Viktor Hediger, Toby M. H. Lambert, and Mona Mourshed
Web exclusive, March 2007
Health care is an increasing concern for the governments of the Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—which want the private sector to play a much more active role in providing and financing that care. Gulf-area health care systems may be far better than they were 20 years ago, but many residents remain unsatisfied with the availability and quality of care at government-run hospitals and clinics. Government agencies mostly lack the managerial skills needed to run health care facilities, and cash incentives alone haven’t been enough to attract specialists to treat the rising number of people with ailments such as heart disease and cancer.
Government-run hospitals and clinics are also ill prepared for a rapidly growing and aging population, as well as for the rise in chronic diseases such as diabetes, whose prevalence has grown as countries have developed. To augment services and raise standards of care, some GCC governments have already encouraged internationally renowned academic institutions to set up health care facilities in their countries. Many more private health care providers are required, however, to meet future demand. Big changes to government policy and regulation are needed to ensure that private players can attract patients and succeed. The most important change: governments must reimburse nationals for private as well as public health care.
For the most part, GCC governments intend to go on subsidizing robust medical benefits—at least for nationals. But costs are rising fast. We estimate that total GCC health care spending will reach more than $60 billion by 2025, up from $12 billion today. Governments now shoulder more than 75 percent of this burden, but even those with the deepest pockets may not have enough funds, in 20 years, to pay for the cost of health care. Most now recognize that they’ll soon need private-sector help to finance it.
A great deal of money is at stake for private insurers and providers alike. Private payers that build scale by competing in more than one GCC state are the most likely to succeed. For private providers, the decision must be whether to enter into government contracts to manage public facilities or to open their own.
The urgent need for change
GCC governments have made substantial investments in medical education during the past 25 years, building hospitals and other infrastructure and promoting a more modern approach to tackling the infectious diseases, such as malaria and measles, that were once rampant in the region. Although differences exist from country to country, the overall improvement has been impressive. Life expectancy rose from 60.5 years in 1978 to 73 years in 2004, and in the same period infant mortality fell from 69 deaths per 1,000 live births to 18.
But health care systems still struggle. The primary reason: governments aren’t equipped to manage health care providers and don’t feel much pressure to set targets for quality, service, or financial performance. A McKinsey survey of more than 600 patients in the GCC reveals that many can’t find the services they need close to home. Others cited problems such as limited appointment hours and long wait times. Survey respondents also reported that public hospitals can be unpleasant, with unattractive and uncomfortable facilities, and that the patient’s basic human dignity is not always respected.
More troubling, over the next two decades the population of GCC countries is expected to double and the number of people aged 65 and over to increase more than sevenfold. Further, our research shows that other demographic changes and risk patterns for diseases will also drive a substantial rise in demand for health care treatment in the region (see sidebar, “Demand forecasts through 2025”).
In 2005 GCC governments spent about $9 billion running public health care facilities and reimbursing nationals for care received abroad. To make sure that they’re getting what they pay for, they have already asked the private sector to provide a wider range and a higher quality of services. But the private sector receives no more than 25 percent of all health care spending in the GCC. The main reason is that while public care is free, patients must pay for private treatment themselves.1 Private facilities not reimbursed or subsidized by the government therefore have fewer patients and lower revenues than they might otherwise. In one Gulf state, private hospitals not affiliated with the government operate at 10 to 40 percent of capacity, since patients tend to pay private providers for diagnoses and then go to a free public hospital for treatment.
Some governments have helped private providers succeed, primarily by engaging them to manage public facilities and then reimbursing them for treating government-funded patients. In the past three years, for instance, generous cash incentives and a guaranteed number of public patients have been offered to top-rated international teaching hospitals, such as Johns Hopkins and the Cleveland Clinic, to get them to manage or open new facilities. The governments’ hope is that big, branded players will create competition and raise standards of care throughout the region. Generally, governments try to lure these top hospitals to take over the management of public facilities or to open up shop in the GCC in exchange for cash, including payment for a guaranteed number of public patients.
In reality, these governments need many more private health care providers, and they can’t solve the problem by rolling out a red carpet for every single one. It is impractical to guarantee volumes of patients for each private provider, mainly because such arrangements are costly. Since most private providers compete with public facilities to attract patients, governments must create a system in which both public and private health care providers issue claims and get reimbursed at equal prices for services rendered. To achieve this goal, a vital first step would be for governments to move away from the current practice of writing large checks to public health care facilities irrespective of the number of patients treated and amount of services rendered.
Most governments acknowledge that such sweeping policy changes are needed, though few have been implemented. A positive development is that in all but one GCC country, new laws require employers to purchase health benefits packages for their expatriate workers. Workers covered under these plans can choose care at either public or private institutions—a system that has the advantage of ensuring that public providers must generate claims in order to be reimbursed by the government.
