MD Medical Tests Hospital Valuations: September 2012

September 2012
NEWS
Spain & Italy improve terms
Mercer lab created
Nursing homes storm
Surpluses
Advent swoops on Mediq
PPPs to end
Egypt
France
Germany
Netherlands
Portugal
Spain
Alzira growth in Valenica

United Kingdom
PCT outsourcing
Eastern Europe
10
11
Innova plans obs and gynae 12

Diagnostics
CRC and Balague collapse 15

FEATURES
Interview Jaap Dijkman,

Medial-Atal
Editorial
18
20
Interview Elan Mladova,

MD Medical Group 22
Soft Outsourcing
Interview Valerie Michie,

Serco
Psychiatry: Set for Growth

HCE final thought
24
28
30
36
MD Medical tests
hospital valuations
Will the London Stock Exchange become the home for a wide range of
private hospitals from around the world? That question may be
answered by the success or failure of the flotation of Russian obstetrics
and gynaecology (OBGYN) clinic chain MD Medical Group.
The company will announce a $295-343 million offering, in an attempt

to raise $150 million of new cash. It is targeting a valuation of around
$885-955 million, or around 18 times prospective 2012 EBITDA. Can
the company justify such a high multiple?
The only other comparable group to float on the London Stock

Exchange, NMC Health, achieved a valuation of 8 times EBITDA. The
company raised $187 million through the IPO.
One source said that institutional investors were sceptical. But an
analyst who follows the sector internationally told us: Thats a
2
Outsourcers expand into

new markets
PAGE
Big outsourcing companies are expanding their healthcare operations

from traditional sectors - such as patient feeding, cleaning and business
process outsourcing - into fast-growth, innovative medical areas. They
are also pushing the complete outsourcing of all non-medical activities
as an alternative to privatisation.
Core soft areas, such as cleaning and catering, are growing at only 23% a year. Outsourcers are often hampered by sales tax traps, which
mean that hospitals cant reclaim the sales tax levied at 19-23% by
private contractors. These traps dont tend to apply in medical areas.
Accenture, a big player in business process outsourcing, is building

new services to manage chronically-ill patients who are constantly in
and out of expensive acute hospitals. It uses its data analysis
2
PAGE
www.healthcareeuropa.com
MD Medical Group - cont.
higher EBITDA multiple than the

peer group average. Still, MD
Medicals EBITDA margin, at
over 40%, is much higher than the
mid-20% global average.
The current range for comparable

emerging market hospital and
clinic groups on exchanges
around the world is 8.7 to 20.8
times prospective 2012 EBITDA.
NMC is the low end of that range,
with IHH Healthcare - the
emerging market behemoth, with
a presence in Turkey, Malaysia,
Singapore and Indonesia - at the
top end.
Hospital chains in developed
markets, meanwhile, trade on a
much tighter range of 5.8 times
(Generale de Sante) to 8.8 times
Outsourcing - cont.
skills to identify these patients

and then directly employs nurses
and doctors to serve them. Pilots
are running in Spain, France and
the UK, as well as the USA,
where Accenture employs 700
nurses.
Sodexo has moved into diagnostic
(Ramsay)
EBITDA.
prospective
2012
Our Analysis: Can MD justify

its price? JP Morgan estimates
2013 EBITDA at $86 million,
which brings the valuation down
to a 10-11 times multiple at the
end of next year. Whether this is
achievable is a matter for debate,
presuming as it does an
extraordinarily high EBITDA
growth. Still, first-half EBITDA
growth between 2011 and 2012
was just over 50%; continued
growth at that rate would make
good on JP Morgans estimate.
The companys numbers are
certainly impressive, with sales up
42% to RUB 2.9 billion in 2011
and ahead 49% at RUB 2 billion
lab outsourcing in a joint venture

with Labco.
Aramark,
a
massive
US
outsourcing outfit, has moved into
multi-vendor
managed
diagnostic imaging outsourcing,
in which it supplies second-hand
hardware with the latest software
++44 207 183 3779
Editor: Max Hotopf, max@healthcareeuropa.com
Marketing & Subscriptions Manager: Sonia Jennings, sonia@healthcareeuropa.com

Editorial Advisory Board
Andreas Beivers, Ph.D., Lecturer, Institute of Health Economics and Hochschule Fresenius
Tomas Ekman, Partner, 3i
Michael Leahy, VP Operations, Euromedic
Joe Ryan, Chief Financial Officer, Medicover
in the first half of 2012. EBITDA

rose 19% to RUB 1.3 billion in
2011 and then up 59% to RUB
851 million in the first half of
2012. Net profit rose 26% to RUB
924 million in 2011 and 84% to
RUB 728 million in the first half
of 2012.
Coming in at the high end on a

valuation might also seem
reasonable with 40% EBITDA
margins
and
a
business
environment that happens to be
characterised by zero-rated
corporate tax, but political
conditions are volatile in Russia
and a favourite son can become an
outcast very quickly. It will be
interesting to see whether the
market is happy to take MD at
their word.
upgrades to providers. The

package offers hospitals a chance
to rent the kit, paying a monthly
service fee. Rob Piconi, head of
Mesa Medical, the European arm
of this division, expects the sector
to grow 30-35% a year and values
the sector at 400-500 million in
2012 in Europe.
Meanwhile, Serco and Virgin are

pioneering new contracts in the
UK, where they manage
everything in small hospitals apart
from clinical services delivery.
Food,
catering,
facilities
management and logistics are all
run by a single partner.
A feature on outsourcing appears

later in this issue.
It should not be assumed that the views expressed in any articles in this newsletter are those of any member of the editorial board
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HEALTHCARE EUROPA
September 2012
Spain and Italy improve payment terms to providers
Most Spanish regions are now

paying
healthcare
service
providers in 60-90 days. Even in
Italy, the situation is improving,
with troubled healthcare region
Lazio pioneering a web portal that
makes debt securitisation much
easier.
Mercapital
partner
Carlos
Barallobre said that the recent
passage of a new law has forced
regions in Spain to pay owed
reimbursements much faster. He
says 60-90 days wait is now the
norm.
In Italy, Steve Skerrett of Banca

Sistema where he heads the
banks Italian factoring business,
which specialises in public and
healthcare sector debt says that
delayed payments have been a
way of life in Italy for 25 years.
He also says that, despite the
recession, payment times have
barely changed. The average
time that healthcare payment
authorities took to distribute
reimbursements or DSO was
318 days in 1990. In 2012 so far?
317 days.
Banca Sistema, which purchased
factoring company SF Trust in
2011, has been active in this area
Denmark
Falck buys PreviaSundhed
Danish emergency services

outsourcing group Falck has
expanded its occupational health
arm in Denmark, with the
acquisition of PreviaSundhed
from TryghedsGruppen.
The deal adds 300,000 customers,

90 employees and 50 small clinics
to the network. Falck now covers
1.7 million Danes in 7,000 public
and private companies. Outside of
Denmark, Falck has also built a
chain of outpatient clinics in
for some time. Italy is a big

market in debt factoring because
long payment times are the norm.
Even large US companies, which
would not normally consider
factoring, come to us in Italy
because they prefer to actively
manage the debt on their balance
sheets. If they dont, these assets
may be scrutinized by equity
analysts back home who are
looking sceptically at the books.
When it comes to Lazio, (which

has a huge dispute with San
Raffaele/Tosinvest) the payment
situation hasnt significantly
deteriorated in the last few years.
In fact, DSO times have been
falling: the site assobiomedica.it,
which is updated monthly using
reports from providers of medical
technology, shows payment times
are down by around a third since
2006.
That still leaves the DSO at 411
days in 2012 so far, however,
above the Italian average. Issues
also become more complicated
for accredited providers, says
Skerret. Accredited providers are
those delivering clinical services.
They get a set spending
allocation
from
the
Poland that work within the

public system and are paid by the
National Health Fund.
Egypt
Merger creates biggest lab

in Egypt
The merger of Al Borg and Al

Mokhtabar has created by far the
largest diagnostics lab group in
Egypt. The group nascent
operations in Jordan and Sudan,
with an eye to international
ambitions. Margins there make
European lab groups weep. We
commissioning authority the

Aziendi Sanitari Locali (ASLs)
and theyll have a lot of trouble
getting further reimbursements if
they go over that. Not only that,
but sometimes theyll have
extremely
narrow
service
definitions, so they wont receive
payment for anything that strays
outside of that.
The biggest development in debt

repayment has been the move
towards a more transparent
process. Says Skerret: Just as
important as the drop in DSO in
Lazio has been the move to an
automated system. Basically,
theyve created a web portal that
companies upload all of their
invoices to. The region then takes
a while to confirm that the claim
is valid, then it certifies the debt.
Once its certified, theres a better
idea of what the timetable for
payment is; not only that, but it
becomes much easier to finance
that debt when its certified,
thanks to the transparent path to
full payment.
Other regions have made some
moves towards this kind of
system, but nowhere is as
advanced as Lazio.
talk to Ahmed Badreldin, of Al

Borg private equity owner Abraaj
Capital, about the Egyptian
market and the groups plans.
The merged group of 3,300

employees should have pro-forma
sales of $120 million and after-tax
profits of $45 million. Around
90% of that comes from Egypt,
although the group already has
operations in Jordan, Sudan and
Saudi Arabia.
The merged business will be 47%owned by Abraaj, 47% by the

owners of Al Mokhtabar and 5%
by staff ESOP, of which Dr Hend
is the main component. It is
September 2012
HEALTHCARE EUROPA
HCE news
interesting to note that the new
CEO comes from Al Mokhtabar,
which was also the controlling
shareholder of the business. She is
Dr. Hend El Sherbini, a Professor
of Clinical Pathology at Cairo
University.
Ahmed Badreldin at Abraaj

reckons that, in total, Egypt does
250 million tests a year, with
government hospitals accounting
for 100 million and the
military/police hospitals a further
70 million, leaving 80 million
from the private and outpatient
sector. He says that the merged
group will perform 20 million
tests over the coming year, or 25%
of the total volume in the private
sector.
Almost all tests are for cash
payers or private medical and
corporate insurers.
Overall, he reckons the Egyptian
market is growing by 10-15% per
annum. Price increases at 5-10%
are lower than inflation, which is
running at 12%, but are
compensated for by a 3-4%
growth in patient numbers and a
rise of 3-4% in tests per patient.
He claims that, so far, Egypt has
seen very little price pressure.
He sees plenty of room for
expansion. Despite the fact that
there are 4,000 labs in Egypt, the
south and other rural areas are still
under-served. Thats our first
priority; secondly, we will expand
into imaging.
Egypt, with its population of 83

million, makes up 90% of group
sales. Outside of Egypt, he says
that the group already has a strong
presence in the small Jordanian
market and a large operation in
the Sudanese market which is
also small, but reportedly growing
at 50% a year. He is interested in
Libya, where he says any
expansion would have to be by
greenfield sites. Outside of the
HEALTHCARE EUROPA
public hospitals, there is almost

nothing there.
Al Borg has been owned by
Abraaj Capital since 2008.
Badreldin says that Abraaj will
most likely exit in 2013 or 2014,
probably via the Cairo stock
exchange.
France
French nursing homes

storm ahead
More rock-solid half year results

from the big three French nursing
homes, which have successfully
moved into Italy, Spain, Belgum
and Germany. But why are
Korians shares down 12% over
the year? Why is Medica down
2%? Why is Orpea ahead only 9%
despite 15% sales growth in the
first half, when the French CAC
index is up 11%?
Orpea saw sales rise 15.2% to

685 million, with attributable net
profits up 25.8% to 50.7 million
in the first half. Medica was ahead
16.1% at 349 million with
attributable net profits up 16.9%
to 24.2 million. Finally, Korians
revenues were up 12.8% at 548
million, with attributable net
profits up 80% to 10.4 million.
Analysts say that the main reason

that the trios shares have underperformed is investor concern
about their dependence on the
state for 30-35% of their revenue.
Orpea has done best out of the
group partly because of good
results, and partly because of a
new strategy, which sees it paying
a dividend for the first time in 24
years. This should enable it to
reach many more institutional
investors.
The new strategy is likely to see a

slowdown in Orpeas steady
organic growth rates, says analyst
September 2012
Sebastien Malafosse at Bryan

Garnier. As with the other two
groups, it buys decrepit homes,
renovates them and then markets
the bright, new facilities to the top
20% of society for higher day
rates. Its pipeline still stands at
8,000 beds, but the ratio of
pipeline beds is down from 47%
in 2009 to 27% and is likely to fall
further.
The concern is that these

companies will be hit by
government cuts, particularly in
France, and by strategies which
seek to grow low-margin
homecare at the expense of
nursing home capacity.
Jean-Claude Marian, president of

Orpea concedes that investors
have been worrying about cuts for
two or three years. Every six
months, the Sarkoszy government
said that it would introduce new
legislation.
The
Hollande
government says that it will
legislate in 2014.
He argues, convincingly, that
investor concerns are misplaced.
The key point is that these
companies all target rich areas,
particularly the wealthiest 20% of
the population, who can afford to
pay daily room rates of up to
200. Poorer people in the
provinces pay 50-70 a day in the
public sector homes. This model
applies not just to nursing homes,
but also in psychiatry. Orpea is the
largest private player in the
French psychiatric market, with a
quarter of the sectors 12,000
private beds.
He says that, as the government
limits new nursing homes and
public sector psychiatry wards, so
this creates greater demand and
higher occupancy rates. In any
case, whatever the Hollande
government says publicly, it is in
the
governments
financial
interests to have patients in
HCE news
private psychiatry. In total, the
state pays us 120-150 per day for
each psychiatric patient. The
public sector still gets 300-400.
Meanwhile, Orpea is responding
to the governments demands by
experimenting in telehealth and
homecare.
The government has made it plain

that any new nursing homes will
have to act as hubs from which
homecare can be delivered to the
surrounding
population.
Accordingly, Orpea has bought
30% of homecare operator
Domidom which generated
2011 sales of 13 million for 3
million. This is a sign of the
times: historically, Orpea has
turned its nose up at the relatively
low margins in homecare.
The
company
is
also
experimenting with telehealth in
Paris, with the keeping patients in
its nursing homes, rehab and
psychiatric units out of expensive
public acute care beds.
While the trio will continue to

grow outside France, where they
have all now demonstrated that
they can build successful
businesses producing at least 2122% EBITDAR, analysts said all
three de-emphasised international
expansion. An analyst told us that
we dont see any particular will
for Orpea to go much further than
generating 30% of sales outside of
France.
Interestingly, Marian didnt

recognise this ceiling. Weve
demonstrated that we can expand
abroad. We are now way over the
3,000-bed critical mass in
Belgium and Spain. We can
continue
to
grow
these
operations.
Meanwhile, M&A activity in

France has declined, according to
consultant Stephane Pichon. He
says that currently, only Medica
seems to be pursuing an active

M&A policy. This is odd, as
prices been falling marginally.
Care homes currently fetch 8-9
times EBITDA. A particularly
juicy deal might reach 10 times.
Analysts continue to signal out

Orpea as the star. Medica has
already
grown
EBITDAR
margins to 26.2% compared to
Orpeas 25.5%. Korians margins,
at 23.7%, are the lowest of the
peer group, and its new
management team has not yet
bedded down. Orpea, Medica and
analysts all point out that Korians
expansion in Germany may be
risky, as Germany is a nonlicenced market where there is
free competition and thus lower
occupancy rates.
Orpea managed to grow sales

