Regulatory, demographic, economic shifts trigger transformations in a market worth over R$300bn

06/21/2024

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Fernando Torelly — Foto: Silvia Zamboni/Valor

Since the pandemic, the health sector has undergone significant changes involving regulatory, demographic, and economic-financial issues, leading to structural transformations in a more than R$300 billion market. These changes are directly related to the soaring cost of healthcare, which reached R$239 billion last year considering only medical expenses paid via health plans.

From 2019 to 2023, the accumulated average adjustment of corporate health plans, which represent 70% of the sector, reached 68.72%—more than double the official inflation index for the period. The cost of healthcare is rising faster than the client’s ability to pay, putting the sustainability of this market at risk.

In this context, two noticeable changes are occurring in the sector: the depreciation of health plans, with a reduced offer of services such as reimbursements, services networks, and coverage scope; and a new wave of consolidation, now involving large groups.

With escalating costs and difficulties in passing prices on to consumers, hospital groups and health plan operators, historically on opposite sides, are now merging assets. In this market, when a hospital’s revenue rises, the health plan loses because it has a higher bill to pay. Ultimately, the patient may receive inadequate medical care and face steep price increases.

“Previously, there was a lot of fat in the sector, and costs were passed on to the client, but that’s no longer possible. Operators are now pressuring large hospital groups as well, which didn’t happen before,” said Vinicius Figueiredo, an analyst at Itaú BBA.

Dasa and Amil have merged their hospitals, and Rede D’Or and Bradesco Seguros have created a hospital company. The insurer also has partnerships with Mater Dei and Albert Einstein, BP, and Fleury, and is a shareholder of Grupo Santa in Brasília. Porto Saúde and Unimed Nacional have joined forces with Oncoclínicas to build specialized cancer hospitals. Medical cooperatives are also merging. “Now, we will see operations involving large groups, followed by smaller deals,” said Osías Brito of BR Finance.

“This movement was triggered by Rede D’Or’s acquisition of SulAmérica in 2022. At the time, there were questions about the sector’s future, and Rede D’Or provided an answer by creating a hospital company with Bradesco,” said Fernando Kunzel, co-founder of JGP Financial Advisory, the advisory arm of investment manager JGP. Also in 2022, Hapvida and NotreDame Intermédica announced a merger to create a vertically integrated operator with a national presence and potential to capture the clientele of insurers. This phenomenon has been occurring for about a year.

“Companies’ health plan expenses average 14%, potentially reaching 20%, of payroll. Maintaining an adjustment at the current level could lead to companies canceling the benefit. There is a risk that only those who need and use the health plan the most will remain in the system. However, without risk dilution, the cost will be even higher,” said Luis Fernando Joaquim, a partner at Deloitte.

The increase in healthcare prices is a global phenomenon due to an aging population, the emergence of new treatments and drugs, and long COVID cases. In Brazil, legislative changes have further intensified the rise.

“There was a failure to understand the impacts of COVID on the sector. Immediately after, in 2021 and 2022, regulatory changes allowed the inclusion of mandatory medical procedures by health plans, unlimited therapy sessions for autism spectrum disorder (ASD), and a national minimum wage for nursing. Additionally, several mergers and acquisitions were completed. In short, there were many movements in a short period, and the sector is still in the adjustment phase,” said Flávia Pareto Conrado, partner and founder of Setter Investimentos, a consultancy and adviser.

“The impacts of therapies for ASD patients are being measured now. It’s complicated to price a product with an unlimited number of therapies,” said actuary Luiz Feitoza, a partner at the consultancy Arquitetos da Saúde.

Those who have not closed a partnership agreement are forming commercial alliances. HCor, for example, conditioned the start of new unit construction on pre-approval from health plans to guarantee revenue. “The future lies in large clusters. Today, it’s necessary to form partnerships or strategic acquisitions,” said Fernando Torelly, CEO of HCor, noting that with the crisis, operators are avoiding licensing more hospitals.

Antonio Britto, president of Anahp, a hospital association, believes vertically integrated units, networks, and independent hospitals with strong reputations can coexist. Mr. Britto said that despite the improvement in operators’ results in the last quarter of 2023 and the first three months of 2024, pressure on hospitals remains.

Abramge, the health plan association, said that the recovery is partial and that more than a third of operators still report negative results.

*Por Beth Koike — São Paulo

Source: Valor International

https://valorinternational.globo.com/