For governments to execute these reimbursements properly, they must require all health care providers, public or private, to gather and report accurate data on their costs and services. Given the current lack of robust data on costs, public health care systems must embark on long-term efforts to achieve transparency. Governments also need to invest substantial sums in IT systems to collect cost data and use them to inform decisions on reimbursement levels for both public and private providers.
Creating—and realizing—opportunities for private providers
Once governments improve their reimbursement systems, private health care providers will have more opportunities to thrive. But other reforms are also vital, including regulations that would make the business environment more attractive to private companies. International health care providers entering the Gulf area have crucial strategic decisions to make: should they run public health care facilities, for example, or focus on specialties and compete in the open market?
Creating a business-friendly environment
The overall objective of regulatory reform is to weed out low-quality providers and protect patients. To start, governments must raise the licensing and renewal standards for medical professionals and health care facilities—public or private. Enforcing those standards and dealing firmly with substandard players will build patients’ confidence in the quality of health care, no matter who provides it.
International health providers entering the Gulf must decide if they should run public health facilities or focus on specialties and compete in the open market
Beyond regulation, governments should improve the way they pursue contracts with private players. Too many private companies are thwarted in their attempts to take over the management of public facilities, simply because government agencies lack the managerial skills and the data needed to structure deals. Governments regularly send out tenders, but though many providers respond with bids, their questions (say, about guaranteed patient volumes or prices for services) are seldom answered. Often governments have not defined the goals of an outsourcing effort, and the data may not be available. These unanswered questions have generated a high level of frustration among international health care providers, and very few contracts have been signed.
GCC governments will struggle to find the answers to these detailed questions until new reimbursement schemes and more transparent data systems are in place. They can immediately increase their chances of attracting more private health care companies, however, by adopting clear strategies: governments must know exactly what they want from their partners, establish a clear process and time line, and have competent, well-informed people available to answer questions about the bids.
Private providers must choose where to compete
The management skills needed to operate health care organizations are in short supply in the GCC. If private companies have the patience to wade through the bidding process, many can prosper in the Gulf by managing public hospitals and primary-care facilities, as well as laboratories and pharmacies. Often these private players can earn substantial cash incentives by meeting performance targets for clinical outcomes and standards of care.
In one GCC state, the government holds an auction when it wants to contract with the private sector. The process starts with a hospital’s current budget, and private companies are invited to bid on how much less funding they could accept while still meeting specified standards of quality and service. Another government is currently accepting bids for managing its secondary-care hospitals. That contract would give the winning partner total operational freedom but also full accountability for its performance, as well as a budget that’s only 90 percent of the hospitals’ current level of government-issued block funding. Given similar constraints, a few private players have managed public hospitals much more effectively and efficiently than governments do.
For providers that wish to move forward on their own, certain underserved populations of patients, such as those who require rehabilitation services and elderly care, may be the most lucrative ones. Our studies show that physiotherapy, renal dialysis, acute rehabilitation, elderly care, home care, occupational therapy, and speech therapy are among the areas in which capital investment is relatively low and potential returns to private providers are high. We also found that a shortage of services for oncology and cardiology patients could present significant opportunities to private health care providers willing to make the large capital investments required for more sophisticated equipment.
Health care providers—whether private or public and whether they contract with the government or open their own facilities—must grapple with a shortage of clinical staff. Nearly 80 percent of all medical professionals in the GCC are expatriates, and turnover rates are high. Most of these expats, particularly those from India and the Philippines, view the Gulf as a stepping-stone to more lucrative careers in the West. The few Western staffers who come to the Gulf see it as an opportunity to save money (perhaps to pay off debts from medical school) and then return home.
The best way to reduce staff turnover is to enlist more locals. But it has been difficult for GCC governments to do so, particularly in nursing, since many locals consider it a demeaning profession. Moreover, patients generally prefer Western-trained clinicians, scarce though they are. But as more locals train at Western educational facilities in the Gulf—such as the Royal College of Surgeons of Ireland (in Bahrain) and Weill Cornell Medical College (in Qatar)—public confidence in local doctors and nurses is likely to grow.
Private providers can help to make nursing and other medical professions more attractive to local students by creating professionally and financially rewarding career paths for clinicians who stay in the region. Better salaries, substantial investments in professional training and development (such as residencies), and the more flexible careers made possible by a greater degree of private-sector participation in the health care system should all help to attract GCC nationals.
Changing health care financing
As governments fashion their new health care systems, they will make drastic changes in insurance requirements and eligibility for both nationals and expatriate workers. In the next five to ten years, these governments will likely design basic health benefits packages and provide them free of charge to all nationals. In most GCC countries, the law now requires companies to provide basic health care benefits (including insurance) for their expatriate workers, who account for 40 to 80 percent of GCC populations (depending on the state). Until recently, expats enjoyed virtually free access to public health care, accounting for as much as 20 percent of its total cost.2
Health care facilities in India, like those in the Gulf States, find it difficult to attract and retain talented professionals. Financial incentives could be the key. Read “A foundation for public health in India.”
