Universal Healthcare Coverage

Opportunities & Challenges ahead in Indonesia

Spotlight Indonesia
The New Frontier of Growth

October 2012
Universal Healthcare Coverage - Indonesia | 1

An introduction
With the fourth largest population in the world and a growing economy accompanied with rising incomes, Indonesia presents many opportunities to healthcare providers and suppliers looking for markets to expand in. Recent public reforms aimed at bringing universal healthcare coverage (UHC) to all Indonesians by 2019 is likely to bring significant changes to healthcare landscape as we currently know it. Clearstates New Frontier of Growth market brief presents an introductory overview of the ongoing developments within the Indonesia healthcare landscape as the UHC is being implemented, and highlights the challenges and opportunities for market participants specifically in the healthcare service provision, pharmaceutical, and medical device industries.

Health access remains limited and lacking despite strong economic growth
A growing population, healthy economy, and rising incomes have been a good mixture for the Indonesian healthcare industry in the past decade. Absolute healthcare expenditure has grown annually at a compounded rate (CAGR) of 18% between 2001 and 2011, greatly boosting demand for healthcare services, pharmaceuticals, and medical devices. Due to such increases in demand, Indonesias healthcare industry has made much progress in recent years. Yet, there still remains a severe shortage of healthcare infrastructure and healthcare human resources. In 2011, Indonesia spent only 2.7% of its GDP on healthcare - this translates into a meager per capita spending of USD 84 on healthcare in 2010, well below the OECD average of USD 4,598 and the East Asia & Pacific average of USD 336 in the same year (See Figure 1). Figure 1: Healthcare expenditure per capita versus GDP per capita, 2010
9,000 8,000 7,000

U.S., 8,233
Vietnam, 83 Indonesia, 84 Denmark, 6,253

2010 Health expenditure per capital (current US$)

6,000
5,000 4,000 3,000 2,000

Thailand, 179 East Asia & Pacific Average, 336

Malaysia, 368 UK, 3,495 Singapore, 2,005

OECD, 4,593

1,000
0 0 10,000

South Korea, 1,452

20,000 30,000 2010 GDP per capita (current US$) 40,000 50,000 60,000

Source: Worldbank Development The unequal distribution of healthcare infrastructure and resources have further Indicators exacerbated this shortage the majority of such resources are concentrated in Jakarta and Java Island, leaving the rest of Indonesias populations in the sprawling archipelago with little accessibility to healthcare services. Additionally, an estimated 50% of total healthcare expenditure is out-of-pocket (2011), making Indonesias private expenditure as a percentage of healthcare expenditure one of the highest in the world. This has led to severe inequality in terms of healthcare provision where there are urban-rural and rich-poor divides, due to low affordability and accessibility of healthcare services to the general population.

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As such, the Indonesian government has made steps in recent years to move towards universal healthcare coverage. Reforms first started in 2004 when a law was passed to bring about change to the Indonesian healthcare system. Weak political resolve was a strong inhibitor for change in the initial years of reform, but these efforts have gradually been ramped up in recent years. Most importantly, the recent healthcare bill ensuring the implementation of the Bandan Penyelenggara Jaminan Sosial (BPJS) has ended an era of uncertainty around the governments commitment towards universal health coverage.

