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23 Feb 2022

Hospital Stocks on the Mend

The past two years of living with COVID-19 has started some trends and accelerated others. Trends such as remote working are now well entrenched. Equity analyst DHERSAN CHETTY discusses another developing trend—greater awareness of and need for medical aid cover.

The pandemic has disproportionately affected older people. Nearly 90% of COVID-19 deaths have occurred in people older than 45. Unsurprisingly, medical aid schemes have reported greater demand for medical insurance from this cohort (up 0.6% in 2021), despite falling overall medical aid demand (down 1.1%).

There has therefore been an influx of older individuals that are now more conscious of their health needs and the importance of having medical aid. The average age of the medical aid pool is thus older. This is important because the over-45 cohort accounts for 60% of total healthcare spend, but only 32% of insured lives.

The longer someone is on private medical aid, the less likely they are to return to public health facilities. Their medical aid membership is therefore ‘sticky’ over time. This is especially true in South Africa, where medical aids may not price for risk. This cross-subsidisation model incentivises older members not to lapse their policies.

Given the trauma of COVID-19 deaths, people are now more likely to cut other expenditure before removing their healthcare benefit. The industry also offers some well-regarded low-cost plans that give the same quality of care, but in a reduced hospital network to improve access.

Elective surgery ground to a halt during the four South African pandemic waves due to the risks of cross infection. The milder incidence of Omicron, increased natural immunity in the population and vaccination progress should unleash pent-up demand for elective surgeries. Vaccination rates among medically insured people are much higher than the national average. For example, 72% of Discovery members were at least partially vaccinated by 28 November 2021 compared to the 47% national average.

Mental health issues have been rising over the past decade and have been exacerbated by COVID-19. Globally, there has been a reduction in the stigma of seeking mental health treatment. Private hospitals in South Africa have been expanding into this fast-growing healthcare segment. The sector therefore stands to be a beneficiary of the trend for improved mental healthcare.

A return to normality means increased costs for medical aids, but will provide tailwinds to the SA hospital sector. The pandemic understandably battered the share prices the JSE’s hospital stocks—Netcare, Life Healthcare and Mediclinic International. The sector declined by approximately 30% at its 2020 low.

These stocks seemed to us to be a bargain, given their prospects for post-pandemic growth and their defensiveness during tough economic conditions. We own meaningful amounts of all three stocks in the Foord Equity Fund, and lesser amounts in other portfolios. They should deliver good double-digit returns for investors over the coming years.

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