14% in the first half of 2012, and
there is still plenty of growth in its
huge
pipeline
of
homes
undergoing renovation.
Analysts expect Orpea to still see

a 20% rise in after-tax profits in
2012, to around 97 million. That
leaves the group trading on a 16.7
times forward multiple hardly a
low number.
Our Analysis: We agree that the

worries over government policy
are misplaced. Many in the baby
boomer generation are wealthy
enough to pay high day tariffs.
This applies in Spain and Italy as
well as France. The truth is that
the Hollande government has
other priorities Education, youth
unemployment and public order
in the suburbs.
You can argue that increasingly

elderly demographics dont
necessarily translate to more
nursing home beds. Capacity has
actually fallen over the past
decade in the Netherlands, the UK
and Sweden as length of stay has
declined sharply. Still, it is hard to
argue with Marians claim that, in
the long-term, 10-15% of over85s will need nursing home care.
Wed expect to see the big three

continue
to
expand
internationally. The number of
private homes up for purchase in
France is shrinking. We think
careful expansion abroad will
probably be cheaper than buying
in France, and likely no riskier.
Korian and Medica have a lot of
shareholders in common and a
merger there would make sense if
Korian falters. Group DVD, the
second-largest privately-owned
group, could also eventually be
purchased by Orpea or Medica.
Medi-Partenaires buys
Bordeaux hospital
Chaos gives room for manoeuvre

and creates opportunity. So says
Frederic Dubois, CEO of MediPartenaires, which has just
acquired a large hospital from
Generale de Sante. We look at the
reasons behind the acquisition,
Medi-Partenaires plans and what
Dubois thinks of the Hollande
government.
Dubois has already done two

waves of sale-and-leaseback deals
this year with property group
Icade, which raised 345 million
for the company. He expects to
conduct a third wave later in
2012, which will mean that MediPartenaires will have sold almost
all of its property. Most of the
money is to pay down debt, but
some has gone into a war-chest
for future operations.
Dubois says that he pans to add
another, smaller hospital to the
group in October 2012, with one
or two more acquisitions to come
after that.
He would not reveal the price paid

for Generale de Santes hospital,
but the deal adds a third facility to
September 2012
HEALTHCARE EUROPA
HCE news
Medi-Partenaires
Bordeaux
group. That group now covers
more specialties and is a more
promising strategic partner for the
regional health authority there.
Dubois says that 2011 was a

difficult year, but remains
convinced that there are
opportunities, despite Hollandes
pledge to end the planned
convergence of tariffs between the
public and private sectors. Dubois
notes that Marisol Touraine, the
French Minister of Health and
Social Affairs, has been stressing
the role of the private sector in
recent presentations. The sheer
scale of the changes happening in
France today is bound to create
some opportunities, he adds,
entrepreneurially.
Germany
Surpluses in Germany
While the individual German

krankenkassen are enjoying
surpluses right now collectively
sitting on 22 billion the central
health fund that allocates money
to all of them ran a 500 million
deficit in the first half of 2012.
It is worrying that, despite

Germanys remarkably improved
employment picture, the fund is
still not able to stay in balance; it
also has implications for how the
insurers will use (or not use) their
surplus cash.
A spokesperson for the GKV the

insurers association refused to
be drawn on what members are
planning to do with the current
cash pile. The GKV is keen to
point out, however, that it is not a
very large sum of money. Insurers
have discretion over whether they
wish to use the breathing space
afforded by surpluses to reduce
premiums, but the health funds
results mean that cost pressures
HEALTHCARE EUROPA
are likely to stay at the forefront

of their thinking. As such, it can
be expected that already-tense
negotiations between insurers and
hospitals over admission rates and
payment reforms will remain
fraught.
Techniker Krankenkasse, for

instance, told us that recent gains
and losses will make no
meaningful difference to insurers
actions going forward, especially
given the unpredictability in the
European economy at the
moment.
The GKV warns: Because the
performance of the statutory
health insurers is continuing to
improve, federal grants to them
will be reduced in the coming
year. Translation: expect the
government to make the surpluses
disappear.
Fresenius pulls Rhoen bid
Fresenius has decided not to

launch a second bid for Rhoen
Klinikum.
The
deal
had
reportedly
become
too
complicated in the eyes of the
supervisory board, which could
not justify a bid that would almost
certainly have left Fresenius
nursing a 50%+1 stake in Rhoen
without any real access to its
profits except via dividend
disbursement.
Our Analysis: We are now back

to stalemate in the German private
hospital market. Just about
everyone has lost out. Fresenius
failed to achieve its goal of
creating a national hospital chain
which could have offered a real
alternative to the public hospital
system. Rhoen is left in a mess.
Eugen Muench is left in control
after going over the heads of his
entire management team when he
accepted the Fresenius deal.
Demoralised management is not
September 2012
likely to perform well. Certainly,

half-year results, and particularly
the performance of university
hospital Giessen and Marburg,
will be watched like a hawk by
analysts. Those groups who
opposed the deal Asklepios,
Sana and B Braun achieved
their goal, but are all left sitting on
large losses on their stakes in
Rhoen.
We expect many years of
stalemate to ensue. The catalyst
for further action is likely to be
Eugen Muench. The fact that he
was willing to sell to Fresenius
suggests that he is ready to retire.
But he could decide to stay on for
at least another decade.
Italy
Tosinvest Sanita fails to

pay staff
Tosinvest, which is owned by the

wealthy Angelucci family, is
mired in a dispute with Lazio
region.
While Lazio has a poor reputation

for paying, the problem appears to
be an almost personal dispute
between San Raffaele and the
head of the Lazio region. A
spokesman for Garofalo, another
large private group with a
presence in Lazio said it had no
problems. Problems seem to
centre around the Villa Buon
Respiro site, which saw a big
infrastructure investment from
Raffaele and an agreement
between the company and the
local government that would
allow the troubled franchise to
continue operating. That accord
has broken down completely,
however, and San Raffaele seems
poised to cut a huge part of its
service.
Our Analysis: Given that San
Raffaele/Tosinvest continues to
fail to answer the phone, it is hard
HCE news
to know what is likely to happen
next. Banking sources suggest,
however, that Lazio is likely to
to
some
sort
of
come
accommodation with Tosinvest.
Its chain of rehabilitation clinics
with 2,000 employees and tens of
thousands of patients annually is
too important to be allowed to
fail.
Netherlands
Advent swoops on Mediq
Advent International has bid

13.25 a share for Mediq, the big
Dutch pharmaceutical distributor
with a large international platform
in
homecare
and
direct
distribution. The deal values it at
775 million, a 53% premium on
the closing share price on
September 21. So, what is the
attraction of a stock which has
been
a
consistent
underperformer?
Shares rose 49% following the bid
and (unless Mediq attracts another
bidder) the Advent bid looks like
a done deal according to analysts.
With 2011 sales of 2.66 billion,

Mediq is a somewhat ungainly
animal. As well as traditional drug
distribution to pharmacies, it also
has 12% of the Dutch retail
pharmacy market and a smaller
chain in Poland. Over the last few
years, it has been building up
higher-margin
value-add
distribution, where it sells directly
to
institutions
(principally
hospitals) and to patients at home.
But profit erosion in traditional

wholesale distribution and in
retail pharmacy this year, means
the share is unloved and was
trading at just seven times 2011
net profits.
Analyst Erwin Dut at Kempten

speculates that Advent will now
break up the business, selling off

retail pharmacy and possibly even
the traditional drug distribution
arm. The future is in the direct and
institutional business, which has
been built through a series of
international acquisitions to sales
of 1.2 billion and a 2011
EBITDA of 102 million.
Dut says that the immediate

problem Mediq faces in the
Netherlands springs from price
liberalisation. This has put the big
insurers in the driving seat. First,
they wrecked drug distribution by
pushing down prices, particularly
for generics. In January 2012,
tariff prices were abolished for
pharmacies. Competitive pricing
means that EBITDA profits in
Mediqs Dutch retail arm are
expected to fall from 26 million
in 2011 to 4 million in 2012.
The deal gives Advent an

international platform from which
to build the direct and institutional
arm. Here, Mediq has operations
in the Netherlands, Germany,
Switzerland and all the Nordic
countries, as well as the USA.
Often, these are combined with
homecare activities. Mediq has
even moved into recruitment in
the Netherlands.
Of course, there is no certainty

that new rules wont also hit direct
and institutional sales. But
national governments are keen to
build better homecare services for
patients in order to keep them out
of acute care for as long as
possible. They are also keen to see
hospitals and health regions
pursue better, leaner procurement.
Making these changes is not easy.
Many vested interests such as
acute hospitals, pharmacies and
the medical professions hate the
idea of a larger homecare sector.
But the economic rationale is

strong and it is what citizens want.
In that sense, Advents acquisition
of Mediq is marching with

history.
Dutch primary groups to

merge
By far the largest for-profit

primary care group is to be
created by Dutch private equity
investor NPM Healthcare which
is merging its Arts en Zorg chain
with ZorgPunt, owned by Menzis,
the big healthcare insurer and
private equity house Reggeborgh.
The combined group will have
150,000 patients. So how is
primary care delivery set to
change?
Currently, Dutch primarily care

looks like the English NHS did
years ago: mostly single-handed
doctors, self-employed, paid
through a mixture of capitation,
payment-by-activity and funds for
running
chronic
disease
management programmes. Back a
few decades ago, when there was
only one insurer in every region to
deal with, that was fine.
Now that the Dutch insurance
market has been liberalised,
however,
doctors
face
a
bureaucratic nightmare. Each one
has to manage contracts with 10to-15 insurers, including claims
processing, contract renewal, rate
negotiations and so on.
What we do, says ZorgPunt

Medical Director Gert-Jan ter
Braak, is take all of that hassle
away from them. General practice
is changing as a profession:
family doctors are increasingly
moving towards the four-day
work-week, they want steady
hours, they just want to practice
medicine instead of having to do
all of this administration. So we
employ the doctors directly. We
deal with contracts, we support
them with an IT system, we
provide the office and the
September 2012
HEALTHCARE EUROPA
HCE news
we
handle
infrastructure,
payments from insurers and we
pay the doctors a straight salary.
As he puts it: We do the things
doctors dont like.
ZorgPunt (Dutch for Care

Point) is also pushing the
polyclinic
model
in
the
Netherlands in a big way. We
want it to be easy for the patient:
they go to one place to get help.
We want to put doctors in clinics
with pediatrists, physiotherapists,
counsellors and so on. Jan ter
Braaks vision extends even
further than this: If you do better
in primary care, you save money
in secondary and tertiary care. We
are collecting a massive amount
of data on patient outcomes, and
our basic deal to the insurers is
this: if populations covered by a
ZorgPunt clinic are less costly
than elsewhere, we want to keep
some of these savings from
reduced hospital and specialist
visits and use them to pay our
doctors for performance. He
admits that it will take some time
to learn how to interpret the data
in this way and to hammer out
agreements with insurers, but
thinks that the company will start
to move to this model in five
years.
ZorgPunt itself is the result of a

merger half a decade ago of three
smaller organisations; the coming
deal with Arts en Zorg will finally
unite all of the various companies
that have been pushing in this
direction into one primary care
giant.
When asked why Menzis had

been involved in the company for
so long, board member Bas
Leerink replied: We really want
to see the creation of big, unified
chains in primary care that can use
economies of scale to really bring
down costs. We think this will go
a long way to containing costs in
the system, so we wanted to give
HEALTHCARE EUROPA
the process a boost. It is part of a

general push to move patients
towards
ambulatory
and
preventive treatment.
EU law prohibits payors from

directly owning a company such
as ZorgPunt, however, and so the
government has mandated a selloff. As such, Menzis will exit the
company, with Reggeborgh and
NPM Healthcare taking joint
ownership. The two investors are
apparently not significantly
involved in management; as Jan
ter Braak points out, the medical
board that runs day-to-day
operations has extensive veto
power, with only broad business
decisions (whether to extend
geographically, etc.) being taken
by the company board.
Our Analysis: These companies

fit nicely with the trends on
everyones lips across Europe at
the moment polyclinics (though
some object to that name),
consolidation, a move towards
focusing on primary care and
paying for performance. The
situation is a little rocky in the
Netherlands, since private equity
is largely distrusted and the
government doesnt want to be
seen allowing investors to pocket
large margins from social
investments. Still, the whole thing
makes sense, and fits neatly into
the mainstream of the health
policy zeitgeist.
From what we have heard,

Reggeborgh is not likely to exit
any time soon, does not commit to
fixed investment windows and
refuses to commit itself to a
public offering as its ultimate
goal. NPM is keeping quiet about
everything, simply saying that all
will be clear in two weeks. Their
silence reflects Dutch worries
about private equity involvement
in the sector.
September 2012
Psychiatry moves towards

payment by results in the
Netherlands
Dutch insurers like Menzis are

pushing
hard
for
the
implementation
of
patient
monitoring systems, threatening
5% tariff cuts if targets arent met.
This is after a 10% cut equal to
600 million to the countrys
psychiatry budget this year,
potentially resulting in the loss of
9,000 jobs in the sector and
reduced capacity to treat patients,
according to the GGZ, which
represents the providers in this
entirely private market segment.
The insurers are pushing for
payment by results.
Spending on psychiatric services
has increased by 9% per annum
between 2001 and 2011, making it
a tempting target for government
budget cuts.
Even now that psychiatric

spending has been reduced to 5.5
billion, it is still 13% of all
spending on the cure side i.e.,
on medical therapies as opposed
to social care in the
Netherlands, says GGZ director
Paul van Rooij. This is a place
where insurers are likely to keep
pushing for cost reductions.
Thats why were trying to work
with them over the long term, to
introduce structural reforms,
rather than just blunt force cuts.
One of these reforms, which
Dutch insurer Menzis has been
pushing particularly hard, is an
increase in patient monitoring
data. Menzis has threatened to
drop providers who arent
keeping up with deadlines for
implementation of a patient selfreporting system, which has fallen
badly behind schedule.
Van Rooij adds: Were working
closely with the insurers now, and
the system is back on track to be
implemented. The problem is that
HCE news
everyone is feeling pressure the
government sets a spending
target, and if that falls short of
what the sector needs, then
insurers will have to raise their
premiums. Obviously, they
desperately want to avoid doing
that. So theyre pushing hard on
initiatives like this one, so that
they can introduce pay-forperformance.
Bas Leerink, a board member at
Menzis, says that patience is
wearing thin. The target was for
20% of patients to be in the
system by the end of 2011. If
providers dont hit that by the end
of this year, we will cut tariffs by
around 5%.
Psychiatric
care
in
the
Netherlands is still based around
expensive inpatient institutions.
We want to reduce the number of
inpatient beds and move more
psychiatric
care
towards
ambulatory treatment. We want to
move away from the per diem
rate, where we are practically
paying per minute. If a patient
takes longer to be treated, the
system assumes thats because he
is a more difficult case. This isnt
necessarily true.
When we get this system
working, and take some time to
understand how to interpret this
data maybe a year or two we
can change the whole system. We
can start paying for outcomes,
instead of activity.
Our Analysis: There is a strong

trend across Europe to push down
hard on margins in psychiatry
particularly in the UK, Germany
and the Netherlands. Payments
are often on a per diem rate.
Margins are high, particularly in
the UK, where EBITDA of 3035% is common for larger
operators.
ZXL aims to net 20%

savings for members
Dutch
procurement
group
ZorgserviceXL (ZXL) claims to
save its hospital members at least
20% on many products. We talk to
Jan Akerboom about its integrated
approach, as well as trends in the
imaging market.
Owned by three not-for-profit
Dutch hospitals, ZXL has recently
added a fourth client and will
shortly announce a fifth.
Akerboom says that the company
will procure 275 million of
goods in 2012 and around 350
million in 2013. Its approach is
somewhat similar to that adopted
by Health Trust Europe in that it is
integrated. To succeed, we have
to get buy-in from the boards of
hospitals. We can then work to
encourage doctors to standardise
on equipment. But ZXL goes
right through to running its own
warehouse and running its own
logistics operations. If we
worked with a logistics company,
its interests would be different
from ours. We want to reduce the
number of stock items by half and
a logistics company wouldnt
want to do that.
It purchases everything apart from
pharmaceuticals for its members,
from food through to MRI
machines. 80% of items are
replenished automatically by
scanner from a central warehouse,
with the rest ordered from a webshop, often by nurses and doctors
on wards.
Prices of medtech devices in the

