There are six main reasons why there are so few truly international players, outside of dialysis. You first have to recognise that health care services are far more complex than manufacturing, and by far the most complex service industry. It, therefore, reflects local cultures and politics in a way which a car manufacturing plant simply doesn’t.
- Corruption No health care service market is clean. Closest are probably single integrated payor provider models such as Clalit in Israel, followed by European NHS models, which are clean but often inefficient. Overtreatment is routine in Germany and the USA. But the scale of overtreatment and back-handers to doctors in markets such as Latam, the Middle East, India, China and SE Asia are so immense as to make it difficult for Western operators to play there. How do you compete in a market where hospital doctors are routinely incentivised by monthly and quarterly diagnostic test and drug prescription targets? Or in Ukraine or Africa where an MRI machine is primarily not a medical device but a vehicle to move millions of dollars illicitly? This is not to say that there aren’t clean operators such as Narayana in India. But it is very hard for an outsider to really gauge the scale of the problem. Even if the operator is clean, the payor and regulatory systems are likely to not be. International private medical insurers, the obvious police, are asleep at the wheel. They don’t measure quality and they don’t reward it.
- Local influence Tied to corruption is the fact that local operators tend to be influential families, most of whom do not see why they should relinquish control or sell to foreigners. Any change of ownership is likely to drastically tilt the tables against the new owners. For instance, they won’t win licences.
- Foreign currency risk This adds a huge extra risk in countries like Turkey, Russia or Argentina.
- Lack of genuine international investors PE funds are regional players who invest locally. Latin American funds invest in Latam, SE Asian in SE Asia, Europe in Europe. Operators tend to stay within these geographies.
- Health care services are “a safe investment” The main attraction for investors of health care services is that it is low risk and recession resistant. So it tends to attract conservative investors who have little appetite for risk. Management teams tend to reflect this culture.
- Ridiculous multiples Western operators remain on half the EBITDA multiples of many Emerging Market players. Even if they wanted to buy, European and US operators would face huge dilution.
There is no shortage of Western operators who have tried investing in emerging markets. Some, such as South African group Mediclinic with the Al Noor hospital in the GCC, have had the guts to stick it out and not compromise. Others have pulled out, having lost tens of millions. Or they simply freeze investments. They don’t generally talk about it. In fact, corruption is a taboo subject in our world. But it is a huge impediment. Wastage levels even in Singapore are around 20%, higher in Florida and off the Richter scale in China.We would welcome your thoughts on this story. Email your views to Max Hotopf or call 0207 183 3779.