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A Compelling Opportunity

May 2016

Is the UAE healthcare landscape an overcrowded market? An analysis by M.R. Raghu, Managing Director, Marmore Mena Intelligence, a research firm with focus on providing information on MENA businesses

Healthcare indicators sometimes present an interesting paradox, as in the case of UAE, where the government has been pushing hard to attract investments, while certain sections in the industry seem to suffer from excess capital.
Hospital and clinic utilization, according to a 2015 survey conducted by The Economist, is relatively moderate, which suggests that there isn’t much of a capacity gap in the industry. But further probing reveals the existence of gaps in specialized areas. There are two reasons for this dichotomy – the affluent go abroad for treatments, while low-income, uninsured populace avoid treatments altogether. The former is mainly due to the relatively smaller population in the UAE, which limits the exposure of doctors to uncommon conditions and specialized surgeries, and therefore impedes the development of their skills, compared to countries with much larger populations, such as India, which has fashioned itself as a hub for medical tourism.
Many believe that the UAE healthcare sector may be overcrowded with too many private players present in overlapping specialities, such as cardiac surgery. In such cases, consolidation and economies of scale could help improve efficiency and delivery of healthcare, while more private participation is needed in areas of severe shortage, such as intensive care, emergency care, neonatology, paediatrics, oncology, orthopaedics, rehabilitation, psychiatry and some surgical specialties. Public healthcare system continues to have a higher share of speciality treatments in the UAE, despite its share of hospital beds falling in recent years.
Portfolio-Chart-1Even with the rapid growth of healthcare in the GCC, the state continues to absorb most of the cost in the current model, which is unsustainable both in terms of financing and delivery. While the governments actively seek to upgrade the quality of healthcare and improve accessibility through the formulation of long-term strategic plans, their existing expenditure on health is already very high, compared to global norms.
For example, in the UAE, the government expenditure increased from 26% in 2006 to close to 70% of total healthcare investment in 2014, mainly due to the opening of many hospitals in Dubai and Abu Dhabi during the period, and provision of aid and free health care to the local population. And this expenditure is expected to increase (in absolute terms) in the coming years, as the prevalence of chronic diseases in the region rises. With the increasing costs associated with healthcare provision, the governments are contemplating moving away from the traditional approach of publically-run healthcare to alternate models.
But funding issues continue to plague the region, despite per capita expenditure being similar to European healthcare. Insurance penetration is very low compared to developed markets, and levels of existing premiums are also much lesser. No tax being levied on citizens, along with rising population and lifestyle diseases, increases burden on governments. To counter this, mandatory health insurance is being introduced, especially in Saudi Arabia and the UAE. Recently, Dubai Health Authority (DHA) announced that it is on the verge of fully implementing Dubai’s mandatory health insurance scheme.

Portfolio-Chart-2Have PE investments dried up?
Over the past decade, GCC health expenditure per capita has grown at a CAGR of 7.9%, and rising populations, increased longevity, and surge in lifestyle diseases continue to drive investments in the sector. While the Gulf States have devoted considerable efforts and resources to boost both quality and reach of healthcare in the region, it still does not match other developed nations in terms of infrastructure and capacity. The scope for private sector participation in the health care segment in GCC remains high, and private equity investors have increased their focus in the industry, in the recent past.
While the number of private equity transactions have increased since 2014, the size of these transactions doesn’t seem to have matched that trend. But this may not be wholly representative of ground realities, as financial information is not provided on many PE deals in the region. UAE recorded the most number of private equity transactions during the period 2005-15, at 10, followed by Saudi Arabia, at 5, and clinics and hospitals account for close to 53% of PE transactions during the period, followed by medical device manufacturing.
But the medical devices manufacturing sector remains insignificant in the GCC – meeting below 5% of overall domestic demand, despite government attempts to encourage foreign investment. To gain a competitive edge, foreign investors need to strike deals with multiple governments in the GCC, and hope that the anticipated divestment of the government from the healthcare sector will open new avenues for private sector participation. Finally, the scarcity of managerial talent in the region is another hindrance for private equity investments, as it makes identification of a management team with sector expertise, local knowledge, a proven track record and the right skill set, a major challenge for the PE firms.

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