Value creation is where corporate strategy and corporate finance are aligned to support shareholder returns; not to be confused with value-based healthcare, which is a reimbursement mechanism that leverages clinical quality measures to incentivise the healthcare industry.
While a balanced approach to both shareholder returns and clinical quality is critical to the success and advancement of healthcare, the UAE has undertaken tremendous initiatives to accelerate quality infrastructure and sustainability in the region, such as attracting new players to the market, evolving regulatory reforms, and increasing health insurance penetration. Enterprises with a short-term view may regard these initiatives as a risk to shareholder returns.
As the Middle East healthcare industry evolves, there are four key ideas to ensure your healthcare business thrives and provides shareholders with returns and, more importantly, delivers on the mission of the healthcare industry; to treat, cure, or rehabilitate society..
Consider your place on the value chain
Horizontal and vertical integration of the value chain can provide competitive benefits and maximise returns. In the region, much of the integration activity seems to be horizontal to increase market share as the key driver of value creation (e.g. hospitals acquiring long-term care providers and specialty services or building more healthcare facilities). Assuming sound due diligence is completed, both vertical and horizontal integration can drive significant value creation. If we look to other markets, we see radical movements such as healthcare systems acquiring health insurers and health insurers acquiring healthcare providers and, even, healthcare providers launching their own pharmaceutical/medical consumable companies. One interesting example receiving media coverage is CivicaRx, a not-for-profit pharmaceutical venture, kick started by hospitals struggling with the high prices and supply challenges affecting availability of life-saving medications imposed by pharmaceutical companies.
Proactively address concentration risk
It’s easy to point out concentration risk scenarios such as when specific payers dominate the market driving up premiums and impacting provider cash-flows. A second common example in the region is hospitals operating in a specific city/country without tapping into volume opportunities or the maturity of developed markets. While the UAE is a thriving economy, there are still opportunities in the healthcare space to ensure the market is kept competitive, stable, and transparent for investors. If we look to a local Middle East enterprise that has successfully de-risked on a country level, it would be NMC Healthcare, which operates in 19 countries across four continents. While resolving concentration risk doesn’t need to be on a global scale or trigger a state of panic, it simply needs to be targeted toward a scenario that drives shareholder returns and/or reduces volatility. Types of concentration risk to consider for your business are country, product/service line, payer, patient mix, supplier/distributor, and credit risk.
While the UAE is a thriving economy, there are still opportunities in the healthcare space to ensure the market is kept competitive, stable, and transparent for investors.
Use the phrase “What if” during your strategic capital planning process
In the last two years, Abu Dhabi and Dubai have released investment guides, which outline where and how to deploy capital in the healthcare sector. For health systems looking to deploy capital, it can be tempting to build a new facility, purchase new radiology equipment, or invest in marketing efforts. Capital requests tend to randomly pop up in different departments so before approving capital requests be sure to understand their urgency and viability. For mid to long term plans, call the appropriate internal stakeholders to the table to pressure test financial models. When pressure testing a financial model, it’ll be important to ensure costs are well detailed, understand if costs are redundant, account for unintended costs/inefficiencies caused by new projects, identifying capital financing options, and build in other sensitivity levers. By asking “What if”, you’ll be able to come up with relatively accurate scenarios that support decision making and ultimately return invested capital.
Create a value creation management culture
Educating your enterprise and arming them with financial acumen will certainly pay dividends. The healthcare workforce is generally not well-versed on corporate finance concepts. To develop a value creation culture, make the concepts very pragmatic. First, start by drafting a list of decisions per department, walk each department through how to assess their own business needs, and create capital request procedures that force the thought process. The classic example would be purchasing advanced radiology machinery (e.g. CT or MRI). Preemptively leverage the finance team to demonstrate to the radiology team the type of research, data, assumptions, and decisions that need to be assessed such as volume forecasts, depreciation, payer mix, maintenance costs, financing costs, and manpower costs. This approach, of course, is not limited to one department, it should be used to educate any department that makes significant capital requests.
In conclusion, driving value to shareholders and patients alike is critical for the advancement of healthcare while delivering value to shareholders can and should be consistent with delivering value to patients. Growth, risk, capital planning, and management culture are only a few ways to drive value creation. As health systems in the UAE consider more robust value creation strategies, I hope these often overlooked or unrecognised approaches help your healthcare business navigate the evolving market and deliver on its mission.
Driving value to shareholders and patients alike is critical for the advancement of healthcare while delivering value to shareholders can and should be consistent with delivering value to patients.