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Annual integrated report 2011


Chief Executive Officer’s review

RICHARD FRIEDLAND

Last year I referred to the notion of putting purpose before profit. Looking back at the year under review, I am humbled that in delivering an essential service to society we have continued to live up to our core purpose of helping care for the health of humankind.

Putting purpose before profit does not eschew the importance of delivering competitive returns to those who provide our capital resources. Our financial results, despite difficult market conditions particularly in the United Kingdom (UK), clearly indicate that we have not lost focus in creating value for our shareholders. But it is the balanced and profound contribution we make to all our stakeholders that I believe truly distinguishes Netcare among its peers.

10 For Netcare’s value contribution in 2011.

It is our intention to continue growing this contribution in a world that faces serious challenges to its very sustainability. In the aftermath of the global economic crisis, society’s trust in business has ebbed to all-time lows and the pressure on business to justify its value to society has never been greater. Furthermore, prevailing and pervasive social and environmental trends are driving volatility in global markets and redefining the competitive playing field. The impacts for the healthcare sector and our business will be significant.

This is borne out by the long-term scenario planning process that the Netcare executive team have been engaged in over the last year, which has challenged us to look at the likely trends in healthcare over the next 20 years. In every possible future scenario, healthcare demand increases. While this is the basis of business growth for Netcare, it also poses a risk insofar as these demands cannot be met by current healthcare delivery systems. The inability to either provide or to fund quality, affordable healthcare for all citizens will have an increasingly severe impact on society in the countries in which we operate.

The supply/demand imbalance and rising costs in both public and private healthcare, which are driving reform in healthcare policy worldwide, make the need for new approaches and business model innovation critical. We are cognisant of the challenges we face and are focusing our efforts to drive the necessary changes within our own business. But the basis for radical change has to be frank and constructive engagement in the development of bold and creative healthcare policies. This is an arena of substantive shifts in South Africa (SA) and the UK as our policymakers grapple with ballooning healthcare budgets. In our engagement with the public sector in both countries we seek to share Netcare’s experience, knowledge and passion for effective healthcare and to transfer the lessons learned between the two countries.

Rising healthcare costs are a global phenomenon and yet much criticism continues to be levelled at the private sector in terms of healthcare pricing. In SA, the leading indicator of hospital spend is in medical scheme spending on hospitalisation per beneficiary per month. Inflation is responsible for 51.2% of the increase in this expenditure since 2003, with as much as 44.0% due to higher utilisation. This is mainly because of the heavy burden of disease in SA, due to diseases such as HIV/Aids, tuberculosis and diabetes, as well as wage inflation and the cost of regulation for medical and related sectors. Advances in medical technology also play a role in increased utilisation as patients’ illnesses can be diagnosed earlier, life expectancy is increased and infant mortality lowered.

Taking these factors into account, the real price increase of private hospital provision was 4.9% above CPIX in the period between 2003 and 2009. From a financial point of view, a sustainable healthcare sector is one in which healthcare expenditure rises in step with general inflation.

So we recognise that even a marginal increase in healthcare costs above inflation is unsustainable. Laying blame for spiralling healthcare costs solely at the door of the private sector obscures the real drivers behind this phenomenon and underplays the need for real and open engagement, which is necessary to find sustainable solutions. Price regulation alone will not address the escalation in healthcare costs, not in SA and not elsewhere in the world. The challenge of delivering affordable and sustainable healthcare requires a consolidated effort from both the public and private sectors, and Netcare remains committed to playing its part.

To this end in SA, Netcare embraces the renewed focus on universal access to healthcare through the National Health Insurance (NHI) reform policy published in August 2011 and stands ready to make a meaningful contribution. In preparation for NHI, all 55 Netcare hospitals will be benchmarked against the National Department of Health’s Core Standards by February 2012. Furthermore, we believe our extensive accredited Primary Care network is positioned to play a strategic role in the provision of equitable and sustainable healthcare through the NHI.

Sustainable healthcare is inextricably linked to the socio-economic progress in the countries and regions in which we operate. Besides developing viable models for healthcare delivery, our ability to increase access to quality care hinges on drivers such as formal employment growth, levels of discretionary income and the number of insured lives in the communities we serve. As such, we are focused on contributing in ways that extend beyond our direct and fundamental purpose of caring for the health of society.

In this regard, we are responding proactively to broader national priorities such as creating employment, skills development and training, and closing the wage gap. We are also seeking to align our governance structures – having changed our executive incentives in SA and strengthened our leadership team in the UK – to better serve our long-term view of being an active and resourceful private sector partner to both regions’ governments.

