Life’s offshore investment strategy contrasts strongly with those of its two competitors. That is a major reason for its preferred investment status.

Netcare spent some R20bn in buying the General Hospital Group and Medi-Clinic, nearly as much on its Swiss and Middle Eastern acquisitions. Both companies have performed well in SA but been hampered by debt burdens abroad.

Life beat its prospectus forecast with its first set of results and recently reported interim earnings up 21%. It recently purchased a minority stake in nine hospitals in India for some R800m – small change compared with its competitors.

CEO Mike Flemming explains the rationale: “Our philosophy is that we bought assets, not an income stream. Our Indian hospitals are part of a listed entity that is performing poorly against its peers. They needed a strategic partner. Our goal is to increase the operating margin from 8% to 16%.

“There are nine hospitals, four of which were built only in the last year. They have modern equipment and good doctors. “The Indian hospital business is fragmented and inefficient and we believe we can help enormously there. It is a great value proposition.

“We have seconded our people, who are our eyes and ears on the ground. We sent them there even though we have only influence and not management control. Our agreement is that we can increase our stake to 50% in 2014, in which case we would have joint control.

“It cost R800m, which in terms of price to Ebitda was ridiculous. But, at R1,5m a bed it was a bargain."

The difference between Life and the others is that they opted to go into First World situations, where the South Africans’ ability to add value is limited.

Flemming hopes that Life will have a lot more to contribute in a Third World situation.

Netcare and Medi-Clinic made their offshore investments at a time when the number of private patients in SA was stagnant. They seem to have made their investments to avoid going ex-growth. Both paid handsome prices for their foreign assets and incurred billions of rands of debt.

Netcare apparently hoped to sell GHG’s properties in the UK to reduce debt – but the plunge in UK property markets  prevented that.

By all accounts the offshore hospitals of both Netcare and Medi- Clinic are outstanding. The question is: can the SAs make a meaningful clinical or financial contribution to efficient First World hospitals?

The table shows that Life has the highest market cap of the three. Its price to book is more than twice those of the other two.  It has more beds but that is largely because of its private-public partnership with government in mental health. Without those beds, Life would have 8 066 beds.

In a wide ranging discussion, I asked Flemming whether he was worried that the medical edifice, starting with medical schemes, may not be sustainable. Life and Netcare  –  results for six months, Medi-Clinic full year

“Our own prices rose 6% compared to the Medical Fund Industry +/- 9%. I believe that is because of increased utilisation by members. The number of private patients continues to rise as more  people become middle class. There is a greater disease burden as more people adopt Western lifestyles. Then there are communicable diseases. It is up to the providers to contain cost. That is why we have changed our pricing model from fee for service to a risk sharing reimbursement model.

How does Life view the NHI?

“Who can question the desire for universal access to high quality healthcare? Government needs to improve the quality of output in its hospitals. So far there has not been one private-public partnership apart from our joint venture with government. All they have contracted out is cleaning, security and so on. 

“We believe  the private hospital sector can play a meaningful role in assisting government achieve its overarching objective.  Details of the NHI delivery model and, in particular, the private sector’s participation in that model is extremely limited.”

- davidcarte@moneyweb.co.za