Discovery aims to limit health inflation

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BR Discovery 8715 inlsa Discovery chief executive Adrian Gore says the UK operations are now cash generative and the company will not need to put in any more resources to the business at this stage. Photo: Simphiwe Mbokazi

Johannesburg - The cost of health care in the country could be managed and medical inflation could be lowered, Adrian Gore, the chief executive of Discovery Holdings, said on Wednesday.

Speaking after the release of the company’s financial results for the year to June, Gore said Discovery was going to use its scale to create a balance in the spiralling cost of health care by negotiating with hospital groups and health service providers. “Health-care inflation can be managed and it must be managed,” he said.

Gore said the growing size of the Discovery Health medical scheme enabled it to keep its health-care costs low. He suggested that bigger schemes could help keep costs down across the industry.

The group said Discovery Health experienced the lowest-in-industry lapse rate at 3.9 percent. In the past five years, open medical schemes have lost over 800 000 members, while Discovery Health’s scheme continued to grow its membership dramatically.

Gore said the scheme had gained a significant share of young and healthy members, who were buying low-cost plans. At the same time, 98 percent of Discovery Health’s existing members chose to remain on the same medical aid plan or to upgrade their plans.

The Discovery Health medical scheme had a 4.5 percent increase in total members under management to 2.4 million members in the 12 months to June. Its normalised operating profit increased by 10 percent to R1.5 billion.

Discovery Holdings grew its operating profit by 21 percent to R3.4bn in the year to June. Normalised headline earnings a share were up 14 percent to R2.3bn as its UK businesses bounced back from a loss-making position to profit.

Gore said the UK operations were now cash generative and the company would not need to put in any more resources at this stage as the business was in a position to grow itself.

Jean Pierre Verster, an analyst at 36One Asset Management, said it was clear that the growth was driven by the UK life operations because they swung from a loss to a profit.

However, he said the overall results were slightly disappointing because the assumption changes in the South African life business led to an embedded value a share that came in below expectations, Verster said.

“Notwithstanding that, it is clear that Discovery continues to invest in growth operations. Their growth businesses – Discovery Invest, Discovery Insure, The Vitality Group and Ping An Health – have gained good traction and are positioned to do well in the future.”

However, the shares fell as much as 5.1 percent, the most in almost three years, after Discovery said life policies might be held for less time than previously expected. The shares closed 3 percent down at R56.20.

“The current economic environment may mean policy-holders will hold their life policies for shorter periods than initially envisaged,” Gore said yesterday.

Group profit for the year declined by 14 percent to R2.2bn from R2.6bn.

“The market might be worried about the Discovery life business and potential policy lapses going forward,” Harry Botha, an analyst at Avior Research, said. – Additional reporting by Bloomberg


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