into cash generated from operations.

In line with the requirements of IFRS, non-financial assets are considered for impairment when impairment indicators are identified at an individual CGU level. In Switzerland, the changes in the market and regulatory environment continued to affect key inputs to the review and gave rise to impairment charges recorded against properties and trade names at the half year of £43m and £55m respectively, with an additional £143m against property equipment and vehicles at the year-end (FY18: impairment charges on property and intangible assets of £84m and £560m respectively). The impairment charges are non-cash and excluded from the adjusted earnings metrics. The remaining trade name will be amortised over its estimated useful life. The impairment calculations remain sensitive to reasonably possible changes in key assumptions, including cash flow projections and long-term growth and discount rates.

Adapting to the current market and regulatory trends

On 1 January 2018, the previously announced reductions to the TARMED became effective. After mitigating actions, including improved utilisation and increased efficiencies, the annualised impact on adjusted EBITDA was as guided at around CHF25m. No further tariff adjustments are known of.

On 1 January 2019, the Federal Government implemented a national framework for the outmigration of six clinical procedure groups from an inpatient to an outpatient tariff with defined exclusion criteria being applied across all cantons which take account of factors including age and co-morbidities. In FY20, Hirslanden will therefore be impacted by a further nine months from the implementation of the national framework.

However, Hirslanden has been impacted by outmigration since July 2017, when the canton of Lucerne first introduced a more extensive list of 13 clinical procedure groups. Similar measures were implemented in four further cantons (Zürich, Zug, Schaffhausen and Aargau) on 1 January 2018, and in Basel on 1 July 2018. Out of the control of the division, Hirslanden has been further impacted by several insurance companies in Switzerland already applying elements of the framework in some cantons that had not yet officially implemented outmigration.

Hirslanden continues to adapt its business model to address the current trends in inpatient and outpatient activity driven by the recent regulatory changes to the healthcare market, while maintaining excellent clinical performance, and continues to engage with insurers and regulators in Switzerland, seeking to offer the most appropriate care and services.

The recent tariff reductions as a result of these regulatory changes required Hirslanden to accelerate, in the near-term, the cost-reduction project to drive further operational efficiencies. Having generated CHF9m savings to budget in the first half of the year, a further CHF12m was achieved in the second half. These cost-saving initiatives, focused on supply costs, employee efficiencies and general administration expenses, will continue into FY20.

Hirslanden continues to implement further actions to adapt to the changing Swiss healthcare environment. Through the Hirslanden 2020 strategic project, changes to the service model and cost structure of the division will support the medium-term performance of the division. In FY20, this project is in the final year of peak operating and capital investment spend before savings and efficiency benefits from standardising, centralising and simplifying the business are expected to be realised. To adapt the service model to the outmigration trend, in addition to the two day case clinics already opened with two further to be opened in FY20, optimised day case processes have been established in the majority of remaining Hirslanden hospitals. This will ensure that day case procedures are delivered in a cost-efficient manner and the division benefits from the Group’s experience of establishing similar day case and outpatient clinics across Southern Africa and the Middle East. The dedicated Hirslanden outmigration project team is evaluating a number of opportunities to ensure the division is well positioned to benefit from the growing outpatient trend over the coming years.

Supporting the division’s Grow2020 strategy, Hirslanden has been successful in retaining and attracting independent consultants as partners to the business. During FY19, more than 250 net additional independent consultants practised at Hirslanden and the division continues to leverage its leading market position and strong reputation to attract highly qualified medical professionals and supplementary insured patients. In addition, further initiatives to improve service differentiation will be implemented where appropriate. In February 2019, the Hirslanden Préférence programme was launched, specifically targeting the semi-private insured patient market.

Investing for future growth

During the year, Hirslanden invested a total of CHF95m in maintenance and expansion capex (FY18: CHF129m), aligning the division’s investment plans to the Swiss healthcare regulatory environment. In FY19, Hirslanden invested CHF55m (up 17% on FY18) in expansion capital projects and new equipment and CHF40m (down 51% on FY18) on the replacement of existing equipment and upgrade projects. During the period, the division continued to invest in the HIT 2020 project to standardise the organisational structure, support processes and underlying ICT and systems across the division. Hirslanden also completed several new outpatient projects including the day case clinic at St. Anna Im Bahnhof, the outpatient clinic at Clinique Bois-Cerf, medical practitioners’ offices at Klinik Hirslanden and Stephanshorn, and the new sports medicine centre at Clinique La Colline.

Capital discipline remains a key focus of the Group and there will be an ongoing review of capital allocation and portfolio efficiencies at Hirslanden during this period of regulatory changes, while ensuring clinical standards and the quality of patient care remain appropriate. In FY20, Hirslanden expects to invest CHF37m and CHF55m on expansion and maintenance capex respectively. This includes the ongoing investment in the Hirslanden 2020 strategic project, in addition to new day case clinics opening at St. Gallen and Bois-Cerf.

