One step back, two steps forward – Hungarian private healthcare in the light of 2023 figures

Introduction

Continuing our series, in this year’s edition of our Private Health Review, we aim to provide a comprehensive overview of the current situation in this segment. Our report continues to be based on the performance of the largest players in the sector, but we also update our estimate for the size of the market.

In our previous publication, we used the term ‘loss of momentum’ to describe the current market trend. In light of this, the past 12 months have been characterized by the same slow, gradual trend, but now we have to use the term ‘recovery’ as an indicator. The poor market environment at the end of 2022 has carried over into the first half of the following year, but looking at the market results, private healthcare as a whole has moved beyond a period of weakening demand and is back on a growth path. Of course, this is not equally true for all players in the sector, as differentiation is also continuing. However, this new growth path has been accompanied by a further weakening of profitability.

Economic environment

The macroeconomic environment has improved compared to 2022, but it is still not the most favorable for the private healthcare market. In 2022, stakeholders closely monitored changes in inflation and energy prices, as these have significant impact on demand and costs. Both inflation and energy prices have decreased significantly since their peak, which has taken a significant burden off the shoulders of private healthcare operators, but due to long-term contracts these had different impact on each healthcare provider. However, high inflation and a general shortage of workforce in previous years have continued to put pressure on the cost side, as competition for professionals remains strong. Differentiation between service providers is also primarily a matter of who can compensate for the impact of high wage inflation, whether through price increases, cost efficiencies or improved economies of scale.

What has helped and could help the recovery in the future the most is the improvement in demand, which has started to grow slowly this year thanks to the recovery in purchasing power starting in the second half of 2023. Comparing this trend with the general consumption statistics, it seems that the recovery is happening a little faster in private healthcare than in other consumer segments. The stabilization or slight recovery in private healthcare demand highlights that this expenditure continues to behave as a very basic consumption good, with demand more stable than for average consumer goods even in weaker income conditions. What has been the main lesson of the last 12 months, however, is that patients can also postpone these expenditures for shorter periods of time, so in the event of major external shocks, providers should be prepared for fluctuations in demand, but these phenomena seem to be more temporary in the healthcare market than elsewhere in the economy.

Regulatory environment

From a regulatory point of view, the main focus of the past period has been the preparation of the reform of the healthcare system and the harmonization of public and private care. This is a somewhat surprising but not illogical development, especially given that public healthcare has been battered by several factors since 2021 (new employment relationship, abolition of the gratuity, difficulties in providing care due to COVID, base funding). At the same time, balanced competition between public and private providers for NEAK-funded services is not a goal that can be achieved in a quick sprint. The push for sectoral neutrality thus seems more like the first steps of a marathon.

There have also been developments outside health regulation that have had a significant impact. Perhaps the most significant was the KATA tightening affecting ten to 20,000 workers in the health sector, which was particularly hurtful for providers employing professional staff in a second job. As most of these were state-owned, the consequences included not only the further cost pressures on private providers, but also the constant newsflow on hospitals closing, services ceasing and the consequent deterioration in the availability of state care.

The regulatory package aimed at reforming the healthcare system, which was published towards the end of the year, caused even more tension. The proposal to force doctors into state care was the main cause of the bad mood, but there was also talk of reorganizing the social care system, the GP care and the emergency care, centralizing laboratories and introducing performance-related pay for doctors, which also raised the possibility of pay cuts. Salary is a key issue not only for doctors but also for other healthcare professionals. For the latter, the long-awaited first step of the basic pay rise, which happened in the second half of 2023, has brought some relief, but the increased staff shortage is becoming a more pressing issue day by day. In any case, these developments have had a double impact on private healthcare. On the one hand, a number of measures have increased cost pressures, but perhaps more importantly, they have reduced the competitiveness of the public sector, which in turn has boosted demand for private services. The rapid depreciation of NEAK funding may be a problem for some private providers. With rising inflation and wages, NEAK funding has remained stable in nominal terms, making it worth less and less, and private operators receive no wage supplements. So the big question is: by the time we reach the last meter of the sector-neutral funding marathon, what will be left of the currently known range of NEAK-funded private services.

