A Closer Look at Financial Performance in Healthcare

Managing Costs, Risk, and Financing to Create an Economically Sustainable Business

2016-03-23

Healthcare providers around the world face resource shortages, economic and regulatory uncertainty, and increasing volatility. Market trends such as alternative compensation models and public-private partnerships are making people rethink established business models and adapt their investment strategies.


In a Nutshell: Financial Performance in Healthcare

Efficient service delivery will be key to competitiveness for hospital operators worldwide. This calls for solutions that deliver better outcomes in patient care at a lower cost.

  • Innovative, high-performance technology can be especially useful here. Viewed in isolation, expensive, large equipment is no longer an automatic revenue generator. However, an accurate assessment of the patient’s condition significantly enhances the cost-efficiency of treatment.
  • New business models are increasingly turning hospital operators into risk and population health managers. To assess risks and efficiently manage the costs of service provision, they need reliable diagnostic data more than ever.
  • Access to capital is a major challenge for many hospital operators. Off-balance-sheet financing of equipment through models such as hiring, purchasing, or leasing shifts capital costs to the operational area (Capex to Opex), and thus enables timely investments.
  • When it comes to competing for wealthy private patients and medical tourists from other countries, financially sound companies will be able to defend and expand their competitive position in the future — even across borders.
     

Investing during Difficult Times
The lion’s share of medical costs is incurred during treatment. Rapid, accurate diagnoses, and effective therapy management and control can significantly reduce these costs. They indicate optimal treatments, reduce unnecessary readmissions, and are a valuable aid in prevention. The use of modern diagnostic technologies in imaging and the laboratory can help achieve this goal.

 

At first glance, the required investment may appear to be a financial hurdle. But investing in medical technology and in systematic and continuous training for staff can contribute to the proper management of diagnosis and treatment. This could help hospital operators reduce costly mistakes and opportunity costs, and thus substantially improve their cost structure for the long term.

Many hospital operators have either no or very limited possibilities for obtaining financing from the capital market. Flexible, off-balance-sheet and usage-based financing models such as leasing, hiring, or purchasing increasingly offer scope for converting capital expenditures (Capex) to operational expenditures (Opex). This allows operators to make planned investments promptly and with minimal strain on liquidity.

 

A Growth Market under Cost Pressure
Global healthcare expenditure amounted to approximately US$7.2 trillion in 2013, which equated to 10.6 percent of global gross domestic product (GDP). Global expenditure continues to rise — albeit with regional differences.

The growing and aging world population, the rise in chronic diseases, a growing middle class in emerging markets, and advances in diagnosis and therapy are all key drivers of rising global healthcare expenditure.

However, for hospital operators, rising healthcare expenditure does not automatically translate to an increase in revenues and profits. Rather, faced with more patients, they come under pressure to reduce the cost of treatment as health systems increasingly respond to higher overall expenses with cost-capping measures. In the U.S., for example, financial challenges are still the biggest headache for hospital managers.1

 

Today, hospital operators take on risks formerly managed by insurance companies. This reversal of the value-added mechanism, away from a “fee-for-service” model and toward a “fee-for-outcome” model, changes the significance of investments in medical technology.

In Europe, as well as in the U.S., cost pressure and commercial risks dominate. Nearly half of all European hospitals are in financial difficulties, especially in countries such as Greece and Portugal. The high risk of bankruptcy within the industry makes it harder for hospital operators to access the capital market. According to a study by consultancy firm Accenture, the average EBITDA margin of selected European hospitals amounted to approximately 5 percent in 2014.2

Given increasing patient numbers and overall costs in both Europe and the U.S., increased efficiency is becoming an existential concern for hospital operators. Meanwhile, financially sound healthcare companies can consolidate their market position through strategic investments.

 

Cost Efficiency in Asia
In the search for innovative business approaches, it is worth taking a look at the Far East. In countries like China and India, low per-capita income, a rapidly growing population, uncertain economic prospects, and a shortage of beds and doctors in rural regions in particular make efficient and affordable healthcare provision a special challenge. For example, in India, the out-of-pocket spending rate is the highest in the world, standing at about 70 percent. At the same time, India is one of the poorest nations in the world.

 

Narayana Health (NH), one of the world’s least expensive and most rapidly expanding hospital companies, was established in this environment. Since it was founded in 2001, NH has grown from a small cardiology clinic into an internationally renowned, major medical company with approximately 6,500 beds in 30 hospitals. Its success is mainly based on a systematic low-cost strategy. This includes the efficient use of modern technology and optimized surgery capacity. In 2014, the Boston Consulting Group named NH as one of the 50 most successful companies in the emerging markets.3
 

The Medical Tourism Trend
Many of NH’s patients come from abroad, which means NH is participating in the worldwide medical tourism trend. Many successful hospital operators secure lucrative patient flows from abroad thanks to excellent low-cost services, a good international reputation, and a focus on foreign target groups, especially wealthy private patients.

 

The huge market for medical tourism is fueled by a variety of motives: many who travel for care do so because treatment is much cheaper in other countries. For instance, the cost of heart surgery at NH averages less than €1,700; in the U.K., it is 7 to 10 times higher.4 By the same token, wealthy patients from places like the Middle East and Eastern Europe often seek better medical care abroad.
 


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1American College of Healthcare Executives, Annual Survey 2014.

2Accenture, European Hospital Rating Report, 2014.

3BCG Perspectives, BCG 2014 Local Dynamos, 2014.

4UK National Health Service; in: Deloitte Health Care and Life Science Predictions 2020.

The statements by Siemens’ customers described herein are based on results that were achieved in the customer's unique setting. Since there is no "typical" hospital and many variables exist (e.g., hospital size, case mix, level of IT adoption) there can be no guarantee that other customers will achieve the same results.