Netherlands
are
generally
considered to be at least 25%
higher than in Germany.
Akerboom says that this reflects
the fact that, historically, doctors
have had freedom of choice and
also very high service levels. By
getting boardroom buy-in, he
seeks standardisation. We divide
products into 25 categories, each

of which we regard as a
commodity insofar as we seek to
get all of them from one
company. Thus food and textiles
are examples, but so too are
cardio medtech devices.
He claims that ZXL is the only

integrated service in the
Netherlands. German operators
Prospitalia and Clinic Partner are
both here, but they are working
more as aggregators and buyers,
rather than doing the entire supply
chain, he claims.
Meanwhile, he says that ZXL

recently helped to negotiate a new
imaging contract with Siemens
for one of its hospital members.
The big imaging companies are
moving to functional contracts
and away from leases for specific
pieces of equipment. This means
that, within certain parameters,
they replace old equipment with
much better new products at no
extra charge in return for
exclusivity for the entire parc of
imaging equipment, including
maintenance contracts.
Portugal
PPPs to end in Portugal
The PPP model really began as a

phenomenon in Portugal in 2003.
The government is now decisively
turning against it. As analyst Jorge
Lanca
of
consultancy
Yes4Knowledge told us: Its not
just in healthcare the
government is retreating from
PPP as a model in public
transport, everything. Companies
who hold these contracts are
supposed to have a guaranteed
income but year after year they
show poor financial results. The
EU has demanded that this end.
They feel that the government is
just
underpaying
private
September 2012
HEALTHCARE EUROPA
HCE news
contractors instead of fully
funding a public hospital, to hide
the spending they should be
doing.
Pedro Pita Barros, of the
Universidade Nova de Lisboa, has
a different take: Its easy enough
to say that this is a case of hidden
deficit, but the same thing
happens to the public hospitals.
They have all been converted into
social enterprises E.P.E.
companies and given a budget
in a similar way. They have been
showing deficits too.
Our Analysis: It is unclear

whether the government will
terminate the existing contracts or
merely let them run their course.
But it doesnt sound like these
PPPs were such a great deal for
providers. The government has
turned in a big way against them
it had originally been planned, for
instance, that a collapsed contract
with Jose de Mello Saude would
be put back out to tender. No such
luck.
This is likely to hit the ongoing
sale of HPP the countrys thirdlargest private hospital chain
which runs the Cascais hospital
under a contract won with a bid of
375 million.
Spain
Two more Alzira hospitals

for Valencia
Two more large public hospitals

in Valencia look set to be sold off
under the Alzira model. This
involves the private sector taking
complete control of a facility on a
15-20 year contract. These
administrative concessions have
delivered cost savings of 25% in
the past. Meanwhile, attempts to
ramp up the volume of
outsourcing to the private sector
have run into resistance from
10
HEALTHCARE EUROPA
trade unions. Their opposition

doesnt change the budget math,
though: we will see some
outsourcing. Sources suggest that
the lab sector may be the first to
open up.
Luis Barcia of Tich Consulting

says that two new hospitals
Gandia and lliria are likely to be
transferred to the Alzira model,
which private operators claim cuts
costs by around 25%. Barcia
claims the current administrative
concessions are working well.
Operators like German insurer
DKV and Bupas Spanish brand
Sanitas are keen to stick with the
model. He says that Valencia has
reduced payment times to 30-60
days, although there is still a
problem looming at the end of the
year, when debts that built up
months ago will need to be repaid.
He says that the Valencian
Ministry of Health is modifying
its plan to outsource public sector
hospitals.
Union resistance means that only
non-medical services are likely to
go out to tender, but he adds that
things might change in the
Autumn.
A manager at Megalabs, the thirdlargest lab group after Labco and

Echevarne, said that it public
sector hospitals will likely be
forced to start outsourcing their
lab operations.
There will be a lot of union

resistance, but we expect to see
changes here in the next 2-3
months. Almost all private
hospitals in the country have now
outsourced to dedicated lab
groups, which can typically run
the operations a great deal
cheaper. Megalabs, for instance,
took on the labs of the Canary
Island-based Hospitem chain last
year.
September 2012
Switzerland
Swiss nursing home

market set to grow
The Swiss care home market

should boom over the next few
years. The move from per diem
rates to DRGs means that swiss
hospitals will no longer be
incentivised to hold onto the
elderly as long as possible. Swiss
municipalities are keen to
outsource care to the private
sector. We give an overview of the
major players, market size and
margins.
The Swiss care home sector

remains highly fragmented. The
three largest players are Lombard
Odiers SENIOcare with 971
beds in 28 homes and 155 assisted
living apartments and Senevita,
with 13 homes, owned by
Austrian operator Senecura. Both
work almost exclusively for
public payors.
Tertianum, with 21 homes, is

owned by Zrcher Kantonalbank,
Helvetia Versicherungen, Swiss
Re and the Marazzi family, and
specialises in the private market.
It is adding two new homes per
year.
SENIOcare has been turned
around by a management team
under Robert Bider (formerly of
Hirslanden) and Reto Heierli over
the last three years, with bed
occupancy rates rising from under
80% to over 95%.
But Bider says that, despite tariffs

that are at least 50% higher than in
Germany, working for public
payors is not easy. Salaries and
costs are much higher. A Swiss
nursing home with double-digit
EBITDA is doing very, very
well, he told us. While most
cantons have a licensing system
similar to France, which means
that
operators
face
less
HCE news
competition than in the UK or
Germany, he says that cantons
have set rates lower than headline
tariffs and that the regulatory
burden
is
heavy.
Local
authorities tend to leave publiclyowned homes alone, but they are
constantly inspecting private
players.
Senevita is expanding fast,
recently purchasing eight new
sites, but it too has found the
going tough at times. New CEO
Hannes Wittwer, like Bider, has a
background in private hospitals.
Remo Schneider, CEO of
Senecura, denies rumours that the
company has been overpaying to
win
new
contracts
with
municipalities. He says that the
companys strategy is to go for the
mid-priced market, rather than the
high-end on which competitors
concentrate.
Despite low margins, as in the rest

of Europe, the private sector is
growing. It is madness for local
communities to own or run
nursing homes, says Bider.
More and more are bringing in
private players. There should be
plenty of room for growth Bider
reckons SENIOcare has just 2-3%
of the total market. He says that
there are 1,576 homes in the
publicly-funded market, of which
40% are privately owned.
Schneider says that in 2010,

140,000 people were in assisted
living or care homes he expects
that to rise to 240,000 by 2030.
There is a big shift underway
towards care homes performing
more medicalised care, with
length of stay dropping as it has
across Europe. In particular, he
sees big growth opportunities in
temporary re-habitation stays.
Currently, nursing home units in

Switzerland have a capacity of
90,000 beds. Schneider reckons
that by 2020 there will be an
additional demand of 50,000.
It is expected that the proportion

of the population aged 65 and
over will grow from 390,000 in
2010 to 860,000 in 2040.
Schneider says: The growth in

quantity alone will account for
additional
costs
for
the
communities, so it will become
more difficult for them to retain
the quality of care. Private
providers have the know-how to
maintain high quality with only
low cost increases.
Margins are almost certainly far
higher for Tertianum, which
targets the wealthy a not
inconsiderable
group
in
Switzerland. To rent a 60 square
metre assisted living flat from
Tertianum costs CHF 5,959
(4,900) per month!
Our Analysis: The major Swiss

players are consolidating and
introducing far more professional
management teams. Wed expect
there to be fast growth in the
market over the next decade.
Finance doesnt seem to be an
issue. Bider says that there are
several
property
investors
including Credit Suisse who are
prepared to buy properties at low
rates. Note the small size of Swiss
homes. SENIOcares average just
35 beds each!
United Kingdom
PCTs the outsourcing

challenge
Primary Care Trusts (PCTs) have,

until now, led the commissioning
of services across the English
NHS. Post-reform, these trusts
will
be
disbanded,
with
responsibility moving to GPs
coming together in Clinical
Commissioning Groups (CCGs).
Many PCTs are still holding on to
some services like community

healthcare that were meant to
have been separated off from
them long ago. Now that reform
has passed, the pace has
quickened on this somewhat.
There are essentially two main

options facing the PCTs, says
Hollendoner. One is that they can
spin the services off into
independent social enterprise
trusts. There have been very few
of these formed, however, as,
leaving aside the requirement to
tender, the contracts are extremely
difficult to establish and the
encumbant workforce tend not to
have the necessary management
skills.
The other option has been for
another body to acquire these
services. PCTs have pushed a lot
of them onto Acute Trusts
(including Mental Health and
Community Trusts, where they
exist), using them to essentially
warehouse these functions
temporarily although for some
this warehousing might be seen as
permanent.
Services that havent been handed

over to other NHS bodies have
been and are being put out to
tender. In the community health
care field involving the running
of
community
hospitals,
emergency response teams and
health workers in the community
these tenders have been won by
Interserve, Virgin and Serco, and
are among the biggest outsourcing
contracts the NHS has seen.
Sercos Suffolk contract alone is
worth 140 million over the next
three years. However, not all
services will go down this path.
Remaining Acute Trusts and

others the places where these
services were warehoused are
thinking about what happens
down the line, Hollendoner
explains. They know that
September 2012
HEALTHCARE EUROPA
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eventually they might be broken

up under reviews of monopolistic
provision. So theyre trying to
land grab that is, acquire as
many assets and services as they
can so that they will still be large
enough to be sustainable after any
break-up. Theyre almost getting
into
competition
with
outsourcers.
Something like this has happened
in the mental health space: Mental
Health Trusts have started to claw
back medium-secure inpatient
psychiatric
treatment,
for
example.
This was kind of a perfect storm:

mental health is still paid for
through block contracts, rather
than pure payment-for-activity,
and so there is little accountability
in the payment method. While the
private sector has endeavoured to
cost its care service on an
individual basis, the purchaser
couldnt tell whether outsourcing
mental health providers were
12
HEALTHCARE EUROPA
doing a decent job. This is largely

the fault of the old system, but
providers didnt help themselves
when commissioners noted that
some of them were making
EBITDA margins of over 30%.
As such, the market for outsourced medium-secure services
actually looks set to shrink
unless outcome data demonstrates
that real value for money is being
achieved.
Our Analysis: In the psychiatric

space, a long and most likely
fraught
process
of
reimbursement reform will be
needed.
Provider Cambian is trying to preempt this by developing its own
approximation of payment-byresults to be offered to
commissioners.
In the community health care

sector, outsourcers seem to be on
the ascendancy. The size of the
addressable market isnt entirely
clear the NHS keeps poor data
on the volume of services
delivered through community
care, so the value of each service
is hard to determine until an
outsourcer goes in and does their
due diligence. Still, given the size
of previous contracts, it can be
expected to be a decently large
market segment.
Eastern Europe
Innova plans obs and

gynae chain
Polish public-sector healthcare

continues to open up to private
equity, as Innova Capital buys
gynaecological and obstetric
hospital Ujastek in Cracow.
Innova plans to spend a further
PLN 100 million in the next two
years on the hospital, which
mainly treats patients funded by
September 2012
the National Health Fund (NFZ).

The ultimate goal is to grow a
national chain through buy-andbuild acquisitions.
Krzysztof Krawczyk, managing
partner of Innova Capital, says
that he hopes to float the business
on the Warsaw stock exchange by
2017.
Our Analysis: This marks the

second big entry into the NFZfunded hospital sector, following
Advent Internationals October
2011 acquisition of American
Heart of Poland. There are, in
fact, plenty of players in the NFZfunded sector including EMC
and Know How who specialise
in privatising general hospitals.
Falck, the big Danish emergency
services group, is also building a
chain of primary care polyclinics.
The newcomers will be dependent

on the prices paid by the NFZ. For
instance, pessimistic industry
expectations were met when
reimbursements
for
heart
operations dropped substantially.
The news must have caused
heartburn for Advent in the wake
of the American Heart of Poland
acquisition.
Sources in the country also tell us
that there is a lot of interest in
southern Poland. Combine
Cracow and Katowice and
surroundings and you have a
spread out conurbation of 3-4
million people in a reasonably
wealthy industrial area. We hear
that Innova is likely to strike other
deals to buy old hospitals and
greenfield sites in the area.
Will Carlyle get top dollar

for Medical Park?
Private equity house Carlyle is

selling Turkish private hospital
chain Medical Park through
Credit Suisse and Goldman
Sachs. We investigate.
HCE news
Medical Park is the largest player
in the wider market of patients
who are partly paid for by the
Turkish health service. Sales in
2011 came to 360 million (TRY
820 million).
We estimate that EBITDA is in

the 14-16% range. Medical Park
is slightly smaller by sales than
Acibadem, which specialises
almost entirely in private pay
patients, although we are told
Medical Park has four times as
many patients.
This is because, unlike Acibadem,

the Turkish government, through
its SGK fund, part pays for
treatment for some 90% of
Medical Parks customers.
The government also officially

prohibits hospitals from charging
SGK patients more than an extra
90% over what is paid by the
state.
Quite what Medical Park will

fetch is questionable. Turkish
sources say that the group used to
be favoured by the government
and thus won some quite
interesting planning victories to
build new hospitals.
Today, we are told that this

closeness has waned indeed two
Medical Park hospital managers
at Bursa hospital were jailed
briefly for infringing SGK rules in
early 2012. This hospital was
opened by the prime minister
Recep Tayyip Erdogan two years
ago.
We are told that the new

government favourite is an outfit
called Medipol, which is building
a large new hospital in Istanbul.
Meanwhile, Medical Park has

launched a new upmarket brand to
compete
with
Acibadem,
Memorial
and
Florence
Nightingale, with a small hospital
in Istanbul. It also plans to open a
big new hospital in Ankara.
The good news of the last few

months is that the government has
now raised the ceiling of what
SGK patients can be charged from
an extra 70% to 90%.
The bad news is that the Turkish

economy will only grow around
4% this year. The private hospital
sector is also slowing down.
After a decade of 15% annual

growth, 2012 will be more like
5%, thanks to the slowdown and
to the Ministry of Health deciding
to issue a blanket ban on new
private hospitals.
Some observers reckon that
Medical Park, if is serving a wider
volume market than upmarket
rivals like Acibadem may be
better placed to weather a
downturn.
All this leaves a question mark

over whether Carlyle will get a
high price for Medical Park. An
alternative would be for Medical
Park to go to the stock market,
although this has typically not
offered much of a premium.
Red ink in Romania
An indicator of just how tough the

Romanian market is proving to be
comes from the latest officially
released results for 2011. There is
a lot of red ink around. We look at
what the numbers say about
different sectors and the leading
companies.
All profits and sales have to be
disclosed in Romania.
However, the figures do come

with a health warning insofar as
they show results at a subsidiary,
rather than a group level, and so,
in some cases, there may be other,
more profitable arms within the
group. And the losses are net
profits, rather than EBITDA
numbers.
Nevertheless, there is no getting

away from the fact that the main
subsidiaries of almost all the
major Romanian healthcare
groups did badly. In some cases,
sales fell.
The big outpatient clinic networks

that have recently opened
hospitals have done particularly
badly.
Hard
hit
was
Advent
Internationals Regina Maria,
which acquired the Euroclinic
hospital in 2010. The figures
show
that
the
combined
Euroclinic/Regina Maria business
saw sales rise just 2.2 million to
27.2 million, with the companys
net loss ballooning from 700,000
to 5.7 million. Competitors say
that integrating Euroclinic has
been difficult. The company
claims that it is pleased with its
EBITDA, but refused to disclose
it.
Rivals have also had a hard time.