Knowing the above, it is not surprising that the regulatory environment and anomalies in the public care system are slowly but surely pushing doctors and professionals into the private sector, while the increasingly difficult public care system is leading to a growing flow of patients into the private sector. The key question, however, is how much the pool of solvent patients can grow in the current macro environment. We have seen a slow turnaround in this over the last 12 months.

In addition to the above factors, increasing regulatory uncertainty is also making the situation difficult for private healthcare players on the capital supply side. Indeed, over the past 2 years we have seen a substantial decline in investor interest in the sector, however in the medium-term external capital will be needed to ensure the industry’s steady development. We have also seen a positive factor on this front, as Liv Hospital has emerged as a significant new foreign investor and some Hungarian private investors have also been active.

Major players

Following the breakdown in last year’s edition, this year we have again included inpatient and outpatient, diagnostic and dental providers in a separate list.

• Inpatient and outpatient care providers

This time, the top list of inpatient and otpatient care providers was made up of those with a turnover of over 1.6 billion HUF, which is not much higher than last year’s threshold. Although financial data was not yet available for some companies at the time of writing, it is fair to say that the 2023 financial year was a year of much slower growth than previously. If we want to highlight the big trends, the significant slowdown of large service providers is striking, with single-digit or around 10% growth rates being the most common in the league of those with revenues of at least 5 billion HUF (TOP9) and only 3 players hanging out of the pack (BEK, Dr. Rose, and Wáberer). The decline in demand already mentioned in last year’s report is strongly reflected in these figures and in 2023 acquisitions have not really boosted the growth of the big players. Although the Tritonlife Group made a significant acquisition of Fresenius’ dialysis business, this only resulted in temporary growth, as Tritonlife also sold this business to the Hungarian state at the beginning of 2024. It is precisely because of this development that we have included two figures for Tritonlife, with and without the mentioned dialysis business.

However, it is interesting to see that there are several players with revenues of less than 5 billion HUF that performed well above the average growth rate in 2023. Here, we can probably see that in the increasingly dense mid-market segment, where the turnover is between 0.5 – 2 billion HUF, those companies could make it to our TOP25 list, which had an outstanding growth rate.

Taking a static view of the top ranking, we can still see that the previously typified groups of service providers are still present in the market. The group of service providers that are also prominent nationally is made up of the TOP4 players. Here, Affidea has not been able to maintain much of its position, which is likely to be even more true after the state’s insourcing of diagnostic imaging services happens. The group following the TOP4 is still dominated by specialists (Maternity, Emineo, Focus-Med), but at the top of this group are also generalists (Swiss, Dr. Rose, Duna Medical). An important new development is that the largest independent rural provider, Kardirex, is now a significant flag bearer of this second group, representing the rapid development of private healthcare in the coutryside. The aforementioned 0.5 – 2 billion HUF turnover field is becoming more massive and dense, with only the leaders of this group making it into our TOP25 list.

2023 was a year of declining profitability, with EBITDA margins 3-5 percentage points lower than the previous year for almost all operators. The positive outliers are typically those that have delivered above-average growth (such as Dr. Rose, Wáberer and Kardirex) or operate in a completely unique market segment, such as FirstMed.

• – Laboratory and diagnostic service providers

Compared to the inpatient and outpatient healthcare providers’ list, the laboratory and diagnostics players have shown smaller increase in turnover and a higher rate of decline in profitability though the difference was not significant. However, this list is not as broad, so the poor performance of a larger player can significantly affect the average rate of growth. Our list also clearly shows that covid specialists are increasingly being squeezed out of the market, with Smart Hospital’s revenue in 2023 being one fifth of the previous year’s, while we have no data on WhiteLab at the moment.

Other diagnostic providers have continued to grow at a steady pace, but of particular note is Spektrum-Lab’s 87% revenue growth in one year, which is a good indication of the performance of the company, which started in 2021 and has already made it into the TOP10 laboratory diagnostics companies by 2023. In addition, the average growth and profitability of the companies in our top list are not far behind those of outpatient and inpatient care companies.

In the past, the centralization of laboratory and imaging diagnostics pushed by the state threatened some major players with the loss of significant NEAK funded volume, but this change has been postponed for a year in imaging diagnostics and for an uncertain period in laboratory diagnostics. Nevertheless, there is still considerable uncertainty among laboratory diagnostics players, as such a decision has a significant market-shaping effect. At the same time, while the government’s planned restructuring is being put on hold, further significant private investment or acquisitions of companies are unlikely.

