Discovery Life far outstrips health unit

ADRIAN Gore might have founded Discovery as a healthcare company two decades ago, but that is no longer where the company makes most of its cash.

This week, Gore unveiled Discovery's financials for the year to June, and the healthcare arm on which it made its name contributed only 40% to operating profits.

Instead, Discovery Life, which provides insurance, made half the operating profits, underscoring the shift away from healthcare, which has faced an onslaught of political pressure to slash healthcare costs.

Discovery's share price soared 160% over the past three years, more than double the 70% increase in the JSE's All Share index during the period .

But it is also a triumph of behavioural economics and incentives meant to reward "good behaviour".

For example, Discovery piloted the "medical savings account" in a bid to make people take responsibility for the medical costs - a model copied by other medical aids - and has rolled out similar smart incentives to life insurance and investment arms. It also wooed customers by offering "rewards" through its Vitality programme - and it added more rewards to its arsenal this week with discounts on Gautrain and Uber cab rides.

So what's next? Banking, perhaps?

Put on the spot this week about whether there would be any Discovery Bank any time soon, expanding from its credit card service, Gore was vague, saying only that this option was being evaluated.

"There's no rush," he said.

But Gore's company has done well to reduce its reliance on the increasingly fraught world of medical aids.

The Discovery Health Medical Scheme pays Gore's Discovery Health an "administration fee" -it is South Africa's largest open medical scheme and administers 2.9million lives with 52% share of the market.

But the government has not only launched a Competition Commission investigation into medical costs, itis also piloting National Health Insurance, whose effect on private medical aid schemes is not yet known but could include a drop-off of patients on lower-tier plans.

Discovery Health's operating profit climbed 10% to R1.86-billion, far less than the 23% jump in operating profits of Discovery Life, which made R2.5-billion. New business in the healthcare arm grew by 4%, compared to the 6% growth in the life insurance division.

Overall, Discovery's operating profit climbed 23% to R5-billion - in line with its average annual 22% growth over the past decade. Discovery's embedded value - the key figure to look at when assessing insurance operations - was up 21% to R43.1-billion

Little wonder that Gore says he is worried about the steep rise in medical inflation, with hospitals, doctors, medicines and new technologies pushing up costs to levels customers are not willing to bear and which might make it unaffordable.

However, the Council for Medical Schemes report this week should make Gore sleep easier. It showed a steep escalation in medical aid profits (or "surplus") to R1.6-billion last year. This shows that the medical aids are paying out less money than they are collecting.

Besides diversifying into investments and insurance, Discovery has also diversified outside South Africa.

In the UK, it operates in a joint venture with PruHealth, and owns 25% of Chinese health insurer Ping An Health. New business in China jumped 119% last year to R339-million, and signs about 300 new members a day.

Brokerage Vestact likes Discovery for this reason: "By partnering with existing insurers, it means that they do not need to spend the capital to break into new markets and they also then get local knowledge from the partner.

"This is a good way to grow their business and time will tell how profitable it will be."

Gore has also spoken about expanding north into other African countries but is treading lightly. Africa, he says, will be part of a three- to five-year plan as Discovery works to find a product that works for a particular market.

Whereas South Africa provided all the profit two decades ago, it now makes up only about 60%. In the UK, for example, profit jumped 33% to R628-million.

This shows there is a strong global affinity for its model.

Back home, there's the threat of competing forms of health cover in the form of gap cover, currently being assessed by National Treasury. Gore said he supports the current demarcation guidelines but critical details still need to be fleshed out. "Supplementary forms of health insurance are great for the market, provided that they are regulated on the same bases as medical schemes."

One cannot have medical schemes that are not allowed to risk rate, and must fund minimum benefits, and insurance products that are allowed to risk rate and do not have to cover minimum benefits, as this would undermine medical schemes, he said.