The largest, Medlife, saw a profit
of 2.8 million in 2010 turn to a
loss of 900,000, with sales ahead
19% at 39.3 million.
Medicover, the Pan-European

subscription services company,
saw sales stall at 10.9 million
and losses soar from 100,000 to
2.3 million. Independent player
Sanador, which has a large new
hospital in central Bucharest,
grew sales 60% to 16.2 million
but also saw a profit of 600,000
turn to a loss of 3.5 million.
All these losses partly reflect

aggressive amortisations over 3-5
years on the new hospitals, but
there is a recognition that demand
has not kept up with new capacity.
Prices are coming down and
brand name doctors are in a
position to demand more money,
said one source.
September 2012
HEALTHCARE EUROPA
13
HCE news
Diagnostics
fared
better.
Euromedic, the largest imaging
services provider, saw sales rise
from 6.4 million to 8.1 million
and losses fall from 4.1 million
to 2.6 million.
The largest lab group, Synevo,

saw sales rise 22% to 23.6
million, but profits fell from 2.7
million to 2.2 million. Nearest
rival Bioclinica saw sales ahead
10% at 7.8 million, with profits
tripling to 300,000.
The malaise has also affected

private outpatient and primary
care networks.
Gral grew sales 19% to 14.2m
but profits are a third at 300,000.
Medcenter saw losses rise to 2m
on sales barely ahead at 7.3m.
Pelican Impex lost 20% of sales at
7.1 million and saw profits fall to
just 300,000.
Our Analysis: Times are tough,

and the recession is going to make
things worse. There will be
casualties. It is hard to see how
smaller chains like Pelican Impex
can afford to splurge 50 million
on a new hospital in Cluj, for
instance.
Romanian Market: 5%
growth at best in 2012
Growth in the private healthcare

sector has stalled in Romania,
with looming overcapacity.
After five years of breakneck

growth, times are tough for
Romanias private hospitals.
Sources at clinic provider
Medicover say that the private
sector is plagued by surplus
capacity, following a boom in
hospital construction.
Fady Chrieh at fellow clinic chain

Regina Maria, owned by Advent
International, agrees: Prices are
14
HEALTHCARE EUROPA
dropping and physicians are in a

stronger position to negotiate
wages. He thinks that growth in
the private sector may well stall
entirely in 2012, with 5% as an
optimistic upper bound.
This is despite the fact that
Romanias
public-sector
healthcare is collapsing.
Chrieh says that the problem is

that
many
Romanians,
particularly outside Bucharest, do
not have the disposable income to
go private.
This coincided with a boom in

hospital construction, during
which private beds probably
quadrupled over a few years.
The next year will be tough, says

Chrieh, with many small and midsized players looking to sell.
Meanwhile the Ministry of Health

has surprised no one by
negotiating a delay in the
implementation of co-payment for
healthcare services.
Minister of Health Vasile Cepoi

said that co-payments will be
first negotiated with patients and
professionals associations.
Upon
finalizing
these
negotiations, co-pays will be
implemented.
Given
the
difficulty of such negotiations, the
Government did not indicate any
hard deadline for the adoption of
co-payments.
Vasile Cepoi has reconfirmed that

the existing healthcare reform bill
will enter parliamentary debate
and be passed before the end of
this year.
Our Analysis: The big chains,

like Regina Maria set to open a
new over-100-bed hospital in
North Bucharest later this year
will continue to grow. Private
equity groups like Advent (Regina
Maria) and Societe Generale
September 2012
(Medlife) are content to pump

money into the creation of
national chains.
Long-term, that still looks a safe

bet, given weakness in the public
sector. But we are in for a few
lean years.
PZU may take minority in

Lux-Med
PZU, Polands largest insurer,

might take a minority stake in
Lux-Med, the largest Polish
private healthcare company. LuxMed is being sold by Mid Europa
this Autumn.
International insurer Bupa has
also expressed interest.
For many years, insurers have

found their path to the potentially
enormous Polish health insurance
market blocked by the presence of
companies like Lux-Med and
Medicover.
These subscription service

providers offer enrolees a limited
basket of healthcare services,
delivered through a branded clinic
network. The majority of the
subscription market is targeted at
employees looking to offer their
workers benefits; the individual
market is relatively tiny.
This system has made it hard for

insurers
like
Signal-Iduna,
Generali and PZU to really grow
the market, as there are very few
healthcare providers who are not
tied into the subscription
networks.
By buying a stake in Lux-Med,

PZU could overnight build
access to what could become a
very large market, particularly if a
widely-expected law making
healthcare
insurance
tax
deductible passes.
Competitors to Lux-Med were

intrigued by the PZU move. PZU
HCE news
has huge distribution and a lot of
money. The state still has a large
stake in Lux-Med, and PZU
potentially has the influence to get
the government to favour
insurers.
But they also say that PZU has

seen
frequent
management
changes and has yet to
demonstrate that it gets
healthcare.
Bupa and U.S. Medicaid thirdparty administrator Centene have

also expressed interest.
The latter is seen as a long shot

Centene has no presence
elsewhere in Europe but Bupa
has apparently gone as far as
appointing UBS, so may be
serious.
Most observers reckon that the

majority purchaser will be a large
private equity house with
international healthcare expertise
and plenty of cash. That narrows
the field to outfits like BC
Partners, EQT, Bridgepoint and
Cinven all of whom seem keen
However, the fact that PZU is
even talking about taking a
minority stake is interesting.
Observers reckon that, unlike
most healthcare businesses which
have been put on the block
recently, Lux-Med is likely to sell.
A price between PLN 1 billion

and PLN 1.2 billion sounds
reasonable EBITDA was just
under PLN 100 million in 2011,
on sales of around 700 million.
Diagnostics
CRC and Balague collapse
Catalan imaging services provider

CRC Corporacio Sanitaria has
gone into bankruptcy under a debt
burden of 44 million, according
to Spanish newspaper Expansion.
This follows the collapse of

Balague, the big independent
Spanish reference lab group,
earlier in September.
Neither CRC nor Balague.

Expansion gives CRCs 2011
sales as 35 million. That would
make it the third-largest player in
the Spanish imaging market,
behind family-owned Eresa (80
million) and Q Diagnostica,
owned by Mercapital.
Balagues 2011 sales reportedly

stood at 28 million. That figure
includes a joint venture with
Ribera Salud to run a number of
public hospital labs in Madrid,
worth nearly 20 million per year.
It is the fourth-largest player,

behind CRC.
CRC has grown fast, winning a

clutch of outsourcing contracts
with Catalan hospitals. Mercapital
nearly bought a 55% stake last
year. CEO Norbet Gallindo
stepped down in July 2011 and
was replaced by Mariana Rovira.
Concerning Balague, Rivals say
that there were several factors
behind its failure.
It won the bid for Madrid in 2008

but, as a reference lab, it didnt
really have the expertise in
volume testing that it needed. The
hope was that this would be the
first of many outsourcing deals,
but there has been a lot of
resistance and its still the only
big lab outsourcing contract in
Spain, said one source at
Megalab.
Sources at Labco questioned

whether the contract had been
entirely watertight it may not
cover Balague in the case of a fall
in population or increased
activity.
Balagues debts are said to have
come to 18 million. It owed
social security 1 million from
2011 the debt that finally led to

bankruptcy.
Other lab groups say they are

getting letters asking them if they
have any claims against the
company.
Our Analysis: CRC could be

seen as a casualty of recent
cutbacks by Spanish health
authorities. However, our sources
say that this would be misleading.
They blame breakneck expansion
under the previous CEO for
CRCs problems.
Mercapital says that payment
times in Spain have recently
returned to 60-90 days a
sensible level.
CRC therefore looks similar to
Balague,
which
also
overexpanded, taking on a large
outsourcing project with 6-8
Madrid hospitals.
In other words: these failures are

best seen as examples of creative
destruction, which should allow a
stronger, consolidated private
sector to emerge.
Competitors say Balagues plight

demonstrates to grasping private
insurers who have dropped
prices by around 30% in the last
three years that there really is
nothing left to give away. It will
be interesting to see whether it
attracts any bidders.
EQT on for Labco and

Biomnis has a deal (of
sorts)
Informed sources have told us we

were wrong to suggest that EQT is
not interested in buying the
European lab group Labco.
Furthermore, rumours in the
market that there will be no deal
for Biomnis, the French reference
lab, are wrong.
Were told that EQT, which
September 2012
HEALTHCARE EUROPA
15
HCE news
sparked the current bid process
for Labco, remains very interested
in potentially bidding for the
group. EQTs initial offer,
reportedly around 10 times
EBITDA, was what prompted
Labco management to start a sales
process.
The company is unusual in that it
is
majority-owned
by
management and the owners of
the many smaller businesses that
it has acquired over the last five
years. But an offer of 10 times
EBITDA was not good enough for
private equity investors such as 3i,
who would barely turn a profit on
that multiple.
Were also told that Biomnis is
now sitting on a deal although it
is not clear whether this is a
partial or complete sale.
Our Analysis: It is clear that,

providing Labco fetches a high
enough price, we are likely to see
trade sales at Unilabs and Amedes
or, quite probably, a merger
bringing all three together.
New CEO at Euromedic
Big imaging services provider

Euromedic International has
appointed Dimitris Moulavasilis
as its new CEO, following the
departure earlier in 2012 of
Richard di Benedetto. A CFO has
yet to be announced, but has been
selected.
Managers who know the company
well are happy to see
Moulavasilis appointed.
He has worked his way up from

country manager and was running
the diagnostics division. Hes a
safe pair of hands who knows the
business very well. We are told
that there will be no change of
strategy.
16
HEALTHCARE EUROPA
Q Diagnostica set to
expand in Brazil
Mercapital is about to buy a large

provider in Brazil which will
double sales to 80 million. The
private equity house already owns
Q Diagnostica, the second largest
private imaging services provider
in Spain. We talk to Mercapital
partner Carlos Barallobre about
the deal and the Spanish imaging
market.
Hospiten, Quiron, USP

Mercapital has owned and sold a
lot of the best private healthcare
operators in Spain. It also has a
record of getting out at the right
time at the right price. This
summer, the company sold home
oxygen outfit Gasmedi to leading
pan-European homecare provider
Air Liquide.
It is not surprising that Mercapital
has just one healthcare service
group Q Diagnostica left in its
Spanish portfolio. Barallobre
freely admits that the last four
years have been tough for Spanish
healthcare. He doesnt think the
next four will be good either. The
number of privately insured
individuals is unlikely to
increase. While the state may
outsource more medical services
to the private sector, he doesnt
expect to see a big expansion in
Alzira-style outsourcing.
That model works best when

there is a need for a new hospital.
We already have a lot of capacity
right now. The truth is, the
Spanish public hospital sector is
fairly efficient.
The one potential bright spot is

outsourcing, particularly for
services such as imaging and
laboratory tests. Here, he says the
Spanish regions are holding
preliminary talks. He thinks that
quite a large slice of high-end
public sector imaging could shift
over.
September 2012
The last decade saw a big

increase in the imaging parc in
Spain. The reaction to the
recession so far has been to ration
the number of imaging tests and
to offer X-rays instead of MRIs.
This has led to long queues and a
big increase in self-payers.
He says waits of six months for
non-urgent cases are not
uncommon now.
But Q is in a dialogue with

policymakers and politicians
about outsourcing. It doesnt
make sense to ration imaging. It
only leads to higher costs later. By
outsourcing hospital imaging
units to the private sector, the state
can achieve big increases in
productivity.
He accepts that there will be

union resistance, but says that in
todays environment efficiency,
productivity and cost control
count for a lot.
He puts the Spanish market for

high-end CT, PET and MRI
imaging at roughly 1 billion, of
which the public sector accounts
for 60% (600 million) and the
private insurers, cash payers and
mutuals the other 400 million.
Around 210 million of the public
sector budget has already been
outsourced to private players.
To grow, Q has turned to South

America. It is about to buy an
operator that works almost
entirely for the private sector, with
twenty centres in one Brazilian
city. He sees huge opportunities in
Latin America.
Columbia, Brazil and Mexico are
very much where Spain was in
terms of penetration levels twenty
years ago, but there are also
fantastic opportunities to partner
with the public sector. At the
same time he says there are
already powerful players out
there. You have two big quoted
HCE news
groups Fleury and DASA in the
lab and imaging sector. He
expects them to eventually leave
Latin America. Who knows? Q
could be their bridge to Europe,
he says.
elections are on September 12 but

the resulting coalition wont take
form until the end of the year.
Atal-mdc and Medial

merge
German labs are wincing after the

regional doctors chambers, the
Kassenrztliche Vereinigungen,
introduced a unilateral directive
on budget ceilings from October
1. But is there an upside?
Two of the big Dutch diagnostics

players have merged. Observers
expect more deals to follow as the
sector prepares for price cuts and,
possibly, even a little capitalism.
The merger, agreed at the end of

June, brings together Medial (25
million in 2011 sales and 431
staff) and Atal with (23 million
in 2011 sales and 300 staff. Staff
numbers may look high, but keep
in mind that both companies have
patient-facing employees drawing
blood).
Thijs Veerman, chief executive of