Healthcare reform in Indonesia Moving towards Universal Healthcare Coverage

Figure 2: Timeline for Universal Healthcare Coverage Implementation in Indonesia

Current estimates put the total proportion of Indonesians covered by some form of insurance at 72% of the entire population in 2013. However, the system remains fragmented in nature, leaving many poor Indonesians without proper access to healthcare. The most recent healthcare reform law passed in 2011 aims to address this by integrating the major insurance schemes1 that are currently active in Indonesia. A new national social security agency, the BPJS, begins its role of integration and creating a national insurance scheme for all Indonesians in 2014, aiming to attain full coverage by 2019. This marks an important step in Indonesias healthcare progress by introducing a single -payer system. Through collaboration with health practitioners, universities, and other related ministries, the MOH has already taken steps to develop a road map INA Medicare 2012-2019, and further reforms to the countrys healthcare system are expected to follow this plan. The national insurance scheme is expected to be a comprehensive package which would cover the cost of hospital stays in third class wards for persons whose insurance has been paid for by the government; persons able to pay for the premium under the new scheme are entitled to first and second class wards depending on the scheme they have chosen. On the other hand, the provider-payment structure is likely to take the form of a mix of capitation and diagnostic-related group (DRG) methods. Such reforms, if implemented successfully, are expected to increase the accessibility of healthcare services to Indonesians, especially the poor and those residing in rural areas. The MOH estimates that it would be able to cover a total of 121.6m Indonesians in 2014 by integrating the major insurance schemes. For the rest of the population, coverage has been planned to gradually extend to the full 2019 population of 257.5m Indonesians, leading to a significant rise in demand for healthcare services. Yet, cost concerns and the consolidation of health insurance schemes into a single-payer system are likely to bring about pricing pressures as well, lowering the value of products or services offered in the healthcare industry

Current major insurance schemes providing coverage to Indonesians include Askes (for civil servants and pensioners), Jamkesmas (poor and near poor), Jamsostek (formal sector workers), Jamkesda (district-level schemes), and private health insurance. The inefficiencies of such a fragmented system are clearly seen in Jamkesmas coverage, where there exists a huge issue of mis-targeting and leakage to the non-poor, resulting in the poor continuing to experience poor access to healthcare. Jamkesda, managed by local government units may have been able to mitigate this slightly, however access to healthcare remains a large issue to the poor. Universal Healthcare Coverage - Indonesia | 3

UHC and its impact to healthcare service providers

Figure 3: No. of hospitals & no. of hospital beds per 100,000 in Indonesia, 2007-2012 Following political commitment in 2000 to fulfill the Millennium Developmental Goals (MDG), the number of hospitals in Indonesia has swelled in recent years, experiencing a 15% CAGR in the past 5 years (See Figure 3). This is further reflected in the number of available hospital beds per 100,000 Indonesians as well, rising by a CAGR of 12% in the past 5 years. Yet, despite the high growth in previous years, there still remains a severe shortage of healthcare services in Indonesia. Compared to the OECD average of 4 beds per 100,000 population, Indonesias hospital beds per 100,000 population is a low 0.94 (See Figure 4), reflecting a shortage of hospital beds as well as the comparatively low healthcare expenditure per capita.

No. of hospitals

2500
2000

0.94
0.53

1500
1000

0.55

0.60

0.59

0.70

500
0 2007 2008 2009 2010 2011 2012 Year Hospital beds per 100,000 pop.

No. of hospitals

Source: Ministry of Health Indonesia

Figure 4: No. of hospital beds per 100,000 and health expenditure per capita
5,000 4,000 3,000 2,000 1,000 0 4 5.00 4.00 3.00 2.00 1.00 0.00

Healthcare expenditure per capita (current US$)

0.94

1.79

2.71
1

2.1

2.17

Hospital beds per 100,000 pop.

Hospital beds/100,000 pop.

3000

1.20 1.00 0.80 0.60 0.40 0.20 0.00

Hospital beds per 100,000 pop.

2011 Health expenditure per capita (current US$)

* Healthcare expenditure for OECD and World averages are 2012 estimates + Data as latest available in Worldbank or Ministry of Health databases

Spike in demand for healthcare services expected

Consequently, UHC is expected to bring about an immediate spike in the demand for healthcare services once the BPJS begins extending healthcare services to all Indonesians in 2014. Past experiences in other countries such as Thailand have shown this effect to occur due to increased accessibility to healthcare following the implementation of universal healthcare schemes. The recent overcrowding of hospitals in Jakarta upon implementation of the Jakarta health card in 2012 is an example closer to home. As Jakarta currently has the largest and best cluster of healthcare infrastructure in the country, this severe shortage is expected to be even more acute in the rest of Indonesia once UHC has been implemented, presenting ample opportunity for healthcare service providers to fill supply gaps across the country. This is especially true in the rest of rural Indonesia where basic healthcare services are lacking severely, and the raised accessibility brought about by UHC would give the poor reason to seek healthcare services.

