By Neil Halligan
Gulf states have largely footed the bill for healthcare for decades, but as revenue-hit governments move away from welfare state models, the private sector is snapping up opportunities in one of the fastest growing sectors in the world
One of the few constants in changing times for GCC countries amid the oil price crash has been their commitment to healthcare. In every budget announced across the six countries in the region, each has stressed its commitment to maintaining spending on healthcare, as one of the ‘untouchables’, alongside education. Funding for the sector is expected to further double over the next decade, a rate that is faster than anywhere else in the world.
In its recent report on healthcare in the GCC, analysts Ernst and Young (EY) forecast spending in the region to grow to $114.6bn by 2024, up from its current level of $55bn. While the spending is relatively small when compared to each country’s GDP (average 3 percent), EY predicts the growth rate will rise by at least 12 percent over the next ten years, mainly due to increasing insurance penetration, the growing population and rising prevalence of lifestyle-related diseases.
GCC countries have footed the healthcare bill for most of their citizens in the modern era, but in a move away from the ‘welfare state’ model, which is expensive, inefficient and, in the long-term, unstainable, Saudi Arabia, Qatar and the emirates of Dubai and Abu Dhabi have all introduced mandatory health insurance.
“Bahrain is evaluating it at the moment and hopefully should implement it soon. In Qatar you’re seeing the implementation happening now,” Ahmed Faiyaz, healthcare expert at EY’s MENA division, says.
“Saudi already has mandatory health insurance for most categories of expats, but they are piloting a scheme this year for their nationals, which is going to cover about one million. Once all the nationals in Saudi are covered, you will see a big shift towards the private sector, even in Saudi Arabia.”
Faiyaz says it is unclear what will happen in Oman and Kuwait.
“This year, you’re seeing that Kuwait, interestingly, is doing some sort of a mandatory health insurance scheme for people over the age 60 or 65, for retirees, for nationals and expats living in Kuwait. There are about 100,000 of them,” he says.
In a cost-cutting measure, some countries have sought to exercise more control on the practice of sending citizens abroad for treatment. Bahrain has already agreed to a new initiative that will see the kingdom’s health department fly medical experts into the country as part of a cost-saving measure that will trim its current $66m annual spend.
The UAE, meanwhile, has been developing its own healthcare system to ensure there is less need for people to travel abroad.
“Traditionally, there have been a lot nationals from the region that would go overseas to the likes of the US, the UK and Singapore, to seek treatment,” says Barton Hoggard, partner at law firm Clyde & Co.
“One of the statistics I have seen is that in 2012, it was estimated that $12bn was spent by the GCC, including travel and stay, on treatment abroad. About $10bn of that was spent by the GCC governments. I understand a significant percentage of this expenditure is spent on the accommodation for the patient and family members who go to support.”
GCC governments, particularly in the UAE, are pushing to encourage locals to stay and seek treatment at home.
“[Patients] are only going to do that if the healthcare facilities and service is as good as what it is overseas. [So governments] are encouraging all the local hospitals and the private sector to get JCI accreditation, which is independent verification that your hospital is operating to international standards,” Hoggard says.
The knock-on effect of reaching such a standard, and having a diverse availability in healthcare treatments and services, is that Dubai Healthcare Authority (DHA) has in recent years been promoting the emirate as a medical tourism hub. Last year, 150,000 medical tourists used 1,400 of the emirate’s 2,900 healthcare facilities, coming from with the UAE, the GCC, Asia and Europe.
DHA officials expect medical tourism revenues to hit $710m by 2020, when it expects to attract over 500,000 visitors.
“There has been a massive increase in healthcare tourism to the UAE, because people from other countries like Qatar, Saudi and Kuwait are coming to the UAE for their treatment,” Hoggard says.
Increased private sector investment also has helped to raise standards, particularly in the UAE. Faiyaz says private sector growth will continue in the coming years.
“When I moved to Dubai and started working in the DHA [in 2009], the public sector was more dominant in terms of inpatient and outpatient utilisation. Today, more than 70 percent of outpatient utilisation is in the private sector and more than half of the inpatient utilisation is in the private sector. This will only increase and will be more like 80/20 in the coming years,” he says.
Increasing demand also will lead to greater private sector involvement, “to correct the current supply deficiencies”, Hoggard says.
“There’s likely to be an increase in public-private partnerships because that’s a way of governments bringing in great technology and healthcare. It usually reduces the government healthcare spend because the private partner is generally responsible for building, financing and operating the facility,” he says.
”The [UAE] government has recently issued a public-private partnership law, which is a signal that they are trying to encourage this form of investment model for significant capital intensive investments in the UAE. There have been healthcare public-private partnerships in the past without this new law, but this is a strong signal that they want to encourage more of these sort of structures, for big capital-intensive projects.”
