Private healthcare – a boom area for investment?

May 8, 2024

Private healthcare has come under the spotlight of late with the sale of the Beacon Hospital in Dublin and the planned move by Aviva back into the health insurance market.

It comes at a time of sharp medical cost inflation and an apparent stalling in the proportion of the population holding private health insurance.

However, in tandem with moves to introduce a universal healthcare model, public lists are growing longer.

So, will private healthcare always be relied on to pick up the slack and is it a developing ‘boom ‘area when it comes to investment?

Sláinte

While Ireland has operated a ‘two-tier’ health service since the advent of the Voluntary Health Insurance (VHI) in the 1950s, in more recent years an attempt has been made to shift the emphasis to a more socialised system of healthcare based on need rather than ability to pay.

The Sláintecare model received cross-party support when it was first unveiled around seven years ago and there has been some success in attracting thousands of staff to work in the public health system. Consultants have been signing up to the new public contract in greater numbers.

The state is planning to recruit an additional 1,000 consultants by 2030.

It’s going to be a costly project overall and the shift to the new model is beset with challenges – not least of all population dynamics.

Nearly 700,000 public patients were on waiting lists at the start of the year and the population is ageing, meaning those lists are only likely to get longer.

With four workers for every one pensioner across the population right now, that ratio is going to shift to two to one in the coming decades, meaning the private health market is likely going to be called on to continue to do much of the heavy lifting when it comes to caring for the population.

Beacon

That may be contributing to making private health assets in Ireland an attractive prospect for investors.

A case in point was the recent sale of the Beacon Hospital by Denis O’Brien to Australia’s Macquarie Asset Management for a price reported to be between €400 million and €500 million.

Speaking to the Sunday Independent at the time he described it as a ‘bittersweet’ move.

Obviously happy to have made a respectable profit from the venture – understood to have been between €170 million and €250 million – there did appear to be a hint of regret around exiting the sector.

Mr O’Brien said he believed private healthcare was poised to become a ‘boom sector’ in Ireland with the potential to develop into something resembling the aviation leasing industry.

There has certainly been a surge in innovation in the sector in recent years, particularly in the areas of diagnostics, precision medicine and clinical trials.

According to Enterprise Ireland, around 500 companies here operate in the health tech sector, exporting over €13 billion a year to markets all over the world and employing in excess of 45,000 people here.

But the rapid pace of development of drugs and procedures has rendered medicine and diagnostics a pricey business.

The Beacon – despite its headline-grabbing sale price – reported a significant fall in profits last year on higher turnover which it blamed on cost inflation in the sector.

It was a similar picture at the Bon Secours Private Hospital Group, which reported a fall in profitability despite higher revenue.

The Beacon claimed its business would require “improved reimbursement” from private health insurers to ensure the future viability of services.

But health insurer profits are coming under pressure again too after a few years of vastly reduced claims and rebates to consumers during the Covid pandemic, all of which makes the move by Aviva back into the health insurance market now after an 8 year absence a curious one.

New private insurer

The company’s return to the market is a joint venture between former CEO of Aviva Health, Jim Dowdall, and one-time VHI head, Oliver Tattan.

Subject to regulatory approval, the new operator is expected to be up and running by the second half of the year.

From a consumer viewpoint, it is hoped a new entrant will add some badly needed competition to a sector which has just three providers at the moment.

But given the costs of expensive new treatments, and the fact that the medical inflation has been running at an annual rate of between 6 and 8% for quite a few years, is it going to be able to undercut its rivals?

Dermot Goode of totalhealthcover.ie, part of the Lockton Group, said it was difficult to pinpoint the insurer’s strategy or aims, especially in the context of the Health Insurance Authority reporting claims up 15% last year.

“Claims are definitely rising and that’s impacting premiums,” he said.

“Unless you can attract a higher-than-average number of younger members who won’t be claiming as much. But even if you achieve that, the risk equalisation model means you might have to contribute more, which begs the question as to where the advantage is?

“With 2.5 million insured overall, they obviously see an opportunity,” he concluded.

He pointed out that the market should theoretically be able to support about five players with around half a million members each. Currently, there are three, suggesting plenty of scope for another player.

Dermot Wells of investment and insurance advisers, Cornmarket, speculated that the new provider would market its products primarily at particular cohorts, starting with corporates.

“We initially expect to see them targeting large tech firms and multinationals with robust corporate plans, thereby establishing immediate scale and credibility. However, these plans will not be exclusive, as consumers will also have access to them, ensuring widespread benefit across the board,” he explained.

He suggested that Aviva may have been persuaded back into the health insurance market by rival AXA’s recent acquisition of Laya Healthcare, which carried with it the potential for cross-policy discounts across home, motor, and health insurance.

“Such integrated propositions stand to deliver added value to consumers, further intensifying competition in the market,” he noted.

Tapering off in insurance uptake

Private health insurance operates on a bulk model with younger members, who tend to have fewer healthcare needs, subsidising more expensive, older members who have more acute medical needs.

However, after years of enticing newer, younger members to sign up to private health insurance with a ‘loading model’ (those who wait until after the age of 34 to sign up to health insurance are hit with a weighted premium loading), the proportion of the population with health insurance has tapered off in recent times.

The rate of growth in the number of people taking out health insurance slowed last year which saw the proportion of the population in possession of a policy stabilising at around 47%, according to HIA (Health Insurance Authority) figures.

That is still short of the record high of just over 50% of the population insured, reached at the height of the Celtic Tiger.

The tapering off in the proportion of the population with insurance cover coincided with a raft of premium increases in the last year or so.

VHI, the country’s biggest private health insurer, recorded a net deficit, last year of €43.3 million amid rising claims costs and despite sharp hikes in premiums, according to figures published in recent weeks.

It doesn’t paint a picture of an industry that wants another player competing for a market that looks to be fairly static and where cost inflation is fairly elevated.

However, for consumers, it is undoubtedly a positive development.

Nursing homes

Nonetheless, interest in acquiring assets in the private health sector continues to grow.

One area where investors have been particularly active is in the nursing home sector.

Around one in five smaller homes, mainly family-run operations, shut down between the start of the pandemic in early 2020 and the end of 2022, according to a report from the ESRI published in recent months.

Many more are being acquired by overseas private investors, around a dozen of which now own an estimated 40% of nursing home beds in the country.

“There has been a consolidation of private for-profit long-term care operators driven by recent entrants into the Irish market who are mainly financed by international private equity and these opened several large facilities recently,” the report said.

Many of those private operators are also behind the trend towards larger homes operating here.

While increasingly it is an unprofitable business for smaller, independent operators, it is a growth area for institutional investors.

Reflective of the wider health system, even with an enhanced publicly-funded model of care, an ageing population undoubtedly presents opportunities for investment.

Our health, and specifically its decline, is big business.

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