Managing director’s review

Life Healthcare extends a warm welcome to our new shareholders. We thank you, and our existing shareholders, for the confidence you have shown in our group through your investment.

Results

Our Group’s 2010 financial results reflect significant growth, with all our businesses contributing to Group profits. Revenue increased by 10.8% to R8 786 million, while operating profit was up 20.1% to R1 867 million. This strong overall performance resulted from organic growth through the expansion of existing facilities, investment of capital in new facilities and technologies, and operational efficiencies leveraged across the group.

Increased hospital admissions

Life Healthcare’s robust results reflect the increasing demand for private medical treatment in South Africa. Our hospital occupancies have been boosted by a growing, affluent but ageing middle class population with medical insurance, a high disease burden and constraints within the public healthcare system.

There is a correlation between higher hospital occupancies and medical scheme membership, which has grown from 6.7 million in 2004 to over 8 million in 2010. The introduction of the Government Employees Medical Aid Scheme (GEMS) has made private health insurance more affordable to government employees, which led to a significant expansion in private health insurance membership. Our hospital occupancies have also risen due to our leadership position in preferred network agreements with medical aid schemes, which offer financial incentives for members to use our facilities. In addition, South Africa’s sustained economic growth has resulted in a growing middle class with more citizens opting for private healthcare, especially in view of the current constraints within the public healthcare sector.

Expanding our horizons

This past year we have focused on growth, quality, efficiency and sustainability.

Hospital division

We increased the number of registered hospital beds to 8 322 (including associates).

Acute care hospitals

In November 2009 we opened the Life Beacon Bay Hospital in East London and the Life Orthopaedic Hospital in Cape Town. Furthermore we acquired the Life Bay View Private Hospital in Mossel Bay. These hospitals, together with the new cardiac unit and additional 55 beds at Life St George’s Hospital in Port Elizabeth, as well as other facility and services expansions, will enhance our revenue in the coming year.

Acute rehabilitation

A number of our rehabilitation units were expanded during the year. Additional adult beds were incorporated at Life St Dominic’s Hospital in East London and a dedicated acute paediatric rehabilitation facility with 10 beds was opened at Life New Kensington Clinic in Johannesburg. Application has been made for a licence for the establishment of a 50 bed rehabilitation unit in the Western Cape. This unit will incorporate a dedicated 10 bed paediatric facility. Responding to the demand for inpatient orthopaedic and pulmonary rehabilitation, these services were incorporated into our rehabilitation product range.

Acute mental healthcare

Scarcity of acute mental healthcare facilities in South Africa has presented an opportunity for us to expand our network in this field and to increase the number of beds in existing facilities. A new 20 bed facility opened at Life New Kensington Clinic at the beginning of the year, while the new bed facility at Life The Glynnwood in Benoni is due to open in March 2011.

Renal dialysis

Our group’s fourth renal dialysis unit opened at Life St James Hospital in East London in 2009, bringing the number of dialysis stations to 40. A fifth unit will be opening at Life Mercantile Hospital in Port Elizabeth in January 2011.

Healthcare services division

Life Esidimeni

Life Esidimeni continues to explore opportunities for clinical healthcare delivery public/private partnerships (PPPs) with government. Contracts for the operation of the Conradie Care Centre and Siyathuthuka Care Centre were extended to the end of April 2011 and May 2011, respectively.

Life Occupational Health

Stabilisation of the economy and new business growth resulted in increased demand for our occupational health services. Some contracts, lost in 2009 due to the depressed economy, have been re-instated in 2010. We expanded our presence in the mining sector through new contracts with mines in the Northern Cape and Mpumalanga. Our focus over the past year to increase the number of national clients has paid off, with a number of such new contracts having been secured this year. The Transnet Rail Engineering contract, for example, required the establishment of 10 additional clinics.

To add value to our occupational and primary health services, we offer personal protective equipment to our existing clients, as well as a range of branded vitamins to enhance the well-being of HIV positive and other individuals treated at our clients’ on-site clinics.

