The paradox of Ukrainian medicine is that despite having a host of medical facilities and hospital beds it still cannot fully satisfy the people’s need for quality health care.
The public sector, which occupies approximately 90% of the market, provides low quality service, while private medical businesses simply don’t cover the whole spectrum of medicine. Thus, around 80% of private companies focus on stomatology or laboratory diagnostics. Large outpatient private clinics are few and far between and are usually located in large cities of Ukraine, while remote regions lack proper inpatient care.
The high demand for health care provides no incentive for competition among medical businesses. It’s no wonder that the latter are able to raise their prices to European levels, neglecting to do the same for the quality of their service.
Weak competition in the private medicine market is a major attraction for investors. Among the most popular and fast-payback market segments to invest in are perinatology, cardiology, oncology, ophthalmology and rehabilitation. The average payback period of Ukrainian medical businesses is 3-7 years, which is considerably lower than that in more developed countries. In fact, according to Pro-Consulting, the average profit margin rate of a private hospital remains at 18-22%1 even during economic crises. It’s no wonder that foreign investors have been represented on the Ukrainian health care market for many years. For instance, as early as 2011 Advent International, an investment fund that has invested in more than 50 medical institutions all over the world, acquired a block of shares of the Ukrainian private clinic ISIDA. In 2012 Siguler Guff & Company bought the Ukrainian clinic chain Into-Sana for EUR 30 million. As a result, Into-Sana is developing rapidly, gaining ground in regional markets by taking over private regional clinics. Other Ukrainian private hospitals like Dobrobut and Boris also shifted their attention towards advancing regional health care, which is a positive development for the market as a whole.
Another positive factor for investors is the medical reform that seeks to implement mandatory health insurance in Ukraine. The reform will result in the state buying medical services for the population from medical facilities of any ownership — another funding source for private medical businesses.
As a result, Turkish, Georgian, American investors and medical business owners are already considering how to approach the Ukrainian market.
An investor or foreign clinic that intends to enter the Ukrainian health care market has two options:
1. Acquisition of existing medical businesses.
The advantage of this option is that the investor gets a working enterprise complete with a client base, location and established operation.
The catch is that very few Ukrainian health care companies have a transparent financial and legal structure. A clinic might turn out to be a group of independent doctors, each of whom is his own firm bringing in his share of customers. Naturally, when such doctors leave the clinic they take their patients away as well.
Other pitfalls besides the lack of clear legal guidelines for dealing with doctors include possible hidden financial obligations, improper registration of real property, issues regarding the protection of intellectual property (trade mark registration, methods of treatment, etc.).
With business conditions being what they are it’s tricky to pass a standard procedure, to determine the actual worth of a business and detect hidden risks. Therefore, the investor should insist on restructuring the medical enterprise and on instituting transparent management that will help to minimize the risks.
2. Opening a new clinic based on the assets of existing municipal or government-owned hospitals.
The existing private clinics are located mainly on the premises of municipal or government-owned hospitals. For example, the private clinic Medicom opened most of its branches in Kiev’s city hospitals. An advantageous location for sure, providing a steady influx of patients as well as the opportunity to sell diagnostic and other medical services not covered by hospitals.
This year all municipal and government-owned hospitals were ordered to reduce the number of hospital beds by 15%. That space now remains unused while the hospitals still have to pay their bills. The government’s plan to make hospitals self-sufficient and change their financing philosophy (payment for services rendered instead of hospital beds) will lead to a further reduction in the number of hospital beds and provide more free space that could be put to good use by investors.
In light of this, regional communities as well as the government will want to draw in foreign investors and turn unused hospital assets into public-private partnership projects. These projects will attract new capital and technologies while the presence of foreign players in Ukrainian markets will promote competition and improve the quality of health care.
It’s a logical development reflecting current world trends which place medical public-private partnerships in leading positions these days. Unfortunately, Ukraine’s procedure for such partnerships is far from perfect. To be honest, in accordance with the current On Public-Private Partnership Act of Ukraine, as of yet no such project has been implemented. Things like the complicated procedure for concluding contracts, mandatory call for bids and lack of support from the government all add to the problem. A bill has been submitted to the Verkhovna Rada to simplify and improve the public-private partnership procedure, including that in the health care industry. We hope that the changes will be passed this very year and the procedure will become transparent and accessible.
While the bill is wandering around the halls of the Ukrainian Parliament, such deals are conducted according to civil and economic law. For instance, they can take the form of renting of municipal or government-owned property, joint venture, concession or management contracts. Any of the proposed deals will work in health care as well by making use of the assets of municipal and government-owned hospitals, in accordance with Ukrainian health legislation.
Thus, in Kirovohrad a private investor rented part of the building of the regional oncology dispensary and opened a TomoTherapy center fitted out with state-of-the-art equipment — the only one in Ukraine. As per the terms of the rental agreement the regional council lowered the rent and the investor promised, in turn, to provide free treatment to a number of children with cancer.
However, every deal has aspects that should be carefully considered by the investor-to-be. For instance, according to current law, on the grounds of a management contract the owner can withdraw from it at any time provided that the manager has been notified.
When signing a rental agreement for municipal or government-owned property it’s important to make sure that it allows for renovation of real estate and provides compensation for non-severable improvements, is a good choice for long-term investment and will let the investor purchase the rented property in the future.
Investors should also consider the fact that since hospital buildings are municipal or government property, the rental agreement will be put up for competitive bidding. In addition, every regional community has its own procedure for renting, with its own distinctive features. Therefore, when planning to rent hospital premises it would be wise to assess whether those features might conflict with the investor’s goals.
While the current situation in Ukraine doesn’t exactly inspire confidence in strategic investors, the Ukrainian health care market has become a window of opportunity for those planning to rise to the top within the next 5-10 years. After all, change brings opportunity.
Tetyana Gavrysh, Managing Partner, ILF, Coordinator of the Kharkov expert group on implementation of medical reform, Honorary consul of Germany in Kharkov
Olena Khytrova, Associate Partner, ILF, Head of Ukrainian-German Medical Association (UGMA) committee on reforming of health system
The article is published in an annual guide of "Yuridicheskaya Praktika" Ukrainian Law Firms
