Mark Ingham: Unpacking the “pie in sky” NHI – and private hospitals share prices

JOHANNESBURG — At the end of June, the 20-year-in-making White Paper outlining South Africa’s universal health ambition was published for public comment. Leading independent investment analyst Mark Ingham studied the 80 pages and was appalled at what he found. It is contradictory, punctuated by sweeping generalisations and is working on stats that are seven years out of date. The paper also takes no account of critical practical issues like funding and access (poverty-riven Africa is on SA’s doorstep, remember). The share prices of SA-listed private hospitals companies have been depressed by the NHI idea. So has their decline been overdone? And is NHI affordable for a country like South Africa – or will it be another disastrous experiment in social engineering where everyone loses? Mark provides the answers in this in-depth interview. – Alec Hogg

This special podcast is brought to you by EasyEquities, and independent investment analyst Mark Ingham is with us now. Mark, there’s been a lot of talk about the National Insurance or the National Health Insurance Program in SA. You’ve been digging into it but it actually, goes back more than 20 years.

You’re correct, it is a very topical subject and the original white paper on Healthcare Reform goes back about 20 years, to 1997. There was also a green paper, Alec, you may recall, which goes back to 2011, which was a precursor to the white paper, yet another white paper that came out at the end of June this year.

What’s the difference between green and white papers?

The terminology they use in Parliament here originates from our UK connections. White paper is commonly used in the UK Parliament. It’s a Government Policy document that sets out proposals for future legislation and it forms a basis, Alec, for consultation with various affected parties and that’s ahead of a possible bill being drafted for Parliament. Subsequent to that obviously, it becomes a [??? 0:01:28.9]. So, a white paper is supposed to be authoritative. It’s supposed to be concise and having gone through all 80-pages of the NHI white paper, I’m left with the conclusion that the white paper is neither authoritative nor is it particularly concise.

That’s pretty disappointing, given that it’s been 20 years in the making but it was released on the 29th June, 80 pages, (as you say). First of all, is it constitutionally sound? That, I guess, is the key question when one has a look at legislation in SA, given that so many proposals have actually died because they’re aren’t constitutionally sound.

You know, I question whether it is in keeping with the spirit of the constitution that we have in SA. I think that’s questionable and I think the practicality, Alec, is also… The NHI takes as it’s basis, Section 27 of the Bill of Rights of the Constitution. That allows for government to take reasonable measures to achieve a certain outcome, with the respect to right to health care. I think, given the contradictions in this white paper, we can get to the practicalities later, but my sense is it’s certainly contravenes some aspects of the Bill of Rights. Also, with respect to the freedom of association, which is implicit in the Bill of Rights, and one of the Sections, for instance, of the NHI white paper means that people will not be allowed to opt out of making a payment towards NHI. They can retain a membership of a particular medical-aid that they belong too, but they have no right to opt out of the actual NHI. So, what that means is that those payments are effectively taxed, Alec, so whether you like it or not the white paper provides for all citizens to be taxed, proportionately to their income.

But we know that only about five-million people actually, pay tax. Whereas 17-million people that are on social grants, so to say all citizens will be taxed to pay for this is, I guess, stretching it a little?

Well, it is. I’ve been quite worried about this insofar as the effect on listed hospital groups is concerned because if we look at the number of people who are in medical-aids in SA, and that includes Gen. So, if you take paid-up members and you take the actual number of beneficiaries, Alec, you’re looking at about 8.7 odd million people that are covered in various forms by medical-aids.

Now that’s not necessarily the fully comprehensive form of cover that you would get with some of the health plans that are available in the market. So, of that 8.7 or so million, only a relatively small proportion would have the full bells and whistles coverage, which is becoming relative expensive in SA, for various reasons that we can go into.

