2018 - the rise of brownfield enablers in emerging markets healthcare
2018 will be a banner year for shop-in-shop models in emerging markets healthcare
2 of 5 part series of thoughts on development, healthcare, and investing
- Techno-paternalistic development – blockchain use case
- 2018 - rise of the “brownfield enablers” in emerging markets healthcare
- Filipino-Germanic relations – a global healthcare workforce solution
- 2017 – the year impact investing jumped the shark
- Reforming impact investing – the need for an ecosystem approach
Healthcare investing across multiple countries looks deceptively easy
It’s no secret a confluence of trends are making healthcare investing in emerging markets appear like a can’t miss situation. A global convergence of chronic disease accelerated by the fact many of the populations involved are genetically predisposed, increasing life expectancies without illness compression resulting in people living sicker longer, and poor country performance on traditional World Bank measures of healthcare infrastructure all give an indication for rising healthcare expenditures and the need for investment.
The trickiness comes when interpreting these trends on a country level, if one factors in medical inflation is typically above currency inflation and that healthcare expenditures have a significant supply-side driven component, it looks like a substantial amount of the increase in expenditures is either uncapturable or will be captured by established incumbents.
Moreover, the configuration of private-sector health care is entirely a product of domestic regulatory landscapes, the ability to generate novel financially exploitable insights takes years of study and continual upkeep. No individual can maintain that level of competency beyond 4-5 relatively static markets, and with respect to India or China, a prognosticator has their hands full simply keeping abreast of one. I hope we’ll one day do away with the title “global health expert.”
The lack of predictive power for these trends is exactly why I get excited when there is a multi-country happening you can hang your hat on. The movement for Universal Health Coverage (UHC) continues to build momentum, and the major international bodies for healthcare aid and technical assistance are committed to push countries away from healthcare service provisioning and focusing on healthcare coverage. The Tokyo Declaration on December 13th reaffirms this strategy for the coming year.
What will be the impact of the push for UHC?
Governments in emerging markets have traditionally played the role of healthcare service provider for their populations and are now caught in a bind. As the cost and complexity of healthcare infrastructure have increased, governments have not been able to keep up. The injection of funding necessary to overhaul the aging public systems would be enormous, and there are no hidden pools of money to tap.
Many health analysts were dismayed in December to see India set a lowball 2.5% of GDP health budget by 2025, but that’s just reflective of the general trend for emerging markets as they struggle to expand their tax base. The result of this is an internal pressure to transition to focus on coverage for its added benefits of cost containment, mirroring the priorities of the development community.
Cost containment is easier to achieve in your own facilities, and countries implementing UHC policies are using tiered payments policies that heavily favor treatment in public hospitals and clinics over private. Simultaneously, governments are aware of their inability to provide 21st-century level qualities of care and are increasingly open to innovative private sector partnerships.
The coming wave of shop-in-shops
The downstream effect of all this is for a new wave of shop-in-shop business models -- brownfield enablers. These entities will craft business models that both leverage the high volumes of public facilities created by tiered UHC policies and gain the benefit of bulk purchasing by being able to operate across multiple healthcare facilities.
The older generation of investors blanche at the idea of what appears to be PPP’s by another name, but because of the distributed and embedded nature of these brownfield enablers, their payments occur at the facility level. This enables new revenue share models that are better hedged against sovereign risk.
My favorite example of a brownfield enabler in Asia is already ahead of the curve in India, Krsnaa Diagnostics, which runs diagnostics departments inside public facilities. With over 150 embedded imaging centers, it wouldn’t be surprising to know they’re already one of the largest volume purchasers of CTs or MRIs in the country. Mature examples in Africa are harder to find as the markets are less developed, a promising new entrant is the African Healthcare Network that’s applying shop-in-shop principles in Rwanda and Tanzania.
Development institutions should embrace and support this change
There’s an inevitability that brownfield enablers will play a larger role in healthcare ecosystems for the foreseeable future, and because these models are carve-outs of existing healthcare functions, there’s a finite number of potential iterations. Consider every cost center or revenue generator in a hospital or clinic, and determine whether there are economies of scale for patient volume, purchasing, or human capital.
The limited number of variations should allow for the standardization of political risk insurance contracts on a country-to-country basis. It would be a strong signal to the market if the World Bank had its political risk insurance arm, the Multilateral Investment Guarantee Agency (MIGA) draw up vanilla contracts for the various carve-outs. I’d start with diagnostics, pathology, dialysis, and cath labs.
Right now, there’s a misalignment between MIGA and the investor evaluation process. MIGA requires an upfront payment to engage in a project, without knowing what the contract terms will ultimately be. This process also requires substantial effort on the part of the investor with respect to documentation and paperwork necessary for MIGA to finally provide a quote, and it’s time-consuming. To solicit MIGA, there’s a monetary cost, a human capital cost, and a time-value cost, and all of this occurs before knowing the terms or whether MIGA will even provide coverage. The universe of potentially insurable projects is limited to all but the most costly.
If the World Bank really is committing to UHC it also needs to promote the private sector entities best equipped to further that goal. Brownfield enablers are an important bridge between deteriorating public services and 21st-century healthcare provisioning.
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