COURSE CODE GEEN 1093 COURSE TITLE Global Engineering: Theory and Practice ????? ?? ? Instructions 1. Wordcount: at least 2,000

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9B09M005 NETCARE’S INTERNATIONAL EXPANSION

Professor Saul Klein and Dr. Albert Wöcke wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected] Copyright © 2009, Richard Ivey School of Business Foundation Version: (A) 2010-06-02

As he reviewed the National Health Amendment Bill that had just been introduced in Parliament in June 2008, Dr. Richard Friedland, who had led Netcare Limited (“Netcare” or “Group”) since 2005, wondered how pressures at home would affect the company as it strived to become a global player in the health-care industry. The proposed legislation would pave the way for regulated prices and collective bargaining between medical schemes and health service providers such as hospitals and doctors, and could change the entire industry structure in South Africa going forward. For a company with a market share in South Africa in excess of 28 per cent, growth at home by acquisition was always going to be limited and subject to stringent scrutiny from competition regulators. Potentially strong organic growth options at home, however, were on the horizon. At the same time, Netcare was itching to demonstrate its skills and abilities on a wider international platform. One of Netcare’s key long-term goals was to deliver innovative, quality health-care solutions to patients in every continent of the world. The recent acquisition of the General Healthcare Group (GHG) in the United Kingdom had propelled Netcare from a predominately South African operation into one of the largest private hospital groups in the world. Political pressures in South Africa, however, could only further complicate the difficult decisions to come in defining how to execute the group’s strategy. What lessons, Friedland pondered, could be learned from the GHG acquisition, how could he leverage the group for further growth internationally, and which continent was best suited for expansion? NETCARE OVERVIEW Netcare, founded in 1994, was listed on the Johannesburg Stock Exchange in December 1996 with six hospitals. Several small and independent hospital groups in South Africa were acquired soon thereafter, including Clinic Holdings Limited and Excel Medical Holdings Limited. In 2001, Netcare acquired Medicross, a managed health-care provider network of 75 medical and dental centers across South Africa. In 2006, Medicross then acquired Prime Cure Holdings, a provider of primary care services for the emerging market with a further 25 centers and 130,000 managed care customers.

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By 2007, with 18,877 employees, Netcare was demonstrating strong growth (see Exhibit 1 for Netcare’s financial statements). Netcare was providing the following key services in South Africa (see Exhibit 2 for a map of locations):  Private hospital and trauma services through equity interests in 56 hospitals with more than 9,546 beds,

358 operating theatres and 86 retail and hospital pharmacies;  Netcare 911, the largest private emergency service with more than 7.5 million members and a fleet of

246 response vehicles and ambulances, three helicopters and two fixed-wing air ambulances; and,  Ancillary health-care services including primary care services through Medicross and Prime Cure, and

diagnostic services through an interest in a nationwide administration and logistical services infrastructure servicing 290 high-tech pathology laboratories and depots.

THE SOUTH AFRICAN HEALTH CARE INDUSTRY South Africa is often characterized as two countries living side by side, with a largely black, poor population with limited access to health care and a low standard of living, on the one hand, and a wealthy, predominantly white population utilizing a world-class private health care system, on the other. The poor rely on a public health-care system that is focused on primary health care and the management of HIV/AIDS, tuberculosis, malaria and other diseases afflicting the poor such as malnourishment. In contrast, the private health-care sector resembles that of a developed country and patients are typically older and require tertiary-level care. Health-care spending in South Africa in 2004 was 8.6 per cent of GDP, which equated to a per capita spend of roughly US$390 per annum1 of which about 60 per cent went towards private health care. Approximately 14 per cent of the population had private medical insurance, while 40 per cent used private sector health services, as outpatients or otherwise.2 Compared to other countries, the private health care system in South Africa ranked near the top in terms of access and quality, while the public sector ranked near the bottom (see Exhibit 3). In South Africa, the hospital groups generally did not employ physicians or medical specialists but rather competed on the basis of attracting doctors to practice in one of their hospitals. Private patients saw their local doctor or specialist, who then referred them to the hospital of their choice to perform operations and the like. The private hospital then billed a medical insurance scheme directly. In a sense, the traditional business model was doctor-driven, with the hospital “renting” facilities and nursing hours to doctors. To attract the busiest doctors to practice in their hospitals, the organizations competed to have the latest and best medical technology, the best nursing staff and world-class facilities. The overwhelming majority of private patients in South Africa were covered by medical insurance schemes, which had tended to increase tariffs above inflation rates. This was leading to increased spending on private health, but at the same time encountering resistance from consumers. Meanwhile, the growth of traditional private sector medical schemes had been slow. In response to these circumstances, the South African government had explored options for broadening social health insurance to the general population. Its first two initiatives were the introduction of a broad-based medical scheme for the 1.1 million public servants in the country, and making health insurance compulsory for all formally employed South Africans. These initiatives would increase the pool of insured people by between seven and 10 million and free up public resources to concentrate more on expanding primary health care and on HIV/AIDS