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And the capacity of the tax-base that will own the capacity of those in work, who contribute in various ways to different schemes. Relative to a population of 55 – 56 million (who knows what the number is these days?), is just simply not there. It’s difficult enough in a rich country. Britain has its own challenges with its NHS and Britain is a well-off country. Indeed, in virtually every well-off country there are various challenges. I think although the spirit of comprehensive coverage is certainly something I think we would all agree is that to which we wish it would actually aspire.

We do have policy failings in SA but I think more importantly, we have delivery failings in SA, and our other problem is that health care delivery is extremely poor. We effectively, have public health failure in SA. Despite the fact that we spend close to 5% of GDP, on public health. Roughly a similar proportion goes on private health. There’s a fundamental disconnect between the delivery outcomes that we see in private and that in public health.

The white paper is silent on the real-world mechanics of this proposed health care system. It’s also silent on the contradictions and the consequences that would be exposed, if this white paper were ever to be put in place. I mean silence on the fact that it’s not compatible to merge a dysfunctional state set-up with a functioning private sector service. Effectively, if this was put in place, my sense is that it would collapse the entire system, given the huge needs and backlogs, and ongoing mismanagement that we see in a very large public service but is a public service that fails to function in a manner that it should.

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What we’ve discovered, and this is something that the private sector hospitals have also picked up on because all the private hospitals, certainly the big ones (the big listed three) have tried in various forums to work with Government to see if public-private partnership wouldn’t be practical. For instance, Netcare (some years ago) put a proposal together to run the Johannesburg General Hospital. That was rejected largely because of the politics around that but Netcare calculated at the time that given the budget that was being spent on the Johannesburg General Hospital that within that budget they would be able to run a reasonably good public health service with the right clinical outcomes. The problem was simply lack of decent day-to-day management. It really gets down to a management issue as to why, Alec, public health is failing in SA.

Just before we move onto the nuts and bolts of it. We do know that SA has porous borders and there is no, even thought of health care being available in many of the countries nearby. Has that been taken into the NHI white paper, in other words, how are they going to restrict access or is access defined only for SA citizens, etcetera?

I guess, what they’re driving at is that all people in SA will be registered to participate in this system. They have put out some fliers giving a potted account if you will, as to how this will work in practice, so those on medical-aid and those without. It gives you a sense as to what will be available and those who are widely available for study, if you so choose to look at these things. Again, the right to public health overrides all else.

medical aidSo, it really is a situation of how do you account for all incumbents effectively whether they are bona fide SA nationals or whether they’re just simply coming over the border to take advantage, (you can call it that), of health care. It gets back to my earlier point that the white paper is silent on the real-world mechanics of this. How’s it going to operate practically, day-to-day when we can’t even get public health to operate properly as it is?

What about the pricing or the funding of all of this?

Well, if this ever came about in practice it would probably hit stumbling blocks from day one. Its envisaged to be a health financing system, Alec, that pools funds and purchases services to provide access. That universal access they insist on and that’s regardless to circumstance, so whether you’re a very wealthy person or whether you’re indigent, regardless of circumstance, you will have the right to treatment.

All sources of funding and that presumably, includes medial-aids too, although it’s a bit hazy on that front. Are to be included in a unified health financing pool and the health services in turn are provided free at the point where the treatment is needed, in other words, at the hospital. But again, the white paper is silent on how this works practically and it’s a particular quirk that I’ve picked up on. Whether the tacit cross-subsidisation of those contributing to medical-aids will in effect, create a disincentive to contributing to those very same health-plans or medial-aids. In other words, there could be a perverse incentive for people just simply to rely on the taxation funded aspects of health care to the detriment of the current private provision.

It’s an interesting point if you were to relate it to what happens in the UK, where there is National Health and you certainly can use it. It doesn’t matter where you come from. If you’re in the country you have the access. It’s all for free but you wait a long time. You sit in queues and, as a consequence, you can take the whole day to get to see somebody to look after your cough and they might just send you away with an Aspirin. It’s that kind of a setup. If you then were to overlay that into the real-world – you have private health care or private health insurance that is doing rather well in the UK because people who cannot afford to spend their days in waiting rooms will then take out their own or pay for their own insurance and make sure that when they need health care they can get it quickly. If there were to be this NHI and if it were to go ahead that presumably, or that option would still be very much alive?

