By Sandeep Sinha, Vice President, Transformational Health Practice, Frost & Sullivan and Vivek Shukla, Senior Advisor - Middle East, North Africa and South Asia, Healthcare & Life Sciences, Frost & Sullivan
The landscape around healthcare delivery has evolved rapidly over the last decade in the GCC. Market forces have been relentless, as they usually are, in shaping the healthcare industry dynamics. Changes in the key industry drivers have influenced almost all providers ranging from a small clinic to a large super speciality hospital, and the trend continues. They have witnessed a pressing need to relook at how they earn and spend their money so that they continue to grow in terms of revenue and earnings before interest, tax, depreciation and amortization (EBITDA).
The industry, which is in its growth spurt in some regions and is close to maturity in others across the GCC, has already started realising that cost optimisation is the way forward as the market evolves further. The healthcare providers can no longer afford additional spending due to inefficient processes and bad decision making.
As per Frost & Sullivan market information parameters, the following key factors are influencing costs incurred by healthcare providers:
Increased Insurance Penetration
One common factor that has a decisive bearing on the dynamics of healthcare delivery economics is – the structuring of the payer system. Various markets across the GCC are at different stages of insurance penetration. From a market like Abu Dhabi where there is 100% insurance, to Dubai which has almost reached the same level, to Oman where the payer environment is dominated by a single large player, to Saudi Arabia where the insurance penetration has been on the rise both for nationals and expats, the industry is destined to be majorly influenced by health insurance in how the hospitals go about their business.
Healthcare is peculiar, in that the user of the service is not necessarily the payer. This unique setup, where instead of one buyer and one seller, three parties are involved in consuming a service, creates interesting dimensions in the entire system. On one hand, there is a consumer of services demanding the best of treatment, and on the other hand there is the payer who wants to restrict over treatment in the name of providing best services. Not to mention the provider who wants to get paid appropriately for the costs it incurs in providing the service.
With increase in the number of people insured there is an invariable increase in the pressure that hospitals face to keep their costs under check. The third party payer will always keep a tab and devise ways to monitor over prescription and overtreatment. The revenue cycles are being made efficient and many hospitals are creating new processes to shorten the daily outstanding amounts.
We have witnessed a surge in penetration of health insurance levels in each of the GCC countries over the last decade.
Exhibit 1: Health Insurance Penetration in the KSA and UAE
It is imperative to keep costs under check, maintain a gap in the revenue cycle process, and give way to reduced payment for the service already rendered. Moreover, the payer, along with the regulators, can create an upper limit for the amount of money to pay in lieu of a specific procedure.
The International Refined Diagnosis-Related Group was implemented in Abu Dhabi, and Dubai is soon going to follow suit. With increasing insurance penetration, this is likely to become a norm in other geographies too. Implementation of DRG impacts the economics of healthcare significantly. When the prices are capped for in-patient procedures, the providers need to take care of their costs proactively. It is very different than the ‘pay for service’ model and hence the case for cost management in hospitals is stronger than ever before. We will see hospitals losing out on margins if they don’t have clarity about the costs of their main procedures, at least.
Working capital requirements will continue to be under pressure as insurance penetration increases. One of the salient characteristics of an insurance-driven healthcare market is that the providers need to manage their current costs keeping in mind the turn-around time of the claims submitted to the insurance companies. Daily Sales Outstanding will be a metric that will become more and more relevant with increase in the numbers of insured patients.
The argument that more insurance holders in a market means more patients for the healthcare providers is true. But ironically it is only one side of the equation. More patients may not necessarily translate into more revenues or more margins. We have observed a direct relation between more insurance coverage and lower average ticket size for healthcare providers. If they are not vigilant about their documentations, submission and re-submission timelines and clinical pathways, the impact compounds with rejections and delays in payments. More patients also mean more investment in additional manpower and infrastructure. This is not always a favourable scenario in terms of profitability. Hence, strategic cost management is paramount as the insurance penetration increases.
We all know the oil prices have come under severe pressure in the last year or two. From $118 a barrel to now around $50 a barrel, the fall has had an impact. For healthcare providers, it means that costs are in limelight as the overall economy is resurrecting itself. Most healthcare providers are now realising that their industry does not operate in a silo. The interdependencies are deeper than what most people had imagined. Oil is a key influencing factor for the overall economy in the region.
In the near term, the probability of oil prices reaching its erstwhile levels of $110+ is bleak. So, the pressure on margins for all industries including healthcare will continue to mount. Having systems for higher margins with control on costs is more pertinent than ever before at this moment.
Source: MonetAM,com, World Bank Reports and Commodity Markets Outlook (2016), Demonstrated price is in Nominal USD
Source: MonetAM,com, World Bank Reports and Commodity Markets Outlook (2016), Demostrated price is in Nominal USD
Citing strong growth in the sector, a number of new players have entered the market over the past few years. Many existing players have expanded in terms of number of units and beds, while many non-healthcare companies have either forayed into or are planning to enter the healthcare market.
All GCC countries have a list of market feasibility studies conducted for new entrants or for the expansion of existing players. Some of these projects have been completed, while some have attained funding.
