Having built the shell of a 60 bed hospital in Bucharest for €2.3m, occupational health clinic chain Romar has decided to convert it into offices. Majority owner Erghin Hagi Calil says that the other two private hospitals in Bucharest both lost money last year.

He claims that Medlife Memorial Hospital lost €2.5m, with Euroclinic, owned by Dutch insurance group Eureko, losing €5m. Press reports indicate that Eureko tried to sell Euroclinic earlier this year.

Hagi Calil, head of Romar, in which the Romanian Construction Fund 2 took a 33% stake for €3m in 2007, says that hospitals cannot make money, as cash payments for private healthcare are not tax deductible. The private healthcare insurance market, which could guarantee a flow of patients, is also undeveloped. But Hagi Calil hopes that, after elections in December, the incoming government will make healthcare tax deductible, possibly as early as January 2009.

Our Analysis: As in Poland, the small companies in the private healthcare sector in Romania are not really capable of bearing the financing costs of new-build hospitals, with typical pay back times of ten years.

These companies are used to subscription occupational healthcare services, where cash flow sorts itself out in the first 12 to 18 months, and the only investments are renting a clinic, hiring some doctors and leasing some basic equipment. In essence, there is no serious acute care in either country, aside from one or two outsourcing deals in Poland with companies like EMC.

The irony is that in both countries, the publicly-owned hospital networks are drastically underfunded and crying out for more investment. The private sector is generally shunned, and yet, unless the government is prepared to massively ratchet up public spending on healthcare, where else is the money to come from?

Others do not share Hagi Calil's optimism that an incoming government would swiftly make private healthcare tax deductible. Daniel Lynch at 3TS Capital, 3i's East European arm, says: "Sure, there is a heap of reforms, but the Romanian parliament is kind of sticky. It could take 4-5 years for them to be passed."

Aside from the thriving lab/imaging sectors, Romanian private healthcare divides into occupational healthcare for Romanian nationals and private healthcare for multinational employees.

The margins in the latter are enormous, with firms like Centro Medical Unirea and Medicover making 40% margins, and charging €80 to €120 a month.

But occupational healthcare is another matter. Romanian companies have to supply this basic service for their employees, and the charges are very low - Hagi Calil puts them at €2 to €4 a month. He services 300,000 individuals through his national network, and sales were flat in the first half.