In my review this year, I will assess Netcare’s contribution in relation to our strategy and value drivers. Hand-in-hand with the scenario planning, the process of integrated reporting has allowed us to test our strategy and confirm that it takes adequate account of the prevailing sustainability issues in our sector and our geographies, as well as those we face as global citizens.

We are confident that Netcare’s strategy will indeed enable us to create value for our stakeholders into the future, and we are making the necessary business model changes and developing the competencies we need to ensure our sustainability. We are committed to finding sustainable solutions to healthcare provision as well as contributing to improving the prevailing socio-economic challenges in the countries in which we operate. Our efforts over the past year and our plans for the year ahead make this intent clear.

Organisational growth

Netcare is a values-driven organisation that understands the importance of service leadership, engagement, listening, learning and partnership in fulfilling its purpose. We continue to invest in programmes that instil and interpret our values in everything we do, throughout our organisation. In 2011, we launched the Netcare Way – a programme of action focused on our core value of care. This programme aims to ensure that values-driven behaviour continues to epitomise the way we do things and to underpin the reasons why we do what we do.

There is a tendency to think of Netcare in SA as purely a hospital group. The fact is we have a comprehensive network of healthcare services available 24 hours a day, every day of the year. Besides our hospitals and emergency services, we are involved in a number of hospitals that are Public Private Partnerships (PPPs). We have the largest network of coordinated and accredited primary healthcare facilities countrywide. We also have one of the largest networks of dialysis units in partnership with Adcock Ingram in National Renal Care, as well as a large pharmacy chain. In 2011, we touched the lives of our patients through 4.9 million patient visits in SA.

Our network in the UK has a different mix of facilities and a different emphasis in many ways compared to SA. In the UK, we have wholly-owned hospitals as well as several leased and managed hospitals. We have a very large chain of cosmetic surgery facilities known as Transform. We run the largest fertility services in the UK through CARE Fertility. We handled some 1.8 million patient visits in the UK in the last year.

We continue to develop our infrastructure and broaden our services across our comprehensive networks, investing in greater capacity to deliver healthcare of a world-class standard. The expansion of our facilities, services, staff and capacity to deliver take into account the impact of the increasing demand for primary health on the system as a whole. Our healthcare networks seek to integrate primary with tertiary care, public and private service delivery, and to increasingly provide affordable access to healthcare and wellness to more people.

The Group’s investment in infrastructure in SA and the UK totalled R1.4 billion in 2011, with about R900 million spent on the SA operations and the balance of about R500 million in the UK.

For details on expanding and upgrading our facilities refer to the SA and UK operational reports on pages 45 and 83, respectively.

The provision of healthcare to all who need it requires meaningful and purposeful engagement and the willingness to develop new delivery models. In this regard, we are excited about the Lesotho PPP, which we believe gives us the opportunity to pilot what we see as the healthcare model of the future. The Lesotho PPP, a landmark development, is the largest healthcare PPP in Africa. In this model, the private sector consortium led by Netcare is responsible not only for the facility, which is as sophisticated as any of our private hospitals, but most importantly also for primary healthcare, clinical outcomes and employing the doctors and nurses that deliver them. Our target is to improve the outcomes that are currently being achieved in Lesotho – and above and beyond that – to meet the Millennium Development Goals, at the same cost as that which was already being spent on healthcare in the country.

The Lesotho model is the first expression of our philosophy to “de-containerise” public healthcare. We believe that it is possible, indeed essential, that quality of care, access to the best physicians and cutting-edge medical technology, world-class clinical governance standards and clinical outcomes are the same for public and private patients. Any differentiation between the two is then only in the amenities, such as private rooms for example, that do not impact in any way on health outcomes.

It is a deep irony that Lesotho, one of the poorest countries in Africa, is leading the way in terms of a healthcare delivery model that will set the standards not only for its neighbours in SADC but for the rest of the continent and perhaps even the developing world.

The drive to innovate is also evident in other parts of our network, for example in Netcare 911 being the first in SA to introduce a motorcycle response team that allows faster response times in urban and semi-urban areas, despite congested roads. We believe this may well become the future mode of delivering emergency services.

Notwithstanding the depressed UK economy and regulatory uncertainty, General Healthcare Group (GHG) has also sought to introduce new services and target particular patient groups. This has been achievable because the business has remained flexible and able to respond quickly to change. GHG has right-sized for growth and strengthened local decision-making, which has allowed it to double its international business and introduce new services to the corporate market.

GHG has also renewed its focus on partnering with the National Health Service (NHS) in the UK, investing significant time and resources in preparing for the new NHS contracting environment. This has involved developing a strong internal NHS-facing infrastructure, both in the people and the processes required to maximise opportunities in the NHS and to meet the needs of the business.

