Ripe for Investment: Health care Under Universal Care Coverage
    Category: Health is Wealth By : Thomas Wirtz, Ernst & Young Indonesia (EY) Read : 1644 Date : Tuesday, August 11, 2015 - 19:59:48

    The following was adapted from the EY report Ripe for investment: the Indonesian Health Care Industry Post Introduction of Universal Health Care Coverage.

    The Indonesian health care sector is at an early stage of its growth curve. The significance of this sector became apparent while I was working on a project on universal health coverage (UHC) this year. I discovered that this sector is considered “hot” by local investors who trying to secure pole position before international investors become aware of the enormous opportunities in this sector.

    For example, a large local hospital operator, Siloam, plans to open 45 hospitals by 2017. Another local player, Mitra Keluarga, plans to open 11 hospitals in the near future. Scale is an important factor when jousting for pole position, but for players without financial muscle, specialization offers an alternative entry point, especially for international investors barred from ownership of general hospitals. International investors, however, can hold up to 67% in specialist hospitals other than maternity.

    The middle class is on the rise: from 136 million in 2010, it is forecast to increase to 168 million by 2020, according to studies from Boston Consulting and World Bank. This rising middle class will seek better health care for themselves, and increased wealth should lead to a rise in lifestyle-related diseases. These trends give private hospitals an opportunity to provide accessible, affordable and quality health care.

    Macroeconomics help drive the sector. Over the last decade to 2013, the economy expanded by over 5% per year to a nominal GDP of $868 billion, and the growth is likely to continue. Nominal GDP per capita grew at a compound annual growth rate (CAGR) of 11% between 2009 and 2013 to $3,475; the Economic Intelligence Unit predicts a continued rise at an 11% CAGR from $3,510 in 2014 to $5,870 in 2019.

    At the poor or near-poor level, the government’s UHC provides the baseline for the country’s health needs, though private hospital operators believe strongly that a rising awareness of health issues will drive patients to the private sector—given its better services, such as a choice of doctors and shorter waiting times.

    Affordable private health care, through economies of scale and efficient resource utilization, will provide a lucrative growth area. Large players such as Siloam have already developed a business model for its UHC business that, through economies of scale, generates EBITDA to gross operating revenue margin of 15% at 300 beds. This strategy of catering to UHC patients is also an opportunity to convert UHC patients into higher-margin private patients. The margin of Indonesian hospitals can be almost 50% higher than similar Indian hospitals.

    Perhaps the strongest case for investing in Indonesian health care is that it is government-backed. The government aims to increase health care expenditure, as a percent of GDP, from 3% in 2013, prior to the introduction of UHC, to 5% by 2019. This change means additional spending of $16 billion, in current GDP terms. Apart from being a job creator, history shows that there is no turning back once the government has launched UHC. Thailand is an example of how UHC raised the status of the country and quality of life for its citizens since it introduced UHC in 2002.

    Opportunities come with challenges. Apart from the usual issues related to setting up business in an emerging market, there is one major issue specific to the Indonesian health care market: a lack of qualified medical professionals. In Indonesia, a doctor serves over 3,300 patients, which means that an additional 210,000 doctors are needed to meet the Southeast Asian average doctor-to-population ratio of 1:769. Specialists, in particular, are in high demand. Some hope that the ASEAN Economic Community will eventually open Indonesia up for foreign doctors, but this will probably take another few years.

    There is a natural synergy in partnerships between foreign investors and local players. The local players need expertise and experience more than capital, as it is through efficient management that new areas can be tapped and profits realized. Examples of areas that will benefit from foreign input include negotiating better procurement deals with pharmaceutical companies (drugs account for as much as 50% of a hospital’s revenue); better resource utilization, including medical personnel; streamlining operations (the largest expenditure of running a hospital is fixed costs); attracting talent, particularly qualified medical professionals and hospital managers; and creating joint ventures with regional centers of excellence. Local investors can bring in local sector and client knowledge, build relationships with key stakeholders and, perhaps most importantly, add valuable input when setting up, as it can take up to three years to set up a new hospital business.

    In conclusion, Indonesia is an emerging market with imperfect information flow, and thus represents high margin opportunities for investors, particularly in health care. This article merely touches on one segment of a dynamic and exciting sector—apart from hospitals, other players in the industry, such as pharmaceuticals, equipment manufacturers and insurance providers, to name but a few, are facing challenges as the result of the introduction of UHC.

    Yet these challenges are ripe for conversion into opportunities for the right players. Foreign investors with industry expertise can make a difference, especially in partnerships with local players, to help grow a severely underdeveloped sector as well as realizing healthy gains. As far as investments in emerging markets go, the Indonesian health care sector is probably one of the safest plays given that health care is a basic human need—and the sector is backed by the government, which has shown its commitment by recent capital injections and additional reserves of over $380 million into the UHC scheme.