Source: Worldbank Development Indicators, Ministry of Health Indonesia

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Expected overcrowding of public facilities to benefit private providers

At the start of 2013, public hospitals accounted for only 40% of all hospitals in Indonesia; yet, the high concentration of hospital beds (83%) situated in public hospitals indicates that the majority of Indonesians are serviced by large publicly run hospitals. This is expected to change gradually over time as the more affluent population seeks better quality healthcare in and shorter waits in public hospitals. Many rich Indonesians currently go to Singapore and Malaysia to seek specialist treatment as there is insufficient infrastructure to provide good quality care despite there being over 1,800 hospitals within the country. Thus private providers of healthcare services can expect to see more opportunity in the near-term as the more affluent population demands for premium healthcare services.

Providers need to expect future challenges ahead in terms of quality standards and pricing
As demand stabilizes, healthcare service providers can expect challenges ahead as well. Under a single-payer system, the BPJS would be able to wield considerably more influence and power on issues concerning standards in the healthcare services industry including quality standards and pricing. The MOHs experimentation with DRG-based methods to calculate provider payments instead of the usual capitation or fee-for-service methods is a sign of the situation possibly changing towards this trend. More adoption of DRG-based methods of provider payments may ultimately lead to standardized quality of care and the gradual lowering of prices for healthcare services. During the implementation of universal health coverage in Thailand, pricing pressures from the government led to the demise of many small hospitals facing cost pressures which made it uneconomical to run small operations. In the long-term, healthcare service providers in Indonesia may also face similar pricing pressures due to the consolidation to the singlepayer system.

Private healthcare service providers better poised to take advantage of UHC

The implementation of UHC in Indonesia presents more opportunities for healthcare service providers in the near future, especially due to the current chronic undersupply of healthcare infrastructure within the country. We have already witnessed a slew of private investments into the countrys healthcare service industry looking to take advantage of the situation such as Ramsay Healthcares collaboration with Sime Darby in the region, and the rapid expansion of Siloam hospitals. With more breadth and depth in the pockets, we expect that large private providers are expected to be better poised than the public sector to navigate within the new UHC system in Indonesia.

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UHC and its impact to the Med-Tech and Pharmaceutical industries

The Med-Tech and Pharmaceutical industries in Indonesia have enjoyed healthy growth in the past decade led by expansions in not only the quantity of healthcare service providers, but also the quality of healthcare service providers within the country. This is likely to continue as the healthcare services industry in Indonesia continues to grow more aggressively following the implementation of UHC. Figure 5: Overview of Med-Tech and Pharmaceutical industries in Indonesia

Rural areas presents opportunities for large Med-Tech players with localized and innovative business models
As rural areas currently face chronic shortages of hospital services, the supply of medical equipment and technology in areas ramping up on healthcare infrastructure is expected to be one of the highest contributors to growth in the short to mid-term. Although strong in Indonesia due to their technological advantages, the traditionally dominant MNCs are likely to be slower in this volume race to supply rural healthcare service providers. This is largely because rural healthcare service providers are more cost-conscious or have lower awareness of the technology at hand. We have previously observed such a preference for low-cost products from China and South Korea in rural areas during the the governments last spending spree on healthcare. Despite this, MNCs may still be able to take advantage of the tremendous opportunity in the untapped rural areas by committing developing localized and adopt innovate business models suited for this segment. Possible methods include education programs for healthcare service providers in rural areas to raise awareness, more collaboration with local distributors to attain better reach in far-flung rural areas, or even customizing a product to fit rural areas needs.

MNC Med-Tech players expected to do well in larger cities, however pricing pressures may be a damper on value in the future
Conversely, MNC players would be able to keep their hold on larger cities where the increasingly affluent middle income population is likely to demand higher quality healthcare services accompanied with higher quality medical technology, especially in the private sector. Changes likely to bring advantages to MNC players include possible Universal Healthcare Coverage - Indonesia | 6

standardization of care under the DRG-system and increased regulations to bring about improvements in quality of care eventually leading to more demand in areas where the traditionally dominant MNC players are stronger in. Yet, even in larger cities, MNC players may soon need to contend with promoting cost-efficiency as healthcare service providers begin to grapple with pricing pressures. This is in contrast to the current trend where Indonesian hospitals with large budgets are clamoring to purchase high-end medical technology, such as 3.0 Tesla MRIs, in order to compete and attract affluent patients. The development of a value product segment that provides not only cost efficiency but value-added features may likely be the long-term direction for MNCs in the med-tech sector to develop in order to fully take advantage of Indonesias growth.

