With huge deficits, and big falls in GDP, will countries slash healthcare expenditure? And, if not, what steps will they take? And how will the crisis affect the private sector?

So far, the evidence suggests that big cuts are most unlikely with countries signalling either flat spend or a small rise of up to 3-4%. Unemployment has soared in many countries leading to large falls in social insurance contributions, but so far governments have made up the deficit. Of course, flat spending or a small rise would normally equate to a shrinkage, given that medical inflation typically runs at at least double the general inflation rate. But the governments should be able to squeeze down on medical inflation by holding down salaries and declaring war on big pharma. 

Portugal is declaring a 0.6%, rise according to academic Susana Oliveira. The Czech Republic should see a rise of 3-4%, according to Vladimira Teitelov, general secretary of the Association of Companies Health Insurance Funds, as should Spain, according to consultancy Tecsalud. Our sources say no cuts are planned for Romania and Hungary. The Bulgarian government is actually preparing a large increase, albeit from a very low base.

Of course these figures may mask big changes at the sector level. In general, we are told that the only sector to have rock solid secure funding is dialysis and the more discretionary the sector the more likely it is to be raided. Big pharma is always a good target and the Greek authorities are suggesting that prices should be the same in Greece as they are in Romania and Bulgaria.

Reaction times to the recession have varied widely. Whilst it was obvious by August that the situation was dire in Eastern Europe, south European states have been much slower to recognise the gravity of the recession. Indeed, getting the Spanish prime minister to use the word 'crisis' has become a national sport.

The immediate reaction to the crisis was to extend out payment times. In southern Italy academic Domenico Salvatore says these now can be as long as two years. Times have gone up to nine months as standard in Romania and over a year in Greece.

Budgets have also been clipped. Imaging and lab groups say that whilst the Czech and Polish authorities were happy to pay for any tests or images over their nominal budgets in previous years, this has now changed, and any work they do over and above quota may not be paid for at all. One manager told us: “Previously we would do extra work external to our budget, because we knew we would be reimbursed and because to do so increased our goodwill with regional authorities. Typically, it meant that the extra expenditure would then be added to our budget for the next year. Now we are being very careful indeed” This means of organic growth has now been stymied.

In Romania last autumn we saw a reversion to the old practice of simply declaring that there were no funds for particular treatments for several months. This led to a complete cessation of imaging work for 2-3 months.

If these are the knee-jerk reactions to the crisis, what are the short- and long-term policies we will see in these regions?

Short-term moves include no pay rises for healthcare professionals. Most countries will attempt to cut back on pharmaceutical expenditure with further moves to generics.

We will also see cut backs or attempts to cut back on the corruption which bedevils the region. In Greece the crisis has unveiled a culture of corruption with many hospitals massively over-ordering pharmaceuticals.

The prices paid for procedures will also be put under the microscope. The Portuguese are likely to look hard at the prices they pay for imaging and lab tests compared to the much lower prices over the border in Spain.

The basket of services provided by the state is also likely to be cut in hard-hit Eastern Europe.  We hear this is likely in Bulgaria and Hungary.

A final short-term effect is likely to be increases in official out of pocket payments. Hated by the electorate (witness the way the left swept the Czech regions in 2009 after its introduction) it, nonetheless, does lead to lower visit levels. The Bulgarian government is likely to introduce a layer of additional private insurance which may be compulsory for all citizens in early 2011.

Longer-term, the crisis is likely to lead to overdue structural changes with a shrinking of the bloated and inefficient hospital sector. In Poland, we have seen a shift from the secondary to the primary sector. The Bulgarians are preparing to take an axe to a third of their hospitals.

We also think it likely that the crisis will precipitate further decentralisation to regional healthcare authorities. This has happened in Poland and is likely to be implemented in Hungary by Fidesz, the right wing party which looks certain to win the April general elections.

So what does all this mean to the private sector?

Private sector outsourcing will go through a lean 2010 with poor cashflow and sales stunted by budget limits. Sales are likely to be down or up a few percentage points, depending upon the sector.

What happens then depends to a great extent on the political complexion. But in general, we think that there will be a rise in outsourcing. The move from inpatient to outpatient should favour outsourcing, such as imaging. And, if regional health authorities are given more fiscal autonomy, they are likely to turn to the private sector. Longer-term, the outlook for sectors like imaging looks reasonably healthy as new procedures, such as radiotherapy, evolve which are cheaper to perform with laser than under the knife.

Private care looks reasonably solid. So far, there hasn’t been any massive exit from the subscription healthcare schemes offered by the likes of Medicover and MidEuropa in Eastern Europe. What we have seen, however, are subscribers trading down to lower levels of cover. Margins continue to decline in subscription as a price war develops.

Nor have we seen (so far) a big decline in the privately insured in Spain. In Eastern Europe, Uniqa said that its healthcare insurance business doubled to €10m in Eastern Europe, adjusted for local currencies. Signal Iduna says that the going is very tough indeed in Romania and recorded an 80% increase in insurance sales in Poland. That sounds high, but Signal was hoping for 120-140%. These big increases are from low bases and may well reflect the introduction of new channels to market which bring healthcare policies to new audiences for the first time. We also hear that the claims record is not good. Overall, it is clear that insurers are missing their sales goals.

Discretionary private healthcare has already been hard hit. A Greek analyst reckons it fell 15% last year and is likely to fall a further 5-10% this year.
However, acute care is seen as holding up well. This is shown in the top prices paid in Romania for CMU Unirea and Medlife by Advent and Societe General respectively.