July 9, 2018

Framework conditions for investing in the new medical market of Ukraine: CSR and PPP

Last year, in 2017, the Ukrainian Parliament passed a law that radically changed the principles of healthcare funding. These changes will affect every citizen and the entire medical market of Ukraine, which comprises over 20,000 medical institutions. The law on the healthcare reform came into force on 30 January 2018, and the first stage launches on 1 July 2018. It will only affect primary care. After January 2020, funding rules will also change for the secondary level of medical care.

Implications for Business

One of the main stakeholders of the healthcare reform in Ukraine could be the core economy-building businesses (producers of agricultural products, processing and food companies, industrial enterprises, etc.). Employees of these companies and their families usually make up 30-50% of the population in small towns. To maintain stable production, business processes and growth, companies need to ensure timely hiring and retention of qualified personnel. This is achieved today by offering a reliable salary that is usually higher that the average local one. Meanwhile, it is impossible to attract and retain qualified employees if there is no high-quality social infrastructure, such as kindergartens, schools, leisure facilities and, most importantly, medical facilities.

Right now, medical infrastructure belongs to local communities and is financed from the state budget. The financing system, which was formed during the Soviet era and has remained in use even after Ukraine’s independence, was in fact aimed at building maintenance (paying for utilities) and paying low wages to medical personnel. In other words, no funds were allocated on improving medical services, purchasing new equipment or introducing modern quality standards of treatment.

Therefore, core companies have a personal stake in the transformation of healthcare system in cities, communities and regions. Before, hospital administrators used to ask for financial support for specific needs, e.g. building repairs, window replacement, purchase of equipment or drugs. However, it was difficult for companies to monitor the effectiveness of their investments and measure their effect.

What’s going to change

July 2018 will see the launch of a new healthcare funding system in Ukraine. Specifically, the National Healthcare Service of Ukraine (NHSU) will start working, which will directly finance hospitals. Funding will be provided based on contracts made between the NHSU and hospitals, and the amount will depend on the number of patients that choose the doctors working in that hospital.

In addition, contract-based procurement of consultations from specialists from specific fields for the purposes of primary medical care, diagnostic and laboratory services is expected to begin as early as 2019.

All decision-making regarding medical institutions is currently under the control of officials that are responsible for budget allocation but not the quality of medical services. Due to this, business investing in medical infrastructure might not always get desired results. The healthcare reform will change this – it will be hospital administrators and management bodies that will be making decisions now. In the new system, hospitals will be able to change their legal status and become a municipal non-profit enterprise. This will grant the administrator (chief physician) independence in running the municipal hospital.

However, this opportunity might have a downside, since Ukraine lacks professional managers of medical institutions. Changes allow hiring managers, rather than doctors, on a competitive basis. They also enable business, by investing in healthcare in their area of operation, to influence healthcare, sit on supervisory boards, and pool resources with other companies to form a joint investment plan and participate in healthcare management.

Another important point is that budget funds will be available not just to public hospitals, but to private clinics and individual practicing doctors as well.

Assisting hospitals

As before, business may continue to support the healthcare system in its area of operation through targeted financial support or various grant initiatives: e.g. training of medical personnel, purchasing and granting medical equipment as charity, hiring external consultants to assist hospitals in organizing business processes, paying for management courses for hospital administrators, etc. But, as noted earlier, business used to have problems with monitoring the efficiency of investments. As part of the reform, however, legislators have now provided business with the necessary tools. According to recently amended Fundamentals of the Legislation of Ukraine on Healthcare No. 2801-XII of 28 November 1992, supervisory boards and/or boards of trustees can now be established by territorial communities as the owners of medical assets in hospitals. Representatives of companies that provide support to hospitals can sit on these boards. These bodies can, for instance, review the hospital’s financial and business activities. This means that a supervisory board can monitor the efficiency of investment provided by business.

Creation of new medical institutions and PPP

Alternatively, core business can create separate medical facilities to provide services to employees and their families. This doesn’t mean that, for instance, an agricultural company will have to take on a medical business as well. In Turkey, the model "build – lease – return" is used. The investor builds hospitals and rents them out to the state on a long-term basis (25 years and longer). Simultaneously, the investor has the preemptive right to provide hospitals with diagnostic and laboratory services, as well as related services (laundry, food, cleaning, etc.). After the lease expires, the investor transfers the hospital building to the state but continues to profit from servicing hospitals.

Ukraine also offers several options to socially responsible business. For instance, a company can lease premises from a community, renovate them and buy medical equipment, and then open an outpatient clinic and hire doctors. Or, after the renovation, it can sublease the premises out to qualified private practitioners. The lease contract can be concluded for a period of 5 to 50 years.

Such outpatient clinics can provide high-quality primary care services to company employees and their families who, by signing a declaration, will be able to choose one of the doctors working at the clinic. This primary care will be paid for by the NHSU based on a contract.

Quite similar to Turkey’s experience is the mechanism proposed in the Law of Ukraine No. 997-XIV On Concessions of 16 July 1999. According to this law, a company can build and manage an outpatient clinic for the period of up to 50 years, where doctors will be treating the employees of the said company and their families, as well as other residents of the community. Payment for primary care will also be provided by the NHSU under a contract. At the same time, the community itself can purchase from the doctors of the outpatient clinic, at the expense of the local budget, additional medical services not covered by the NHSU. It is also possible to buy additional medical services using health insurance.

There are other legal forms of cooperation with the communities that business could use. This includes contracts on management of medical assets as well as unique contracts that combine elements of several forms of cooperation and are concluded in accordance with the Law of Ukraine No. 2404-VI On Public-Private Partnership of 1 January 2010.

In one of our cases, a large economy-forming agribusiness wishes to support systemic changes aimed at improving medical care in the community. Along with supporting changes at the municipal healthcare facility, the company will create conditions for opening a private outpatient clinic in the community, whose doctors will also be able to sign a contract with the NHSU and provide the population with medical services for budgetary funds. This will give the community residents a choice, whether to get treatment at the municipal medical institution or a private outpatient clinic. This could also serve as an incentive for improving the quality of services and medical care at the municipal hospital.

In conclusion

Under conditions of opaque political plans and reforms, when the medical shadow market is still adapting, socially responsible business finally has a real chance to transform the medical market in territorial communities and improve the quality of medical services, consequently increasing its own influence in its area of operation and eliminate risks hindering expansion. For such business it would be expedient to conduct an audit of the healthcare system at its area of operation and form an investment plan, implementation of which will allow to increase the influence and address expansion-related risks.