Latin America – Looking beyond the ATM business model
Our inaugural Healthcare Latam conference (147 very happy delegates from 20 countries met for two days in Sao Paulo, Brazil) demonstrated the potential and the problems faced by the private health care sector in Latin America. It also revealed the future and what lay beyond the perhaps dominant fee for service business model in which many operators main aim is to max out insurance policies. Subscribers can see all presentations by going to search, clicking on type of article and choosing “presentations”.
The potential is huge, Brazil is the world’s second largest privately insured healthcare market with 50m lives covered, one way or another.
In Argentina, people are turning their backs on a disfunctional public sector system. One Argentine hospital we talked to said it was enjoying 100% bed occupancy and 12% organic growth as a result.
Private healthcare is also a substantial slug of provision – 50% in Chile, 30% in Argentina and 15% in Brazil. Consolidation is already occurring – in many countries – Argentina, Chile, Brazil – the sector is dominated by massive integrated payor-providers. UnitedHealth acquired integrated payor-provider Banmedica (Chile, Colombia and Peru) in the summer of 2017, following its 2012 acquisition of Amil in Brazil. Insurer Bupa has done much the same in Chile and more recently in Brazil.
Elderly care is set to see huge growth as professional operators running purpose-built homes develop in Chile and now, following Orpea’s entry, in Brazil. It is hard to argue that purpose built nursing home sector will not enjoy 20% CAGR for the next few decades.
But in many countries the private health care services sector is in crisis.
Cooperation with governments which see-saw between statist populism and free marketeers remains difficult. Despite the pro-private sector regimes now in power in Brazil, Argentia and Mexico, around 85% of delegates said they did not see any real change in the willingness of the state to work with private operators. Only around 15% thought things were improving. (On the plus side, no one thought they were getting worse). Most private public partnerships have failed.
The huge underlying issue that the sector faces is the need to move away from fee for service towards DRGs or capitation. Particularly in Brazil, over-treatment is common and wastage massive. This, really, is the main taint and problem that the private sector faces, not just in Brazil or Latam, but across all Emerging Markets.
In Brazil, this has led to big increases in the price of private healthcare insurance. For the past four years premiums reflecting costs have risen at around 15-20% in a country where general inflation has recently fallen to under 3%. This is unsustainable long term. Delegates heard that over 1.5m Brazilians have already dropped out. As Wilson Oliveira a director at third party adminstrator broker Qualicorp put it: “The problem is that the people who drop out are the young and healthy, so we end up retaining those who use their policies and so with higher claims.” He says that PMI has risen from 10pc of household income to 15%.
Tracy Francis, senior partner at McKinsey Brazil and former head of healthcare for Latam, said: “Employers once saw PMI as a way of retaining staff. More recently, it has become their second largest cost after pay. They have responded by cutting back cover. But now they are looking for structural changes, such as primary care gatekeepers.”
So why is healthcare inflation so high? The answer is clear. Operators are paid fee for service in a market where insurers operate little or no control. In Brazil, when insurers do question claims, they are likely to lose any legal case they bring. Olivieri said: “Judges are paternalistic and will find against nasty corporates and in favour of a doctor, even if he says he needs three biopsies.”
So slow have insurers been to get off the mark, that it is only now that Amil, the big payor provider bought by UnitedHealth in 2012, has put in place a fraud department.
Breaking this log-jam will be difficult. Anecdotally, it is clear that many hospital operators in Brazil pursue what HBI calls “the ATM business model” in which an operator simply aims to max out the insured policy at every occasion.
The other problem with most fee-for-service operators is that there is little continuity of care. The CEO of Clinica Iram in Chile said: “People with cancer in Chile are not really treated, there is no continuity of care.”
Often this reflects the lack of any sort of organised outpatient sector. Instead, in many countries, the patient can go direct to a bewildering array of specialist doctors.
But solutions are beginning to emerge. Here are three of them.
Cheaper, more sophisticated insurance policies which limit choice and control costs
Perhaps the most promising is UnitedHealth’s new-found determination to reduce unnecessary costs within the 35 core hospital network which it owns. By the end of 2018 some 35% of all payments will be performance and outcome related says Amil Director, Daniel Coudry, up from 15% today and zero at the start of the year. The fraud department has recruited lawyers and is referring cases to the police. Optum, Unitedhealth’s data business, is going through Amil with a fine toothcomb.
Brazilians expect the result of this to be the development of a new cut-price insurance product which limits consumer choice in exchange for a substantial discount. Other payor-provider networks would then have to follow course. We know from Switzerland that a 20% discount will lead to around a third of the market shifting over five years. But Switzerland is an individual market, Brazil is corporate and so more likely to be price sensitive and so smaller price cuts could lead to bigger gains.
Innovative operators prepared to build clean and economic services from the ground up should have huge demand.
Other examples include Prevent Senior, a Brazilian policy for the elderly which includes check ups and preventative healthcare.
More public private cooperation
Most PPPs in emerging markets fail. But there are some successes, such as imaging group Alliar in Bahia State in Brazil. We are also told by consultant Maureen Lewis at Aceso Global that the big not-for-profit hospital groups in Sao Paolo have been successfully running public hospitals in Sao Paulo state for nearly two decades through right and left governments. “Today they run around 40 hospitals all in poor areas and deliver really high quality care at two thirds of the cost of public sector hospitals, mainly because they do not employ public sector staff.” She said that the Sao Paulo model had been tried out elsewhere in Brazil but with little success: “politicians have to keep their fingers out, give he operators room to innovate and not force them to employ public sector workers.”
Against this, six big PPPs in Mexico have failed because they have been focused far too much infrastructure rather than service delivery and have been dominated by consortia which are property, rather operator, focused. Big hospital operated PPPs in Chile have become political footballs, as they have in Spain.
We are not convinced that PPPs are the way forward. They are far too complex and dependent on politicians. But we do think that as the private sector grows and professionalises, so it will start to win competitive tenders and contracts to win many contracts to outsource elective procedures and other treatments for the state.
Low cost operators offering joined up care
Low cost is beginning to develop, particularly in Mexico which like India has low levels of private medical insurance penetration (just 7% compared to around 25% in Brazil). This means that most patients pay cash. As in India, this encourages the growth of specialist operators who can cut the price of treatment to a level where the family of a patient can afford it. It is only in such countries that we see medical treatment priced to consumer price points, rather than up to tariffs. Such operators can now be found in dialysis, ophthalmology and diabetes. Often they have taken a business model directly from a specific Indian company.
In Brazil, Lewis highlighted the emergence of drop in clinic chains such as Dr Consulta which she says is spreading like wildfire.
Equally, the big payor-providers should see the development of continuity of care packages. Vivien Rosso, CEO of Brazilian not-for-profit cancer hospital AC Carmargo says that continuity in the outpatient sphere is happening and is essential to the achievement of good outcomes.
What of the future?
It is clear that the integrated payor provider model is going to dominate most private healthcare systems in Latin America. The ability of AI to interrogate big data means that payors who own or control providers should be in an increasingly powerful position to control costs. The ultimate example here is Kaiser Permanente or, better still, Clalit, the Israeli HMO.
Meanwhile, as with elsewhere in Emerging Market healthcare, private equity investors should invest in companies which are innovative and which, in the long-term, are going to make healthcare provision cheaper and better. As in India the secret is in the quality of the management team. If this all sounds like obvious motherhood to you, then we can think of a dozen examples where investors have done the precise opposite!
We would welcome your thoughts on this story. Email your views to Max Hotopf or call 0207 183 3779.
