Discovery Group said the high cost of private healthcare is a result of an increase in chronic illnesses and an ageing population, which are among the drivers of medical inflation, adding that it is rolling out initiatives to keep the cost down.
According to Discovery, increasing chronicity accounts for 15% of the demand for healthcare, with chronic beneficiaries having grown from 15.8% in 2008 to 33.1% in 2024. Increased ageing of the scheme contributes 47% of the demand . Discovery has 3.9-million medical aid scheme members in South Africa.
The company will increase rates by between 7.4% to 10.9% next year, more than consumer price inflation. Discovery said medical inflation outpaces CPI due to ageing populations and a growing number of people being in poor health, which leads to a greater demand for healthcare services over and above the increase in the cost of those services.
CEO Adrian Gore admitted that its proposed price increase is “high”.
“We know that, and we're focused hard on trying to make healthcare affordable. But it's important to understand what the components are. You have the unique aspects in healthcare of supply side drivers, utilisation drivers, new technologies, etc — all these create some inflation. We are seeing incredible ageing. We see increasing chronicity, and we see the buy down effect — healthy people often buy very basic plans, and that creates an adverse selection effect. The demand side utilisation adds like 4% to 5% to that inflation rate. It's not easy to manage. We have an egalitarian system.”
In addition to introducing a cheaper plan costing R1,300 per month, targeted at young professionals, Discovery will also ramp up programmes aimed at encouraging people to live healthy lifestyles.
We are seeing incredible ageing. We see increasing chronicity, and we see the buy down effect — healthy people often buy very basic plans, and that creates an adverse selection effect
— CEO Adrian Gore
“In terms of ageing and chronicity, we are really focusing on this issue of hyper personalisation; every single member of the Discovery medical scheme will have incentives and rewards and targets provided by the scheme, and this idea of hyper personalisation ... on what they should do, will start playing out. So we have a great, great focus on chronicity, on making people healthier. We believe the two together will create a massive sense of stability and growth potential for the Discovery medical scheme, of course, for Discovery Health.”
Discovery medical scheme has 57.9% market share. Discovery Health reported a 7% rise in operating profit to R3.9bn. Overall, Discovery South Africa, which includes health, bank, life insurance, investment and car insurance businesses, reported a 16% rise in operating profit to R9.7bn.
Zaeem Kumandan, portfolio manager at Nedbank Private Wealth, said Discovery continues to refine the shared value model and is now positioning itself to engage members in personalised programmes.
While it continues to innovate well ahead of its peers, both locally and globally, a “key risk we monitor is the overall complexity of the group, which currently has many moving parts, thereby increasing forecast risk, as well as the complexity of the group’s products. In a post-Covid world, many consumers now prefer simpler, basic products without all the bells and whistles”.
Overall, Discovery Group operating profits, including global businesses in China and the UK, were up 17% to R11.6bn.
Gore said that over the past eight years the company went through a cycle of significant investment, with a focus on globalising its capabilities, footprint, and scale, as well as building new ventures such as Discovery Bank. “This investment cycle was aimed at creating new avenues for long-term growth and we are confident that the business is positioned well to capitalise on this investment.”
The company is entering a new phase of growth and expects compound annual growth of 15% to 20% over the next five years. Average earnings growth per annum is forecast at between 12.5% and 17.5%.
Gore said the bulk of those earnings would come from the banking division. “The bank's performance has exceeded expectation. We are doing well in the mass affluent space. Nearly 60% of new business is coming from people new to Discovery,” he said.
The bank has crossed the 1-million customer base, deposits grew to R19bn and revenue grew 41% to R2bn. The bank, which also provides home loans, is targeting 2-million clients and R3bn in profits by financial year 2029.
Kumandan said Discovery’s growth in South Africa would be driven largely by the success of the banking offering, while globally the group's success remained tied to its partners, where the group is leveraging its IP. In China, the relationship with Ping An continues to be a key growth driver given the large total addressable market.
“In our view, competition remains intense in the South African financial services landscape, with life insurers now competing in the banking profit pool, and vice versa. Ultimately, players with differentiated, value for money offerings will come out as winners over time.”
Barry de Kock, equity analyst at Denker Capital, said while the bank appeared to be tracking well and management had provided somewhat bullish guidance, there remained some execution risk. “Naturally, the turn to sustainable profitability could prove to take longer than expected given growth in loans which require upfront provisioning (home loans in particular). Lastly, while the probability seems low, there also remains a risk that they will require more capital down the line for the bank.”
He said Discovery management had a “somewhat uncharacteristically bullish outlook”, expecting medium-term profit from operations to be ahead of their longer-term target of CPI +10% without requiring additional capital to do so. “Given accounting complexity and associated difficulty in forecasting future results, Discovery’s investment case remains more challenging than peers in our view.”
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