Hospitals nervous ahead of probe

Image courtesy of Stock.xchng

Image courtesy of Stock.xchng

Netcare, Life Healthcare (LHC) and Mediclinic are expected to take some heat when the delayed hearings of the Competition Commissions’ inquiry into the private health care market start.

The three listed hospital groups dominate the private hospital market and, although none has a market share of more than 35%, Health Minister Aaron Motsoaledi contends each is able to exercise dominant market power at provincial or district level.

The inquiry was due to begin in May, but was delayed to allow further submissions.

Smoothing prices

The minister has, on several occasions, expressed the need for firm price regulation in private healthcare. Motsoaledi calls the private hospitals “profit maximisers” with price-setting power, having no need to compete on either price or quality in order to attract patients.

The profitability levels of Netcare, Mediclinic and LHC are high. The return on equity (ROE) of the three big players in the South African private hospital market is between 20% and 30% – double or even triple returns in other markets.

“In the US and Asia it is about 11% and 13% … This is due to good management, but undeniably also because they are more expensive than their overseas counterparts,” says Abdul Davids, head of research at Kagiso Asset Management.

But you need to keep the bigger picture in mind, he cautions. South Africa’s public hospital services are poor cousins compared with the UK and US, increasing local demand and prices.

Netcare hospitals in the UK underwent a similar inquiry and in Switzerland, where Mediclinic is the largest private player through Hirslanden, regulatory changes occurred three years ago.

Reuben Beelders, a portfolio manager at Gryphon Asset Management, says investors should be aware healthcare companies are always at risk of government involvement.

Davids says the distribution of private hospitals in South Africa may prevent forced sales, as happened in the UK.

“In South Africa, Netcare is the largest player with around 36% of the private hospital market share. Its hospitals are mostly in Gauteng, with a smaller presence in KwaZulu-Natal. LHC is stronger in the Eastern Cape, while Mediclinic leads in the Western Cape.”

Netcare performed best of the three in their latest financial results. Its share price rose after the results announcement on May 18, breaching R42 on May 19 after falling below R40 on May 7.

Mediclinic’s results disappointed and the share price followed suit, from about R130 to R108. LHC’s results also did not impress and its share price slumped to about R36 after the results, from over R41 previously.




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