Star-MDC, says that the not-forprofit
sector
is
already
consolidating
because
substantial price cuts are
expected, probably in 2014. He
says that many other groups are in
merger talks he personally
knows of a dozen currently
underway. There are around 100
facilities in the country serving
the outpatient sector.
Some groups (such as Star-MDC)
have substantial imaging parcs as
well. Prices are high and money
has been reinvested in ever more
lavish equipment, as it cannot be
disbursed to investors.
Groups might also be pursuing
mergers in expectation of market
liberalisation. That depends on the
forthcoming elections, however.
The right-wing, if victorious,

would allow external shareholders
and profits in the sector. The left,
who are slightly ahead in the
polls, are opposed to both. The
German labs hit by 6.9%

ceiling
Operators say that a few KVs

introduced a 6.9% budget ceiling
from July 1. A ceiling is likely to
be imposed by all KVs
nationwide from October 1
onwards. Opinion varies on what
this will be. Some expect 6.9%,
others say 4-5%.
It looks as though the ceiling will
probably then stay in place going
forwards.
The KVs claim that, in return,

they will deter specialist
outpatient doctors doing their own
tests. From October 1, these selfreferrers will only be paid a predetermined maximum average fee
per request for example,
between 4 for gynaecologists
and 40 for specialised tests from
rheumatologists
and
endocrinologists. The Federal KV
plans to squeeze out unnecessary
testing many self-referrers are
billing average fees well above
80, and in some cases, well
above 100 per episode.
In theory, all this should add
expand the market significantly
for the big labs. It is believed that
the self-referrers make sales of
nearly 1 billion.
Assuming around half of these
tests are actually necessary, this
would amount to 400-500
million of potential additional
sales. In practice, some of the labs
we talked to are sceptical that the
KVs, which represent the doctors,

will really enforce this. The labs
are an easy target. Why offend
thousands of doctors instead?
Apparently, the KVs have been
promising to rein in self-referrers
since 2009. Some groups claim
that they are already seeing more
business from former selfreferrers.
Our Analysis: The German lab

market has been growing
extremely quickly for the last two
years. Sonic, for instance, saw
organic growth of 6% in the year
to June 2012. We can see why the
KVs have acted. This is a severe
move, though. A ceiling of 4-6%
will greatly reduce profits and
will far outweigh the equivalent
organic growth rate. It may
essentially make the growth of the
last two years moot.
The ceiling only affects the lowprofit portion of sales paid for by
the statutory insurers. This varies
from 55-90% of sales for most
labs. But operators are still
worried that the much higher rates
for private insurers will be
targeted in 2014. So in answer to
our question: there is little or no
upside. The only hope is that
notoriously resistant self-referrers
can be persuaded to change their
approach.
As healthcare budgets come under
scrutiny, we may see price cuts
and budget ceilings imposed
elsewhere, although these should
be balanced to some extent by
growth in public hospital
outsourcing in Western and
Southern Europe as countries
limit healthcare budgets.
The problem is that the cuts will

be introduced quickly, while it
will take the best part of a decade
before the public sector hospitals
begin to outsource services to
partners in earnest.
September 2012
HEALTHCARE EUROPA
17
HCE interview
Jaap Dijkman, CEO, Medial-Atal

We talk to Jaap Dijkman, who will take over as
CEO of Medial-Atal from October 2012. The
newly-merged group is now the largest
diagnostics laboratory in the Netherlands, with
forecast 2012 sales of 60 million.
HCE: You have recently merged with Atal and

weve also recently seen LabNoord merge to create
the second largest group, with sales of around 55
million. Why is this happening?
JD: Everyone is aware that there is some spare
capacity, particularly in West Holland. We also know
that the price competition in the hospital sector will
eventually affect the lab space. Dutch prices for
volume tests are high right now compared to
Germany.
There are other good reasons to merge. In our case,

we bring together Medial, which has a lot of
expertise in hospital outsourcing, with Atal, which
has managed to create a completely integrated lab in
which the normal professional siloes have been
removed. We see big benefits in scale and we will
move to a much more efficient new building in
2014.
HCE: The Netherlands has around 100 of these
medical diagnostic centres (MDCs) serving primary
doctors, doesnt it? Some have large imaging parcs
as well and theyre all not-for-profits, arent they?
JD: Yes, and they still are.
HCE: Do you see that changing?
JD: Yes, but not immediately. It partly depends on

who wins the autumn election, but it is also clear that
it is much easier to create real competition in labs
than it is in hospitals. You can send your test
anywhere, but patients want to go to their local
hospital so making the lab space a real market
should be much easier.
Generally, I think the managers running MDCs feel
that they dont have much need to access capital
except for constructing new buildings and we can
get access to capital in that case from property
companies, without giving away equity.
18
HEALTHCARE EUROPA
September 2012
If the large international lab groups started moving

into the Netherlands, that would change. There is
nothing to stop them buying MDCs, but they
wouldnt be able to pay dividends.
HCE: And are they moving in?
JD: Not so far. Sonic does do around 50 million a

year in Dutch reference tests from Belgium, but no
one is competing for the volume market yet.
HCE: You mentioned that some diagnostic centres
do imaging as well as lab tests. What do you make
of that?
JD: Yes, some MDCs are very active here. I cant

see it myself. The hospitals have a lot of imaging
equipment and are also trying to reach the primary
care market. Thats where the money right now,
while the insurers force prices down in secondary
healthcare.
HCE: So do you think we will see a change of
government this Autumn in the Netherlands?
JD: Probably not. A centrist coalition seems most

likely, looking at the polls. I think the existing
reformist health minister is likely to get her job back.
She is fairly popular. Even if the left won, I doubt
there would be support for a retreat from market
reforms in healthcare.
HCE: Do you expect hospital outsourcing to grow?
JD: Yes. We already have four hospitals that have

outsourced to us. Wed like to expand to other
hospitals in our region.
HCE: In most countries public hospitals have been
very reluctant to outsource to private operators.
JD: Yes, and that has historically been true for the
Netherlands. Outsourcing of a core process is a big
step, both for doctors and professionals, but from a
business standpoint it makes a lot of sense. With the
HCE interview
pressure from the insurers mounting, outsourcing
becomes more and more likely.
Our model is straightforward. We keep a small lab in

the hospital to handle hot tests and the capacity to
handle emergency demand peaks. The rest we do at
a central lab near to the four hospitals. We now want
to break down the divides between the different
disciplines within the central lab.
We have also developed IT applications that inform
general practitioners about the tests their patients are
having in the local hospital. Its something they
value that you wont find elsewhere.
HCE: So, you see the hospital landscape changing

fast in the Netherlands?
JD: Well yes and no.
Theres a lot of talk of mergers between hospitals.

Some studies from insurance companies show that
there is clearly excess capacity and that hospitals can
be a lot more efficient if strengths are combined
across them. But hospital managers tend to run these
organisations at a fairly high level, while doctors are
still in charge at the macro level. So merging
individual units is difficult and I know of many
projects that were eventually shelved. The insurers
are applying price pressure and hospitals are not
supposed to exceed their budgets, but it is very

difficult to enforce the regime. Insurers will need to
insist on closing capacity which will be politically
difficult.
HCE online
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September 2012
HEALTHCARE EUROPA
19
HCE editorial
The more the hospital exceeds its cost-reduction
and quality-improvement targets, the more money
it can keep. If it misses the targets, it will lose tens
of millions of dollars. This is a radical shift. Until
now, hospitals and medical groups have mainly had
a landlord-tenant relationship with doctors. They
offered us space and facilities, but what we tenants
did behind closed doors was our business. Now its
their business, too.
It is extraordinary that, until 2012, this was not the
case.
Max Hotopf, Editor, HCE
But perhaps I shouldnt be surprised.
What can hospitals learn from casual

dining chains
In an interesting article in the New Yorker, Atul

Gawande, professor of surgery at Harvard Medical
School, writes on how hospitals and doctors can
learn from restaurant chains. Medicine seems to be
depressingly far behind on some basic issues.
I say seems to be because it is extremely hard to
judge how far operations and stays in hospitals are
really being standardised.
To what extent are patients being put on controlled
pathways? To what extent is data collection on best
practice really driving treatment on a day-by-day
basis?
No one does anything about it. We just joke that his

patients are special.
Why disruptive competition is a good

idea in healthcare services
Can we combine competition and integration?

asks Chris Ham, Chief Executive of the Kings
Fund. Can we move beyond the polarised debate
and take a look at what the benefits and problems
of competition actually are?
The problem is that everywhere, apart from in

Germany and the Alzira franchises in Spain,
doctors remain the customers the people who
generate most of the business rather than salaried
employees. This means that hospitals have to
deploy a lot of tact and diplomacy.
Presenting at the Summer meeting of the European

Health Policy Group in London, Ham clearly
thought that the answer was yes.
The Cleveland and Mayo clinics in the USA are

also pioneering here, but it is extraordinary to read
Gawandes statement in the article that this year,
my employers new contracts with Medicare,
BlueCross BlueShield, and others link financial
reward to clinical performance.
With that as a starting point, and moving through

discussions of the wrong and right kinds of
competition, Ham reached a point of consensus
with the academics Christensen, Bohmer and
Kenegy: disruptive competition, carefully
targeted, can improve outcomes. We can try to
produce more Kaisers.
Helios and other operators are changing that,

principally through information transparency
show a surgeon that his operations underperform,
and eventually he will give up the my patients are
different tack and start paying attention.
20
I recently chatted to a junior doctor in a large

London NHS teaching hospital who says that, if he
criticised the work carried out by one of the
consultants, he could damage his career. It is very
hierarchical and yet everyone knows that some
surgeons have far more patients who routinely end
up on critical acute care lists than others.
HEALTHCARE EUROPA
September 2012
Taking a look at the American model, one thing we

hear at Healthcare Europa a lot is this: we wouldnt
want a US-style system here. But Kaiser
Permanente sure is doing something right.
HCE editorial
Thats where you come to the point of combining
competition and integration, explained Ham.
What you need is integration on the clinical end.
Then you can have an integrated system of
disruptive competition.
But what does this mean? Given how often

homecare was cited as an example particularly in
France and Italy it means solutions like case
managers co-ordinating care; open dialogue (aided
by technology) up and down the systems of
primary, secondary and tertiary care; and a laserfocus on care pathways.
If you have this structure in place, you get what we

see in Italy: highly-sophisticated homecare
companies providing complicated care, meshing
smoothly with the public system thanks to a solid
systemic framework thats there to support them
and more importantly the patient.
Integration is important on the clinical end, rather
than the organisational end, said Ham.
This means that its less important arguing about

what the overall structure should look like; whats
more important is making sure doctors on the
ground are working together.
It also means that this integration has to be broad:

as Ham said, Concentration of integration within
the treatment of a specific disease, treated as its
own separate issue from everything else, will just
lead to new silos.
But old businesses beware: the point of

Christensen et al.s paper is that we need disruptive
competition where new competitors enter and
change medical and business practices.
That is a contrast to where incumbent providers

lock down revenue streams turning their noses up
at radical new medical technology or treatment
methods to preserve old products. That, says Ham,
is little better than no competition at all.
The flip-side of the coin is what weve seen with

telemedicine and, when payment mechanisms are
implement poorly, in homecare: clinicians fear
being cut out of the loop by new technology and
processes.
They fear losing their patients, and thus their

revenue stream. This has repeatedly scuppered
attempts to bring eHealth into the health systems of
Europe.
The Kings Fund is well respected, and its views
have had a certain simpatico with those of the
government.
David Cameron has personally been pushing

telehealth; companies like Telemedica promise that
this time will be different. But will it? That depends
on how hard the NHS is listening to people like
Chris Ham.
HCE reports
Opportunities in Healthcare: The Medicalised Homecare market report now available
The 230 page report is based on hundreds of interviews with entrepreneurs, academics and
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The report costs 2,500 for a paper copy and 3,000 for a searchable pdf site licence.
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September 2012
HEALTHCARE EUROPA
21
HCE interview
Elena Mladova, CEO, MD Medical Group

MD Medical Group the second-largest private
provider of healthcare in Russia specialises in
obstetrics and gynaecology, as well as paediatrics
under the Mother and Child brand. We talk to
CEO Elena Mladova about patients, MDs
business model and the size and growth rate of
the Russian market.
Sales in 2011 rose 45% to RUB 2.9 billion (71

million), with EBITDA ahead 19% at RUB 1.3
billion (32 million). The group employs 1,350
people between its one hospital in Moscow, seven
outpatient facilities and three outpatient franchises
across Russia and the Ukraine. It has a presence in St
Petersburg, Kiev, Ufa and Irkutsk. The group is
opening an eighth clinic in Perm and plans two
substantial new hospitals: one in Moscow, the other
in Ufa. The business is owned by its founder, Prof.
Mark Kurtser. On September 17, it announced plans
to list on the London Stock Exchange.
HCE: Tell me about your average patient?
EM: She is a woman of 30-40, shes middle class.

She may need IVF, she may have a child with a
medical condition or she may face a difficult birth.
The alternative is the public sector.
HCE: And what is that like?
EM: Wards are typically 4-6 patients, although

sometimes as low as two. But there is a very low
ratio of doctors and nurses to patients. Typically,
youll get one nurse to 25 patients. People in Russia
do not always have much confidence in public sector
healthcare. There are also long waiting lists, which
make it problematic for obstetrics and fertility. Once
you have been accepted for IVF, there is still a wait
of probably a year before treatment.
HCE: What do you offer in comparison?
22
HEALTHCARE EUROPA
September 2012
EM: Comfort, confidence and access to the same

doctor throughout. Also access to the latest
technologies and approaches. We also offer
everything under one roof, including diagnostic
tests, so we can save her time.
HCE: But can she afford your services?
EM: Increasingly, yes. Id say our target now is the

top 30% of the population. A cycle of IVF with us
costs up to $5,000, including medicines which are
normally changed as extras the same as in Europe.
Child birth starts from RUB 150,000 (4,000).
Around 90% of our patients pay cash, with the
remaining 10% paying via private healthcare
insurers. However, an unknown portion of the 90%
will then be refunded by their insurers.
HCE: And how is she going to find you?
EM: Our brand recognition is pretty high, so she can

come directly. Or she may be referred by her doctor.
HCE: I thought that Russian doctors were unwilling
to refer patients, as by doing so they lose them?
EM: No, I dont think that is true. A single doctor
cant deal with every condition. In any case, patients
are increasingly well informed by the internet. They
will do the research and have a dialogue with the
doctor about their choices.
Three years ago we established our own training

centre here that offers educational programmes for
doctors not employed by us. This is done to increase
the loyalty of the medical community and ensures a
certain level of referrals.
HCE: What is the Russian governments approach to
private healthcare?
EM: Broadly speaking, very favourable. By law,

private healthcare companies are zero-rated for
corporation tax until 2020. There are provisos
designed to stop distributors from getting the tax
break, but we qualify on all counts. The government
HCE interview
is talking about funding private healthcare with
public health funds from 2015, although the exact
form this would take is not yet clear.
It also wants to see an increase in the birth rate
which is rising, but is still low.
HCE: How large is the wider private healthcare

market in Russia?
EM: Recent figures for 2011 from Frost and Sullivan

put private medical insurance at RUB 76 billion
(1.8 billion) and out-of-pocket at RUB 302 million
(7.44 billion) a total of RUB 378 million (9.25
billion). The grey market, bribes paid to public
sector medics, is a further RUB 104 million (2.5
billion). They expect the legitimate sector to grow
2.2 times by 2016 to RUB 855 billion (21 billion),
with the grey market staying static at RUB 104
million (2.5 billion).
HCE: You are in Moscow. Isnt it a sort of Russian
Switzerland in a sea of much poorer people?
EM: Maybe that used to be the case, but today we

estimate that Moscow accounts for just 20% of the
market for private healthcare in Russia. There is
tremendous potential in the provinces. There are 13
cities that have a population of over a million
people. There are also some very wealthy oilproducing regions.
HCE: So, what is your business model? Most
private hospitals are hotels, which are used by
freelance doctors to carry out their work.
EM: That is not our model. Over 75% of our doctors

are employed full-time, particularly those in our core
area of obstetrics, gynaecology and paedatrics. If we
have women with heart problems, then we will bring
in specialists who will conduct a few sessions a
week at our centres. But we directly employ most of
our staff.
HCE: So how do you differ from Medsi, which with
2011 sales of RUB 6.3 billion (155 million) is far
larger than you?
EM: Well, that is simple. Medsi is much more

orientated towards providing services for patients
with voluntary health insurance. It is focused on
outpatient services and doesnt specialise in
OBGYN. They acquired their first hospital building
in Moscow last year from the state, which they plan

to renovate. We design and build our hospitals.
The two other large groups are slightly smaller than

us. Medicina (Healthcare Europa estimate: 2011
sales RUB 2.8 billion) and European Medical Centre
(Healthcare Europa estimate: 2011 sales RUB 2.6
billion) are also generalists with a strong outpatient
focus.
HCE: And other, smaller competitors in your
market?
EM: The nearest is Scandinavia which covers the St

