Michael Logan in Budapest -
With healthcare reform measures axed by March's referendum and further challenges to any reforms likely, few foreign investors will be prepared to brave such political risk for a limited return, making the Hungarian government's hopes to woo private capital into its health insurance system look increasingly slim.
Healthcare reform is one of the key planks of Hungary's long-term efforts to cut its budget deficit. Revenue-raising measures have so far helped bring the deficit down from 9.2% of GDP in 2006 to an estimated 5.7% in 2007, but the European Commission and others have called for deeper reforms that will help bring government spending well below 50% of GDP.
The healthcare system, which has sucked up money for years, is an obvious candidate for tinkering. According to the government, the problems are manifold: there are too many inefficient and outdated hospitals; GPs prescribe drugs like candy; the average Hungarian goes to the doctor too often - 15 trips per year, compared with five for the average Briton; patients spend several days in hospital after an operation when they could be treated as outpatients. The list goes on.
The government last year finally managed to run its central healthcare fund at a surplus for the first time, mainly by increasing collection rates on contributions, slashing drug subsidies and cutting beds. However, investment is needed to upgrade infrastructure and more pressure needs to be taken off the central budget. So the government has hit on the idea of introducing private capital into the insurance system.
Parliament in February approved a law that will see the central fund replaced with 22 regional bodies, into which private companies can invest up to a level of 49%. The tender is to be called this summer, funds are expected to begin operating by early 2009, and by the end of 2009, if all goes to plan, mergers will have brought the number of funds to 7-10 operating on a national level.
Health Minister Agnes Horvath believes this will solve most of the problems in one fell swoop. The capital injection can be used to upgrade poor facilities and competition will dramatically improve services, forcing inefficient and poor-quality facilities out of business, she says.
Putting aside the fact that the World Health Organization is not entirely convinced by the plan, the government faces major challenges in getting the system up and running in the first place. Investors need to be found, and the political turmoil surrounding the unpopular healthcare reform is not likely to have them queuing up.
On Sunday, March 10, Hungarians overwhelmingly voted to scrap fees for visiting the doctor and a daily fee for visiting the hospital, even though the measures appeared to be addressing some of the current issues, particularly cutting out unnecessary visits to physicians.
While the impact on revenues is relatively small - a matter of a few hundred million euros - the message that people are sick of reforms is far more significant. Following the referendum result, Horvath vowed to continue with the next phase of reform, but if anything the private capital model is less popular than the fees, and has already prompted demonstrations. Opponents of the system - including the chamber of doctors - believe that private firms will either refuse to insure the elderly and chronically ill, or do so at a premium.
Analysts believe that main opposition party Fidesz, which called the first referendum, is now preparing to tap into this unrest, build on its victory and target the private insurance system before it even gets off the ground.
"Going forward, there is likely to be a constant questioning of the government's credibility - and possibly new referendum proposals - the next obvious target is the restructuring of the health-care system," Istvan Zsoldos, an emerging markets analyst at Goldman Sachs investment bank, said in a note.
Fidesz leader Viktor Orban said the government should think seriously about withdrawing the new system, and private individuals are currently collecting signatures for a referendum on it. If Fidesz begins actively campaigning, then the government could find its new insurance system on the chopping block as early as this autumn.
Should the system somehow navigate the obstacles and come into existence, it then faces another hazard: a likely change of government in 2010. Pollsters give the government between 15-20% of the vote, meaning that barring a miracle, the centre-right opposition party Fidesz is set to gain power. Fidesz is unequivocal about what it will do once it is running the country: "Fidesz will abolish the private capital system," former Health Minister and Fidesz's expert on healthcare Istvan Mikola told bne.
For any investor who feels brave enough to take on the risk, the return on the investment is not even particularly high, something that Horvath recently admitted. "Healthcare is not a market where one can expect high profit - we are talking about the care of 10m Hungarians," she told journalists at a press briefing. "The rate of return point will be after 10-15 years."
Under the new model, profits for each fund will be capped at 2% of capitation income - a per-capita figure paid to each fund by a central body responsible for collecting contributions. Each fund is allowed to insure between 500,000 and 2m people. For the smallest funds, Horvath said the capitation income would be around €193m per year. Therefore, the most an operator of a small fund could hope to make per year would be €1.89m (2% of the 49% stake). The maximum profit would be four times that.
Horvath said that investors would have to pay around €46 for each person insured in order to gain the 49% stake, meaning €23m-92m needs to be stumped up to buy into the funds. On top of that, the minimum capital level for each fund will be €11.6m in the first year and 5% of the capitation income subsequently.
Looking at these figures, it isn't hard to see why the Finance Ministry is having to employ an international advisor and launch road shows this summer in order to convince insurance companies to invest. However, according to a senior source who has represented major international insurance firms in Hungary for over 10 years, the ministry will struggle to find anyone that will bite. "I would not recommend investing in this to my shareholders: the business cases only work after 10 to 15 years and some scenarios will be negative forever," he told bne on condition of anonymity.
"An investor or shareholder of a regional bank/insurance company has a lot of opportunities to invest," he continues. "For €25m-50m you can buy smaller- to medium-sized insurance companies and pension funds all over the region; you can push distribution to enlarge market share; you can enter new markets - all these business cases have a higher probability of positive figures than the health reform in Hungary."
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