Growth

We continue to extend the boundaries in our growth strategies and have ambitious yet realistic goals for the next three to five years. A lready a leading provider of high quality, cost effective healthcare in South Africa, Life Healthcare aims to establish itself similarly in other selected offshore emerging markets. We will grow the capacity of our existing facilities to meet increased demand and to enhance profitability while remaining competitive. Capital expenditure of R 600 million excluding new acquisitions has been allocated for 2011 to achieve our growth, quality, efficiency and sustainability strategies and to provide facilities and technology to attract specialists, healthcare professionals and, of course, our patients.

Increased admissions in all our hospitals have encouraged us to expand the geographic reach of our coverage in the acute care hospital sector. Over the next two to three years, we intend to increase our bed numbers by approximately 800. This will be achieved by:

We are exploring opportunities to create niches in fields such as mental health, renal dialysis, acute rehabilitation, frail care and treatment for tuberculosis.

In support of our plans for international expansion, our group has formed a strategic partnership with the International Finance Corporation (IFC), a member of the World Bank Group, to encourage investment between emerging market countries. We intend to access markets where we have identified the scale and financial resources to drive demand for private hospital services and where we can leverage our skills.

Quality and clinical governance

The quality management programme we introduced into our operations a number of years ago has developed into a comprehensive, consistently applied and measured endeavour for which our group has received international recognition. It is important that our quality programme focuses on our patients’ experience of the service we provide them, on health and safety issues affecting them, as well as on the clinical excellence we demonstrate in caring for them. In the latter respect, we continually explore ways of improving our clinical interventions, adopting and benchmarking ourselves against international best practices, with the ultimate aim of enhancing patient outcomes.

Our Group is a key role player in expanding the quality improvements that we have implemented in our hospitals to the industry at large, including the Department of Health, and is a leading force in the industry wide collaborative initiative, Best Care … Always. Through HASA we have participated in developing revised quality standards for health institutions countrywide.

Operational efficiencies

Life Healthcare hospitals face above inflation escalations in health professional salaries as well as electricity and other utilities’ costs, which impact our profit margins. In an effort to safeguard profitability while continuing to provide quality care, we have reviewed all our financial structures and obligations, streamlined our operational activities and standardised our accounting processes. Benefits derived from our critical review of efficiencies in theatre, appropriate medication formularies and usage, stock classification, and staffing models – to name a few – have achieved a sustainable culture of performance, productivity, and efficiency.

For the past four years Life Healthcare has maintained its international ISO 27001 ISMS (information security management system) certification. Significant investment in information management has improved the patient experience as well as the quality and efficacy of information used in key decision making. Our systems have enabled the provision of significant strategic information to our business processes and enhanced our management of key business areas.

Our updated information management system, being phased in over five years, is assisting the hospitals with quicker and more efficient admissions and superior patient case management, while modules that will be implemented in coming years will also enhance billing, credit management and infection control. The judicious management of skills allocation through a system that assesses the number and condition of patients in a ward, and then ascertains the appropriate skills and number of nursing staff required, ensures the most efficient use of our healthcare professionals. This is further enhanced by our initiative to free nursing staff from administrative duties, enabling them to focus on patient care.

Sustainability

Healthcare regulatory environment

The problems and challenges facing South Africa are many and varied. Affordability of healthcare provision has become a global phenomenon and South Africa is not alone in facing this. What makes our situation more complicated is the severity of our disease burden. As a result, implementation of the Department of Health’s 10 point plan to improve the quality of healthcare for all South Africans, has assumed a greater urgency. Life Healthcare has appointed Dr Keith Shongwe as general business manager health policy, to liaise with government in matters relating to the healthcare regulatory environment, health research and economics, and government relations and strategy.

National health insurance (NHI)

In September 2010, the ANC announced their plans to phase in NHI over 14 years, with 2012 as the starting point. At the core of NHI will be primary healthcare, as the first point of entry into the health system. Roll-out is initially intended in the seriously underserviced areas where people have difficulty accessing healthcare.

At the time of the announcement of the NHI, the private sector had been afforded minimal opportunity to assist in the planning for this extremely complex endeavour. We look forward to receiving clarification of the process, so that we can contribute positively to the development of a model and address existing challenges that will significantly impact NHI, such as the shortage of medical professionals and resources in the country.

