Healthcare Russia

Healthcare Market Evolution in Russia

The Russian healthcare system and market have been going through a challenging but interesting transformation period, which, in our opinion, opens a "window of opportunity" both for traditional healthcare players and emerging brand new business models.

In Russia, healthcare spending is still materially behind that of the developed countries. Despite that, according to official figures, public spending increased by 74% in real terms over the last decade, healthcare costs in Russia amounted to only 5.4% of GDP in 2014, according to the World Health Organization (WHO), or 3.7% of GDP, according to the World Bank.

Even with an optimistic view, we witness a 4% to 8% gap compared to the developed countries. According to WHO, health spending accounted for 11.3% in Germany, 13.6% in the US, 8.9% in Brazil and 6.9% in Poland.with an optimistic view, we witness a 4% to 8% gap compared to the developed countries. According to WHO, health spending accounted for 11.3% in Germany, 13.6% in the US, 8.9% in Brazil and 6.9% in Poland.

According to the Russian Ministry of Finance, the Government has no plans to reduce healthcare costs in 2016. There is no official data on the longer-term budget available as the planning period for the state budget was reduced from 3 to 1 year subject to Federal Law No. 273 dated September 30, 2015. However, we cannot expect that the current healthcare financing gap in Russia will be bridged by public funds in the medium term. This is due to both the overall economic situation, including the adverse impact of low oil prices on the Russian budget, and recent regulation developments, namely the health reform with the new model of healthcare co-financing by the Government and citizens as part of in the pilot launch of Compulsory Health Insurance + (OMC+).

On the other hand, we also see a trend when the voluntary health insurance market, historically 95% funded by employers, is squeezing in real terms as companies, mainly small and medium businesses, reduce their costs associated with employees’ benefits. Many of them either reject voluntary health insurance, they exclude expensive services or offer less clinics. Insurance companies, major players in the voluntary health insurance market, recognize they do not expect any growth in this market in the near term and insist that the co-financing model can be a source for the further acceleration. Therefore, another trend in this sector is healthcare costs shifting to consumers.

According to various experts, the average share of medical services funded at the expense of consumers does not exceed 20–25% of the total medical service market, including the shadow market. Naturally, the paid medical services fall mainly on the middle and high income population. Taking into account the above factors, we reckon that the proportion of paid medical services will rise in the medium and long term and can reach about half of the healthcare market in the 15-year horizon.

• Firstly, it is often quite difficult to get timely and high quality health services with the compulsory health insurance programs, which contributes, on the one hand, to the development of the shadow market and, on the other hand, to the growth of paid medical services.
• Secondly, consumers who are accustomed to receive medical services under the voluntary health insurance programs and face a reduction in social benefits will be compelled to cover their medical expenses. However, when people pay "from their own pocket", they tend to become more demanding to the quality of services, value for money proposition and service level. Clinics will have to become more competitive and innovative to keep customer loyalty.
• Finally, the private clinics are first to adapt innovative diagnosis/prevention/treatment methods and state-of-the-art technologies, following, albeit belatedly, the global trends. Such services are too expensive for the public clinics and compulsory health insurance programs, however, the demand will grow alongside of the growing welfare.

Apart from the local trends, we scan a number of global developments, which will also impact the Russian healthcare market.

A good example is the so-called 4P Medicine (Predictive, Preventive, Participatory and Personalized). Genetic testing and personalized prevention/treatment plans are gaining popularity in Russia, especially Moscow. However, we expect that the more educated and informed people get, the higher demand for these services will be making the prices go down. This trend will push forward the market of preventive and wellness services and, ultimately, transform them into the mass market category.

The digitalization and "uberization" will definitely affect the healthcare market. Over the last 3–5 years, the Russian market saw a variety of start-ups operating in the healthcare market without providing real healthcare services. The emerging market of digital healthcare services is very diverse and includes cloud storage of medical records, online appointments, remote physiology monitoring, online medical advice, telemedicine, web-platforms for interaction between physicians and patients, etc.

These global trends will only intensify their influence in Russia in the coming years, and the companies that can most quickly adapt to the changing market landscape will take the most advantageous position and capitalize on this.

Thus, we see a "window of opportunity" for both the major traditional healthcare players, such as clinics, and the new players wishing to develop innovative business models.

Service level, loyalty development and customer retention in the context of affordable prices are becoming more and more vital for larger chains of clinics. This, of course, will require both innovative marketing/customer service solutions and better operational efficiency.

On the other hand, we anticipate more independent players to emerge in the digital medicine or integrate their solutions into traditional medical establishments.

Nevertheless, it is time for the healthcare market players to review their competitive strategy in light of the Russian and global healthcare developments and get adapted to the current and future trends.

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