Hospitals – are private hospitals big business?

January 28, 2011

by Jacqui Pile – ~uFinancial

The perception that private hospitals are making “super profits” has placed them at the centre of government’s proposed price reforms. In government’s corner is the Council for Medical Schemes , which also believes private hospitals are earning far higher than average returns on their investments.

But is this really the case?

Registrar of medical schemes Monwabisi Gantsho told a conference of the Institute of Health Risk Managers last year that the cost of debt had dropped significantly since 1999, yet hospital groups’ return on investment (RoI) had grown from 10% to nearly 25%/year. At first blush, that’s alarming because the figure is nearly double the 12,4% return on average capital employed of the top 40 JSE-listed companies over the past five years. It also means hospital groups have expanded their margins without passing on the benefits of lower funding costs to consumers.

But hospital groups say the council’s calculation of their profit margins doesn’t take into account the real cost of being in the hospital business. The Hospital Association of SA (Hasa) estimates that it costs about R2m on average to build and equip a new hospital bed to meet strict clinical safety and building regulations. Adjusting for the fact that not all existing hospital beds are new, the average value per existing bed would still be at least in the region of R1,5m , given maintenance and upgrading costs. Netcare says it has invested 70% of its profits after tax back into the business over the long term, so it’s important its assets are reflected at replacement, rather than book value. The council’s RoI figure for hospitals factors in a cost per bed of just R600000.

Calculations by the FM comparing the hospital groups’ net profit to their investment in the sector, based on the number of beds they own in SA, suggests hospital companies have lower RoI ratios than the market average (see table). While the top 40 listed companies showed RoI ratios of 12,4%, Netcare’s RoI was 10,3%, Medi- Clinic’s 10% and Life Healthcare’s 12,2%.

Of course returns at a sector level, let alone market level, are a broad measure and do not tell the story of how an individual company’s returns are derived.

A look at hospital groups’ profit margins may be a better way of assessing whether their returns are reasonable.

In 2010, Netcare’s profit margin was 14,9%, Medi-Clinic’s 18,8% and Life Healthcare’s 21%. That seems large until compared with other consumer-focused companies such as telecommunications giant MTN (41%), generic drug manufacturer Aspen (26%) and clothing retailer Truworths (34%).

~uHospitals – are private hospitals big business?

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