For many years Life Healthcare has proved, through Life Esidimeni, that we are proficient at providing affordable healthcare to the low income sector. Affordability and cost containment are attained through good primary healthcare and ensuring that patients access health services at the correct level. We hope for an inclusive process which will enable us to engage with the state and other stakeholders in a spirit of cooperation, to work towards constructive solutions in ensuring an NHI that is appropriate to South African needs and conditions.

National health reference price list (NHRPL)

In 2007, the Department of Health provided pricing guidelines for the establishment of a reference tariff set out in the NHRPL based on current costs, reasonable returns on capital invested, and spread over current occupancies. These tariffs were to be established as a combined approach by business and the Department of Health, and would facilitate competition and the entry of new participants into the industry.

To ensure a fair and accurate NHRPL process, the private hospital industry commissioned Deloitte to collate data and to maintain confidentiality between the various participants. The exercise proved useful in that it established the basic cost of services provided, highlighted any cross-subsidies between services, and identified areas where services under recovered costs.

It also emphasised the fixed cost element of the private hospital business and therefore the need to plan and ensure that facilities were able to maintain minimum levels of occupancy.

Unfortunately no agreement was reached with the Department of Health, and as a result the published 2009 tariffs and the 2007 regulations were rescinded by High Court order.

We will continue to update and maintain the costing model to assist us in any future price negotiations.

Shortage of doctors and other healthcare professionals

It is of national concern that insufficient doctors are qualifying to serve the healthcare needs of the country. The shortage of doctors in South Africa in both the public and private sectors, coupled with the long development lead time for specialists in particular, will impact the future quality of healthcare. According to research done by Econex there are approximately 27 400 general practitioners and specialists practising in South Africa. This is much lower than the often quoted number of 36 912 doctors, which fails to take into account doctors who are still registered but do not practise for a variety of reasons. This equates to a ratio of 0.55 doctors per 1 000 people compared to 2.1 in the UK, 2.7 in the USA and 1.7 in Brazil (WHO 2008 figures).

In addressing skills shortages, Life Healthcare has a clinical directorate comprising doctors who are tasked with improving access to academic institutions with an emphasis on fields such as cardiology, neurosurgery, internal medicine, orthopaedic surgery and paediatrics. We are keen to partner with academic institutions to address the current lack of capacity for doctor education at recognised institutions. We currently sponsor a fellowship for gastroenterology at the Pretoria Academic Hospital and trainee cardiologists at both the University of the Witwatersrand and University of Cape Town.

Of equal concern for South Africa is the shortage of nurses as well as pharmacists. Demand for nursing services corresponds with demand for hospital beds and our group has been successful in attracting and retaining nurses of a high calibre. The Life College of Learning with its geographical spread of 10 learning centres and our national network of acute care hospitals, position us ideally to train and develop nurses. Our Group’s pharmacy management services resource development programme focuses on the training of pharmacist interns and pharmacist assistants in conjunction with eight S outh African universities.

Business stakeholder relationships

Specialists

Although the doctors – mainly specialists – who work in Life Healthcare’s hospitals are clinically independent from our group, they play a strong consultative role in the operation of our hospitals through participation in our medical advisory committees and/or hospital boards. Our supporting doctors have contributed meaningfully to the success of our quality initiatives and business efficiency projects. In return Life Healthcare ensures that our medical professionals are supported with quality personnel, facilities, technology and equipment in the treatment of their patients in our hospitals.

At Company level, Life Healthcare has provided investment opportunities for doctors, and they currently own a 5.9% shareholding in the Group. Doctors have also purchased shares in certain hospitals, aligning their interests with those of the Group.

As a support to both doctors and line managers our clinical directorate safeguards professional conduct and standards and monitors procedures to ensure best practices are followed.

Private medical insurers

Our commitment to providing world class quality and cost effective healthcare is underpinned by our strategy to make healthcare accessible to all sectors of the private insurance market.

Life Healthcare is the leading hospital provider to private insurers for preferred network agreements, under which patients are either encouraged or restricted to use our group’s hospitals rather than other healthcare facilities. Due to our ability to contain hospital costs without comprising quality of care, we have maintained strong relations with the medical insurers.

Life Healthcare has initiated innovative models to ensure that our pricing structures are current, appropriate and accurate. Through information sharing and co-operative relations with medical schemes, we have introduced alternative reimbursement models (ARMs), changing our billing systems and fee structures. These models consist of a mix of per diems, fixed fees and diagnostic related groupings (DRGs) that commit Life Healthcare to managing and containing costs, and passing on a portion of the savings from such cost containment to the private medical insurers.

