Strategic Report: Divisional Review Switzerland
Dr Ole Wiesinger
Chief Executive Officer: Hirslanden

CEO’s statement

“This year was a particularly challenging one with a number of Swiss healthcare regulatory changes impacting Hirslanden. To address the trends in inpatient and outpatient activity driven by this evolving regulatory environment, Hirslanden is adapting its business model. We are continuing to transform from being a pure acute hospital operator to an integrated healthcare service provider that offers medical services across various levels of care. During the year we opened the Bellaria Outpatient Surgery Unit in Zurich, which allows procedures to be carried out safely and efficiently in an ambulatory environment that aligns with the regulatory changes. Through our Hirslanden 2020 strategic programme we are accessing the most appropriate outpatient solution for each hospital and seeking to increase the efficiency of the existing business by implementing standardised systems and processes. Despite these challenges and the mature, saturated market, as the largest private healthcare service provider in Switzerland, Hirslanden is well positioned to take advantage of future opportunities for growth through selective investments. In July, we successfully completed the acquisition of the 115-bed Linde Private Hospital in Biel which has performed well since its integration. Throughout all this flux, patients remain at the core of Hirslanden’s long-term strategy and we remain focused on providing them with excellent clinical care.”

Key financial and operational highlights

As at the end of the reporting period, Hirslanden operated 17 hospitals and 4 outpatient clinics with a total of 1 805 inpatient beds and 9 635 employees (7 633 full-time equivalents). It is the largest private acute care hospital group in Switzerland servicing approximately one third of inpatients treated in Swiss private hospitals. Hirslanden accounted for 47% of the Group’s revenues (FY17: 48%) and 48% of its adjusted EBITDA (FY17: 53%).

Effective 1 July 2017, Hirslanden acquired Linde Holding Biel/Bienne AG (“Linde”) for a total consideration of CHF107m. Linde is a leading private hospital in the Biel region of Switzerland offering a wide range of medical services with 115 beds, an outpatient clinic facility, emergency unit, six operating theatres, physiotherapy, radiology and an ophthalmology centre. In March 2017, the hospital’s main building was expanded with a new wing which provides the opportunity for future growth. Linde delivered a good operating performance following its successful integration.

Hirslanden’s FY18 revenues were impacted by the timing of the Easter period, a subdued summer market, the continued change in insurance mix and the evolving changes in the regulatory environment. Revenue in FY18 was up 2% to CHF1 735m (FY17: CHF1 704m) as a result of flat inpatient revenues and an 8% increase in outpatient revenues, which contributed around 19% of the division’s total revenue. The gradual insurance mix change continued, with a 10% increase in general insured patients and a 3% decline in supplementary insured patients. This, together with the integration of Linde, contributed to the 1.5% decline in revenue per bed day. Bed days sold and inpatient admissions were up 1.6% and 2.6% respectively. Excluding Linde, Hirslanden revenue was down 1% and outpatient revenue was up 3% with bed days sold and inpatient admissions down 2.6% and 2.1% respectively.

Adjusted EBITDA decreased by 7% in FY18 to CHF318m (FY17: CHF340m) with the adjusted EBITDA margin decreasing to 18.3% from 20.0%. This reflects the impact on revenue of current trends in the market and regulatory environment as well as the continued investment costs relating to the Hirslanden 2020 strategic programme offset by the benefits from cost-management programmes and efficiency savings.

Depreciation and amortisation increased by 12% to CHF110m (FY17: CHF98m) reflecting the incorporation of Linde and ongoing fixed asset investments. Adjusted operating profit decreased by 14% to CHF208m (FY17: CHF242m).

Net finance costs increased by 42% to CHF81m (FY17: CHF57m), mainly due to the derecognition of unamortised finance expenses of CHF24m due to the refinance of debt facilities implemented during the year.

Hirslanden contributed £106m to the Group’s adjusted earnings (representing 48%) compared to £121m (representing 55%) in the prior year. Hirslanden converted 81% (FY17: 96%) of adjusted EBITDA into cash generated from operations, down from 96% in FY17 due to an increase in trade receivables largely caused by billing process changes.

In October 2017, the Group completed the refinancing of Hirslanden’s secured long-term bank loans with a 25bps reduction in the cost of debt on a like for like basis and an extended maturity profile to at least 2023. The new facilities total CHF2.0bn.

In line with the requirements of IFRS, the Group performs an annual review of the carrying value for goodwill and other intangible assets. In Switzerland, the changes in the market and regulatory environment affected key inputs to the review that gave rise to impairment charges recorded against properties and intangible assets of £84m and £560m, respectively. Hirslanden’s goodwill and indefinite life trade names were carried at £307m and £341m, respectively, at the previous year end balance sheet date of 31 March 2017. The impairment charges are non-cash and excluded from the adjusted earnings metrics. The remaining trade names will be amortised over their respective estimated useful lives.