1 World Health Organization, 2006. 2 Statistics South Africa, General Household Survey, 2005.

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Page 3 9B09M005

management and prevention. For service providers, such as Netcare, the major implication was a shift from traditional low-volume, high-margin operations to high-volume, low-cost, low-margin ones. The structure of the health-care market in South Africa is depicted in Exhibit 4. During the Apartheid era, the private hospital sector served the minority white population almost exclusively, while the majority black population had to use public hospitals. To address social and economic inequities, the South African government developed a regulatory environment to drive national and sectoral transformation. The Broad-Based Black Economic Empowerment Act, promulgated in 2004, allowed the government to issue Codes of Good Practice for private sector firms. The Codes provided a core set of indicators and criteria to define and measure Black Economic Empowerment (BEE) and guidelines on how to establish sector transformation charters and targets to achieve meaningful, effective and broad-based BEE. Central to the Codes was a balanced scorecard approach, which measured an enterprise’s BEE contribution across a range of indicators, as follows:

Weighting

Equity ownership (by historically disadvantaged individuals)

20%

Management control (by historically disadvantaged individuals)

10%

Employment equity (achievement of affirmative action targets)

15%

Skills development (of historically disadvantaged individuals)

15%

Preferential procurement (from firms owned by historically disadvantaged individuals)

20%

Enterprise development (of firms owned by historically disadvantaged individuals)

15%

Socio-economic development 5% The BEE Charter for the Healthcare Sector (the Health Charter) sought to manage a myriad of health-care challenges effectively and ensure a healthy workforce that could participate productively in the economy. While the Health Charter had not yet been finalized, the development process had entailed information sharing and open discussion between the public and private sectors and had fostered partnerships in a previously fragmented industry. What differentiated the draft Health Charter from other sectoral charters was that improved access was considered equally as important as broad-based black economic empowerment. PROPOSED LEGISLATION In her 2008 budget speech in the National Assembly, the Minister of Health, Dr. Manto Tshabalala- Msimang, noted that:

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Page 4 9B09M005

Of the R118 billion3 that was spent in the health sector in 2007/08, R66.4 billion (or 56.3%) was private sector expenditure, which serves about 7 million people, while R51.6 billion (43.7%) was utilised in the public health sector, which provides services to about 40 million people. Over the past years, the private health sector has been unable to increase access and also appears to be unable to contain cost escalations. … The National Health Amendment Bill has been submitted to this House for consideration. The Bill provides for the appointment of a facilitator to work with funders and providers to seek agreement on tariffs for healthcare services provided by the private health sector. This process should bring some transparency into the process of tariff setting in the private healthcare sector and assist us to contain costs” (June 5, 2008).4

Industry representatives regarded the Bill as a price-setting mechanism, while the Department viewed the Bill as creating a regulatory framework through which prices were negotiated, as happened in many developed countries. The country’s third-largest private hospital group said the minister should rather work with the industry to find alternative mechanisms to price controls to make health-care services available to more people: “Medi-Clinic maintains the opinion that the draft bill objectives are already covered by extensive legislation. It is undesirable that the Health Act be amended to introduce additional regulatory controls.”5 South Africa’s private health-care industry warned that the proposed changes could hasten the emigration of doctors and nurses and undermine investment in the country. Private hospitals were highly capital- intensive and if returns were not sufficiently appealing, the capital would be routed elsewhere.6 Indeed, Med-Clinic noted that it and Netcare had already made significant investments offshore. Medi-Clinic had recently completed the acquisition of a Swiss hospital group (Hirslanden Finanz) at a price of $2.36 billion. Concern from investors was also cited as causing downward pressures on company share prices, and Netcare shares were trading at around R8.00, down from a peak of more than R13.00 some six months earlier. NETCARE’S STRATEGY Netcare’s philosophy and approach to its health-care business was characterized by a strong performance- driven culture with a fanatical attention to detail. With a reputation in the South African health-care industry for innovation and an obsession with measurement, Netcare maintained world-class standards in patient care, staff competence and relationships with medical practitioners. Netcare’s strategy was based on six major themes: Organizational Growth Netcare saw its presence in South Africa and the United Kingdom as an opportunity to combine the expertise and experience of senior teams from both countries to drive sustainable growth across two major private and public health-care markets. In South Africa, organizational growth had come from expansion of existing hospitals and the building of new hospitals, with four being completed in 2006. Additionally, it had secured large contracts for its Netcare 911 emergency and ambulance service. Netcare was expanding

3 US$1=R7.80. 4 Minister of health budget speech 2008 at www.info.gov.za/speeches/2008/08060515451001.htm 5 Medi-Clinic CEO Koert Pretorius, Business Day, June 4, 2008. 6 Sunday Times, May 25, 2008.

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Page 5 9B09M005

into new emerging markets by providing a low cost, high volume service to private patients who previously could not afford the traditional private hospital offering. In the United Kingdom, Netcare’s operations were reorganized into regional structures and three new National Health Service (NHS) contracts were awarded in 2007. Operational Excellence An ongoing focus on building and sustaining a culture of excellence at every level of operations characterized the Group. It was committed to driving efficiencies and containing costs in ways that did not compromise quality. In South Africa this had led, for example, to the implementation of a Systems, Applications and Products (SAP) system, the accreditation of all hospitals and a drive to implement shared-services centers. In the United Kingdom, 28 hospitals were IT-enabled for the NHS Extended Choice Network and back-office functions were integrated. Physician Partnerships General practice physicians and specialists were the most critical part of the private hospital business model and Netcare focused on providing them with state-of-the-art facilities, skilled nurses and the latest technology. Netcare had invested heavily in facilities and technology and nursing and doctor training. These initiatives led to Netcare attracting an additional 162 medical specialists to its facilities in 2007. In the United Kingdom, Netcare had launched partnership schemes with doctors and expanded to more than 60 Practice Development Groups across their hospitals. Best and Safest Patient Care Netcare introduced a clinical governance program to define clinical pathways, which in turn lead to reduced variability in service and thereby safer patient care. Netcare also formed a Medical Advisory Ethics Committee and had its own clinical governance guidelines for trauma, ICU and infection control. The Group boasted of having the lowest hospital infection rate in South African recorded history. Netcare experienced a 5.9 per cent increase in admissions in 2007 over 2006 (to one million), and a 9.4 per cent increase in primary care visits (to 3.6 million in 2007). Netcare also enjoyed a 1.7 per cent increase in total cases handled in the United Kingdom to 1.1 million. Passionate People Netcare’s HR strategy was a critical component of its overall business. South Africa was suffering a critical shortage of skills, including nurses. Aggravating the skills shortage was a brain-drain of nursing skills from South Africa to countries such as Saudi Arabia, the United Kingdom, Canada and Australia. Netcare believed that it needed to be an employer of choice to attract and retain nurses and related skilled workers, as well as to increase the training of nursing students to overcome these problems. Netcare participated in initiatives by South African companies to recruit expatriates back to South Africa. Netcare also trained 3,700 nurses and paramedics in 2007, at a cost of R100 million.

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Transformation Under the leadership of founder Dr. Jack Shevel, Netcare had adopted a largely confrontational approach to the government and regulators in the industry.7 Netcare left the Hospital Association of South Africa (HASA) when HASA wanted to follow a consultative lobbying approach with the health minister over new pricing regulations. Netcare broke ranks and launched a controversial court challenge. Ultimately, the court challenge was successful but relations with the government were considerably soured.8 When Richard Friedland took over as CEO in 2005, he immediately ordered a strategic review and Netcare’s approach to government changed significantly. Friedland recognized that government was an important stakeholder in the health industry and that regulations had a strong impact on a health operator’s ability to make a profit. Netcare’s current approach was to engage early and regularly with the government so that it was seen as a partner in health care. Friedland embraced the Health Charter and Netcare currently had 17.3 per cent black equity ownership and seven per cent women ownership. The majority (61.4 per cent) of the company’s workforce was from previously disadvantaged groups and Netcare had spent R37 million on corporate social investment, including R18 million covering indigent patients. On a well-respected scale of BEE commitment, Netcare was rated at the highest level. Friedland’s vision for Netcare’s vision in South Africa was to be able to provide a tiered system that could provide access to all South Africans:

The top tier is already well-serviced and there is a high degree of competitive rivalry between the private hospital groups to service this market. Netcare is the leading hospital group in this highly competitive sector of the market and intends for this to remain so. For future growth, however, Netcare has to take risks and develop new models to service the rest of South African society. This is not only the only alternative for organic growth in South Africa, but is also a social imperative. Netcare is well-placed to offer a holistic solution to the formally and informally employed who can not currently afford private healthcare. The future lies in a new funding model and efficiencies in service provision. Netcare is well-positioned to serve this market with its primary healthcare offerings of Medicross and Primecure — 51% of patients using Primecure in 2007 paid for services out of their own pockets. The reason for this was primarily a lack of trust in the public service healthcare, or the desire for a more efficient experience. This will also remove a substantial burden from the South African public healthcare.

INTERNATIONAL EXPANSION Netcare began to expand outside South Africa in 1997. The United Kingdom was chosen as one destination, based on its low penetration of private sector operators and its attractive demographics in terms of an aging population. (See Exhibit 5 for an overview of the relationship between demographics and health-care spending.)

7 “Cool operator Shevel looks back on R10bn adventure,” Business Day, May 13, 2005. 8 “Rivals speak on Netcare’s move,” Business Day, August 11, 2004.

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The U.K. Health System In 1997, when the Labour Party came to power, the National Health Service (NHS) was in disarray as a result of severe under-funding and lack of modernization. There were waiting lists of more than one million patients, with five per cent waiting for more than 12 months to see a doctor. Increases in health expenditure fluctuated between zero per cent in some years to six per cent in others and, since the 1960s, real spending per annum averaged 3.6 per cent of GDP, while the average for OECD countries was 5.5 per cent.9 Compared to other developed countries, the United Kingdom had fewer doctors and health-care professionals per capita, and investment in health care technologies and facilities was low. Many buildings predated the formation of the NHS in 1948. The problems were exacerbated by poor morale amongst staff and severe staff shortages. In response to these challenges, the U.K. government set a series of ambitious targets for the NHS in 2000,10 including:  Maximum wait for inpatient treatment of six months by 2005;  three-month maximum wait for outpatient treatment;  Primary care access to a general practitioner within 48 hours by 2004;  A wait of no more than 18 weeks from general practitioner consultation to hospital treatment; and,  Patients to have a choice of four to five practitioners by 2006, and open choice of health care providers

by the end of 2008. The Labour government hoped that the initiatives would result in more choice to patients, more value for money by the introduction of market forces, the creation of a sustainable independent health sector market, increased capacity in difficult areas and innovation in the NHS. In doing so, it also intended to change the balance between public and private funding (see Exhibit 6), and thereby open the way for public/private partnerships. Netcare’s Entry into the United Kingdom Netcare entered the U.K. market in 2002 to provide specialized health-care services on contract to the NHS. Netcare had seen an opportunity to use the skills that it had developed in South Africa to win tenders with the NHS in the United Kingdom. According to Friedland:

Initially Netcare’s hope was to take advantage of the NHS waiting lists and fly UK patients into South Africa for treatment, but this was not feasible due to the nature of the UK market. In rural England many people had not even traveled to London and it was unlikely that they would want to travel to South Africa. Instead Netcare decided to send South African medical professionals to the UK to test whether they could operate efficiently within these boundaries. Netcare introduced systems that were regarded as novel and groundbreaking by patients such as the patient making one visit and having a complete diagnosis with all services such as x-rays and other assessments available on the spot.

Netcare’s first tender was a five-year contract with the NHS (worth GBP 42 million11) to perform 44,737 cataract procedures. Netcare enjoyed almost immediate success, as it was able to adapt its home-grown 9 NHS Plan 2000, Department of Health, United Kingdom. 10 www.dh.gov.uk.

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