When Government Is Your Competitor

Two hallmarks of most healthcare systems outside the US are “universal” insurance coverage and separate private and public sectors that serve different segments of the population. The private serves the top 10-15% of the population by income and ex-pats while the public sector serves everyone else. These structures vary country and pose different operating challenges for operators and investors in these businesses.

The Challenges Come in Numerous Forms

First, there is competition for staff. Wage rates for the private sector typically are higher than those in the public sector. As a result, public systems face the challenge of retaining adequate staff. The risk for private systems is public systems’ policy changes to address this issue. The strategies can range from limitations on practicing in the private sector (China) to pre-announced, multi-year wage increases (Singapore). Most emerging markets face shortages of medical staff, which magnifies the difficulties in adjusting to policy changes.

Second, tax policy can change patients’ behavior. Malaysia’s implementation of a 6% Goods and Sales Tax (GST) in late 2015 effectively raised prices for private providers and caused a decline in patient volumes at private hospitals and clinics as demand shifted to the public system (which is exempt from the tax). The move was a bit surprising because the government promotes the country as a destination for medical tourists.

Third, some public hospitals compete for private patients. A subset of public hospitals (typically the most prestigious ones) in some countries operate dedicated wings or units that cater to private sector patients. These units typically offer the same amenities (private or semi-private rooms, menus, etc.) as private hospitals. The threat from these hospitals usually is benign because these units are small, don’t grow, and aren’t a strategic imperative for the public hospital.

Fourth, health insurance policy can shrink the private market. The UK (where South African hospital chains are active) is diabolically (and possibly unintentionally) squeezing out private health insurance companies with its NHS Choice Framework. This policy allows patients to choose from both public and private hospitals when referred by their General Practitioner for certain treatments. This policy effectively cannibalizes private hospitals’ business as patients can receive private care at little additional cost because the NHS’ tariffs are substantially below those of private insurance plans.

A Healthy Private System Benefits the Government

The countervailing dynamics that limit governments’ competitive activity is multi-fold. First, private hospitals serve the most demanding segment of the market that is unwilling to tolerate long waiting times; poor customer service; or loss of choice. Second, this segment of the population (presumably) pays a higher share of taxes and spares the government the cost of providing care. Third, private providers pay income and other taxes. Fourth, some private hospitals draw patients from outside the country, providing a source of foreign and exchange and enhancing the country’s reputation.

Indonesia: A Case Study in Symbiosis

Indonesia stands out as an example of the balancing act that governments face. The country is phasing in universal health insurance through the Jaminan Kesehatan Nasional (JKN) that targets 100% coverage in 2019. Inadequate medical infrastructure is one of the country’s biggest challenges. The number of hospital beds/10,000 population is 9, well below the developed world’s typical 20. The government is adding some capacity to the public hospital system, but the private sector is picking up the slack, accounting for 75% of hospitals under construction. Private hospital operators are learning to adjust their cost structures to earn profits on the JKN’s rates and the government recognizes that it needs a healthy private sector to fulfill its policy goals. 

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