Petersburg market (Healthcare Europa estimate:
2011 sales of RUB 1.8 billion (44 million)) and so
is not a direct competitor to us. Its a good company,
but it only has 8 obstetrics beds in its inpatient
facility.
Our competitors are almost all centred on a single
city. Expanding nationwide is a difficult challenge
for them and they lack inpatient capacity. We have
a 250-bed hospital in Moscow, we are building a
further 280-bed hospital at Lapino in North Moscow
and we have a site for a hospital in Ufa of 30,000
square metres, the same as our existing Moscow
hospital.
HCE: So, what is your strategy?
EM: With Lapino we will be able top expand into

other areas, such as rehabilitation, trauma and
related services. Weve also built up our diagnostics
offering while keeping a focus on our key areas of
womens and childrens health. Elsewhere, our
approach is to start by buying an outpatient clinic. if
its popular and works well, then we add a hospital.
Thats what were doing in Ufa, which is Muslim
and very family-friendly.
We are also about to open our first outpatient centre

in Perm in September 2012. There is a lot of
potential, but I dont want to be drawn into how
many centres we will establish over the next five
years!
My main concern as chief executive is to ensure that

we maintain quality levels, keep up cooperation
between centres and successfully launch new
projects.
September 2012
HEALTHCARE EUROPA
23
HCE feature
Soft Outsourcing:
The Picture Right Now
HCE here provides an overview of the business models, penetration rates and
innovation in soft outsourcing across Europe. This is the first of a series of articles
looking at the outsourcing sector.
It is easy to ignore the big outsourcers when looking

at private health and social care providers. But the big,
cross-industry outsources are precisely where a lot of
the outsourcing activity is happening. Sodexo,
Compass (Medirest), Aramark, Dussmann and ISS
have divisions with healthcare sales worth hundreds
of millions, even billions, to the health and social care
sectors. Medirest, for instance, had sales of over
600m in healthcare outsourcing in Europe alone in
2011.
Finally, we have a fifth category: functional

privatisation. This involves the entire management of,
for instance, a hospital - including clinical delivery being outsourced to a company or consortium. This is
extremely rare. The only examples in Europe are the
Alzira model in Spain, several (soon-to-be-axed)
PPPs in Portugal, Hinchingbrooke in the UK, St
Goran hospital in Stockholm, a Generale de Santeowned hospital in Italy and a number of smaller
municipal hospitals in Poland.
First, some definitions. The sector can be divided into

soft outsourcing - food, cleaning and services such as
portering or internal logistics - and hard outsourcing looking after equipment and buildings, often tied into
PPPs. A third category is business process, or white
collar, outsourcing, covering administration,
procurement, human resources and accounting.
What counts as privatisation and what as outsourcing

is a fine line. For instance, in most European
countries, publicly-run care homes are gradually
being replaced by new private nursing homes. In
Sweden and Finland, however, the running of
municipal homes is being outsourced on long
contracts to private operators. So, in these two Nordic
countries, there is a substantial nursing home
outsourcing market.
Increasingly, these companies are moving into

medical outsourcing. Some are also offering contracts
covering all non-medical support services for a given
institution, which can be seen as a half-way house to
full privatisation.
All of these services are non-medical.
The fourth category, then, is medical outsourcing.

This covers diagnostics, sterilisation and even (in
some Italian hospitals) the outsourcing of nursing
services. The supply of oxygen to patients at home
could also be considered outsourcing. This would
include industrial gas giants Air Liquide and Lindes
homecare efforts across the continent. Recruitment of
nurses and doctors could also be considered as
medical outsourcing. It is very big business indeed in
some countries.
Increasingly, big outsourcers are offering integrated

outsourcing, in which they essentially offer to take
over all non-medical functions for a healthcare
service provider.
24
HEALTHCARE EUROPA
September 2012
Beyond functional outsourcing, we have hospital

privatisation, as practiced in Germany and, to a lesser
extent, Poland, the Czech Republic, the Netherlands
and Sweden, where ownership changes from the
public to the private sector.
So what do the players in soft outsourcing look like?

And how are markets developing?
In general, the sector is increasingly dominated by

large, international players. In soft outsourcing that
means Compass (Medirest), Sodexo, ISS, Aramark
and Dussmann. You also have outfits like Serco in the
UK who do both soft outsourcing and business
process outsourcing. In general, everyone seems to be
invading everyone elses space.
Consolidation varies hugely across the continent. We

estimate that in the UK, Medirest and Sodexo - the
two largest players - have over 60% of that part of the
market which has been outsourced. Meanwhile, in
Spain, Germany and Italy, smaller, regional players
HCE feature
dominate are more common.
Growth rates in soft outsourcing in Europe are fairly

low. Mike Iddon, development director of healthcare
services at Medirest reckons that the larger European
soft markets - such as patient feeding, laundry and
cleaning - are growing at around 2-3% a year
organically. Sodexo, in its nine-month report, saw
2.7% organic growth in healthcare, saying that
expansion was particularly modest in Europe.
While a recent survey carried out byB2B International
on behalf of Medirest suggests that the budget crisis
has left many hospital managers much more open to
outsourcing in general, he says that,so far, the
company feels the pick up in activity levels has been
a little disappointing. On the contrary, the last two
years of recession has led to cost pressure in the
market
But growth in soft outsourcing is much faster in some
developing markets. In Turkey, for instance, the
percentage of hospitals outsourcing at least one
service rose from 70.8% in 2001 to 93.3% in 2008.
Both Compass and Sodexo initially said that the UK

was the most advanced market in Europe. In fact, the
markets with the highest penetration are in souther
Europe - Portugal, Italy and Spain. Our data suggests
penetration rates here of 70-90% for services such as
patient feeding. On the face of it, this is puzzling.
These countries have rigid labour laws and so, one
would have thought, outsourcing would be
particularly difficult. We suspect that this is the
precise reason that it has occurred so much faster here
than in Northern Europe. An Italian survey found that
the major reason given by public sector hospitals for
outsourcing was general institutional pressure
relating to labour force management.
Non-medical outsourcing is much less frequent in the

Netherlands, France and Germany. In the case of
France, this seems to reflect unease with the notion of
outsourcing a public service to the private sector. But
theB2B survey found that managers in the UK,
Germany and Italy sometimes had similar concerns.
The situation in Germany and the Netherlands is not

helped by sales tax traps which means that hospitals
(which are sales tax exempt) compete on an uneven
playing field. This immediately puts external players,
who have to charge VAT at 20+%, at a serious
disadvantage. In Germany, hospitals outsource
internally to captive limited companies that they own
and which then carry out work for other hospitals as
well. Prof. Guenter Neubauer at IFG in Munich says
that, assuming a profit margin for the hospitals of

10%, the private sector needs to be able to undercut
them by 30% before they can even begin to compete.
Nataliane Thoulon, vice president of strategy and

development in global healthcare at Sodexo, put
penetration rates for soft services in the UK at around
30%, compared to 5-10% in France. It is interesting to
note that Sodexo estimates that private-sector
operators in France (who carry out over half all
surgical operations) outsource over 50% of their soft
services. This suggests that there is a strong
commercial rationale for the French public sector
(which is not renowned for its efficiency) to outsource
a great deal more.
In general, theres be a long way to go, particularly in

North and West Europe. Iddon at Medirest points out
that penetration rates for the outsourcing of catering
in private non-healthcare sectors often reaches 90%.
In the UK and elsewhere, there is still some
unwillingness from the public sector to outsource
such services.
This would suggest that the market will change

substantially over the next decade. But Iddon is
realistic. Penetration rates in the UK have risen from
30% to around 35% in the last decade, possibly
longer. It has been very slow and we see no immediate
sign of that changing.
Indeed, he points out that Scotland has stated that
outsourcing by public-sector healthcare organisations
will cease at the end of current contracts. Iddon feels
that the outsourcing proposition is still very
compelling however, especially as clients are looking
to focus on their core activities and become more
efficient.
Other sectors beyond soft outsourcing are growing
much faster. British BPO outsourcer Capita, for
instance, reckons that BPO outsourcing by the NHS in
the UK will grow by 20% per annum over the next
few years. Serco, which handles soft outsourcing and
BPO in the UK, puts that figure at around 12%. B2Bs
survey suggests that BPO - and particularly IT - will
grow fast elsewhere too (see separate article).
Multi-vendor
managed
diagnostic
imaging
outsourcing is soaring by 30-35% a year, according to
Rob Piconi of Mesa Medical.
Outsourcing can be seen as staid and stodgy, but new

markets are continuing to emerge. Take the way Serco
and Virgin are pioneering new contracts in the UK,
where they manage everything apart from clinical
September 2012
HEALTHCARE EUROPA
25
HCE feature
services delivery. Food, catering, facilities

management and logistics are all run by a single
partner.
Or consider how Accenture is building new services

aimed at the small percentage of chronically-ill
patients who cost a fortune, by combining their data
analytic skills with medical services. Other services it
offers in the USA include ways to help insurers reduce
administration and enrollment costs and working with
insurers to help them improve outreach services.
Soft Outsourcing - The Birds-Eye View

Steady and surprisingly skilled would be a good
description of the soft outsourcing industry today.
Iddon makes the point well. Two or three unskilled

but bright people might succeed in setting up and
running a restaurant. They could not run patient
feeding for a hospital.
Churn rates in most of these sectors are very low.

Around 20% of the contracts (typically of five years
length) change hands. This figure is inflated slightly
by closures due to hospital rationalisation. If an
outsourcer has built a good and trusted relationship
with a hospital, Iddon says it is most unlikely to lose
a contract.
Ascertaining real penetration rates is difficult, but
there have been a number of academic studies in

different European countries over the last decade.
These typically ask a sample of public-sector
hospitals what services they have outsourced and give
some measure of growth.
Weve aggregated the results of some of these studies

(see table below). This, of course, is not
overwhelmingly accurate. Some categories may not
be directly comparable and the studies were done at
different times. In some cases, we have had to roughly
interpret the results to bring them into line with the
other categories. Still, a useful picture of the market
emerges.
Almost everywhere, there has been more resistance to

the outsourcing of medical functions - such as
imaging and lab diagnostics - than to non-medical
outsourcing. This is probably a reflection of the power
wielded by medical professionals.
The outsourcing of soft services is not all about

saving money, but about focusing on the delivery of
medical services. Managers need to realise that
outsourcing will actually give them more control, not
less, and that delegating services like cleaning and
catering to experts who have developed detailed
methodologies is likely to lead to better quality. It is a
long and hard journey. However, academic studies
typically show that a large proportion of hospital
management is happy with the outcomes from
outsourcing.
Global hospital outsourcing, HCE estimates

SERVICE
CLEANING
LINEN
FOOD
TRANSPORT
IT
TURKEY
2005
32
USA
2003
57
FRANCE
2003
27
PORTUGAL
70
63
24
11
80
16
18
65
11
14
20
SPAIN
2003
(MUNICIPLE)
17
47
ITALY
2008
GERMANY
2007
98
67
94
37
95
84
67
15
NOTES:
Germany = Brois Augurzky, Markus Scheuer 2007. Stats include outsoucing to hospital-owned enterprises.
Spain = Puig-Janoy, Jaume and Pol Perez Sust 2003
Italy = Manuela Macineti 2008
Turkey = Vahit Yigit, Dilaver Tengilimoglu, Adna Kisa and Mustafa Zeedan Younis 2007
France & USA = Olivier Aptel, Michel Pomberg and Hamid Pourjalali 2003
26
HEALTHCARE EUROPA
September 2012
HCE feature
Sector Strategies
The main drive we see from soft outsourcing
providers right now is to move into new areas. The
end goal is to become a fully-capable strategic
partner for public-sector providers.
All of the big groups - Compass, Aramark, Dussmann,
ISS and Sodexo - are following a similar policy of
trying to become strategic partners to public
healthcare. Thoulon at Sodexo says: The problem is
that we are perceived as the people who provide
commodity services such as food or cleaning.
Essentially, outsourcers are looking to move up the

food chain. Serco, for instance, is managing
community hospital and outreach services for the
English county of Suffolk, as well as running a
diagnostic lab joint venture. Sodexo has a joint
venture with Labco to sell diagnostic services.
Dussmann has moved into sterilisation, buying 70%

of Italian player Sterilitalia. It plans to introduce these
services into Austria, Germany and Italy. Medirest has
also moved into sterilisation.
Meanwhile, Aramark has moved into third party

maintenance and the provision of second-hand
imaging equipment with the 2010 acquisition of
MESA Medical in the USA and Europe.
Whether offering a wider portfolio, which includes

more skilled service, really leads to a deeper, stronger
and more lucrative partnership with public providers
is questionable. As Thoulon admits ruefully:
Everyone is trying to become strategic partners by
offering a wider range of services, so even this
approach is becoming commoditised!
Iddon also questions where the approach works. It is

easy to talk about partnerships, but most customers
primarily see us as contractors at the moment; there is
a way to go yet.
Offering a wider array of services may give you more

leverage. The big buzzword now is integrated
facilities management, in which one operator takes
over all site-related support services.
Take the bankrupt South London hospital trust. The

politically controversial option would be to hand them
over to an operator like Circle (functional
privatisation) or, even more controversially, to sell
them to a Ramsay or a Helios, giving a private
operator complete control. A more politically
acceptable half-way house would be to hand aspects
of the management to a Serco or a Compass, in

partnership with a more successful neighbouring NHS
hospital trust.
Whether such an approach would lead to long-term

savings is questionable, as existing labour relations
and management would remain untouched.
The Future
Soft outsourcing is going to grow fast, particularly as
public budgets are cut - but roadblocks remain. The
sales tax trap might just be the main impediment to
soft outsourcing across Europe. Neubauer has tried
hard to get policymakers to remove it in Germany. He
reckons that the statutory insurers alone could save
over 2 billion per year if they were able to use
private outsourcing companies. Entrenched interests
among hospitals, however, makes change extremely
difficult.
Market research shows demand

strengthening
Medirest recently commissioned market research
company B2B International to conduct interviews
with 35 32 CEOs and CFOs in public hospitals in the
UK, France, Germany and Italy. A third of those
interviewed were outsourcing converts, a third
skeptics and a third were individuals who had yet to
be convinced either way.
Carol-Ann Morgan at B2B says that responses

covered the spectrum. We had people who saw
outsourcing as the way forwards. Others had deep
reservations about the idea of public sector services
being outsourced to private players. She says that
this reservation was particularly strong in France and
Italy, but that even in the UK B2B talked to hospital
trusts who were not particularly keen.
The research found that many executives were much
more willing to outsource IT, which they perceived as
an area where they were not executing well.
The main reason to outsource was not price, but rather

a desire to improve efficiency and add value by
allowing board members to concentrate on healthcare
delivery. Respondents were largely concerned about
loss of control, poor quality and possibly higher costs.
HCE
September 2012
HEALTHCARE EUROPA
27
HCE interview
Valerie Michie, MD, Serco