Saudi Arabia is also looking to attract more private sector investment, albeit a bit slower than other countries in the region. Julie Bassi, a Jeddah-based senior associate with law firm Al Tamimi & Company, says King Salman’s recent changes to foreign investment laws will support this strategy.
“They were relatively liberal up until a few years ago but they got a new head of SAGIA (Saudi Arabian General Investment Authority) and all of a sudden it became a nightmare for foreigners to invest in Saudi Arabia,” Bassi says. “It’s starting to change again; they’re being more selective but in certain areas they are being a bit more open and welcoming. One of those areas is healthcare, because of the growing need in Saudi Arabia due to changes in the population.
“Currently, the majority of healthcare is government-based and it’s public sector. There is a move towards the private sector to take the burden away from the public sector. As a result, they’re looking at other ways to attract money into the country.”
While it’s getting easier for investors, “there is still some way to go”, she says, despite changes in legislation last year.
“The legislation that came in around about April 2015 enabled hospitals to be foreign-owned. Whilst previously hospitals had to be Saudi-owned, the legislation now states that hospitals can be foreign-owned, but it’s subject to a foreign investment licence. From our conversations with SAGIA, they will only consider applications for hospitals that have at least 300 beds. So you’re looking at large hospitals,” she says.
Still, about 75 percent of Saudi hospitals are publicly run, and while Bassi says there does not appear to be a leaning towards privatising any of those facilities, there could be some operational contracts on offer.
“There’s a possibility they may end up being privately-operated, but if that did happen that would be under an operational agreement [rather than ownership],” she says.
Partner at consultancy firm Strategy&, Walid Tohme, agrees. He says Saudi Arabia has identified healthcare as a sector with plenty of opportunity for the private sector to participate.
“Potential opportunities include partnering with reputable global medical organisations to operate Ministry of Health hospitals or arrangements to have third parties operate Ministry of Health diagnostic labs or radiology,” he says.
“These are early days but there are notable efforts to try and make the whole healthcare ecosystem more attractive to the private sector, including introducing payment systems, medical diagnostic coding schemes and electronic health records. SAGIA has also introduced measures to encourage international investors, such as allowing a greater share of foreign ownership.”
While health facilities and clinics are largely seen as sound investments in the GCC, with a decent profit return, Faiyaz says specialised facilities tend to earn larger yields.
“It depends on the model, it depends on the segment that they are targeting, and it depends on the specialisation,” he says. “What we do see is that facilities that are more specialised and focused and that have a better positioning in the market, are definitely able to reach better returns for their investors, significantly more than smaller set-ups with a more general focus.”
That healthy return on investment has seen a number of largescale mergers and acquisitions (M&A) in the region. Last year saw a massive consolidation of the sector, with significant deals involving the likes of NMC Health, Al Noor Hospitals, Mediclinic, Aster DM Healthcare and VPS Healthcare.
Hoggard, who specialises in domestic and cross-border M&A, joint ventures and private placements, says Clyde & Co acted on “five or six transactions for NMC last year”.
In February 2015, NMC announced they had obtained a new $825m facility and would use a substantial amount of that money for its acquisitions. Hoggard says “they were true to their words”.
“The multiples for these transactions in healthcare are pretty large, as well. For example, NMC acquired Provita and the multiple was 14½ times the EBITDA (earnings before interest, taxes, depreciation, and amortisation). They also acquired 86 percent of Clinica Eugin, which is a fertility group in Barcelona, for $161m, which was 13 times EBITDA,” he says.
“They are really high valuations which basically reflect the current supply-demand imbalance in the UAE’s healthcare sector. But it also endorses a widely-held belief that the healthcare sector has been an extremely attractive investment option in the medium term.”
Mediclinic’s $2.2bn reverse takeover of Al Noor, which was approved at the end of last year, will be a major merger, he adds.
“It’s another refection of the consolidation in the healthcare sector with the big players just getting bigger and snapping up all the smaller clinics,” Hoggard says. “They talk about the advantages of that merger being the knowledge transfer between the two groups, producing all of these synergies. It’s a massive merger because the combined group will be the largest private healthcare company in the UAE and in Switzerland, and the third largest in South Africa.”
Hoggard says this year is expected to see even more acquisitions.
“One of the main reasons is that there is this big demand-supply imbalance. The big healthcare groups talk about wanting to be a fully integrated healthcare service provider and so they are looking at acquisitions to be able to expand and diversify their portfolios,” he says.
“Some of them are doing it by way of greenfield expansions, but it takes longer to take advantage of the market opportunities or the shortage of supply, because it’s going to take you two or three years to construct a hospital or a speciality clinic. Whereas, if you go out and acquire one you can take advantage a lot sooner.”
With another year of significant acquisitions expected in the healthcare sector, the impact of the lower oil price is unlikely to adversely affect its future growth, particularly if mandatory insurance is rolled out across the GCC.