Local Pharmaceutical companies in prime position for UHC implementation

Local pharmaceutical companies currently have a strong hold on the Indonesian market, where low healthcare expenditure has generally favored the use of generics which makes up close to 70% of the Indonesian pharmaceutical market. Furthermore, regulators require all pharmaceuticals sold in the country to be produced locally, putting big Pharma at a disadvantage. Consequently, local players with their strong distributor networks are expected to gain tremendously from an expected surge in demand for low-cost generics under the UHC, especially in rural areas where the provision of basic healthcare would greatly increase population access to medicines.

Big Pharma should also be excited about UHC implementation in Indonesia

Despite dominance of local players, various international players such as Sanofi and Pfizer have invested in significant resource in the Indonesian market by setting up production facilities. This is likely the case as these companies still see tremendous opportunity in bringing innovative medicines to an increasingly affluent population and a country with rapidly improving healthcare infrastructure. UHC implementation is likely to further expand this base of patients willing to pay for innovative medicines as general access to medicines increase.

Price suppression expected for both generics and branded pharmaceuticals in the long term
Although the volume of pharmaceutical products is expected to surge following the implementation of UHC, many within the industry also expect to see the price-volume effect in action. Further exacerbating the price-volume effect is the transformation of the system into a single-payer system, giving the government more power in reducing the prices of drugs. Rising costs of medicines and healthcare services over the past few years has already run several local healthcare schemes dry. As pharmaceutical products form the largest proportion of healthcare expenses, the government is expected to fight to keep the costs of pharmaceuticals low. Already, pharmaceutical companies are beginning to feel the effect of other reforms accompanying UHC implementation. The launch of the e-catalog in 2013 opened the bidding process to the public, and has led to reductions in prices of up to 40% or more. Furthermore, many within the industry expect stricter regulations in the coming years to accompany a rise in the quality of healthcare services provided, raising costs for the pharmaceutical industry. Hence, value growth from increased access to healthcare services under the UHC is expected to be less optimistic in light of lower margins.

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Opportunities are abound despite challenges faced in UHC implementation

Amidst the excitement of the implementation of UHC in one of the most populous countries in the world, the road to providing full health coverage to all Indonesians is still filled with many challenges. Successful unification of provider payment mechanisms under the BPJS would take significant cooperation from the various agencies, whilst the specifics of what UHC would cover and premium rates have yet to be set. The collection of premiums would also be a significant issue in a country consisting of 70% of informal workers spread across 10,000 plus islands dispersed over a wide area. Furthermore, a chronic undersupply of medical infrastructure and healthcare manpower would limit the accessibility to healthcare services despite the implementation of UHC. It is imperative that the Indonesian government looks upon experiences locally (including Bali, Aceh, and Jakarta) as well as in other countries (such as South Korea, Taiwan, and Thailand) in order to avoid pitfalls along the way. Yet regardless of these challenges, UHCs accompanying reforms and widespread effects are still expected to bring about significant changes to the healthcare landscape in Indonesia. The bill implementing BPJS in the beginning of next year is a positive sign of the countrys growing demand for healthcare amidst growing affluence within the general population. Additionally, the countrys young population puts it in a position to enjoy demographic dividends in the near future, allowing smoother implementation of any reform requiring large public investments. Consequently, despite the industrys expectations of a gradual lowering of margins, opportunities are still abound as general accessibility and affordability to healthcare services rise rapidly. With this in mind, healthcare companies looking to successfully navigate in Indonesia would need to be increasingly invested within this diverse country in order to take full advantage of the potential that UHC will bring to the market.

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About Clearstate

Clearstate (www.clearstate.com), a business of the Economist Intelligence Unit, is a highly specialized healthcare research consulting firm that offers in-market insights and business intelligence complimented by strategic advisory to help clients to implement pragmatic and innovative growth strategies to tap into opportunities in the emerging economies.

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