LEADING analysts are cautious about the growth trajectory for South Africa's private hospital sector. They cite stagnant medical aid membership figures, a declining healthcare workforce, and a persistently challenging macroeconomic environment as key headwinds.
This week, Netcare and Life Healthcare, two of the nation's largest private hospital groups, reported earnings growth for the six months ending in March. However, Netcare acknowledged that the "broader operating environment remains challenging. Formal sector employment has yet to show meaningful improvement."
The Root of the Slowdown
Luresha Chetty, senior equity analyst at Ashburton Investments, commented on the underlying issues. She explained that the tough macroeconomic environment and structural changes in the healthcare industry have caused a slowdown in patient volumes. These volumes 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.
Echoing these concerns, Mohamed Mitha, investment analyst for Camissa Asset Management, said that the outlook for the private hospital sector "remains challenging". He noted that the pool of medically insured lives has remained largely stagnant in the past decade. Additionally, it appears unlikely to grow meaningfully without substantial job creation or constructive reform of medical aid legislation.
The Squeeze on Profitability: Medical Schemes and Margins
A significant operational hurdle for private hospital groups is their negotiating position with medical aid schemes. Mitha highlighted this, noting that hospitals are "largely price-takers".
He said bargaining power rests with the medical aid schemes when it comes to setting tariff increases and determining inclusion in hospital network arrangements. As a result, the hospital groups’ revenue growth has typically lagged behind cost inflation. This has led to significant margin compression across the sector over time. For example, Life Healthcare’s Ebitda margin is now just half of what it was in 2015.
Mitha added that this structural imbalance is anticipated to "remain a key headwind for the industry in the foreseeable future".
Life Healthcare’s Ebitda margins were reported at 15.3% for the six months to March, while Netcare's stood at 18.5%. Despite the margin pressures, revenue at Life Healthcare increased by 8.1% to R10.3 billion. In contrast, Netcare's revenue rose by 5.3% to R12.7 billion, supported by patient volumes and statutory pricing increases. In the acute hospital business, paid patient days saw modest gains of 2% at Life Healthcare and 1.4% at Netcare.
Diversification: A Strategy to Counter Stagnation
Cjetty observed that a common theme in the two sets of results was a focus on growing volumes in acute hospitals and diversifying revenues. She said the low GDP and high unemployment environment have caused lacklustre growth in medical aid beneficiaries in South Africa. Furthermore, the percentage of the population covered by medical aid schemes has fallen in recent years.
In response, both Life Healthcare and Netcare are expanding their service offerings. They are venturing further into mental health care, renal care, oncology, and diagnostics. This approach aims to diversify revenue streams and create new pathways for acute patient volumes.
Netcare has ambitious plans, including an 88-bed mental healthcare facility in Montana, Pretoria, set to be built next year due to growing demand. Furthermore, it will open the Akeso Alberlito 80-bed facility in March 2027. It is also constructing a new 87-bed Akeso hospital in Polokwane.
Life Healthcare, meanwhile, has acquired a renal dialysis business. It anticipates completing two diagnostics-related acquisitions in the second half of its 2025 financial year. Chetty noted a difference in approach, saying that while Netcare is focusing on greenfield builds only in its mental health business, Life Healthcare will begin a greenfield build for an acute hospital in Paarl in the second half of the financial year.
Future Outlook: NHI and Tariff Setting Remain Key Variables
Looking ahead, Stephan Erasmus, investment analyst at Anchor Capital, indicated that while insured admission volumes are showing a slow recovery, "policy developments around national health insurance and tariff-setting remain the main external variables affecting the private hospital groups in South Africa".
Chetty concluded with a sobering assessment that the "external drivers of growth remain muted for these hospital players in the coming years".