Government

Life Healthcare is committed to building a better South Africa by improving healthcare in the country. The Group has, through Life Esidimeni, maintained a long standing PPP with the government in providing quality long term healthcare services to indigent patients. Our group is also in partnership with the Eastern Cape Department of Health and an empowerment partner in Life Isivivana Hospital in Humansdorp.

Corporate social investment

Sustainable corporate social investment is an inherent component of our business ethos and is aligned to our long term objectives. In A ugust 2010, the three week strike action by nurses from the National Health and Allied Workers Union (NEHAWU) led to widespread shutdowns of state clinics and hospitals. In total 109 patients, most of them in dire need of specialised medical care, were admitted to various Life Healthcare facilities. Several state paediatric patients were admitted to Life E sidimeni’s Matikwana H ospital, a PPP district facility near H azyview, while other Life E sidimeni facilities admitted mental health and other long term patients from state hospitals affected by striking healthcare workers.

Our own private hospitals were in no way affected by the public sector strike. I applaud the compassion shown to these patients by our nurses and supporting doctors during the strike action. This generosity of spirit is evidenced in many examples of services rendered in our community outreach projects (see page 40 to 41).

In another public sector outreach, Life Healthcare responded to the call to support the government’s national campaign to have 15 million citizens counselled on, and tested for, HIV and screened for other chronic conditions by June 2011. Capitalising on our ability to access employed but medically uninsured people, we are engaged in free counselling, testing and screening services at more than 50 of our occupational health sites and also at a number of our hospitals.

Looking ahead

Key to our continued success is the ability to adapt to a changing healthcare environment and explore innovative methods of healthcare delivery to ensure sustainability. It is premature to predict the effect the planned NHI will have on the private sector. We await clarity from the government on the role of private healthcare providers in this initiative. We are confident of our ability to make a meaningful contribution both to NHI and the country as a whole.

In particular, we can share expertise with the public sector in providing management, systems and administrative support; by training healthcare professionals and partnering in addressing issues such as skills shortages; by reducing waiting lists of patients requiring elective surgery; and by establishing clinical quality benchmarks and understanding disease patterns. We are committed to broadening access to healthcare for low income groups and to making a positive impact on people’s lives across the spectrum of society. Our outreach to government continues.

Skills development is essential to the country’s sustainability. Training of nurses and pharmacists remains a priority to mitigate the skills shortages in meeting the needs of doctors and patients, and to ensure continuity of high quality patient care. In striving to attain our strategic objectives, we remain committed to investing in the further education, development and well-being of all our employees.

We will continue to focus on our growth objectives in South Africa and in selected offshore emerging markets.

To enhance performance, productivity and best practices throughout the group we will pursue our quality management and clinical governance strategies, aiming to maintain and exceed internationally accepted standards of care. In promoting affordability and accessibility we will continue to focus on cost containment and business efficiencies.

Life Healthcare has a consistent strategy, a disciplined framework, and exciting opportunities for sustainable growth. Aligned to our growth, quality, efficiency and sustainability objectives and our vision of providing world class healthcare for all, we will adhere to the ethics for which Life Healthcare is renowned. I look forward to 2011, confident that we will once again add value for our shareholders.

Acknowledgments

This year we welcomed Dr Keith Shongwe to our executive management team. We believe his extensive experience in clinical and government matters will broaden our expertise.

Two changes to the executive team are Dr Dena van den Bergh, general manager national healthcare functions, who resigned after 27 years of service, and Dr Steve Taylor, general manager coastal region who has stepped off the executive team but will remain within the group as medical director. I thank them for their effort and contribution to executive management over the years.

Our corporate activities intensified during the year with the share offering and subsequent listing on the JSE, and I would like to thank the board for their guidance and resolute support of management during this time.

Life Healthcare employees across all of our operations have shown dedication, often beyond the call of duty. Our financial results and the progress we have made in expanding our group are evidence of every individual’s contribution to the Company. We are also indebted to the healthcare professionals, patients and suppliers who support and strengthen our endeavours. Thank you to all of them.

Michael Flemming
Managing director