Operational excellence

Besides the investments we are making in expanding our capacity, we need to continually seek efficiency improvements to make our services more affordable. Our ongoing optimisation efforts span financial initiatives, specifically the management of debt, capital expenditure and working capital, through to the optimal use of our non-financial resources, including people, infrastructure, materials and utilities such as energy and water.

Our focus on operational efficiencies in the last year was reflected in the improved performance from the SA businesses and enhanced working capital management in both SA and the UK. The SA operations continued to focus on operational efficiencies, cost containment and business improvement, which included initiatives such as the standardisation of surgical consumables and the substitution of generic medicines. In the UK, working capital was tightly controlled and improved despite the shift to higher NHS caseload and the longer payment cycles associated with such activity.

Specific examples of optimisation in SA include Netcare 911, which has applied an activity based productivity model enabling the business to allocate the right resources at the right place at the right time, making for better dependability, flexibility, quality, cost and speed of response. In our Primary Care division, stringent cost control measures and operational efficiencies as well as effective managed care risk management underpinned the stabilisation of the division. The business-wide operating system rolled out in the prior period has been enhanced to optimise efficiency and stability.

In the UK, optimisation efforts have included the development of a more transparent pricing model for self-pay patients in response to their preference for up-front pricing information. Other priorities have included corporate cost reduction and operational benchmarking to deliver a cost effective and consistent structure.

For more detail on our optimisation initiatives refer to the SA and UK operational reports on pages 45 and 83, respectively.

From a broader optimisation perspective, the Group continues to pursue an effective reduction of carbon emissions from operations, reducing energy costs and increasing efficiencies in lighting, heating and cooling. Increased efficiencies were also attained in relation to water consumption in the last year. Material environmental issues are tabled at Sustainability Committee meetings, which falls under the auspices of the CFO. Netcare has committed to establishing an environmental policy with defined action plans that outlines areas of focus and improvement. We continue to participate in the Carbon Disclosure Project as well as the Water Disclosure Project. Furthermore, in the JSE SRI survey, Netcare met all entry-level indicators for management responses to climate change issues.

While we have made significant progress in the last year in operational excellence, we recognise that we have much work still to do specifically on improving our costing models and extracting further efficiencies. This will remain a priority in the year ahead.

Physician partnerships

The professional partnerships with the physicians that work within our facilities form an essential feature of our differentiation as a healthcare provider. In both SA and the UK, we foster relationships with doctors and dentists as key stakeholders in our networks through a well-developed framework of formal representative processes as well as direct communication channels.

Further detail on our country-specific physician partnerships can be found in the relevant operating reviews.

Best and safest patient care

As the pressure to transform healthcare systems intensifies, Netcare has embraced its responsibility for playing a leading role in delivering the highest standards of care. The Group has built a substantive platform to ensure that quality leadership and clinical governance is at the forefront of leadership at all levels, and has placed increased emphasis on measurement and benchmarking across the organisation.

We are also increasingly focused on building structures and forums to maximise staff, doctor and patient engagement in safety and quality improvement. Extending this beyond the organisation, Netcare was a founding member and is an active leader of “Best Care … Always!”, a clinical improvement campaign across the public and private sectors in SA.

Besides the benchmarking exercise underway in preparation for the NHI, we have also benchmarked our hospitals against 3 800 hospitals in the United States of America. This has involved surveying over 300 000 patients over the last 15 months. We have asked one simple question: “Overall, how satisfied were you with the service you received in our hospital?” The results have shown that at least 60% of patients are “always satisfied” and 34% are “usually satisfied”. While the results have been generally pleasing, they indicate that we have more work to do especially considering the 6% of patients that stated they were “never or sometimes satisfied”. We do, however, compare favourably to private hospitals and major academic institutions in the United States.

I am also pleased to report that two of our hospitals, Netcare Milpark and Netcare Union, are the first officially accredited Level 1 trauma hospitals in SA. This accreditation is bestowed by the South African Trauma Society, based on the trauma standards adapted for South Africa from the American College of Surgeons.

We have also been benchmarking clinical quality in our hospitals against a scorecard of indicators, which include prevention of healthcare associated infections, antibiotic stewardship and neonatal intensive care outcomes as well as emergency services and renal care outcomes. Generally we have either exceeded or matched the best international standards, with surgical site infections being the only indicator where we are below par. This is an area of challenge for all healthcare providers in SA and indeed globally, and improvement will be a significant focus for us in the coming year.

