Candesic s Dr Leonid Shapiro examines the implications of the largest reform of the Irish healthcare system since Ireland s independence

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Candesic analysis Sea change Candesic s Dr Leonid Shapiro examines the implications of the largest reform of the Irish health system since Ireland s independence In 1916, seven members of the

1 Candesic analysis Sea change Candesic s Dr Leonid Shapiro examines the implications of the largest reform of the Irish health system since Ireland s independence In 1916, seven members of the Military Council of the Irish Republican Brotherhood staged an armed insurrection known famously as the Easter Rising, leading Ireland to independence three years later. Over the same period a century later, Ireland is to see another revolution, this time in their health system. By 2019, Ireland will see the greatest reformation of its health system since its independence. While this is expected to benefit the Irish people, how this will impact Ireland s numerous private operators is more uncertain. Over the last decade, Ireland has been a thriving market for private operators. With nearly half of the population covered by private health insurance (PHI) and private operated beds approaching a quarter of the market, Ireland has become a cornucopia of business for private operators and their investors. One of the reasons Ireland s PHI is so high is because it is regulated to be risk equalised across ages, resulting in younger people subsidising older ones. As a result, PHI premia are much more affordable for older people who need the most. In fact, 44 of Ireland s 65+ population is covered compared to less than 10 in the UK. The result has been a sustained growth in private operator revenues as the population ages and demand for private grows. What is surprising is that even during the credit crunch, which hit Ireland disproportionately, private operators revenues continued to rise, despite lower PHI coverage as a result of unemployment (figure 1). But despite the financial recovery, all is not rosy. The government has implemented a number of changes in recent years that have shocked the PHI market. Some of these moves have been supported by the Troika (European Commission, European Central Bank and the International Monetary Fund) as part of Ireland s financial re-stabilisation. Michael Noonan, the minister, capped the PHI premium that can be tax deducted to 1,000. Budget (c. 750 per year) policies were not affected but high cover policies, often favoured by older people, have effectively seen a 200 premium increase from January of this year when the new rules took effect. Additionally, James Reilly, the health minister, increased the premium insurance tax levy (which serves to help fund public health) by 14 or 50, meaning that between this and the tax 48 HealthInvestor April 2014

Figure 1 TURNOVER OF SElected operators million 2.9 5.9 5.4 CAGR 07-12 15.5 18.1 58.3 68.9 81.3 52.1 47.8 86.3 65.6 86.1 91.0 10.8 44.0 Galway Clinic Beacon Hermitage Blackrock 51.6 14.7 11.1 86.9 19.

2 Figure 1 TURNOVER OF SElected operators million CAGR Galway Clinic Beacon Hermitage Blackrock Bon Secours relief cap, many people s premiums will increase by 250 or typically 15 (in addition to normal premia inflation) in Furthermore, new regulation, which came into effect in July of last year, has mandated that PHI providers pay the full price of a bed for their insured patients who are looked after in public s. Previously, PHI providers had only to pay the statutory 75/day when their members received public, but now, PHI providers must pay full private rates for all their insured patients, regardless if they access public or private in public s. The impact of this will be further pressures on premia inflation to a level some observers say will make PHI unaffordable. What does this mean for private operators? On one hand there are Source: Company information; Candesic research; Candesic analysis PROPORTION OF ADULTS COVERED BY PHI Source: Health Insurance Authority (HIA), Health Insurance Market reports, Candesic analysis 45 HealthInvestor April

3 Blackrock Clinic, Dublin positives. By making private in public s more expensive, insurers will more readily channel patients to private s (or at least not be incentivised to channel patients to public ones). However, the dramatic increases in premia will force more people out of PHI and it is unlikely this decrease will be completely replaced by more self-pay as most people who leave PHI will revert to relying on the state. But that is not the end of the story. The health system in Ireland is about to be completely restructured. The reforms, coming by 2019, will see the Irish system move to one based on the Dutch model of health which is fundamentally centred on universal PHI. To examine the changes, we must first understand the current system. At the moment, Ireland s population can be divided into those with PHI, those with a medical card (effectively a state paid insurance card for the poor), and those who have neither and must self-pay (figure 2). Irish self-payers can opt to be treated in public s as public patients and pay a statutory 75/day up to a maximum of 750 in one year, meaning many self-payers are more like self-co-payers. Public s treat both public and private patients. Public patients have to wait on waiting lists and share rooms. Private patients get to jump the queue and get private rooms. About 60 of PHI funded patients and most self-payers opt to be treated in public s, however, most PHI patients jump the queue in these public s and most selfpayers don t. The trend has been a decrease in PHI patients and an increase in those with medical cards (mainly due to the recession) and those who self-pay (who can no longer afford PHI). So what is going to happen by 2019? The landscape will change completely as everyone in Ireland will be forced to buy PHI, with those who cannot afford to do so having their premiums paid by the state (figure 3). Hospitals, both private and public, will negotiate freely with insurers and the distinction between them will fade as public s will be turned into semi-autonomous trusts who will act like private (or at least independent) players/actors. Primary will also be covered where currently GPs charge patients attendance fees. The intention of the reforms, in addition to reducing costs, is to eliminate the two -tiered system where privately funded patients are allowed to jump the queue while publicly funded ones sit on waiting lists. PHI insurers will compete for customers and negotiate independently with providers. This may see expensive providers (like the Mater Private, who charge 15,000 for a hip replacement compared to 12,000 for Blackrock), find themselves limited to gold policies, while more cost efficient high volume operators (like some of the public players) scoop up budget consumers. 50 HealthInvestor April 2014

