Challenges and Opportunities Private Investors in Mexico Healthcare

In the past two decades, the healthcare delivery system in Mexico has seen significant changes, that have affected the way public hospitals, but in particular, investor backed private hospitals grow and are managed.

Mexico is currently experiencing an economic recovery with a gross domestic product (GDP) growth of $1.7 Trillion USD since 2015, and also continuous growth in the middle class. Some estimate, that nearly half of Mexico’s population is considered middle class; however, according to the Mexico Statistic Institute, Instituto Nacional de Estadistica y Geografia (INEGI), only 41% of Mexico’s population is classified as middle class.

Either way the middle class in Mexico is undergoing characteristic changes. Many typical middle-class couples are postponing parenthood and choosing careers at the university level, such as engineering, medicine and law. These older parents have fewer children, and later in life. This shift, positively impacts a middle-class family’s disposable income. The IMF reported in 2012 that real growth in personal disposable income in Mexico was 3.6% as compared to the 3.4% in Brazil and 1.7% in the US.

This growing middle class have different expectations for goods and services that their parents didn’t have and it is these expectations and higher disposable income, that when combined, impact many market sectors. Promoting a noticeable increase in high end retail stores such as Palacio de Hierro and Liverpool, high end automotive dealerships such as Mercedes and BMW, increases in first time home buying and dining out at restaurants, vacations abroad, etc. These changes also have negative impacts on health. In Mexico, one out of three children is either obese or overweight, and one out of six adults suffer from diabetes. Additionally, like other OECD countries, the average life expectancy in Mexico continues to grow. The proportion of people from the age 65 or older is expected to triple to 20% by 2050; increasing chronic age-related health conditions. This growth of consumerism, albeit still considered more practical than their US counterpart, has also influenced the growth of many private healthcare insurance companies in Mexico. This is because many government healthcare providers, continue to struggle with the lack of specialists, low technology, more wait-times and crowded emergency rooms. Therefore, many middle-class Mexican’s purchase private healthcare in order to have access to private healthcare providers. Many familiar brands such as BUPA, New York Life, AXA and MetLife have been doing business in Mexico for many years. They provide many Mexicans, including the middle class with private health insurance, and compete with their Mexican counterparts such as Grupo Nacional Provencial (GNP) and others.

Private hospitals have been in Mexico for several decades. Many private hospitals began as small physician owned family businesses and their bed capacity and services reflected their size. Some would say they were seen as an opportunity for physicians to control their own destiny in a rapidly changing environment, and deliver their brand of healthcare to their community. Many of these hospitals attracted a specific patient population depending on the specialties of the founders. Today it is still not uncommon to see many of these private hospitals being managed this way in Mexico. They have an average size ranging from a dozen to forty beds with limited technology and low complexity services, but still providing a vital services to their communities. These hospitals are typically managed by medical directors who in many cases are founders as well as practicing physician with no formal hospital management career training. This may explain why there are more greenfield projects than mergers and acquisitions.

As private hospitals grew in the larger industrial cities such as Mexico City, Guadalajara, Monterrey, etc., so too, did the size of the private hospitals. These private hospitals in these larger cities offered their communities broader range of cutting edge technology and medical services. These larger hospitals typically have a bed count that range from one hundred to two hundred and fifty beds. It would be a mistake however, to assume that these hospitals are easier to manage than their US counterpart of equal size, if judged solely by the bed count.

These hospitals attract the very best physician specialists, and with them come the privately insured patients, self-pay patients as well as the upper middle-class members of the community. These patients are unsatisfied with the longer wait-times in emergency rooms, limited access to specialists and lack of cutting edge technology of some government hospitals.
In order to meet the expectations of their customers such as patients, physicians and insurance companies, these hospitals have to perform efficiently and with a high degree of customer satisfaction. Taking into consideration the patient population that these hospitals attract, it’s not uncommon to find that these hospitals have an ALOS of three (3) days or less. If these hospitals had to operate with a five or six (5-6) day ALOS, they would have needed to almost double their physical plant capacity, bed count, overhead and cost structure.

For the last decade they has been an outward migration of these types of private hospitals, into other cities in Mexico, such as Hermosillo, Puebla, Chihuahua, just to mention a few. This growth of private hospitals in other smaller markets is fueled by private investment, foreign and domestic to take advantage of opportunities that the current growth of the middle class in those markets; availability of insurance payors provide. As a result there is an expansion of more sophisticated private integrated healthcare systems such as Grupo Angeles, StarMedica and CHRISTUS Muguerza and others. Even with this growth and outward migration, the industry remains fragmented, which presents additional opportunities. The expansion and growth of private hospitals increases competition and creates challenges for hospital owners and operators and yet continue to yield very healthy double digit EBIDTA percent margins.

Recruiting and retaining qualified specialist has always been a challenge for all hospitals; and like many other countries in Latin America, Mexico has a shortage of medical specialists. Private Hospitals use different recruitment techniques to attract physicians such as providing them with medical office space at cost, incentive physician loyalty programs and forgiveness loans if they relocate or start a new service line.
Hospital owners and operators face the same cost control challenges that their colleagues around the world do. How successful they are at managing labor and supply costs while progressively improving services in this ever-increasing competitive environment, will determine the success or failure of these private hospitals.

Compounding the matter is the fact that many of the ancillary labor force that all hospitals need is also becoming harder to recruit and retain. Mexico’s educational system produces very talented individuals in these fields but the demand is outpacing the supply and there are very few technical schools that could serve as a choice between a trade and university level education.
Another challenge that is faced by both the physician specialists and these private hospitals in the new age of consumerism, is the middle class use of the internet and social media. The use of social media and the internet has brought a new level of access of personal medical information to these discerning consumers and they are now more likely to select a hospital and a specialist based on information they gathered on the internet. This is in vast contrast to how their parents made the same selection a generation ago. As a result, many specialists market themselves on the internet, on Facebook, Instagram, YouTube, etc. and the majority of private hospitals have dedicated department staff to specifically provide consumers with social media information and together with informatics team work on new and better search engine optimization strategies.

In Mexico, demand for healthcare services exceeds supply across the board, with disproportionate need in rural communities. Private hospitals are facing challenges on multiple fronts, even so investors continue to see long term opportunities. The uniqueness of these changes is that, they are occurring at a rapid rate. A growing middle class that is well educated, well informed and with more disposable income and higher expectations of physicians and private hospitals. Physician specialists who are in short supply, work independently and typically do not belong to any group practice, who are themselves at the top of their profession, look for hospitals that can provide them with the cutting-edge technology that they need, and the amenities their patients demand. These physicians are typically credentialed at more than one hospital and from time to time demonstrate their elastic loyalty by moving their practice and patients to a hospital which can meet their needs. Then there are the new entrants into the space, such a retail pharmacy that now offer very low-cost medical exams and sometimes even free if they purchase their medications at their pharmacies.

This is just a glimpse of the panorama of the evolving market forces facing today’s private hospitals in Mexico. This creates opportunities for investors, local and international private equity firms and for those who can successfully navigate through this environment will find themselves successfully shaping the future of healthcare delivery in Mexico.