Discovery CEO Adrian Gore. Picture: FINANCIAL MAIL
Discovery CEO Adrian Gore. Picture: FINANCIAL MAIL

DISCOVERY Health has announced an operating profit of R762m, up 12%, for the six months ending December.

However, members who have been hit by above-inflation medical aid rate increases and shrinking benefits are not cheering. They think it is scandalous that a company whose purported aim is to bring them "affordable healthcare" should make exorbitant profits.

But Adrian Gore, the CEO who founded the company in 1992, says Discovery's profits are not exorbitant considering its size and positively modest compared with those of cellphone companies and banks.

"Healthcare is a very complex animal to control. It is expensive and it takes up a huge amount of people's take-home pay. People are concerned and rightly so, and we have to do our best - we have to do better - to keep costs down. It's as simple as that."

It is a tricky tightrope to walk, because Discovery's responsibility to members is to keep medical aid costs low, yet its responsibility to shareholders is to keep profits as high as possible.

Gore denies that this represents a conflict. To those who believe that the company has a profit incentive to reject their claims, he says there is no link between the two at all.

He says the bulk of the group's profits do not come from Discovery Health, which contributes 40% of profits, but from its other businesses like Discovery Life, which have grown "dramatically".

The Discovery Health Medical Scheme is meant to be an independent entity with its own board of trustees which "hires" an administrator - in this case Gore's Discovery Health - to run the scheme for a fee.

It is the size of the administration fee that is the bone of contention. For the six months to December, the scheme paid a R1.95-billion "fee" to Discovery Health, which then spent R1.1bn to administer the scheme, leading to its R762m profit.

Gore argues that the fee is less than the international standard and has been "escalating much lower than the inflation rate".

If anything, he says, this administration fee "drives down, not up, the rate members pay".

"If you look at the savings and benefits to members of the scheme, every R1 that is paid to us as an admin fee results in a saving of R2."

But is Discovery not in effect paying itself these administration fees?

"Definitely not."

Gore says the administration fee constitutes 11% of total member contributions and as the medical aid scheme gets bigger, the fee comes down.

The Discovery medical scheme could cancel the contract and choose a different administrator, but then members would lose the benefits of being part of the Discovery Health stable.

Gore says this would be "bizarre" and make no sense commercially.

"This is a big scheme that has been built up and is riding on the system and structure that members are joining voluntarily because of the very services Discovery Health provides.

"People are joining us in huge numbers, they're not leaving. On what basis?"

Desperation?

"However you see it, we're clearly doing a better job than others."

Gore, 48, is an actuary by training. He is considered by not a few analysts to have one of the most brilliant business minds in South Africa. Although he is worth about R2.2bn, this does not stop him rising at 5am and working a 14-hour day.

Under him, Discovery has grown into a vast enterprise with medical insurance companies in the UK, the US and China. At home, it has 2.5mn members and nearly 50% of the open medical scheme market.

Gore says it is because of the money earned by all its different businesses that Discovery is able to keep its members' rates as low as it has.

Annual increases of 2.5% above inflation are not what most people would call "low", but Gore says the company is up against implacable cost drivers.

These are technology and the limited supply of doctors and nurses. Unlike other industries in which technology drives down costs, in healthcare new technology, including prohibitively expensive and constantly evolving medicines, does the opposite.

"The main input costs are technology and labour. These are what drive costs up above the inflation rate. There's no mystique to it, no mystery. This is the fact."

Hard-pressed members and doctors who, to put it politely, are irate, claim Discovery is squeezing them dry and has no business running so many other companies or sucking up to shareholders at their expense.

Gore says he would not have been able to build the structures that make sustainable healthcare possible for Discovery members without private sector investment.

"The fact is you need private sector investment to build these kinds of structures. To get private sector investment, you've got to have a for-profit system. The bulk of members want a powerful company behind their healthcare that's investing in the system, that's building the system. That's why it's successful."

Yet Discovery seems to spend considerable time and money on what many members - and doctors - consider frivolities.

This includes expensive glossy magazines and its Vitality programme - for which, incidentally, it recently hired Kulula.com founder Gidon Novick, who presumably does not come cheap.

Gore says these sorts of things are "incredibly important" and do not cost members a cent because they are paid for out of the company's administrative fees, which are fixed.

"If we didn't do all that stuff we'd make more money, because we'd still be charging the same fee."

Were it not for Discovery's Vitality programme, Gore argues, the medical aid would cost "many, many percent more".

His argument is that Vitality has a "dramatic" effect on keeping down claims by giving people incentives to live healthier lives.

But Gore admits that such things, which critics deride as gimmicks, also have the effect of attracting and keeping healthy people in the scheme, "which is the biggest challenge for any health insurance scheme".

"If you don't retain and attract healthy people, it fails. Without Vitality and all these other things related to marketing and communication, the scheme would be 10% or 20% more expensive."

What is clear is that Discovery has capitalised on the collapse of the government's healthcare programme.

Although the government plans to introduce a National Health Insurance system to fix some of its problems, Gore says expectations of what the new scheme can deliver must be tempered by reality.

"To build a good NHI, we're going to have to find ways to produce more doctors and nurses. It's going to take a generation to deal with that."

It would be a good thing if the system worked so well that people did not need private medical aid, but "unfortunately" the country would never be able to afford it.

"We don't have the resources. We don't have the ability to do that.

"That is why you will continue to have a system where people pay out of their own pocket for medical aid schemes."

However much it costs, he believes they will pay.

"In spite of the difficulties, they'll allocate sufficient resources."

So the business model he devised just 20 years ago is a winner?

"The system is remarkably robust the way we see it."

* This article was first published in Sunday Times: Business Times