4 Figure 2 ACCESS TO HOSPITAL CARE Population* by type of health cover 000, 2013 Recent trend ( 09 14) in-patient by type PRIVATE PUBLIC TOTAL 4,590 Everyone is entitled to access publicly funded health, but there are charges for services (e.g. in-patient stays as a public patient on public wards): 75/night, up to 750 in any one year Patients can elect to be treated (and pay) as private patients in private or public s, usually for faster access to or to have private or semi-private rooms ~10 one or more Private insurance 2,052 (~45) Policies vary in cover and many do not offer access to all private s. In public s, private patients pay the statutory 75/night, plus additional fees associated with private accommodation ~9 one or more 60 Medical card ** 1,868 (~41) Medical card holders, who are too poor to have insurance or self pay, have their completely paid for by the state This group has grown significantly in number since the recession ~15 one or more Self-pay in public s 650 (~14) Those with neither private insurance nor a medical card must pay the statutory 75/night for in a public. Those who choose to skip the queue and be treated as a private patients in the same public must pay more (up to 1k/night) ~6 one or more 100 Self-pay in private s 20 (<1) The remainder uninsured choose to be d for in a private for a true private experience 100 *Not actual volumes of because some patients may report more than one admission, but are only counted once **Means tested card which gives access to certain public health services free of charge Source: National Health Service Plan (2014); Health Insurance Authority Statistics (February 2014); Central Statistics Office, Health Status & Health Service Utilisation; Candesic analysis Figure 3 IRISH HEALTHCARE OVERHAUL: UNIVERSAL HEALTH INSURANCE PLAN Current health system Planned health system Health service executive (HSE) Central tax-d health service National Treatment Purchase Fund (NTPF) Universal health insurance system To be introduced by 2019 Hospital insurance fund Minimal primary public cover GPs set their prices Primary State-subsidised public Patients only pay a 75/night hotel charge for admission with a yearly cost ceiling of 750 but risk a long wait for quick access to private beds in public s Public Funds quick access to private for patients who have been waiting too long Private access to some private s Guarantees access to in private and public s in the same way private insurees were Public (More independent) (Kept as public option) Private Covers free GP for all patients Primary Hospitals paid by insurers for provided Negotiate prices directly with s Competing health providers Pays insurance premiafor those who qualify based on their income and for that is not covered by health insurance (e.g. A&E) GP and prescription fees Private health insurers Pay for a compulsory universal risk-equalised and income-based health insurance Patients Patients Pay for private health insurance according to their risk profile (statutory corporation) It can cover Source: Bidgood (2013), Health systems: Ireland & Universal Health Insurance, Civitas; Candesic analysis HealthInvestor April

Figure 4 private s in ireland National general/acute beds* Private: 3,119 beds, 22 s 22 78 Public: 10,997 beds, 34 s Limerick beds, 1 616 beds, 2 s Cork 418 beds, 2 s 1158 beds, 3 s Galway 191 beds,