How much and how far will the different NHSs in
the UK go in outsourcing services to the private
sector? We talk to Valerie Michie, managing
director of health services at Serco, which is
running a pioneering community care project in
Suffolk. Analysts reckon Serco has more than
doubled its healthcare outsourcing since 2011,
when it claimed a 5% share of a 2 billion market
in health support services to the NHS in the UK.
That market that is expected to double by 2015.
HCE: Tell us a little bit about Sercos presence in the

health sector?
VM: Well, we really made our entrance into this

space when we began working with Leicester Trust
back in 1997, providing facility management
services: catering, cleaning, portering, reception,
security, maintenance and engineering.
From there weve moved out to work with more

hospitals were currently working at six acute sites
across the country and to focus on expanding our
integrated service contracts such as with the
recently-opened Forth Valley, where we were
involved in designing the hospital.
Our core services are estates and facilities

management, administration, human resources, ICT,
procurement, finance, scheduling and billing. But
our range of services is always expanding were
doing pathology services in partnership with Guys
and St. Thomas Trust and Kings College Hospital,
and weve recently won the Suffolk contract to run
the regions community services.
HCE: What do you see as the potential?
VM: We estimate that health systems in the UK are

spending internally around 13.5 billion on basic
support services which could be outsourced. On top
28
HEALTHCARE EUROPA
September 2012
of that, deals like Circles functional outsourcing of

the entire Hinchingbrooke hospital shows there is
far, far more potential.
HCE: So youre trying to expand the scope of
service provision?
VM: Yes. Were always looking at what were doing

with our current partners and seeing what else we
can provide.
Of course, were also continuing to secure new deals

we just won an integrated facilities management
[IFM] contract with East Kent and a 240 million
business processes outsourcing [BPO] contract with
Anglia Support Partnership, an organisation
delivering BPO services to a number of NHS
organisations, mainly in the East of England.
We also just won our first community services
contract in Suffolk, which is a pretty big deal. Its a
natural progression from previous work weve done
managing community hospitals in Norwich and
Braintree, but its for a large community covering
600,000 patients and its a sign of new market
emerging in health.
The deal involves taking over a series of community

hospitals, as well as services for community nursing,
specialist nursing, speech and language therapy and
specialist childrens services. Its worth 140 million
over three years, and were working with partner
organisations who are delivering the clinical
services: South Essex Partnership University NHS
Trust (SEPT) and Community Dental Services
(CDS).
Were performing all of the management services,
and our partners are supporting in the deliver of the
clinical services.
HCE: What drew Serco to the health sector?
HCE interview
VM: Its a front-line service area, and we pride

ourselves on our employee engagement many of
our employees transfer to us from the NHS.
But its also quite exciting because a lot is becoming

possible. The political climate may be supportive to
the further involvement of the independent sector,
and if Hinchingbrooke is a leading indicator, then all
of a sudden the private sector is going to have more
opportunities to deliver service..
Were now moving into higher-level clinical support

services helping to design care pathways and
patient flow, managing patient hand-offs between
clinicians and services, and so on which the NHS
is becoming increasingly willing to outsource.
HCE: Speaking of the political environment, what is

the NHS culture towards outsourcing like at the
moment?
VM: Obviously, these things can be changeable.

Part of the challenge is that, even post-reform, the
health system is still going to be very localised: you
have to build a coalition of a lot of stakeholders, all
of whom are going to be responding to different
political pressures. But theres a lot of hope: not only
Hinchingbrooke, but things like the 2010 NHS
QUIPP, which identified 600 million of savings to
be made through outsourcing.
Theres also an increasing realisation in the NHS

that we can make the investments in technology and
modern design for which they cant access
investment support. Look at what were doing in
Forth Valley, for instance: we were involved in the
design of the hospital, and we are implementing a lot
of high-tech solutions. The hospital features a tunnel
network underneath the site, where our robots can
deliver services.
HCE: Wow.
VM: The service delivery is designed to be patientcentric, which is so rare in the NHS. We see a lot of
potential here. Thats one of our big strengths: we do
things that patients really love, and we do it while
delivering services at cost savings of 20-30% for the

NHS.
HCE: So whats the vision for future services,
ultimately? What would Serco like to end up doing?
VM: What were looking at right now is all of these

acute trusts that are looking to become foundation
trusts over the next few years. Theyll be looking for
partnerships going forward.
Hinchingbrooke has really changed the

conversation. Serco itself wont be doing any Circlestyle, whole hospital contracts wed want to
work with clinical partners, in much the same way
we are for the Suffolk community services but we
are very excited about the possibilities at the
moment.
This all tracks with what the NHS is doing. It isnt

just industry hype. Were seeing the formation of
larger procurement regions, purchasing services for
all kinds of trusts, rather than everyone doing
everything separately.
The contract that we won with Anglia was a

framework agreement, so from now on other trusts
can just pick up that document and really speed up
the tender process using it and we were involved in
crafting it. This is all very significant, and its going
to help grow this market a lot.
HCE: What about whats happening outside of
England? Is Serco looking at continental Europe?
VM: Not really. The UK is our main market, but

were also active in the Asia-Pacific region and the
Middle East. We just won a ground-breaking
contract in Australia, exporting our UK service
model to deliver a digitised service solution to the
Fiona Stanley Hospital in Perth.
September 2012
HEALTHCARE EUROPA
29
HCE feature
Psychiatry: Set for Growth
Across Europe, a nascent private sector is expanding into psychiatric care provision for the
continents public payors. But with all major markets still stuck in the economic doldrums, are
they fighting for a shrinking slice of the pie? HCE takes a look at select markets to see how far
private operators are making inroads into mental healthcare.
Its a small sector, says Cecilia Malmstrm of

Swedish healthcare services provider association
Vardfretagarna.
Out of the three sectors - private, public and not-forprofit - the private sector is the smallest in this area,
adds Carlos Rus of Spanish private hospital
association FNCP.
Sweden and Spain are on one side of a continuum in

Europe, ranging from limited private sector
involvement in psychiatric care through to heavy
involvement - as in the Netherlands, where all standalone psychiatric providers are private.
Public payors have been opening up to the idea of

private providers picking up some of the slack in
mental health systems across Europe. In the UK,
Chris Thompson, Chief Medical Officer of provider
The Priory, says that the NHS is still providing most
of the countrys psychiatric care. The NHS mostly
just turns to the private sector for severe, chronic
cases, as well as secure services - caring for people
who are a danger to themselves or others, those who
have been put in care by the legal system.
The story is similar in Sweden for the only truly large
provider, INOM. We have become very specialised
in this severe cases, as well as in secure, explains
Deputy Director Rasmus Nerman. You have to show
the health system that you can provide a lot of added
value.
This is the typical profile of psychiatric providers

working for the public payor: specialised services for
conditions like schizophrenia, manic depression,
bipolar disorder, eating disorders and other various
severe types of mental illness, along with an offering
of secure facilities. These secure services, rather than
being referred through the normal health system, are
obviously managed in partnership with national
ministries of justice. In each country, secure is
separated into three levels: low, medium and high.
Thus far, for both political and practical reasons - the
state reserves the right to enforcement of the strictest
30
HEALTHCARE EUROPA
September 2012
law and order - high-security psychiatric institutions

have remained the preserve of the public sector.
What we also see is that psychiatric providers have

made moves towards offering a closed loop of care,
in which providers offer care homes focusing on
geropsychiatry, step-down to assisted living
community housing and ambulatory and inpatient
clinics. This is already a reality in the UK and in
Germany, and is developing in Sweden and the
Netherlands. What remains to be seen is whether the
loop will close even tighter: if primary care and
homecare will be brought into the fold in a big way.
Payors: Scepticism and Waning Patience
Psychiatric care has stood outside of the DRG

revolution across Europe. In the UK, psychiatric care
is paid for through block contracts - tenders for
providing services that pay in lump sums, rather than
through a formula determined by activity levels and
patient profiles, as with DRGs. In Germany, payment
is determined by length of stay, rather than condition.
The same is true in the Netherlands and in France.
Payors are growing more sceptical of this

arrangement, however, reflecting high profits among
providers. In the UK, EBITDA margins range from
17-30%; in France, Medica saw 28% EBITDA in the
first half of 2012.
Talk among UK NHS circles is that payment-byperformance is an inevitability, rather than a

possibility. Payors are angry about what they see as
profiteering, with EBITDA margins having been as
high as 35% a few years back.
Trying to pre-empt the health system, provider

Cambian is developing its own performance-based
reimbursement system to offer to the NHS. Cambian
is currently the only UK provider working on this,
says Nancy Hollendoner of Smith Square Partners.
Theyre offering, essentially, tariff trims: they are
targeting certain time-frames for their inpatients to
HCE feature
step down out of care and into the community. If they
fail to hit these targets, they will accept a lower
reimbursement rate. The payment reform has yet to
be rolled out, so its not clear whether the NHS will
accept it, or whether the idea is even practical for a
single company to pursue.
In Germany, reform has been legislated - minus the

messy details of what it will actually look like. The
Ministry of Health is developing a new system to
move past the current per diem reimbursement
mechanism internally, says a spokesman for Ameos,
the countrys largest psychiatric care provider. They
are unfortunately not in contact with providers during
this process. The plan is to move to a system based
on patient conditions for determining reimbursement
rates - but this can be difficult in a field in which exact
patient diagnoses might only be made after months of
observation.
Sweden is slightly ahead of the curve in this respect,

rolling psychiatric care into the free choice regime.
We are paid per patient, explains Nerman of INOM.
Every psychiatric provider must offer patient
reporting data and quality metrics. This is used by the
health system to manage reimbursement rates - but, of
course, psychiatric care is very complicated. Often,
we must negotiate payments on a patient-by-patient
basis, because every case is so different.
Generally, the trend is towards more data monitoring

and a steady-as-she-goes approach to payment
reform. The process is likely to be long and fraught in
the UK and Germany, but the payors there are aware
that they dont want to rock the boat too much.
Public Budgets: The Economy Applies

Pressure
After this years massive 10% budget cut - equivalent

to 600 million - in the Dutch psychiatric sector, it
was clear that mental health isnt exempt from the
austerity knife. We simply have to get psychiatric
spending under control, explains Bas Leerink of
insurer Menzis. Right now, there are no plans for
further cuts, unless providers fail to implement patient
monitoring and quality reporting procedures. In that
case, it is possible that the insurers will institute a
direct cut to reimbursements, possibly by as much as
5%. Looking forward, we are seeking to set a cap on
the psychiatric budgets growth rate.
In the UK, certain therapies - such as inpatient

treatment for eating disorders - are being cut back
drastically. In Sweden, the government is looking to
contain further psychiatric budget rises, while in
Germany broad-based cost reduction is the goal. In

Spain, where the economic crisis is particularly acute,
cost-savings are the rule, and further expansion of the
kind of secondary services that psychiatric providers
are supplying there is extremely unlikely, according to
the FNCP.
This doesnt seem to have been much to the benefit of
private providers so far, though there are signs
everywhere that their position is improving. Still,
given the particular position that mental health
occupies - typically treated as the poor man in the
health system compared to somatic care - general
cutbacks in the public sector are not being met with
like-for-like increases in privately-provided capacity.
Private Pay: Can It Pick Up the Slack?

Private pay cannot pick up the slack.
In the UK, customers paying out of pocket provide at

most 20% of the biggest providers revenue, while
some - such as the Huntercombe Group, owned by
Four Seasons Healthcare - do not deal with patients
paying out of pocket at all. In Sweden, this is down
around 5-10%. In Germany, the only major provider
to be targeting private pay is Schoen Kliniken, which
treats less severe psychosomatic cases - anxiety
disorders and the such - as well as more strictly
medical neurological cases - following brain trauma,
etc.
The game for the big providers is, for the most part,
simple: win contracts with the public payor. This is
where the money is, and is where the major players
are all focusing their attention.
FRANCE - Profitable and Growing

Consultant Stephane Pichon says that there are 240
private psychiatric institutions in France. Nursing
home group Orpea is the countrys largest player in
psychiatry. Director Jean-Claude Marian says that
there are 12,000 private for-profit beds in France,
equal to 23% of the countrys total capacity of 53,000
beds.
The private sector is already fairly well consolidated.

Orpea has 3,000 beds, which equates to 25% of the
private market. It is followed by Generale de Sante,
the largest hospital chain, which has around 25
institutes. Rival nursing home groups Medica and
September 2012
HEALTHCARE EUROPA
31
HCE feature
Korian both hold under 1,000 beds.
Of the 240 institutions in the private sector, around

150 are independents or in smaller chains. As is
happening elsewhere in Europe, they are gradually
being swallowed up by the larger players.
It is not hard to see why. Medica revealed, for

instance, that EBITDAR in post-acute and psychiatry
came to 28% in the first half of 2012, making it the
companys most profitable sector - group EBITDAR
came in at 26.2%.
This is despite the fact that, as with somatic acute

care, the private sector is reimbursed on a much lower
tariff than the public sector. In fact, the discrepancy is
even greater than the 29% discount in acute. Orpea,
for instance, is paid 120-150 per diem for psychiatric
patients, while public operators receive 300-400 for
the same treatment. Private operators generate
additional revenue by charging patients a room rate.
The silver lining to low prices, however, is that the

state has an interest in sustaining the private sector and expanding it.
Demand for private-sector beds is extremely high.

Jean-Claude Marian recounts the anecdote of a friend
who tried to reserve one of the 1,000 beds that Orpea
operates in Paris. I rang the manager in charge of the
division. He told me that there were absolutely no
spare beds at all. None. Anywhere.
GERMANY - The Accidental Sector

Ameos didnt really even expect to win the tender for
Schleswig-Holstein, says Michael Almeling, who
has a long history in the psychiatric sector and now
heads small regional psychiatric provider Oberberg
Kliniken. Back in 2000, no one wanted to be in
psychiatry. Then Schleswig-Holstein came up as the
first big public psychiatric hospital to go out to tender.
It was huge: between 1,200 and 1,300 beds across two
hospital sites, mainly dealing with chronic
psychological morbidities. It was almost a surprise.
Ameos didnt come into this expecting to become a
leading psychiatric provider.
Things snowballed from there for Ameos: the win led

to the company taking over the secure psychiatric
hospital that was linked to Schleswig-Holstein.
According to Almeling, theres not really much
money to be made in secure services - or forensic
32
HEALTHCARE EUROPA
September 2012
services, as they are known on the continent - but the

acquisition gave Ameos a certain prestige that
bolstered its position with the German health
authorities.
It is now the largest private-sector psychiatric care

provider in Germany. Although the spectacle of a
private provider running a secure facility caused a big
fuss in the country when it first happened, with some
claiming that it might not even be legal, Ameos
arrangement is relatively uncontroversial now.
The private sector now accounts for about a third of

the care delivered in psychiatric clinics in Germany.
The big players are familiar names: Ameos,
obviously, and also Rhoen, Schoen and Helios.
Psychiatry is a secondary activity for most players,
taking up relatively little of their total bed capacity.
Even for Ameos, psychiatry is not a sole focus.
Barriers to entry for new players are extremely high,

since in order to run specialised psychiatric services,
a provider needs a licence.
The thing is, to get this licence, a provider must

purchase a public psychiatric clinic. According to
Almeling, there are no further big sell-offs planned, so
it is unclear how any new providers would make
inroads into the market.
In 2011, Ameos revenues in its 22 psychiatric clinics

came to 206 million, while geropsychiatric longterm care through its 10 homes generated 36 million.
As a group, 2011 EBITDA was 50 million on 396
million of sales, with an EBIT margin just shy of
10%.
Other competitors unfortunately do not provide

sectoral breakdowns, but Rhoen has some enormous
psychiatric clinics, along with smaller facilities. The
huge Fachkrankenhaus fr Psychiatrie und
Neurologie Hildburghausen alone contributes a net
6.565 million to Rhoens bottom line. Helios runs six
psychiatric clinics.
The sector is currently awaiting payment reform,

which will move reimbursements closer to a DRGstyle payment schedule.
The government has not been consulting with private

providers on the matter, and it is widely expected that
a long period of muddling through will come right
after implementation. The final result will look very
different from what the Ministry of Health first
announces.
HCE feature
NETHERLANDS - Cuts and Reform
In the Netherlands, the 5.5 billion mental health
services budget defines the extent of the mental health
market, along with the up to 200 per-patient co-pays
that the state instituted starting in 2012. All standalone psychiatric clinics in the country are in the
independent sector. These are for-profit, but cannot be
private equity-owned. A position which we are told is
unlikely to change fast. The GGZ, the association
representing those providers, says that theyve been
hit hard by the countrys recent budget cuts.
The government sets a budget cap for psychiatric
care, explains Paul van Rooij, director of the GGZ.
If that cap falls short of what is needed, then insurers
need to fund psychiatric care out of increased surplus
premiums. Unsurprisingly, they are not eager to do
that. Now it looks like the sector might have lost as
many as 9,000 jobs by the end of this year.
If demand for any one psychiatric area in the country
suddenly shoots up in a sustained way that could not
reasonably be expected, then the government steps in
to deal with the situation, appropriating funds and
then instituting caps to pull spending back down.
This era of austerity follows ten years in which the

CAGR for the sector was over 9%. The 2012 budget
cut represents the first serious blow to a sector that has
seen good times for a long while now.
Further budget cuts may come down the line - as

much as a 5% cut to tariffs - if providers do not
comply with demands from insurers to improve data
reporting. The insurers have banded together and
demanded that the psychiatric sector improve
accountability, and as such have developed a new
performance monitoring system based on cost data,
patient self-reporting and treatment progress
monitoring. The target was to have 20% of patients
data fed into this system by the end of 2011; at time of
writing, providers still have yet to achieve this. The
20% goal must be reached by the end of this year,
according to insurers, to avoid further cuts.
The Dutch sector is largely based around hospitals.

