Investment Banking and Mandatory Health Insurance in Armenia

The implementation of the compulsory health insurance system in Armenia will begin in mid-2024. It will include all registered workers and pensioners from 2025. The system will become mandatory for all Armenian citizens from 2027.

The Health Ministry of Armenia announced that mandatory health insurance in Armenia is expected to cost up to 200,000 drams ($500) annually per working citizen. This amount will cover all types of medical services, except for dentistry and plastic surgery. Minors, pensioners, and persons with disabilities will be exempt from paying the tax, they explained further, adding that Armenians earning less than the country’s average salary will get significant tax discounts.

The introduction of mandatory health insurance in Armenia is expected to bring several benefits to the population. First of all, it will provide comprehensive health insurance coverage to the entire population by 2027, which will help to address the issue of underutilization of essential health care services. Currently, lots of Armenians don’t go for annual medical check-ups simply because it costs too much and some services are provided only for those patients who have health insurance. Now, with mandatory health insurance, people won't have to worry about money when they need to see a doctor or get treatment.

Moreover, the mandatory health insurance system will help to reduce the financial burden on households. Out-of-pocket spending on healthcare in Armenia ranks among the highest globally, with 85% of healthcare expenses being paid directly at the point of care. Consequently, nearly one in five Armenian households allocate a significant portion of their income—up to 10%—towards healthcare expenses, far surpassing European averages. Along with a reduction in the proportion of people who refuse to see a doctor for financial reasons, the share of private spending on medical services in total healthcare costs is expected to decrease by more than 20%, reaching a maximum of 65% in the medium term. This will be accompanied by an increase in allocations from the state budget for healthcare spending by about 3 times in the medium term, which will amount to at least 4% of GDP. It is worth noting, that the increase in government spending on health care will be aimed at ensuring financial access to basic services in the insurance package, setting realistic prices for reimbursable services and partially or fully subsidizing insurance premiums. This will help to ensure that essential health care is more accessible and affordable for all Armenians.

Last but not least, mandatory health insurance will make healthcare better overall. With a steady stream of money coming in, healthcare providers can invest in things like better facilities, equipment, and training for their staff. This means better care for patients. Plus, there will be a system in place to make sure that the quality of medical care stays high. This means patients can trust that they're getting the best care possible.

How long can the government last without the help of private insurance companies?

The health insurance system will be partly funded by deducting a fixed amount from workers' wages, similar to income tax. However, relying solely on government funding could pose challenges in the future. Private insurance companies are concerned regarding potential risks associated with corruption and monopolization under state control, given that both the collection and allocation of insurance premiums will be overseen by governmental bodies. While involving them might increase costs, some experts suggest it could help manage clients effectively. However, some experts believe that the government will eventually need to collaborate with private insurers to manage the volume of clients effectively. The CEO of one of the country's largest insurance companies, predicts that the government will be forced to share the market with private companies in the future. He stated that no government or fund can cope with such a volume of clients and that private insurers will be necessary to ensure the sustainability and efficiency of the health insurance system.

Besides, the mandatory factor of the system will lead to increased awareness among citizens about insurance products and eventually increase insurance penetration in Armenia. In 2022, in Armenia, total gross written premiums were 0.224% of GDP for health insurance, while globally it was 1.3% (5.8 times higher). Furthermore, Armenia allocates relatively low public spending on health compared to other countries in Europe and Central Asia. Over the past 25 years, the country has dedicated approximately 5.4% of consolidated budget expenditures to healthcare, which translates to around 1.4% of GDP. This amount is at least four times lower than the average allocation for countries within the same income group as Armenia.

Investment banking in the Healthcare industry

Between 2022 and 2023, global M&A volumes in health industries experienced a slight decline of 8%, while deal values increased by 9% during the same period. However, these trends varied significantly between the pharma and life sciences sector and the healthcare services sector. Specifically, the pharma and life sciences sector witnessed a 10% decrease in deal volume, yet there was a substantial 73% surge in deal value in the first nine months of 2023. The megadeal was Pfizer's acquisition of Seagen in 2023 for $45.7 billion. This deal demonstrated that large pharma companies are still willing to pursue significant acquisitions of biotech firms to strengthen their pipelines. According to PwC's 27th Annual Global CEO Survey, 54% of health industry CEOs say they plan to make at least one acquisition in the next three years.

In Armenia, Investment companies can leverage their market analysis capabilities, industry expertise, and due diligence services to identify potential M&A opportunities in the healthcare sector. This could include advising on acquisitions, divestitures, and strategic partnerships. At the end of 2022, 100% of the shares of one of the Armenian insurance companies RESO were sold to "Polygraphia” CJSC. After the successful completion of the transaction, the company was renamed REGO Insurance. The introduction of mandatory health insurance in Armenia may also impact the role and market share of private insurance companies and there can be more transactions in the near future. Investment companies can advise these private insurers on strategic options, such as mergers, acquisitions, or the sale of shares, as well as find investors who want to invest in the rapidly growing industry of the insurance business.

Investment companies and investment banking departments in banks can also provide financing solutions, such as debt or equity capital, to healthcare providers in Armenia to support their investments in technology, infrastructure, and operational improvements, which will be crucial in the context of healthcare reforms.

Looking ahead to 2024, there is cautious optimism regarding M&A activity in the health industries. While expecting a more favourable macroeconomic and regulatory environment, the healthcare sector is predicted to need the expertise of investment bankers.

Pros and Cons of Government-funded Health Insurance

Government-funded health insurance, like any system in any country, has its advantages and disadvantages.

Pros:

• Universal Coverage: Government-funded health insurance ensures that everyone, regardless of their income, can access essential healthcare services. This can lead to improved health outcomes and reduced health disparities within a population.
• Cost Control: With a single-payer system, administrative costs are lower compared to private insurance. The government can negotiate prices with healthcare providers and pharmaceutical companies, potentially lowering healthcare costs for everyone.
• Preventive Care: Government-funded health insurance programs often prioritize preventive care and wellness initiatives, which can help reduce the incidence of costly chronic diseases and improve overall public health.
• Risk Pooling: By spreading risks across a more diverse population, government-funded health insurance spreads out the financial burden of healthcare costs, potentially reducing individual premiums and out-of-pocket expenses.

Cons:

• Taxpayer Burden: Funding government-funded health insurance programs typically requires substantial tax revenue which can lead to increased taxes for individuals (additional percentage to income tax), which may not be popular among taxpayers, especially if they believe they are not benefiting directly from the system.
• Limited Choice and Competition: A single-payer system may limit choices for both patients and healthcare providers. Patients may have fewer options for providers, and providers may face limited reimbursement rates, potentially leading to reduced incentives for innovation and quality improvement.
• Long Waiting Times: Most of the time government-funded healthcare systems experience long waiting times for non-emergency procedures or specialist appointments, especially in high-demand environments with limited resources.
• Bureaucracy and Inefficiency: Government-funded health insurance systems can sometimes suffer from bureaucratic inefficiencies and red tape, leading to delays in care, administrative errors, and dissatisfaction among both patients and healthcare providers.
• Infrastructure and Technology: Some regions in Armenia may lack adequate healthcare infrastructure and access to advanced medical technology, which could impact the quality and availability of healthcare services, particularly in rural areas.

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