Afrocentric

BUSINESS MODEL

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The Group’s business model explains how value is created for stakeholders and depicts the capital inputs required to effectively provide health administration and health risk management in the context of the external environment, and in response to stakeholders’ needs.

The business model depicts how the businesses transforms inputs, through business activities and operations, into outputs and outcomes.

These elements inform the material risks and opportunities and are considered when developing an effective strategy.

SIX CAPITALS
AfroCentric relies on a range of capital inputs that are transformed through its activities to create value, as outlined below.

			FINANCIAL CAPITAL			The Group obtains the funds required for executing the strategy through earning returns on investments and re-investment of earnings generated from services. Increasing the service fees base enables the Group to increase financial capital and create value for our stakeholders.
			INTELLECTUAL CAPITAL			Intellectual capital consists of employee intellectual property including systems and processes, uniquely tailored IT systems, licences (such as the licence for back treatment in South Africa) and business and industry knowledge. The Group continually aims to increase its intellectual capital through streamlining operations and investing in improvements to ensure efficiencies.
			MANUFACTURED CAPITAL			Manufactured capital is the physical objects that AfroCentric requires to provide services and include IT and call centre equipment amongst others. An example of manufactured capital is the Fusion IT system, designed to enhance security and efficiency of data management.
			HUMAN CAPITAL			Human capital is the capabilities and experience of employees on which AfroCentric relies. We have a skilled workforce across a range of key competencies related to the industry and who provide services from call centres and operations to administration and actuarial analysis. The Group continually aims to increase human capital through recruitment practices, skills and talent programmes. AfroCentric has its own learning academy to upskill and empower employees.
			SOCIAL AND RELATIONSHIP CAPITAL			The AfroCentric Group is invested in South Africa with the purpose of promoting a rational healthcare delivery system that focuses on quality while controlling unsustainable medical inflation, improving people’s lives and the quality of care. This is achieved through investing in relationships with stakeholders brands in which it is invested. The Group is committed to transformation, and providing a meaningful contribution to uplift the communities in which it operates and to the South African nation as a whole.
			NATURAL CAPITAL			The AfroCentric Group does not have a significant environmental footprint. We rely on environmental resources and processes, such as water and electricity, to provide services rendered. The recent energy crisis and load shedding increased our environmental impact as a result of diesel generators being utilised. The Group is committed to sound corporate citizenship and monitors and measures its greenhouse gas (“GHG”) footprint, considering that carbon tax legislation may have a financial implication.

MATERIALITY

AfroCentric’s definition of materiality is defined by the IIRC’s <IR> Framework as those matters that substantially affect the organisation’s ability to create value over the short, medium and long term.

The Group views materiality determination and assessment as a continuous process because we appreciate that the external environment is continually evolving. Through understanding how material risks and opportunities as well as stakeholder expectations inform the strategy (how the business is responding), the Group is able to execute a successful business model.

AfroCentric’s external environment, risks and stakeholder engagement culminate in the material risks and opportunities.

A risk assessment is undertaken regularly, and the results are combined to arrive at strategic, financial, reporting, IT, compliance, reputational and operational risks. These risks are considered in relation to the external environment and stakeholder expectations.

The process involves considering the risk and opportunity likelihood and potential impact within the quantitative and qualitative parameters set by the Group. These matters form the foundation for the Group’s future materiality assessments as management continuously seek to align its strategic approach with the critical factors in its operating environment.

EXTERNAL BUSINESS ENVIRONMENT

SOUTH AFRICAN ECONOMY
The South African economy has endured a minor economic setback over the past few years, from which it has not yet recovered. The Rand experienced a significant reduction in value in 2015, and remains weak against international currencies. The severe drought experienced across large parts of the country, during the summer months further exacerbated the economic stress, which resulted in increased commodity prices. The impact of these combined factors were felt across all industrial sectors and by all demographic groups. Inevitably, some were more exposed to the effects of the economy than others. Some industries that experienced a setback responded with a reduction in employment levels and/or reduced remuneration and benefits packages for employees, including provision for private healthcare, directly impacting our clients and thus the Group.

IMPACT ON SOUTH AFRICAN HEALTHCARE SECTOR
Rising inflation unmatched by economic growth and remuneration increases impacts on disposable income. This results in limited choices for consumers. In some instances, consumers choose not to pay for private healthcare. These decisions are also influenced by escalating healthcare costs, which is unaffordable for most of the population.

This further increases healthcare costs, as the young and healthy opt for low-cost insurance alternatives or choose not to join a medical aid scheme at all, using public sector facilities for acute care. Lacking young entrants, what remains is an ageing membership base with increased medical scheme claims, resulting in even higher contribution requirements, an ‘actuarial death spiral’ which further drives out existing healthy members, unable to afford the rising premiums.

The increased costs of medicine and medical devices is mainly attributable to the importation from countries with stronger currencies (predominantly the United States). The value of the Rand, however, presents opportunities to diversify into international markets. International contracts could yield lucrative returns if the Rand remains comparatively weak.

NATIONAL HEALTH INSURANCE
The government’s plans to introduce NHI are underway. Since 2012, 10 health districts in seven provinces have been running pilot projects. The pilots were designed to test the ability of health districts to assume greater responsibilities, to assess utilisation patterns, and to determine the cost and affordability of implementing a primary healthcare service package. According to the White Paper “NHI represents a substantial policy shift that will necessitate a massive reorganisation of the current healthcare system, both public and private”. Government is committed to ensuring access to quality healthcare for all South Africans, regardless of their financial standing.

