Is Brazil’s healthcare sector facing a paradigm shift? (Part 2)

To recap from our last post on the Brazilian healthcare system, the country witnessed 6.5% (CAGR) growth in total spending on healthcare between 2003 and 2014, only to see spending contract by a forecasted -2.9% (CAGR) during the 2015-2016 period.

In this post, we look specifically at the breakdown within the public and private sectors to understand which entities were cutting the most, the drivers of contraction, and finally at FSG’s expectations for the short-term.

Digging in to the public numbers  

Economic contraction generally means lower government revenues, and Brazil’s case is no different. With public healthcare spending primordially funded via general tax collection, during the recession there was less money in public coffers to provide the universal coverage guaranteed by the country’s constitution. Without borrowing or taking funds from other sources, Brazil needed to reduce spending on healthcare. Indeed, that is exactly what we witnessed:

  • Public healthcare spending, CAGR 2002-2014: 6.81%
  • Public healthcare spending, CAGR 2014-2016 (forecast): -0.23% 

However, while the contraction in the last years has been significant, different parts of the public sector have reacted differently:

  • Federal spending growth, Real % change YOY 2015-2016: -2.4%
  • State spending growth, Real % change YOY 2015-2016: -3.8%
  • Municipal spending growth, Real % change YOY 2015-2016: -0.8% (*data represents only capital cities)

Nevertheless, the combined figures have led to reduced coverage in the public sector at the same time that demand for coverage was growing. In fact, during the recession many individuals who before had received private sector care were forced to seek coverage in the public system. This shift was driven largely by individuals that lost pre-paid coverage or because they were looking for personal savings on out-of-pocket expenditures. The phenomenon placed an increased burden on the public system at the precise moment when it could little stand to take the increased strain. The results included:

  • Sharp cuts in investments in new facilities and large equipment
  • Reduced surgical procedures
  • Enhanced concentration of public sector tenders to drive greater bargaining power
  • Delayed payments
  • Implementation of utilization management techniques (emerging)
  • Outsourcing of public hospital management (emerging)

When looking at 2017, FSG expects greater spending in the public system, though largely due to one off effects, including a one-time increase in federal spending and debt relief for key states.

  • Public healthcare spending, Real % change 2017 (forecast): 2.96%
    • Driver 1: One off increase in federal spending (elevation of constitutional limit)
    • Driver 2: Temporary debt relief for major states (Rio de Janeiro/Rio Grande Do Sul/Minas Gerais)

Despite the relatively positive outlook for this year, FSG believes Brazil’s public healthcare system will need to undergo fundamental changes (or push more of the burden of coverage to the private sector – which is highly unlikely) in order to continue to meet its constitutional obligation of providing universal coverage, a process which we will discuss more in depth in our next post.

Looking closer at private sector spending 

As mentioned in our overview of the public system, Brazil’s pre-paid system lost 2.4 million insured individuals in the 2014-2016 period, largely due to a sharp drop in formal sector employment. This represents a drop of approximately 4.9%. This non-insignificant drop in the private pre-paid system along with reduced out of pocket spending by Brazilians with squeezed incomes led to predictable challenges for most MNCs operating in the sector.

  • Private healthcare spending, CAGR 2012-2014: 6.31%
  • Private healthcare spending, CAGR 2014-2016 (forecasts): -2.74% 

This reduction in spending came at the same time that healthcare costs continued to rise, and the impact on private payers’ financial performance and behaviors has been evident.

As payers’ revenue has failed to keep up with growth in costs, suppliers in Brazil have seen notable shifts in behaviors and should expect to see these only accelerate and solidify over the medium- and long-term. Indeed, during the 2015-2016 period, intense financial pressures in the private sector led to the accelerated adaption of new strategies by private payers:

  • Vertical integration (facilitated by a 2015 law that permitted the entrance of foreign capital in Brazil’s hospitals and clinics)
  • Implementation of selective contracting (e.g. preferred provider status)
  • Implementation of financial incentives for providers (e.g. risk sharing)
  • Implementation of utilization management techniques (e.g. requirement for second opinion in select cases)

Much as in the case of the public system, while FSG expects greater spending moving forward, the forces driving change (slower revenue growth and continued acceleration of costs) are here to stay and will require significant adaptations. Indeed, a slow labor market recovery in 2017 will continue to suppressed revenue growth for most private third party payers, while consumers’ disposable income will remain weak. The only upside will come from easing credit conditions, which are only posed to provide a marginal boost to total spending.

  • Private healthcare spending, % change 2017 (forecasts): 0.64%
    • Driver 1: Slow labor market recovery (delayed return of number of individuals with private insurance)
    • Driver 2: Accelerate monetary easing cycle (provides greater access to individuals for out of pocket spending)

The major question today for forward-looking executives at healthcare MNCs with operations in Brazil is in regards to the future role of Brazil’s private sector players: Will we continue to experience a sector that is supplementary in nature (continuing to increase its numbers as the economy recovers and operationalizing new managed care techniques), will we see an explicit shift in policy to push a greater number of Brazilians to this sector for lack of resources in the public sector, or will we see the private sector becoming a closer partner of the public sector (perhaps with the public sector contracting third party payers to provide coverage)?

In our next post, we will look to provide greater clarity regarding this question, while also outlining why Brazil is only set to require more healthcare provision and not less over the medium- and long-term.

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