It could well be but again, you’re trying to merge the situation where the total funding comes from extra taxation. Which, by the way, hasn’t been thought through properly. Extra taxation, together with the current medial-aid. Now all this is going to be merged into one pot from what I can pick-up, which is not the situation that you have with Socialised Medicine that you had in the UK. There’s a clear delineation between the NHS pubic provision and that in a private hospital.

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Here you get a situation, which two systems, if you can call them that, are merged and the current financing system or that pooling that I referred to is supposed to provide for all-comers, whether it is private or public. So, the situation means that all the service providers will contract with the NHI, so if I’m Netcare I contract with the NHI. I’ve got to align with set-pricing and reimbursements and this, whether you’re private or public, you have a fixed price. The all-know in Government decides what price is set and what you will be reimbursed for, as the service provider.

In addition to that all emergency services and that will include both the provincial and the private sector, so for example Netcare, 911, all medical vehicles will be of a standard cover. You will not be able to discern which is public or which is privately operated. The NHI will, as they claim, proactively identify population health needs. How they do that, they don’t quite say.

They will determine the most appropriate efficient and effective mechanism to draw-in on existing health care service providers. In addition to that the NHI will pay all health care costs on behalf of the total populous.

The individuals who remain with the current medical schemes, that’s well and good but as we’ve mentioned previously, you cannot opt out of making mandatory payments but you can choose not to avail yourself of NHI services. You have to pay but you don’t necessarily need to avail yourselves of that. If you want to go private exclusively you could. However, given the fact that the merging of public and private, which is effectively what this white paper is driving at. How that works in practice would be extremely difficult and it would be financially extremely challenging, for the current private health care groups. Given the fact there’s this implicit cross-subsidisation with a significantly greater proportion of the populous now being encapsulated within a very similar budget.

Let’s think about it, we’re probably looking at about 10% of GDP. Even allowing for the additional tax, which isn’t significantly more, Alec, than we have at the moment. But what we’re looking at or what the government policy is driving at is effectively, trying to get private sector outcomes with a very similar budget to what we have at the moment. And without the management mechanisms to put this in place properly.

It sounds very ‘pie in the sky’ particularly if you take the UK example again, five-times richer than SA. A similar type of population and they struggle to make it work. So, anyway, it is what it is. If this were to be implemented what would the impact be on companies like MediClinic, Discovery and, you mentioned earlier, Netcare, Life Health, etcetera?

The expenditure and funding estimates are antiquated. Alec, they’re working on 2010 figures, which go back to the earlier green paper. We’ve moved on seven-years from there and the landscape has changed dramatically in the last 7 – 8 years. So, the actual numbers that they’re working on are scarcely credible. I think there’s very little understanding of financial reality in this. If you go through the white paper the stats are not particularly good. The sweeping generalisations and these generalisations have been good enough to be taken as a statement of pay out. There’s no doubt that this paper started had started out as a foregone conclusion and reverse engineered back from there.

We have a situation, in which the private sector is fingered or various things that are not particularly good. The private sector is seen to have weak systems of governance and leadership. It’s seen to be poorly regulated, and it also, this might surprise you, the private sector is claimed to have poor outcomes when it comes to hospitals or delivery. So, the actual health quality is questions. As we’ve seen with the current health care market enquiry by the actual government. The current Competition Commission health care enquiry is ongoing. It’s delayed and there’s no mention of the Com-Com health care market enquiry in this white paper whatsoever. It appears to be pre-empting certain outcomes that the enquiry is currently working on and we don’t know what those outcomes will be but they’ve been pre-empted in this white paper.