The combination of the Hirslanden Clinique La Colline and Clinique des Grangettes in Geneva was announced in September 2018 and consolidated from 1 October 2018. The combination, which included a cash consideration of CHF77m for a 60% controlling interest in the combined entity, strengthens Hirslanden’s leading market position in Geneva and will deliver enhanced services for patients in addition to being earnings accretive. The hospital is supported by around 450 affiliated independent medical practitioners and attracts a high proportion of supplementary insured inpatients while providing an extensive outpatient service.

MArket overview

Switzerland has a reputation for having one of the best quality healthcare systems in the world supported by both public and private providers. Compulsory health insurance operates in Switzerland and the healthcare market is mature and stable with a wealthy ageing population. A gradual change in the insurance mix occurred over time with the proportion of basic insured patients in Switzerland marginally increasing each year. Outpatient activity is growing strongly in Switzerland, driven in part by the outmigration of care regulation implemented nationally since 1 January 2019. Hirslanden continues to engage with insurers and regulators in Switzerland, seeking to offer the most appropriate care and services for this growing market.

Largely as a result of recent acquisitions, Hirslanden’s leading market position strengthened during the year. With its increase in inpatient beds and inpatient admissions, Hirslanden now holds 18.7% and 34.3% of these respective categories in the Swiss private market. In the larger, combined public and private market, Hirslanden now represents 4.4% and 6.9% respectively.

According to the Euro Health Consumer Index 2018, Switzerland is the Gold medallist out of all the healthcare systems in Europe, scoring very high for Accessibility and Outcome (893 of 1000 possible points), overtaking the Netherlands. As it is quoted in the study, “the top position of the Swiss healthcare system is to a great extent a product of an even performance across the sub disciplines, very good medical quality and excellent accessibility”.

Hirslanden continues to drive for improved quality and patient experience. As with all other divisions at Mediclinic, the internationally recognised Press Ganey® group is used to measure patient satisfaction. Last year, 91.5% of 33 899 people indicated that they would likely recommend Hirslanden.

Since 2012, Hirslanden has participated in the Initiative on Quality Medicine. The initiative collects and measures performance indicators and clinical outcomes from over 380 hospitals in Switzerland and Germany. This transparent benchmark highlights the clinical quality of Hirslanden with all the division’s hospitals scoring above the last recorded benchmark of 74%, the majority excelling with a score of between 85–100%. Refer to the Clinical Services Report on the Company’s website for a more in-depth description.

Outlook

The current operating environment is challenging with all public and private hospital operators across Switzerland financially impacted by the recent TARMED tariff reductions and outmigration of care. The shift from inpatient to outpatient medical treatment continues with the national framework implemented on 1 January 2019, which states that six clinical procedure groups will only be reimbursed on an outpatient tariff basis. Adapting to this growing outpatient trend and in order to define and strengthen the care regions, Hirslanden strives to have highly efficient day case clinics for each delivery region. The day case clinics concentrate the volume of outpatient surgeries from the hospitals located in the region. This allows Hirslanden to supplement the service offering of the hospitals with adequate structures in order to ensure cost-effectiveness on the one hand and to be able to have a comprehensive integrated range of services for patients on the other. Hirslanden has recently opened two standalone day case clinics in the regions Zürich and Central Switzerland. In FY20 Hirslanden plans to open further day case clinics across the delivery regions.

In addition to the outpatient strategy, Hirslanden plans to expand and invest across the continuum of care by evaluating joint ventures in the field of primary care and new digital solutions. Combined with the benefits of the Hirslanden 2020 strategic project, these and other initiatives are expected to support Hirslanden’s performance over the medium term.

Hirslanden is committed to treating patients with general health insurance in accordance with the national criteria for effectiveness, expediency and cost-effectiveness and thus makes a clear contribution to cantonal health care and affordability of health care in general. At the same time, Hirslanden continues to focus on first-class patient care in the supplementary insurance area to improve service differentiation where appropriate. To make it easy for patients to see what benefits they can expect according to their insurance class, Hirslanden has developed uniform packages that clearly define what benefits patients with basic and supplementary insurance can expect from registration through to being discharged. Hirslanden thus sets standards for basic and supplementary insurance treatment, and offers its services in a uniform, transparent and premium-based manner. However, regardless of the patient’s insurance class, Hirslanden ensures the clinical outcome is always the same. In addition to the existing Hirslanden Privé programme for private patients, Hirslanden launched a further programme for semi-privately insured patients in February 2019, Hirslanden Préférence. Given the positive experiences with the existing Hirslanden Privé programme, it is expected that the benefits of the new programme will support the attraction of important semi-privately insured patients.

|