The ANC has talked about national health insurance since 1994 but implementation thereof has always been challenging, and largely unaffordable. While this remains the case, the pressure from the party on the government to accelerate the plan has been rising from recent policy conferences, with the most recent resolutions mandating that “Government must speed up the implementation of the recommendations of the commission of inquiry into a comprehensive social security system in the spirit of the Mafikeng conference resolution on the National Health Insurance (NHI)”.

This led to the tabling of the National Insurance Bill to parliament in 2019, and its more recent signing into law by the President in the days leading up to the 2024 national election. The Act describes its purpose as to “establish and maintain a National Health Insurance Fund in the Republic funded through mandatory prepayment that aims to achieve sustainable and affordable universal access to quality health care services by:

  1. Serving as the single purchaser and single payer of health care services in order to ensure the equitable and fair distribution and use of health care services;
  2. Ensuring the sustainability of funding for health care services within the Republic; and
  3. Providing for equity and efficiency in funding by pooling of funds and strategic purchasing of health care services, medicines, health goods and health related products from accredited and contracted health care service providers.”

While there are obvious social objectives in achieving universal healthcare for all, the Department of Health (DoH) also believes there are inefficiencies in the current healthcare system which NHI would seek to address, in particular:

  1. The current system spends an equal amount on healthcare services (~R250bn per year) in the private sector that serves 15% of the population, as in the public sector serving 85% of the population.
  2. The procurement of medicines and healthcare goods and services is separate between private and public. DoH believes if there is a single purchaser of medicines and healthcare goods and services then the country can achieve lower prices through economies of scale.
  3. Duplication of systems, medical records etc.

In addition, the Competition Commission has also weighed in on the matter via the Health Market Inquiry, also raising a number of concerns:

  1. A fee for service model (doctors, hospitals, and medical practices charge separately for each service they perform) is expensive and has been abused by healthcare professionals hence the need to change to a DRG system (case-mix complexity system implemented to categorize patients with similar clinical diagnoses in order to better control hospital costs and determine payor reimbursement rates).
  2. Abuse of the system where people go to specialists for services that could be delivered in a primary health setting by a nurse or GP.
  3. Medical scheme packages are complicated to assess with respect to value vs price and not comparable across various schemes making it complicated for members to compare.

Universal healthcare for all is an end goal, but in practice this is likely to be a long process, starting with Prescribed Minimum Benefits (PMBs). PMBs are defined in the Medical Schemes Act, where medical schemes are at a minimum obligated to cover the costs related to the diagnosis, treatment and care of:

The NHI Act intends to begin by creating a fund that will be a single purchaser of all PMBs. It aims to first procure primary healthcare services (GP consultations, nursing staff etc) and then add more PMBs through time. When the fund has all PMBs procured or in place, then private medical schemes will by law no longer be allowed to cover any PMBs, instead only providing complementary cover.

Philosophically, Universal health care is a good thing for the citizens of South Africa and access to healthcare services is a basic human right as defined in the constitution. The public health system in its current form does in fact provide universal health coverage as every citizen can get medical treatment at all public hospitals in South Africa free of charge at the point of care, however it is also true that the resource allocation in terms of specialists, nurses, GPs to patient ratios as well as funding and quality skews in favour of the private healthcare system.

The NHI Act in its current form has faced significant resistance. There are obvious challenges from a human and financial capital standpoint, as well as questions over the capacity of the state to deliver on such a complicated system, something which has proven challenging globally. A non-exhaustive list of issues raised might include:

  1. Based on previous calculations from the Department of Health, an extra R200bn is needed to fund NHI. This is expected to be raised through the fiscus which is unaffordable in the current fiscal context, and very difficult to source from an already strained and shrinking tax base.
  2. Public hospitals that have been piloted to assess whether they have the capability to deliver on NHI have in the main failed to meet the minimum requirements to deliver healthcare services to the standard required,
  3. There’s a shortage of human resources (doctors, nurses and specialists in SA) currently and there is no clear plan on how these shortages will be addressed if NHI were to be implemented.
  4. There remains a question mark over the constitutionality of removing the right of citizens to privately procure health care services.

The issues raised above have created uncertainties and they will affect private hospitals, private medical schemes, healthcare services personnel and the South African fiscus.

  1. Healthcare administration requires scale for the business model to be viable. Only a limited number of people in South Africa would take complementary cover if all PMBs are exclusively provided by the NHI Fund. Hence, without the ability to cover PMBs, private healthcare administrators could cease to exist. Discovery is the biggest provider of private healthcare administration and it’s the most profitable segment of its business. Hence, the implementation of NHI will negatively impact its valuation.
  1. Private hospitals currently utilise 66%-70% of their beds on average in a year while catering for 15% of the population. It would make sense that being able to cover 100% of the population will result in a higher utilisation of its beds. However, the price paid by the NHI Fund to procure these services is unknown. It has been suggested that the NHI fund will provide services under a DRG system which is a model being used internationally but it’s hasn’t been finalised which adds further uncertainty. What we have observed globally is that when countries move from a fee for service model to a DRG model or regulated prices in general, hospitals margins decline sharply due to lower prices.
  1. SA has a shortage of healthcare services personnel who have raised concerns around the implementation of the NHI Act in its current form. These concerns were not considered before the NHI Act was signed and some are considering emigrating.

With respect to market reaction, in general investors don’t like uncertainty. The NHI Act certainly creates uncertainty and investors will reflect this by raising the discount rate used to value future cash flows. The NHI Act doesn’t specify how patients will be allocated to various hospitals and at what price those services would be procured at, therefore the potential for higher revenues at a lower margin is also uncertain at this point. It is important to note that this can also create opportunity as the market unilaterally marks down all exposed companies.

The healthcare sector will be impacted, but stocks specifically that could be impacted by the NHI Act are Life Healthcare, Netcare, and to a lesser extent Remgro, indirectly through their stake in Mediclinic. Apart from the uncertainty there is certainly an investment case for Netcare, underpinned by an attractive valuation (partly because of the uncertainty described above) and positive earnings momentum driven by the recovery in patient volumes post the covid pandemic, which is driving margin expansion as capacity utilisation normalises. This is further supported by cost drivers as digitalisation costs start to fall off.

The Life Healthcare story is similar to Netcare, but the strategy of pursuing lower price network deals in the hope of volume compensation in the short term is likely to be a less attractive strategy relative to Netcare’s margin focussed strategy.

Remgro has a significant holding in Mediclinic, accounting for 32% of its NAV. Since only 25% of Mediclinic’s profits come from South Africa, on a look through basis the contribution of Mediclinic South Africa to Remgro’s NAV is approximately 8% which is manageable, especially when one factors in the stock’s 50% discount to NAV which halves this number.

Another stock that would be impacted by the NHI Act is Discovery who is already faced with deterioration in the operational momentum of their UK and Chinese businesses and concerns around the impairment of their SA Life business balance sheet post the implementation of a new accounting standard (IFRS17). In addition, the SA Healthcare administration business is 42% of its profit and is potentially the most impacted by the NHI Act of all stocks in our universe.

Matrix Fund Manager’s base case scenario beforehand was that the NHI Act would likely be sent back for review given its unworkability, however it proved to be too tempting to use as an opportunistic pre-election ploy. It is still their belief that implementation will be delayed as the Act in its current form would be challenged in court, and in practice affordability and execution challenges make implementation difficult in the short to medium term.

This article was written by Matrix Fund Managers, an investment partner and portfolio manager for Amplify Investment Partners.