So, the private sector is seen as being responsible for the high cost of health care. That comes through very clearly, and the hospitals in particular. So, the NHI is proposing price control and part of the problem that the government sees in the health care systems in SA, is apparently now going to be resolved by a single funder, a purchaser/Government and payer, also the government. There’s mention of pharmaceutical companies and so forth. This complex de belief that goes around this too because there would have to be significant new legislation brought into place

Everything that you’re talking about, Mark it really looks terribly off the wall but is it, in your estimation, time to start selling the shares in these companies because it’s that serious? Everything that  you’ve unpacked for us is if the NHI is to be enacted and there is clearly, a political movement that wants that to happen. Then SA’s companies who are in that sector would be vulnerable.

Well, they are and you asked the question what’s the impact? Well, the impact is going to be negligent. How do you model that? Given the fact that the white paper is scant on detail and big on, as you say, ‘pie in the sky.’ The detail is almost completely ignored and in favour of the big picture what they called phased implementation. It indicates in the white paper all manner of bureaucratic structures are going to have to be set-up. Eleven separately identified acts of parliament need to be changed, along with many other pieces of legislation.

Now, the implications of this, from a time point of view, let alone a legislative complexity point of view. Leave aside the financing aspect for now. This could take many years. They will also be, no doubt, a number of challenges from those affected by this and that will further delay matters. So, there’s no doubt that the private hospital would have a right to challenge this legislation and the effect that it could conceivably have on their business models.

So, they’d keep it tied up in court, in other words? There’s no imminent threat to investors, who happen to hold those shares.

No, what got me thinking on these lines is a lot of these companies, the Netcares, Mediclinics, and Lifes of this world are popularly seen as defensive investments. Very predictable, growing in line with nominal GDP probably a bit more and with occupancies being as they are in the hospitals, pretty good occupancy, and a fairly good base load of income. Just the sort of defensive investment you would like to have. Yet we’ve seen the share prices of these companies steadily come off. We’ve seen Life Health Care down from R35/R36 to R25. Netcare has gone from R35 to R25. Mediclinic has also come down in recent times.

They were very richly rated and I think rightly so, but my sense is that investors are probably starting to question whether the threat of NHI and in an underpinned course by some poor thinking on the part of government, in drafting potential future legislation for this. I think people rightly have to ask questions because the earnings impact will develop on a scenario that you would model. But there’s no doubt that the earnings impact could be material compared to where we are at the moment. With significant margin compression and I think that would have implications right through the value-chain.

This is not just detrimental to the private sector. It’s potentially detrimental to the public sector as well and it doesn’t really tackle the pressing problems that the public sector has. There are a number of ways in which the private sector could join together with the public sector to achieve a far better outcome than we’re achieving at the moment. Without going through this convoluted expensive and potentially, damaging NHI process. I think the trust deficit between government and the private sector is such that a pragmatic solution, along those lines. In which the private sector through good management helps government get far more [??? 0:26:43.5] insofar as the public delivery is concerned. That to me, would be a very prudent way of going about it and a sensible way of going about it and, as time goes by, possibly new forms of delivery would emerge.

At the moment, it’s extremely difficult to actually see this working. I think also, and I mentioned at the outset, that it contradicts itself right through. Although the three big hospital companies are seen as the main reason for health care inflation, there’s also no [??? 0:27:26.1] emphasis in the white paper on the purchasing power of the medical schemes and sales, and on the supply of health care professions, and that’s another aspect that we could spend 30 minutes discussing. What would happen to the health care professionals in this type of situation? The NHI also recognises that medical costs will rise over time, independent of NHI implementation. It says that in the white paper and that’s because of population aging, advances in technology and higher demand. All of these factors have been mentioned by the existing medical-aids and whether you like it or not, those challenges are not going away, whether you have NHI or you don’t.

A complex subject and you’ve done great justice to it. The white paper for the proposed NHI in SA, which was released on the 29th June 2017. Giving us, his assessment thereof is Mark Ingham, one of SA’s leading independent analysts and this special podcast was brought to you by EasyEquities.

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