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Impact of Insurance on Healthcare Economics

Article-Impact of Insurance on Healthcare Economics

The economics of healthcare delivery in the region is undergoing a transition owing to many factors, the most significant being the increase in the number of people with health insurance. Players who are inclined to embrace change and have an insight into what underpins the healthcare costs and revenues, stand to benefit more than their counterparts who are either resistant to change or oblivious of the intricate dynamics.

The user is not the payer: Financing healthcare for citizens and expats has been a priority for most governments in the region. Insurance penetration has increased over the years. Steps towards mandatory insurance are being taken in Oman, the KSA and remaining emirates of the UAE [Sharjah, Ras Al Khaimah and Ajman]. The impact on the economics of healthcare is being felt in the region already. With higher propensity to consume services, patients are visiting doctors and hospitals more often. Demand for higher end diagnostic and curative services has also seen a surge in recent years and the trend will continue. Market forces are mandating the infusion of the latest technology and higher end procedures and this will also continue. Expats who used to go back to home countries and citizens who travelled westwards for treatment earlier are now choosing to stay back and demand treatment in the country of their residence, as insurance covers it.

Overall, volumes in terms of patients, prescriptions and procedures have gone up in the areas that have witnessed higher infusion of health insurance. With increase in volume, the marginal cost of providing a service has come down, thereby impacting the overall average cost of each procedure. However, there is a likelihood of increased costs in the short run as more infrastructure and manpower will be required to serve the increased number of patients.

When healthcare costs for a person are paid by a third party, the dynamics change rapidly. The user of the service is not the payer of the service anymore. Further, the payer has incentives to save or defer the payment and be more profitable. On the other hand, the service provider does not face much resistance from the user for payments of diagnostics, tests and treatment. This in turn, can sometimes entice the provider to overtreat and overprescribe. The interesting interplay when three parties are involved results in attempts by each of them to shift the burden of costs to another.

Hence, overall margins will stay under pressure as payers will incessantly bargain for better discounts as they grow in stature with more policies being sold. This will increase price pressures and hence providers will have to turn towards cost optimisation to maintain healthier margins.


Cost of providing care is a game changer: We have witnessed pressure on pricing of services by payers in the markets for the reasons stated above. Service providers are now being driven to take a hard look at their costing and cost structures to maintain margins. We reckon that providers that manage to continuously maintain lower relative costs in comparison to their closest competitors will create a deeper advantage for themselves, provided they do not compromise on clinical outcomes and quality. This will require innovative and possibly disruptive cost structures that are difficult to replicate.

There are various models that are being tried by the early innovators in the region. Activity Based Costing to determine costs of top procedures and diagnostics has been done by a few leading players. Some are looking at reducing the capital expenditure (CAPEX) by pay per service arrangements with equipment suppliers. Outsourcing of services is on the rise. In some cases, even the core services are being outsourced.

The time and money taken to hire a skilled doctor or a paramedic and pay for their license, visa, insurance, etc. adds to the cost burden of providers in the GCC. Organisations that hire these people are beginning to look at various ways in which resources can be retained or in some instances, even outsourced. We have come across examples where a group of visiting physicians takes over the onus of setting up and running a department in a hospital on a revenue sharing basis.

The graphic below depicts a typical structure of cost bifurcation of a hospital in the region

Source: Frost & Sullivan Analysis

Manpower cost is a crucial component in any healthcare system: Nearly 50% of the costs in a healthcare delivery system are attributed to manpower. The requirement is diverse; from various kinds of doctors to nurses to technicians, healthcare has always been challenged by cost and availability of manpower. The economic viability of healthcare entities hinges on how manpower allocation is planned and its costs are structured. Recently, physician engagement models in some Middle Eastern countries have undergone a change. We are also witnessing more visiting doctors and part-time physicians being hired by various hospitals. The coming years will see further interesting changes in how healthcare organises its manpower to deliver services.

As depicted in the table below, the number of physicians and nurses in two of the largest markets in GCC has been steadily increasing over the years. We reckon this trend will continue for the foreseeable future.

Management of working capital is critical in modern times: Payment cycles are more relevant than ever before. Healthcare providers must keep a tight leash on the money required to run daily business, because they get paid for their services later. This also has an impact on how the vendors are paid and inventory that can be stocked. Urgent payments are gaining priority over the ones that can be deferred.

Governments are not insulated from the change in the overall economic forces at work: Public facilities are looking to share the burden with private ones and arrive at a balance between private and public sector participation in healthcare. For instance, there have been a series of announcements in the KSA, which indicate a shift towards the Public Private Partnership model in healthcare delivery. Oman has also indicated its openness to private participation in some of the initiatives. Other countries will follow suit as the market evolves further.

We have also witnessed the interest of government hospitals to participate in the insurance eco-system. Governments have either started or shown interest in many instances in participating in the health insurance system and have their hospitals raise claims to payers for treating patients. This will add to the payouts of insurance companies, thus impacting the overall premium being paid to them.

Pharma industry is undergoing a metamorphosis as well: Expensive branded medicines are now less preferred by payers than the cost-effective generic ones, especially in markets where insurance is playing a dominant role. With more people from the middle and lower income strata coming under insurance, this trend will amplify further. This will compel pharma companies to either focus more on generic production and distribution or innovatively engage industry stakeholders to promote branded medicines.

In short, the economics of healthcare is largely driven by the shift in the financing of care. As the transition from self-pay to third party payment continues, the eco-system will see many interesting changes in the future. Healthcare providers, payers, pharma companies and governments will need to continuously re-invent systems that they have relied upon in the past.

TAGS: Insurance
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