Analysts have warned that growth for private hospitals will be muted on the back of stagnant medical aid membership numbers, a declining workforce and the tough macroeconomic environment.
This week, Netcare and Life Healthcare reported growth in earnings for the six months to March. Netcare said the broader operating environment remains challenging and formal sector employment has yet to show meaningful improvement.
Luresha Chetty, senior equity analyst at Ashburton Investments, said the tough macroeconomic environment and structural changes in the health-care industry have caused a slowdown in patient volumes that are required to achieve the operating leverage necessary to drive the expansion of earnings before interest, taxes, depreciation and amortisation (Ebitda) margins in the acute business of both companies.
Mohamed Mitha, investment analyst for Camissa Asset Management, said the outlook for the private hospital sector remains challenging. “The pool of medically insured lives has remained largely stagnant in the past decade and appears unlikely to grow meaningfully without substantial job creation or constructive reform of medical aid legislation.”
Just under 10-million people have medical aid.
Mitha said private hospital groups face a difficult operating environment, as they are largely price-takers in negotiations with medical aid schemes.
“Bargaining power rests with the medical aid schemes when it comes to setting tariff increases and determining inclusion in hospital network arrangements," he said. "As a result, the hospital groups’ revenue growth has typically lagged behind cost inflation, leading to significant margin compression across the sector in time. For example, Life Healthcare’s Ebtida margin is now just half of what it was in 2015.”
This structural imbalance is expected to remain a key headwind for the industry in the foreseeable future, Mitha said.
Life Healthcare’s Ebitda margins for the six months to March were 15.3% while Netcare's were 18.5%. Revenue at Life Healthcare increased by 8.1% to R10.3bn and Netcare's increased 5.3% to R12.7bn, supported by patient volumes and statutory pricing increases.
In the acute hospital business, paid patient days were up 2% and 1.4% at Life Healthcare and Netcare respectively.
“A common theme in the two sets of results was a focus on growing volumes in acute hospitals and diversifying revenues. The low GDP and high unemployment environment have caused lacklustre growth in medical aid beneficiaries in South Africa, and the percentage of the population covered by medical aid schemes has fallen in the years," Chetty said.
The external drivers of growth remain muted for these hospitals players in the coming years
— Luresha Chetty, senior equity analyst at Ashburton Investments
“Additionally, structural changes in the health-care market, for example fewer acute procedures being done at day clinics and lower birth rates, have also contributed to lower patient volumes at private hospitals.”
Amid the low growth in acute patient volumes, both Life Healthcare and Netcare have broadened their health-care-related services to areas such as mental health care, renal care, oncology and diagnostics, to diversify their revenues streams and create pathways for acute volumes.
Netcare will next year build an 88-bed mental health-care facility in Montana, Pretoria, as the demand for the service continues to grow. In March 2027 it will open the Akeso Alberlito 80-bed facility and is building a new Akeso hospital in Polokwane, which will have 87 beds.
Life Healthcare acquired a renal dialysis business and is expecting to complete two diagnostics-related acquisitions in the second half of the 2025 financial year.
“In contrast, while Netcare appears to be focusing on greenfield builds only in its mental health business, in response to demand for mental health beds, Life Healthcare will begin a greenfield build for an acute hospital in Paarl in the second half of the financial year,” Chetty said.
Across the sector, while insured admission volumes are recovering slowly, policy developments around national health insurance and tariff-setting remain the main external variables affecting the private hospital groups in South Africa, said Anchor Capital’s investment analyst Stephan Erasmus.
“The external drivers of growth remain muted for these hospitals players in the coming years,” Chetty said.
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