REGULATORY UPDATE

On 1 January 2018, the transitional solution to the national outpatient tariff (“TARMED”) became effective. After mitigating actions, including improved utilisation and increased efficiencies, Hirslanden expects the annualised impact on adjusted EBITDA to be around CHF25m. The Federal Government has also been preparing a national framework for the outmigration of basic medical treatments transferring from an inpatient to an outpatient tariff, which is expected to be implemented from 1 January 2019. The final list of interventions will be agreed following the conclusion of a recent working group review. In the Canton of Lucerne, similar measures were implemented on 1 July 2017 and in four further Cantons (Zurich, Zug, Schaffhausen and Aargau) on 1 January 2018. Although the Federal Government is expected to implement a national framework from 1 January 2019, a number of insurance companies in Switzerland are already applying certain elements of the framework in some further cantons.

Adapting to the current market and regulatory trends

Hirslanden continues to adapt its business model to address the trends in inpatient and outpatient activity driven by the evolving regulatory environment in Switzerland and the ongoing insurance mix change whilst maintaining excellent clinical performance. The continued investment in the Hirslanden 2020 strategic programme is a key building block of the long-term strategy to adapt to this changing environment, whilst also delivering cost savings and operational efficiencies for the division over time. The pace of regulatory change and its impact on the business continues to evolve and we are monitoring it closely to adapt accordingly.

The growing outmigration of care trend in Switzerland is being addressed as part of the Hirslanden 2020 strategic programme. This programme has two main goals: to increase the efficiency of the existing business by implementing standardised systems and processes; and to develop new areas of business, such as outpatient facilities to efficiently service day case patients. During the year, a new corporate office was opened in Zurich which will support the drive to deliver efficiencies across the division in addition to the roll out of standardised systems across the Zurich based hospitals in April 2018 that will continue across the rest of the division over the coming three years. Hirslanden is assessing the most appropriate outpatient solution to implement for each hospital, including the reconfiguration of existing hospital surgery units and the establishment of specialised outpatient and medical centres moving towards a more integrated medical network that facilitates the access to healthcare for patients. New medical centres where doctors’ practices will be located are planned to open in Zurich, Cham and St. Gallen during the financial year ending 31 March 2019 (“FY19”).

Investing for future growth

In FY18, Hirslanden invested CHF47m in expansion capital projects and new equipment and CHF82m on the replacement of existing equipment and upgrade projects. The division continues to invest in Hirslanden 2020. Hirslanden Klinik Im Park in Zurich opened its new Bellaria outpatient surgery centre in April 2017, which includes a ward for procedures requiring short inpatient stays. In FY19, Hirslanden expects to invest CHF55m and CHF77m on expansion and maintenance capex, respectively. Building work continues on an expanded emergency department for Klinik Hirslanden in Zurich and a new ward at Hirslanden Klinik St. Anna in Lucerne which are both expected to be completed in FY19. Other key projects in the year ahead include Hirslanden 2020, the new Birshof medical centre and intermediate care facility, new emergency units at Klinik Linde and Andreas Klinik as well as an outpatient surgery unit and medical centre at the train station in Lucerne.

Market overview

The Swiss healthcare market is one of the best funded in the developed world and continues to grow steadily. Hirslanden is the largest medical network and the largest private hospital group in Switzerland, and operates effectively within a high-quality healthcare system where the population enjoys freedom of choice and high-quality services in both the public and private sector. A survey, financed by the Commonwealth Fund and conducted in 11 countries, found that 60% of respondents in Switzerland rated the functioning of the Swiss healthcare system as “good” or “very good”. 66% considered the medical care provided as either “excellent” or “very good”. Of the 11 countries surveyed, Switzerland had the best response.

Hirslanden’s main competitors are the public hospitals. Many of these will improve their infrastructure in the coming years. According to publicly available sources, CHF16bn is earmarked for the construction and renovation of hospital buildings.

There are 26 cantons that supervise and manage hospitals and ensure their funding in collaboration with the mandatory health insurance. Besides the regulation of the inpatient sector, the cantons increasingly intervene by defining lists of medical procedures to be performed ambulatory or by establishing a moratorium for foreign doctors.

Outlook

There continues to be a significant focus on the shift of basic medical treatments from the inpatient to the outpatient sector (“outmigration”). The Federal Government is preparing a framework for the outmigration of services, likely to be ready for implementation from 1 January 2019, across Switzerland. Having opened the new Outpatient Surgery Unit at Klinik Im Park, Hirslanden will also open a new medical centre in Zurich (Seefeldstrasse) in spring 2018 and further ones at Schuppis (canton of St. Gallen) and Cham (canton of Zug) early in 2019.

Given the current market and regulatory trends, the investment programme within Hirslanden and the potential for increased synergies, the division is well positioned to adapt its business model and maintain its status as the largest medical network in Switzerland while continuing to improve patient satisfaction and clinical outcomes.