German hospital market is facing an uncertain future
The future of the German hospital market still hangs in the balance. As winter approaches and energy prices remain high, politicians still cannot agree on what to about Federal Health Minister Karl Lauterbach’s proposed reforms – but whatever the outcome there are opportunities as well as challenges ahead.
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HBI has reported extensively on Lauterbach’s plans for hospital reform which aimed to, among other things, close some hospitals in an over saturated market, and put an end to Germany’s notorious overactivity. In July the regions agreed key points with central government – splitting the DRG [diagnosis related group tariff] into a lump sum with smaller-than-before payments per activity, and reclassifying hospitals to limit what activities they can perform.
However, regional health ministers don’t agree on the finer details, with Baden-Württemberg’s Health Minister Manfred Lucha calling the results so far “very disappointing”.
Stefan Schrettle, partner at L.E.K. Consulting, tells HBI: “The hospital reform is over the concentration of some specialties within centres of excellence and the potential reduction of services in smaller hospitals. Hospitals will need to demonstrate they have the capabilities. Smaller hospitals might also reduce opening hours, meaning not every hospital would keep their emergency units, which local politicians have challenged as they think quality of care would decrease on a local level.
“Everyone agrees we will see lower numbers of hospitals, but the argument is whether it is a managed reform or an unmanaged process where hospitals go insolvent. That’s the trade off right now. Everyone agrees something must happen but the bottom line right now is “we agree something must happen, but don’t let it happen in my district”.”
There are also concerns about local employment if hospitals close. Another point of disagreement is there is no intermediary funding for hospitals on the brink of insolvency, although the government has already paid vast additional amounts to help with energy costs.
Tobias Koesters, managing director at L.E.K., is clear hospital closures will happen regardless and says: “The DRG was set up 20 years ago to, in the long term, phase out the least efficient hospitals. But that mechanism takes a long time right now.”
A German legal expert tells HBI there are likely to be hospital insolvency cases, which may be why local politicians are desperate to get extra funding. But he adds: “Every sensible and serious health economist will say we have too many hospitals, particularly mid-sized ones with no specialisations.”
This does have a benefit to private operators although it may initially be difficult to see. Both the shift towards more specialisation, which private operators can provide, and the shift to outpatient, could benefit savvy investors and hospital operators.
Schrettle points out the DRG for many outpatient procedures have already been relativised with similar procedures on an inpatient basis, minus the “hospital cost” for beds. This happened in October last year.
Some hospital groups seem to already be taking advantage of this. In the Q3 results for Schön Klinik, the group reported the number of “inpatient and semi-inpatient treatments” from January-September was down 1.1% to 144,939 while the number of “outpatient attendances” in acute hospitals had increased 5.8% to 359,198.
This is especially important with the still high energy prices.
The federal government is spending €6bn between October 1, 2022, and April 30, 2024, to help hospitals with energy prices. Energy prices are a particular hindrance to hospitals, with Schön Klinik for example seeing its EBITDA margin drop from 7.2% to 6.7% in Q1-Q3 2023 compared to last year which it says is at least partially due to energy costs.
Schrettle explains the impact this is having on hospitals: “The topic around energy needs to be considered in a broader context. Almost all providers, including non-hospitals, have suffered various salary and cost increases and so on. A lot of these non-hospitals are asking for more money while the ministry believes the money in the system should cover the higher costs.
“Right now, the government is being forced to save some money as well because €60bn of spending was rejected by the Supreme Court. While that’s not only for healthcare, it means the government needs to look for further spending cuts.”
So bad news for energy-intensive outpatient specialties like dialysis and radiology, which received funding for the gas price brake, but have not received previous funding like the €8bn inflation package hospitals received in November 2022.
HBI understands the previous condition this aid was based on, that private groups would be unable to pay dividends or bonuses, has been quietly scrapped according to our German legal expert. Both sources from L.E.K. said such a condition would be unusual, as none of the Covid-era funding or any other previous government funding for private companies of any description was given on that condition.
HBI has reached out to conglomerate Fresenius, one firm which would have potentially been caught up in that, for comment.
And what of Lauterbach’s outpatient reform which threatened to stop private equity from investing in the sector? There is a new twist which could be good news for the private sector. Schrettle says: “The FDP (Federal Democratic Party, coalition partners in government) put out a positioning paper saying they want to ensure there’s a diversity of providers including corporate owned models and there needs to be a fair level of competition.”
Without the support of the FDP, the government cannot pass any policy unless it is backed by the centre-right CDU or far-right AfD – both scenarios seem unlikely.
Our German legal expert agrees: “I’m under the impression M&A is coming back, because I think investors have now understood nothing is going to happen and we’re going to keep the coming law. Investors were afraid and are much less so now.”
It is interesting to note that in our recent discussions on the possible renewed sales process for European Dental Group, the firm’s German assets were presented as a boon, rather than a barrier.
We would welcome your thoughts on this story. Email your views to Joe Quiruga or call 0207 183 3779.