5 Figure 4 private s in ireland National general/acute beds* Private: 3,119 beds, 22 s Public: 10,997 beds, 34 s Limerick beds, beds, 2 s Cork 418 beds, 2 s 1158 beds, 3 s Galway 191 beds, 2 s 910 beds, 2 s Dublin 2,029 beds, 11 s 3672 beds, 8 s Although direct comparisons are difficult, ~7 of beds in the UK are private s Mater Private (plus 2 clinics & cancer unit) Blackrock Clinic (plus satellite) Hermitage Galway Clinic Bon Secours Beacon (plus 5 outreach clinics ) Mount Carmel (In liquidation in Dublin) St Vincent s Barringtons Whitfield Clane St Francis Sports Surgery Clinic Highfield Health St John of God St Patrick s University Hospital * Excludes specialist public s, e.g. paediatric and orthopaedic s which could, nevertheless, compete with private s Note: Beds/100,000 based only on county populations, so excludes wider catchment Source: Health Service Executive service directory; Independent Hospitals Association of Ireland, Candesic analysis Private operators will have to choose their strategy between upmarket or mass market. A significant portion of the population (the 15 currently without insurance or a medical card) will have to pay for PHI. This will effectively be an additional tax but will result in more people being covered and a bigger PHI industry overall. We expect more PHI players to enter the market, bringing more innovation and breaking up the oligopoly of the four incumbent players. How will the reforms impact private operators? Private supply varies by region, with wealthy regions like Dublin and County Cork having private operators responsible for a high proportion of total beds (figure 4). However, unlike the UK, Ireland s private players are not consolidated; many are single site businesses (figure 5). We expect provider consolidation to become a necessity post reforms as competition among PHI insurers heats up. More competition will force PHI players to negotiate harder with providers and in turn, providers will be forced to consolidate to maintain enough negotiating power with insurers as well as gain operational efficiencies required economically. Private providers will also see more competition themselves from public operators, who will behave more like independent operators post reforms. There may always be that small proportion of the population (20,000 people in figure 2) who use true private health entirely, plus the foreign patients who come to Ireland for treatment, but this is not enough to support the many upmarket private s in Dublin. The reality is that almost the entire population will be covered by basic health insurance which will cover a simple basket of services across primary and secondary. Additional services and private rooms will have to be paid for separately, either out of pocket or through additional insurance. This additional insurance, however, will not be regulated to be risk equalised. Older people, therefore, will have to pay much more than younger ones to cover their increased level of risk. This is bound to limit additional cover taken out by older people and private operators should brace themselves for empty private beds or be forced to put basic insured patients in them at a lower margin. This future, however, all depends on the success of these reforms. There is of course a chance they are watered down, but beyond the obvious, it is unclear how people will react to mandatory insurance and if operators will be able to maintain speedy access for everyone, even those who are willing to pay more, in a single tier system. An open market system like the one proposed could see insurance premia become unaffordable, leading to the government subsidising more people. Furthermore, and perhaps more seriously, given funding constraints, the new system may still be riddled with long waiting lists and this time be without the private system to take some 52 HealthInvestor April 2014

6 Figure 5 DISTRIBUTION OF PRIVATE GENERAL HOSPITAL BEDS BY OPERATOR General beds by operator number Whitfield Clane Barringtons St Francis 86 Single site, Waterford Single site, Clane Single site, Limerick Single site, Mullingar Hermitage 101 Galway Clinic 101 Single site, Galway Mount Carmel 163 Two s, Kilkenny & Sligo Beacon 183 Blackrock Mater Private Also operate a 24 bed oncology clinic with HSE in Limerick and a PPU in England Two s, Dublin & Cork St Vincent's 267 Bon Secours Total 723 2, ,000 1,500 2,000 2,500 Source: Health Service Executive service directory; Company information; Candesic anaylsis of the pressure off. This may see a rise in the true private clients who pay out of their own pocket in full to skip the queue (or insure themselves to do it), but will do so in the knowledge they are paying twice. Our view is that private operators should prepare for the bulk of their services to be delivered more efficiently and rely less on high-margin, private-pay beds. Wealthy areas such as Dublin should maintain some pure private demand and operators should consider designating or keeping areas for VIPs, but overall, they will need to deliver services more cost effectively as fewer older people will have supplemental insurance that pays for high-margin, private-type services. For investors, this may mean making money more the Tesco rather than the Waitrose way. But consolidation opportunities will abound. Mater Private, Ireland s third largest private player, has seen the most investor activity with management buying half the business for 42 million in 2000 and Capvest acquiring the other half for 175 million in The business is now estimated to be worth 500 million. A year ago, Capvest hired Rothschild to explore selling the business but no sale has been evident. Blackrock, the number four player, saw a 125 million bid from USbased Dignity Health and United Surgical Partners International in 2012, but no sale occurred. Beacon, the number five player, majority owned by the University of Pittsburgh, saw a transaction valuing it at 167 million in Value creation from international expansion is also possible. Mater Private expanded into the UK in 2012 when they formed a joint venture to create the private patient unit at the Clatterbridge Cancer Centre in Wirral in Expansion of international patients is also possible, however, Dublin will have to compete with London for these. Overall, while there is much uncertainty, there is also opportunity. As long as sensible prices can be paid, it is likely that new owners will be able to shape the private groups they own to profit from the many changes yet to come. However, buyers are advised to tread fully. Revolutions aren t easy to control. Dr Leonid Shapiro is managing partner of Candesic, a strategy consultancy serving private operators, the NHS, and investors. Lshapiro@candesic.com Candesic HealthInvestor April

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