66 For more information on clinical governance in SA.

Growing with passionate people

The passion that characterises Netcare’s people, which is so evident in the stories of dedication and selfless service that emanate from this organisation on a daily basis, binds our business together and makes it strong. Our people are the ambassadors of our brand and are responsible for enacting our values, and we continue to focus on a wide range of initiatives to positively engage with them.

Our commitment to being an employer of choice was again recognised in 2011 by receiving the Best Employer Award in the Healthcare Sector and third place in the Large Company Category in the CRF Institute’s annual Best Employer’s Survey, placing us in the top ten employers in SA.

For more information on staff engagement and other related initiatives refer to our SA and UK Our people reports on pages 74 and 98, respectively.

We regard skills development as critical, not only to resource our own growth, but to supply the sector as a whole. Netcare’s training model extends beyond building human capital for the sector to building social capital for the country. We continue to develop improved training models to address the chronic skills shortages in SA of specialist nurses and pharmacists, seeking to build capacity in healthcare provision.

Job creation is fundamental to SA’s stability. At a time when job losses and retrenchment are pervasive, Netcare has employed an additional 2 514 people through the economic downturn. We also pay the highest guaranteed minimum wage to low-income earners in our sector, having awarded a 15.4% increase in 2011.

Accelerating transformation

As a business whose advent coincided with the birth of the new SA, we see ourselves as playing a pivotal role in rebuilding the country and normalising the socio-economic landscape. In tandem with answering the national imperatives of job creation, skills development and training, and addressing income disparity, we recognise that transformation is a concept that goes far beyond compliance with Broad-based Black Economic Empowerment (B-BBEE) legislation.

In the past year the SA operations maintained the levels of African, Coloured and Indian (ACI) and gender representation across most levels within the organisation. I am particularly pleased to note an increase in the employment of employees with disabilities. This improvement is a result of an awareness campaign at an operational level and concerted efforts to identify and network with recruitment agencies that focus on securing employment for people with disabilities. In line with our strategic commitment we will continue with our efforts to ensure our staff profiles become more reflective of our society.

Our progress in advancing B-BBEE was recognised in a number of awards in the year, detailed on page 11.

Netcare’s corporate social investment (CSI) programmes represent a considerable investment in SA communities. Programmes generally involve partnerships with communities and government, and focus on reducing poverty and improving access to quality healthcare in support of the Millennium Development Goals. Netcare SA’s approach to community development is informed by national development priorities and the needs of communities. Projects are carefully selected and managed to ensure that the resources that are committed achieve clear objectives. Our CSI focus areas include: indigent emergency medical services, healthcare accessibility initiatives, community health and welfare sponsorships, and academic sponsorships.

In terms of extending free access to healthcare in SA, through Netcare 911 in roadside emergencies and in trauma and household incidents, in our hospitals and in many other initiatives, we have been able to offer world-class healthcare free of charge to over 128 000 patients since inception. We are also involved in several community initiatives, one example in SA being our nationwide network of 37 sexual assault centres, which are available 24 hours a day free of charge.

For more information on our community initiatives refer to our SA and UK CSI reports on pages 77 and 101, respectively.

Looking ahead

Access to quality healthcare is a basic human right and fundamental to social and environmental sustainability. It is the basis for self-actualisation and the foundation for progress. This remains the basis from which Netcare will continue to fulfil its purpose and make its contribution to all our stakeholders.

Against the backdrop of volatility in global markets and substantive changes in the countries in which we operate, we will continue to advance our strategy. We believe it is our route to sustainable value creation, while becoming more agile and adaptive. We stand ready to engage with our partners both in the public sector and within our business to drive innovation in healthcare, and to proactively address the common challenges we face.

We remain confident that the demand for private healthcare services at primary and tertiary levels will be sustained in SA over the medium- and long-term. Our capital investment in expansionary projects is expected to sustain growth in SA.

With global economic uncertainty persisting, budgetary and structural uncertainties in the NHS and the impact of austerity measures on the UK economy, the next 12 months are anticipated to remain very challenging for GHG. Private caseload is likely to continue to be constrained, while NHS volumes will depend on which areas are targeted for budget savings. Nevertheless, the strategies and improvements implemented during the year should position GHG to address these challenges.

Appreciation

In closing I pay tribute to our executives, our managers and the thousands of Netcare employees in SA and the UK for their enormous contribution, their dedication and their service leadership. These have been evident not only in a set of sound financial results but especially in the wide-reaching initiatives that have advanced our strategy and our sustainability, as well as our substantive contribution to the communities we serve.

I also pay tribute to and thank our Chairman, Jerry Vilakazi, and non-executive directors on the Board of Netcare for their sage advice and stewardship over the past year.

Richard Friedland
Chief Executive Officer