Because these expats have relatively low incomes and governments strictly regulate premiums to make health insurance affordable, insurers competing for market share will likely lose money on basic benefits packages for this segment. Unless private insurers have the exclusive right to sell their benefits packages in certain states or regions of the GCC, they’re unlikely to reach the scale necessary to turn a profit.
For nationals and the more affluent expatriates, revised insurance and eligibility requirements should open up more opportunities for international health insurers. To give one example, we expect competition to thrive in the premium-benefits market, serving nationals and expatriates who want coverage for services excluded from basic packages. Premium policies for dental care or elective plastic surgery or for insurance that covers high-end, hotel-style services for the affluent will always be in demand. We estimate that the market penetration of these premium-benefits packages, sold at a good profit margin, could reach 4 to 5 percent of the GCC’s population.
Further opportunities for international payers will arise from the governments’ lack of experience and skills in building and running complex health insurance businesses. Government administrators will need experienced insurers to process and validate claims, to teach providers to issue claims, and to reimburse them. Governments have two choices until they can effectively transfer the necessary skills to local businesses: they can partner with health insurance companies or temporarily outsource some key functions (such as claims processing and management) to international companies that specialize in settling claims. In the Gulf, few people have experience or skills at the point where health care and finance intersect. For governments and the insurance companies they work with, the biggest challenge will therefore be to find qualified professionals to build and run complex health insurance businesses in the region.
Changes in regulation and customer behavior are blurring the boundaries between the health care and financial-services sectors. For an in-depth look at how traditional players can best position themselves to compete, see “The coming convergence of US health care and financial services.”
To gain the best competitive position, international health insurers and companies that specialize in managing claims and working with provider networks must attempt to generate a critical mass of business by striking deals with governments in more than one GCC member. Building more volume by entering several states and regions of the GCC helps insurers from both a financial and a talent-management perspective, since they need to justify their investments and deploy scarce talent. By bringing senior, experienced people into the region and making a commitment to coach, train, and transfer knowledge to locals, the payers can make themselves much more attractive to governments searching for partners.
For many payers, a winning approach might start with offering an experienced expatriate team an opportunity to lead the majority of all claims-management activity. Over ten or so years, coaching and training programs in which locals shadow the expatriates could make it possible for governments to manage the business themselves. At that point, though locals would staff the administration, the international insurer could continue to own and oversee the claims-management business. Whether or not the insurer did so, these arrangements might be quite lucrative. GCC governments often pay big money to insurers for hiring and training locals.
Private insurers and providers in the GCC, and its health care systems overall, will succeed only if governments adopt appropriate policies and regulations. Although the challenges that governments face are changing rapidly, most of the GCC states seem ready to rise to the occasion. They are already elevating the private sector’s role in health care, and, ultimately, that will best serve their people.
Demand forecasts through 2025
While demand for health care in the GCC is clearly rising, the extent of the increase and the forces that will drive it are matters of debate. To inform the debate, we constructed a model of demand for health care covering each of the six GCC countries, across 20 specialties and five age brackets. Over the next 20 years, our model projects a substantial increase in health care costs, as well as in the number of inpatient and outpatient treatments and in the number of hospital beds needed to accommodate this increase. The model takes into account five forces behind the changing demand: population growth, the demographic profile, the development of risk factors, treatment patterns, and medical inflation.
Demand for treatment. We estimate that, over the next 20 years, the demand for health care in the GCC will rise by 240 percent. In particular, we expect this growth to result from steep increases in cardiovascular disease and diabetes-related ailments (Exhibit 1).
Demand for hospital beds. By 2025 demand for hospital beds will have more than doubled; the region will require almost 162,000 beds in all. Saudi Arabia and the United Arab Emirates are expected to register the greatest percentage increases in demand (Exhibit 2).
Costs. Total health care spending in GCC countries will rise to about $60 billion by 2025, from almost $12 billion today. In particular, spending on treatment for cardiovascular disease, which now accounts for 12 percent of the total, will double, growing at almost twice the overall rate of health care spending (Exhibit 3).
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About the Authors
Viktor Hediger is an associate principal and Mona Mourshed is a principal in McKinsey’s Dubai office; Toby Lambert is a consultant in the London office.
Notes
1 Generally, public care is free for nationals. Expatriates pay a fraction of what it actually costs the government to provide care.
2 Foreign workers account for such a small portion of total costs because they tend to be young and relatively healthy and thus require less health care, on average, than nationals do. Further, expats who become seriously ill are often sent back to their home countries for medical care.
