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Healthcare M&A: creating opportunities

01 October 2009 FAnews

FAnews spoke to Blum Khan, CEO of Metropolitan Health Group about mergers and acquisitions in the healthcare industry and the impact it will have on the various role players.

There are currently 120 medical aid schemes in the healthcare sector. "This is definitely too many," says Khan. "The result is a fragmented industry. We need larger risk pools and I believe that in the near future, we will see more mergers in the healthcare space. The consolidation will make some smaller businesses unviable, so we may end up with no more than 30 to 40 large medical aid schemes."

Khan believes that initially, these mergers will be more evident on the medical aid scheme side than on the medical administrator side. "However, the realities of the cost of operations, the need for capital expenditure in new systems and information technology, the need to realise economies of scale and critical mass so that the benefits of procurement can be derived, will drive consolidation. In future, there will be a need to have a strong balance sheet supporting the administration business, so this may also lead to consolidation."

NHI uncertainty

While Khan believes that uncertainty around NHI may lead to an acceleration of mergers and consolidation, he notes that GEMS may drive the early phases of consolidation.

With regard to the impact of the NHI on Metropolitan Health Group (MHG), Khan believes it will be positive. "MHG is in a strong position to be a winner from the introduction of NHI. MHG has interesting competitive advantages resulting from its proven track record in delivering high quality administration services to large medical aid schemes.

It also has a low cost business model, probably the lowest in the industry. Affordable healthcare is all about low cost of operating, high quality service to patients and achieving the optimal levels of access to healthcare for all South Africans."

Challenges

"Ensuring that disruption to the members is kept to an absolute minimum is the real challenge during mergers," comments Khan. "This can be mitigated through good planning, structured implementation of the mergers and professionally dealing with issues such as change management.

"The impact on the broker is that, normally, mergers lead to renegotiation, settlement or termination of contracts and agreements. The rationale for the merger must be sound and the brokers must be motivated to buy in.

"What needs to happen is that a process of consultation with all stakeholders, including the brokers, needs to take place. Typically, if a win-win can be achieved for all stakeholders then wider support for the merger will be achieved."

Opportunities

Khan notes that the new world in healthcare will bring many new and exciting opportunities and will require innovation and willingness to change from all.

"Fewer schemes in the market will be a good thing, if the benefits of critical mass can be extracted and passed on to the consumers. Large medical aid schemes will ensure that the non-healthcare expenses are kept at competitive levels. Similarly, fewer administrators could be a good thing, as long the industry remains attractive to large institutional investors."

For brokers, Khan believes that mergers could result in new opportunities. "Good brokers will always have a role to play. They will provide the professional advice which supports the merger process. However, brokers, like other service providers, must demonstrate their value.

"Expect large scale change as the main feature in the future of the healthcare industry. Players who can adapt and respond to the new challenges will survive and succeed," says Khan.

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