Demand in neglected areas

While SA's dominant hospital groups venture offshore into more developed markets, smaller groups are making inroads into non-metropolitan areas in SA - disproving the notion that the local market is saturated.

Reitumetse Pitso: Financial Mail, 17 December 2015

The big three - Life Healthcare, Mediclinic and Netcare - seem attracted to expansion in destinations such as India, the Middle East, Europe and the UK. Domestic regulatory pressures have contributed to making them look for further opportunities aboard; the Competition Commission has opened an inquiry into the private healthcare sector, exploring features of competition distortion among them.

It is also becoming increasingly difficult for them to secure licences. Newcomers to the private healthcare sector are black-owned hospital groups BusaMed and Phelang Bonolo, which are hoping to lessen the 80 percent dominance of the big three. They are also positioning themselves to cater for parts of the market that have previously been ignored.

BusaMed opened its first hospital in the Strand, Cape Town, this year. Three others are in development in Modderfontein, Harrismith and Bloemfontein. A year after Phelang Bonolo opened the flagship Botshilu private hospital in Soshanguve, company founder and group executive Mabitje Rampedi is adamant that the market for private healthcare is ripe and neglected in areas previously classified for disadvantaged groups.

Phelang Bonolo has Hartebeespoort Private Hospital and East Med Day Clinic, both still to be built. Rampedi said the remnants of apartheid spatial planning in the townships became clear to him as he admitted patients from surrounding townships while he practised in Pretoria's suburbia.

He said Soshanguve was rapidly growing, while in Pretoria all the hospitals were in one street. Considering the population, its needs and economics, it made sense from a financial point of view to bring the facilities closer. After the authorities had been convinced, the challenge was showing funders that Rampedi and his associates could run hospitals.

To develop a track record, Phelang Bonolo had to create a strategic partnership with Netcare, but with no intention of growing with it. It made the funding of Botshilu much more palatable for the likes of the Industrial Development Corp (IDC), the Public Investment Corp (PIC), venture capitalists and financial institutions.

The IDC has financed the majority of black-owned private hospitals in townships. The PIC also has large stakes in the sector. BusaMed's hospital is, however, backed by private equity, with the National Empowerment Fund as a shareholder.

Financial services company Mergence said earlier this year it was also in the process of securing funding to launch its own black-owned hospital group. According to market research group Urban Studies, private hospitals are mostly found in affluent suburbs of metropolitan areas where more than 70 percent of the households are in LSMs 9 and 10.

Urban Studies CEO Dirk Prinsloo said a suitable model needs to be developed for private hospitals where township development is taking place. With the department's minimum threshold population for a private hospital at 100 000-130 000, a private hospital could be warranted for Soweto, because 12 percent of the population, about    160 000 people, fall between LSM 9 and 10, Prinsloo said. Lenmed, which is 30 years into providing private healthcare, has not lost its momentum.

In March the group opened a primary healthcare centre in KwaMashu, Durban, and added its 10th hospital through an acquisition in the Northern Cape. Lenmed's expansion plans include the construction of a hospital in Gauteng's Tembisa and another in Kimberley, both to be commissioned in 2017.

The group also has a presence in Botswana and Mozambique. Lenmed CEO Prakash Devchand said the company does not target high-income earners, but that the provision of quality healthcare services has sustained the group. He notes that the Western Cape, Gauteng and KwaZulu-Natal are developed in terms of private healthcare, and said there are opportunities for the group to take in other provinces.

Lenmed has a wide shareholder base to fund its expansion plans. The cash flows of its more mature hospitals seem to support the newer hospitals. Though SA has a shortage of nursing staff, Devchand said it is not as urgent as the need for medical specialists, the effects of which are beginning to be felt within Lenmed. Melomed, which is based in the Western Cape, said it has embarked on in-house training for nursing practitioners. But the shortage of specialists, especially in certain disciplines, remains a challenge, said Melomed marketing manager Randal Pedro.

Melomed has four hospitals in middle-income communities, in areas that have previously not had private healthcare facilities. Its first foray out of the province will be a facility under construction in Richards Bay that is expected to be completed in 2017.

Econex health sector economist Mariné Erasmus says the proliferation of new hospitals is good for competition when it comes to pricing quality. She said investors would have done extensive research before setting up; even people not on medical aid will have access to healthcare on a cash basis.

Further, Erasmus said, when the National Health Insurance comes into effect, these facilities will already be in place - closer to communities - to contract with the Department of Health. What will be interesting, she said, will be the interplay between pent-up demand and supply-induced demand, and how it will affect a new facility's occupancy rates. She said new hospitals open up because there is already a demand.