•  – Dental providers

Last but not least, we also looked at the largest Hungarian-owned dental practices. In 2023, a turnover of more than HUF 2 billion was needed to make our TOP10 list. Of our three lists, dentistry saw the biggest increase compared to the previous year and the only one where profitability improved significantly. By 2023, as in the other sectors, the covid effect have completely disappeared and the list of dental operators was once again dominated by dental tourism operators.

The response to the hectic changes of recent years has not been the same, so that in the now recovering market, the top 10 players have remained largely unchanged, but there has been a significant shift in the order. There was a change at the top, with Helvetic Clinics taking the top spot on this year’s list. In the majority of cases, the players that ranked lower than average achieved below average growth compared to the previous year, and their profitability is also significantly below average, supporting our view that some have responded better to the turbulent changes of recent years.

In addition to dental tourism, retaining local patients remains important for tourism-focused companies. However, the few operators with a specific focus on the local market hold their place surprisingly well in our top list.

Overall, the recovery in foreign demand has allowed the average growth of top dental practices to significantly outpace that of outpatient and inpatient facilities, while in our view the largest players focusing on local patients have been able to keep pace with growth mainly through consolidation.

Market size

Although we know a lot about the growth of the largest private service providers, the demand for service providers is growing, the question is raised more and more often on how big a business segment we are talking about. To conclude our report, we would like to update our market size estimates from last year.

Again this year, we have used the more detailed statistics on total healthcare spending from the Central Statistics Office and selected spending on privately financed inpatient and outpatient care. As this dataset is now available up to 2021, we were able to estimate the figures for 2022 and 2023 using growth rates for the top providers. Based on this, private spending in the sector could have reached 600 billion HUF in 2023. We have also tried to estimate the value of services provided by private providers and financed by NEAK subsidies, as this care is also part of the output “delivered” by private providers. In these estimates, of course, we also run into the definition of who is actually considered a private provider, depending on the definition, the amount of these expenditures could be around 250 – 350 billion HUF (the same was estimated by the authors Csaba Lantos-Kiss Borbála to be 250 billion HUF in 2018, so there is some growth in this sector, even if not too high).

Compared to the previous year, the share of the TOP 25 outpatient and inpatient providers in the total market has not changed much. This part of the private healthcare market only managed to increase its share by 0.9%, but even in such a difficult year, the growth of the private healthcare market was not interrupted.

Taking all the above together, we estimate that the total turnover of private healthcare providers in 2023 could exceed 900 billion HUF, 2/3 of which would be financed from private pockets and 1/3 from NEAK subsidies.

Summary

As we indicated in our previous report, 2022 (including the first half of 2023) was a year of stagnation. This was accompanied by a differentiation between the various private healthcare providers. This means that some providers were better able to adapt to changing circumstances, were more innovative or provided higher quality services, while others were less successful. As a result, differences between providers in the market have increased.

The experience of the past year and a half has shown that the private healthcare sector in Hungary is very sensitive to changes in economic cycles, which is due to the high out of pocket rate. A significant proportion of people pay for health services directly out of their own pockets, rather than through insurance or pre-savings such as health funds. The real solution to improve the situation would be a major overhaul of the financing mix. This could include strengthening insurance schemes, attracting more public subsidies or introducing other alternative financing solutions that would reduce people’s direct costs and provide a more stable financial basis for private healthcare providers.

Overall, the Hungarian private healthcare sector has faced serious challenges in the recent period, but an improvement in the economic situation and a gradual increase in purchasing power could put the sector back on a growth path in 2024, which was already evident in 2023. However, the rebound is taking place in a new context. While the last 5 years have been more of an extensive growth phase with a significant increase in capacity, we believe the period ahead will bring a slightly different type of competition. Infrastructure seems to be less and less of a bottleneck, so we expect the growth competition to focus more and more on quality and efficiency. Looking even further ahead, long-term stability and growth will require a restructuring of the financing structure to reduce the impact of economic cycles and to make the overall health system more efficient. In our view, growth in 2024 will exceed the 2023 level and mergers or acquisitions could start to take hold, which could also support further consolidation in the sector.