As per our estimates, the gap in demand and supply is narrowing fast and has reached near minimum levels in some regions. The growth in population rates, including the growth rate in expat population, does not justify addition of new facilities in some regions. The homogeneity of infrastructure being developed does not help either. Most new players are creating undifferentiated, similar hospitals and clinics as the existing ones. This skews the demand and supply dynamics in an undesirable direction for the existing and new providers.
When supply growth overtakes demand growth, we will start to witness consolidation in selected markets and categories. Some regions (e.g. Dubai) have already seen activity in the M&A space in healthcare.
As undifferentiated competition intensifies, the players will have to choose ‘cost leadership’ as a strategic position to survive. We maintain that the ultimate strategic advantage in healthcare delivery lies in having a highly differentiated offering with a clear relative cost benefit. However, in absence of the former, the latter becomes almost a necessity. Healthcare industry players will need to work on their costs afresh in the context of intensifying challenge from the new entrants.
Exhibit 3: Growth of Population as Compared to Healthcare Infrastructure in the UAE
Strategic Implication of Relative Cost Advantage
We maintain that the ultimate strategic advantage in healthcare delivery, apart from a radically differentiated brand, is the relative cost advantage. Hospitals and hospital groups who manage to crack the codes for strategic cost management will dominate the markets. Higher relative margins will underpin the power to drive the market as a leader. It will mean more bandwidth to produce higher clinical outcomes, offer selective discounts to payers and invest in brand building to enhance the market position further.
The key to attaining the position of a cost leader, is the ability to arrive at pricing before arriving at costs. In other words, however unconventional it may sound, players who practice price-based costing will stand to gain. The traditional approach of stacking up costs and then adding a margin will suffocate the organisation for creativity and innovation.
In any case, as most markets in the GCC are slowly but steadily headed towards DRG, price-based costing is going to be a reality sooner than later.
Some Levers That Can Help in Attaining a Better Control Over Costs
Few healthcare providers have attempted a cost rationalisation exercise when the pressure on their margins started mounting. The general understanding in the market is that these attempts were rather ad-hoc and lacked depth. Mostly downsizing was done and few salary corrections took place by the providers who attempted a cost reduction in the face of mounting pressure on the margins.
We believe that in challenging times, organisations need to harness the power of teamwork and human spirit rather than dampen it. The amount of money saved by removing people or reducing their salaries/bonuses has to clearly offset the quantum of dent that the overall motivation and enthusiasm goes through with such a move. Otherwise, downsizing can actually kick off an unprecedented downward spiral in an organisation’s growth journey.
Exhibit 4: Typical Cost Structure of Hospitals
Source : Frost & Sullivan Analysis 2017 2017
Here are some alternatives to be considered while optimising costs:
- Vendor assessment and renegotiating contracts can save a sizeable amount. Many times, it helps to take support from an outside neutral mediator and expert to assess the upside in the contracts and the trade-off between vendor optimisation and value compromise for the organisation. The external help is not only relevant in talking to vendors, but is also useful in calibrating internal stakeholders’ expectations about cost saved versus value lost. We reckon that up to 10% of entire costs can be saved if this exercise is taken up in the right spirit.
- Process optimisation can also lead to significant cost savings. Delays, repetition of tasks, waste of resources, etc. are all culprits in terms of adding to the costs. The fact is that people on the shop floor are too busy and sometimes blindfolded with excess workload, and thus out-of-the-box thinking takes a backseat. It may help if organisations encourage fresh ideas to save time, resources and therefore, money.
- Organisational restructuring is usually the most exercised option because it looks easy and is more visible than others. It can be exercised, but not without a word of caution as mentioned above. \
- Equipment downtime and utilisation eats into the bottom-line. It may be rational to sometimes take a hard look at all the equipment, its utilisation, possible dilution, upgrades and preventive maintenance protocols.
- Proactive participation by the staff can be a game changer. There are examples in the industry where 3% points on the direct cost were lowered by an active programme where the staff themselves volunteered to take care of costs.
- Leadership team, wherever possible, can set an example for the rest of the organisation. The caveat is to do more and propagate less than vice-versa. If the noise is more than the actions, the leaders will lose face and subsequently the trust of their followers.
- Right service mix has a direct bearing on profits. In a recent example, a hospital added plastic and cosmetic surgery and promoted it well enough to not only increase the average margin earned per surgery, but also enhanced its direct cash earnings. An acute sense of demand gaps in the market for services that have higher margins is something that every healthcare provider must develop.
- Physician engagement models are crucial to profitability, especially when most of the HR cost is attributed to physician payouts. Needless to say, it is more effective to have the right mix of fixed and variable composition in the payout from the beginning than to course correct mid-way.
- Volumes drive down costs. For procedures where marginal cost is less than its average cost, hospitals will harvest higher margins. This strengthens the case for focused volume generation for certain procedures which can drive profitability.
The list can go on, but the point is made: strategic cost management is the key measure that will separate the market leaders from the rest of the players.
Arab Health Online