These institutions provide over 90% of psychiatric
treatment in the country, both in their inpatient beds
and their outpatient clinics. Policy in the country has
pushed towards the creation of closed-loop
organisations: that is, a patient can come in for
evaluation, inpatient monitoring, step-down to
sheltered housing in the community and then proceed
to regular outpatient treatments while being treated by
the same provider at all stages. This all comes under

the cure - or healthcare - budget, while social care,
such as community-based treatment, comes under the
care budget. The current plan, however, is to merge
all areas of psychiatric into the cure budget. This will
mean that BuurtzorgT - the spin-off of enormously
successful homecare provider Buurtzorg, which will
soon be providing psychiatric homecare in
partnership with psychiatric provider MoleMann will be competing for the same pot of money as the
current psychiatric establishment.
That establishment is formed of more than 80

providers around the country. Parnassia Group comprising ten brand names in the sector - alone
accounts for 10% of the current psychiatric market,
with 564.3 million in revenue in 2011 and over 8,000
employees.
It used to be that a single provider exclusively covered

a single region of the country - now that the market
has been liberalised, a new wave of independents
have come rushing in, of which Parnassia Group has
been the most successful. The old regional
organisations remain - GGZ Leiden, GGZ Eindhoven,
etc. - and are indeed very large, with highly-integrated
service offerings running the gamut from inpatient to
homecare. Revenue among these groups ranges from
100 to 150 million. However, with the homecare
market developing towards the point of new
independents entering psychiatric care in a big way such as with BuurtzorgT - these old regional groups
will come under further pressure.
SWEDEN - The Start of Something Special

In Sweden, the private sector has been around in some
form since the 1950s, though it is only in the previous
decade that major providers began to emerge.
According to Vardfretagarna, the association
representing private-sector healthcare services
providers, the free choice segment of the market is
very small. Swedens free choice regime, in which
municipalities allow patients to choose between both
public and private sector providers for select services,
has been a boon to private providers in other areas.
Currently, however, the largest provider in this
segment outside of INOM is PRIMA, which operates
primarily in Stockholm, and has only 368 employees.
INOM estimates that psychiatric spending equaled
around SEK 20 billion (2.36 billion), the private
September 2012
HEALTHCARE EUROPA
33
HCE feature
sector share of which was SEK 7 billion (825.6
million). The full responsibility segment - i.e.,
clinics owned and operated by a private provider,
rather than public clinics run by private management
- is SEK 5 billion (589.7 million).
INOM has a 15% share of the full responsibility
segment (SEK 750 million, or 88.4 million), and is
the largest private-sector psychiatric care provider in
Sweden. It is involved in the free choice segment
(paid for by municipalities), specialist referrals from
hospitals (paid for by municipalities and county
councils) and secure services (paid for by the prisons
service).
There are five or so big providers in Sweden - INOM,
PRIMA, Carema, Capio and Praktikertjnst. Below
these providers are hundreds of tiny companies, the
largest of which make a turnover of around SEK 20
million (2.36 million), though the market is
apparently seeing rapid consolidation.
Nerman of INOM explains: The smallest providers

are having trouble keeping up with the increasing
complexity of the work. Thats not to say that theyre
bad - in fact, there are some incredibly well-respected
small operators - its just that with the burden of
increased data reporting to the payor, along with the
increasing complexity of morbidities and - more and
more - comorbidities in the population, they cant
keep up with providers like us who have the
advantage of scale.
As in the Netherlands, providers are trending towards
a closed loop, of providing a full patient pathway
from diagnosis to treatment to step-down and
community care. It will be interesting to see how the
interface between psychiatric care and homecare
providers develops.
Perhaps the most hopeful sign in Sweden for the

private sector is that the psychiatric budget is
increasing while cultural attitudes about mental
healthcare are shifting rapidly.
It used to be, says Nerman, that if you were old

and found yourself depressed, or if you were young
and had trouble understanding and focusing on the
world, it was just considered tough luck, youre just
that way. Now things have changed: people are more
willing to listen to you, to help you out. Its a better
atmosphere in general for those with mental health
needs.
34
HEALTHCARE EUROPA
September 2012
SPAIN - Private Equity Looks on in Interest

Private providers are in a curious position in Spain.
A plurality of the countrys psychiatric capacity is

provided by the not-for-profit sector, through
organisations affiliated with the catholic church.
According to the register of hospitals, there are
currently over 3,100 places in public institutions, over
6,500 in not-for-profit institutions and just over 3,000
in for-profit institutions. That leaves with the private
sector with an overall 24% share of the market by
capacity.
According to those weve spoken to, even this might

overstate the extent of the private sectors reach right
now. Outside of low-margin ambulatory work, its
really the case that the private sector is used mostly
for highly-specialised, capital-intensive psychiatric
hospitals right now, the FNCP told us.
Joan Barrubs of Antares Consulting confirms: The
ambulatory sector is very heavily based in the
independent sector. It is still mostly charities and notfor-profits, but the private sector is involved as well.
The inpatient sector is very, very much public sector private hospitals are mostly highly-specialised.
These private hospitals often focus on the cross-over
point between neurosurgery, rehabilitation and
psychiatric care.
According to Barrubs, private equity has been

keeping a keen eye on the sector, looking to make a
move. It has been held back by a lack of development
in the market and the lack of an opening consolidation doesnt necessarily make sense across
the sector right now, fragmented as the opportunities
are for private operators.
We have just begun a consultancy partnership with a
private operator, announces Ignacio Riesgo of PwC.
Were working now with Istitut Guttmann, one of the
most prestigious neurorehabilitative institutions in the
country. But when you speak of chains of providers
- no, these do not exist.
UNITED KINGDOM - The Rise of the Big Players

The UK is seeing the development of sizeable
operators in the psychiatric care sector. The Priory
Group, Partnerships in Care, The Huntercombe Group
HCE feature
(a subsidiary of Four Seasons Health Care, the
countrys largest care home operator) and Cygnet
Healthcare are the top operators here.
The 2011 private share of the countrys roughly 4

billion addressable market was around 30%, or 1.2
billion. Secure services alone amount to 1 billion of
NHS spending.
When geropsychiatric care homes are included, the

potential market balloons to 14.5 billion - however,
this crosses over into social care, rather than NHS,
spending. It also includes a lot of care home activity
that would not be considered secondary, psychiatric
care per se.
The Priory Group, particularly after the 2011

acquisition of learning disability-focused Craegmoor,
is the largest psychiatric care provider in the UK, with
2011 revenue of 455.4 million and EBITDA of
134.9 million (29.6%) - though its exact market
share is difficult to determine, given its presence
across sub-sectors funded by both NHS and local
authority spending.
The sub-sectors breaks down like this.
In the secure space - run by the Ministry of Justice Priory runs four big medium- and low-secure
hospitals, which makes it the third-largest in that
sector, behind Partnerships in Care and non-profit St.
Andrews Healthcare. In the inpatient non-secure
space, paid for by the NHS, Priory is the largest in the
market.
Priory also dominates other sectors, providing 50% of
Psychiatry - UK
ORGANISATION
THE PRIORY GROUP
REVENUE
M
EBITDA
M
EBITDA AS %
OF REVENUE
455
134.9
29.6
PARTNERSHIPS IN CARE
172.8
52.1
30.2
HUNTERCOMBE GROUP
83.6
15
17.9
CYGNET HEALTHCARE
78.2
20.8
26.6
ST ANDREWS HEALTHCARE 159.9
N/A
N/A
the UKs inpatient adolescent psychiatric care beds

and 30% of inpatient eating disorder care beds. It is
also the market leader in the special educational needs
sector, though obviously this falls outside of strictlydefined healthcare services.
This represents a fall in revenue and margins across
the board from 2010, after several years of growth.
Priory had seen 465.3 million in revenue in 2010 (2%) and Partnerships in Care 186.6 million (-7%).
Increased capacity in the private sector is reportedly
being offset by reduced occupancy rates.
Part of this is because of cutbacks in the secure sector.

Hollendoner of Smith Square Partners explains:
Now that reform has passed, especially, existing
trusts are looking to gather as many assets as possible
so that, if a monopoly investigation decides to break
them up, they will still be large enough to be
financially viable. Mental Health Trusts are actually
taking back a lot of the medium-secure work that
went out to private providers now.
This will be particularly damaging to Partnerships in
Care, which has - we have been told - overbuilt
capacity in the medium-secure segment.
Not only that, but the fact that psychiatric care is

purchased through block contracts means that there is
little accountability for providers, who are earning up
to 30% EBITDA.
This has poisoned the well somewhat between the

payor and these organisations, and both sides are now
edging around the issue of reform.
Hollendoner adds that there is a caveat: The public

sector is somewhat concerned that a new payment
mechanism would open it up to cost challenges from
providers - legal challenges claiming systemic
underpayment. Both sides will be very cautious going
forward.
Right now, private sector penetration ranges from 3050% across specialised sub-sectors (acute, secure,
etc.), while community services (emergency
response, social worker support) are provided almost
entirely by the NHS and not-for profit organisations.
HCE
NOTES:
St Andrews is a not-for-profit provider.
Huntercombe Group is owned by Four Seasons Health Care. Figure given is
EBITDARM.
Cygnet Healthcare is part-owned by Barchester Healthcare.
September 2012
HEALTHCARE EUROPA
35
HCE final thought
A Facebook for patients: the Holy Grail
We talk to Dr Mohammad AlUbaydli, the founder of Patients

Know Best, a cloud-based
system that allows patients to
aggregate and share their
medical data with medics and
others.
The system appears to have

achieved lift-off, with tens of
thousands of users across the UK
and the USA. Al-Ubaydli claims
that over 90% of the patients offer
the service take it up. Meanwhile,
Patients Know Best is preparing
for 2013, when it will roll out its
service to a county of 1.6m people
in the UK.
To top it all off, Al-Ubaydli is

now looking for capital to make
the leap abroad. So, how has he
succeeded
where
Google,
Microsoft and the NHS have
failed? And how will this enable
the development of new business
models?
Patients Know Best developed
out of the idea that medical record
systems only really work when
the patient is given control.
Al-Ubaydli himself has a rare,

chronic condition and realised
that, for patients like him, it really
is the case that the patient does
know best, especially when
several different groups of
medical staff are involved in their
care.
He says: The more specialised

they are, the less the doctors
know.
The system developed by Patients

Know Best enables everyone doctors, patient, carers - to view
the patients records remotely. It
also allows doctors and patients to
communicate remotely and
develop workflows and treatment
36
HEALTHCARE EUROPA
regimes online.
What makes the system unique is

that the company is the only
provider with full access to N3,
the NHSs secure national
network. This means that it can
connect data collected at NHS
hospitals and primary care clinics.
The system is compliant with

both UK and US data protection
laws.
As such, the level of encryption

means that Al-Ubaydli cant even
tell us how many patients are
registered. Patients get to decide
who can access their data.
The company was founded in

2008 and grew up in a few
specialised
UK
hospitals,
including Great Ormond Street.
Al-Ubaydli is now signing
contracts with four drugs
companies - including Novartis as well as with a chain of ten US
hospitals.
In Europe, a charity is about to

launch a 5 million research
project across five countries into
Alkaptonuria using Patients
Know Best as a platform. A
county in the UK is about to sign
a deal making Patients Know
Bests system available to its
population of 1.6 million. AlUbaydli says: It is aimed at the
20% of that population who are
chronically ill, but the contract
allows everyone to use it.
So how has he succeeded where

the NHS, Microsoft and Google
failed?
Al-Ubaydli says the NHS doesnt

know how to write software.
Microsoft and Google mistakenly
relied on a consumer-upwards
approach. The idea was that the
enthusiastic patient would go to
September 2012
the doctor and get him on board.

The reality was that the doctor
would simply refuse to upload the
data.
He also says the giants did not

appreciate that it is not data but
workflow and action points that
are key.
Where workflow was offered, it

was far too expensive: Microsoft
wanted hospitals to pay $1
million a pop. And potential
partners simply did not trust
Google or Microsoft with data.
So why have telehealth and

chronic disease management
programmes failed?
According to Al-Ubaydl says that,

normally, telehealth applications
are lucky to achieve a 5% take-up
from patients that are offered
them.
In the USA, the only people who

use them are wealthy, white
women, he quips. He claims a
take-up of over 90% for his
system. It allows children, for
instance, to run the software on
behalf of their parents.
The aim is to provide an

international platform for medical
records, one that can also run on
mobile phones and provide a
market
for
hundreds
of
independent app developers.
He also says that the system

allows drug companies to offer a
payment-by-results service. The
drug company will be paid for
reductions in blood pressure. A
patient on a course of treatment
would let the drug company have
access to their data. That could, of
course, be rescinded whenever the
patient wants.

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talk to Ahmed Badreldin, of Al

The merged group of 3,300

The merged business will be 47%owned by Abraaj, 47% by the

Ahmed Badreldin at Abraaj

Egypt, with its population of 83

public hospitals, there is almost

French nursing homes

More rock-solid half year results

Orpea saw sales rise 15.2% to

Analysts say that the main reason

The new strategy is likely to see a

Sebastien Malafosse at Bryan

The concern is that these

Jean-Claude Marian, president of

The government has made it plain

While the trio will continue to