The private sector will be instrumental in the success of the NHI. The NHI is intended as a national scheme, based on the principle of a ‘single fund’ and a ‘single payer ’, and will require sophisticated IT solutions. AfroCentric, through its IT subsidiary, Helios IT Solutions (“Helios”), manages a range of IT solutions with healthcare specialisation that includes technical support.

AfroCentric is supportive of the NHI. The Group welcomes the revitalisation of the public health sector and endorses the ideal clinic model described in the White Paper. Through Medscheme, AfroCentric possesses the necessary skills and experience in health risk managment as well as health administration and is willing to share this expertise with the architects of the NHI. Medscheme also has electronic tools that profile general practitioners (“GPs”) and specialists applying cost and quality metrics of treatment that impact on healthcare outcomes. These tools could provide government with the means to implement its plans for a reimbursement strategy that rewards evidence-based healthcare and effective use of resources.

There is currently engagement with the NHI implementation process. Pharmacy Direct has been providing courier pharmacy services to the Department of Health in 5 of the 8 pilot districts under the Central Chronic Medicine Dispensing and Distribution (“CCMDD”) Programme.

Payment integrity of healthcare claims is a core objective to secure the success of the pending National Health Insurance. The prompt and accurate payment for healthcare services rendered by legitimate practitioners and facilities will form the backbone of the NHI and ensure that all citizens receive quality healthcare quickly and at an affordable price. The management of fraud, waste and abuse will be key to safeguarding the financial sustainability of the NHI nationally.

AfroCentric is proud to declare that their investment for the exclusive licencing of the Insurance Fraud Manager (“IFM”) predictive analytics software is demonstrating material savings for their client medical schemes. IFM is licenced through FICO, the world’s leading software provider of credit scoring analytics. By continuously scoring healthcare claims and providers using advanced analytics, AfroCentric is able to proactively monitor and detect irregular claiming behaviours much sooner than conventional retrospective methods. Combining ‘Big Data’ with predictive analytics provides AfroCentric with a distinct advantage in the industry, by creating a holistic overview of irregular billing patterns and trends across many medical schemes, which allows for preventative measures to be taken against errant providers and facilities.

HEALTH MARKET INQUIRY
The Competition Commission launched a health market inquiry into the private healthcare sector at the end of 2013. The inquiry is intended to investigate “the state, nature and form of competition in a market”. Medscheme submitted a detailed response and participated in the consultative process. The Commission intends to publish its report and recommendations by the end of 2016. AfroCentric is optimistic that the inquiry will result in recommendations that will positively impact efforts to combat the causes of soaring medical price inflation.

RESPONDING TO THE EXTERNAL ENVIRONMENT
In addition to the macroeconomic and legislative pressures described, the private healthcare sector is in a period of consolidation. Smaller schemes and those experiencing member attrition due to the economic setback may find themselves unable to cope in the current economy. Scheme mergers represent opportunities for Medscheme to acquire new clients or have the current membership base of existing schemes increase. Medscheme is the largest manager of medical schemes with approximately 3.7 million lives under our management and has the flexibility in its IT systems to administer the specific range of benefits each client scheme offers.

Medscheme is also the administrator for several government schemes. This provides a firm foundation from which the Group can bid for future NHI tenders and other state contracts. AfroCentric holds the South African proprietary sub-licence for ‘Insurance Fraud Manager’, a fraud, waste and abuse detection application from FICO, a Canadian-based software company that is the global leader in healthcare fraud detection. This could provide an opportunity to assist government with risk management.

OUTLOOK
The economic outlook remains uncertain. The private healthcare market is experiencing a state of fluctuation with the impending conclusion of the health market inquiry and the next stage of NHI development only recently revealed in the 2015 White Paper. Although much remains uncertain about how the NHI will ultimately be implemented, government has embarked on a process of consultation that will include the private sector to discover the best routes to implementation. Through its range of healthcare-related businesses, the AfroCentric Group represents a large part of the healthcare value chain. As a key player in the industry, AfroCentric is well positioned to maximise the consolidation opportunities that exist, continue to participate in the NHI consultative process, and assist the Competition Commission with recommendations in response to the health market inquiry.

RISKS
The AfroCentric Group is committed to being a ‘risk-intelligent’ organisation with an entrenched risk management capability focusing on value creation and value preservation. Risk management is a formal response to corporate risk. It is a structured and systematic process interwoven into existing management responsibilities. It enables management to effectively manage uncertainty, and associated risk and opportunity, enhancing our capacity to build value for stakeholders.

The Board has the ultimate responsibility for risk management, which is delegated to the Chief Executive Officer and the Executive and senior management teams. The risk responsibilities include, amongst others: approval of the risk management policy and framework, defining the risk appetite, monitoring the implementation of enterprise risk management, establishing the necessary risk structures, reviewing risk reports and ensuring comprehensive risk assessments on a regular basis.

ENTERPRISE RISK MANAGEMENT PROCESS
The Group’s Enterprise Risk Management Framework (“ERMF”) is aligned to the principles of King III. A structured and systematic enterprise-wide approach was adopted to ensure key risks within the Group are included, enabling AfroCentric to achieve its strategic objectives.

ENTERPRISE RISK MANAGEMENT GOVERNANCE STRUCTURES
The AfroCentric Group established various governance structures for the management of risk. These are managed by the appropriate level of leadership and are operating effectively. The different risk governance structures in place, where the various classes of risks are addressed, is illustrated accordingly.

AUDIT AND RISK COMMITTEE
The Audit and Risk Committee is appointed by the Board, and is responsible for providing direction and oversight in respect of Enterprise Risk Management.

THE THREE LINES OF DEFENCE
The Three Lines of Defence governance model is implemented as a key principle of risk management. It is designed to promote risk ownership, transparency, accountability and consistency across the Group, through the clear identification and segregation of duties as described below: