InSight: Mansfield Advisors reviews the prospects for private investment in Spanish and British hospitals

Spanish and British health services are remarkably similar, but where Spain and the UK differ is the scale and scope of private hospitals. Paul Fegan, senior engagement manager, and Henry Elphick, chair, of Mansfield Advisors consider the two markets and ask, can we ever expect to see the development of large ‘full service’ private general hospitals in the UK?

In the simple characterisation of health care systems as either ‘Bismarck’  or ‘Beveridge’, the Spanish and British health services are both examples of the latter. Both are largely funded through general taxation; both use primary care gatekeepers to manage access, and both rely to a significant degree on public provision. Sadly, both systems also struggle with waiting lists and a sense of chronic underfunding, and both rely on contracts with private acute hospitals to meet demand. Spain sustains large private hospitals, offering emergency treatment and maternity, whereas the typical UK private hospital is small and focused entirely on elective care.

Private equity is an active investor in both the UK and Spanish hospital markets – for example, in the UK, BC Partners and Centerbridge have owned BMI Circle, and Cinven Spire Healthcare respectively, and in Spain, CVC, BC Partners and Cinven all owned assets that are now part of Quiron Salud. Macquarie Infrastructure and Real Assets currently own Viamed Salud.

Each market, whilst similar, has important differences.

Who pays, who provides, what is provided and why?

Key differences between the private acute markets in Spain and the UK have implications for investment in the sector.

Capacity

Spain has over 32,700 private acute beds in 295 hospitals. The UK has just over 7,600 beds in 190 hospitals. At an average of just 40 beds, the UK private hospitals are therefore much smaller than the average 111 beds per hospital in Spain, and Spain has more than six times as many private acute beds per million population as the UK. LaingBuisson estimates that the UK private acute market was worth £5.5bn in 2019 (the last year before the pandemic skews market activity), compared with £7.9bn in Spain.

Moreover, Spain’s private acute hospital sector includes some very significant institutions. For example, Hospital Teknon in Barcelona has 285 beds, 14 intensive care cubicles, 20 operating theatres for high and low complexity procedures, and a 24-hour emergency suite, with resuscitation facilities. In fact, it is ‘normal’ for Spanish private hospitals to have emergency rooms, whereas in the UK, it is unknown. Even in London, only a handful of private hospitals offer urgent care, and none provide an accident and emergency service.

Private payors insurance

Undoubtedly one of the drivers of this difference is the penetration of voluntary private medical insurance (PMI). In both the UK and Spain, the Beveridge system assures universal coverage (you can’t opt out of paying tax), so PMI is duplicative – that is, it provides an alternative to the national health system, but doesn’t exclude anyone from using it. In Spain, around 25% of the population is covered by PMI, compared with around 11% of the UK population. That translates to around 11.8 million Spaniards and 6.8 million Britons, some 1.7 times as many people covered in Spain than in the UK. At least part of this may be because PMI is cheaper in Spain, but since neither country has community rating or risk equalisation, both markets are structurally similar.

Essentially this implies that, unlike the UK, Spain can justify and sustain large profitable ‘full service’ private general hospitals because it has a critical mass of people with PMI. Yet interestingly, the market for PMI is as skewed as the UK. Just over 20% of insureds, or 2.4 million, live in Madrid. Similarly, just over 20% of UK insureds, or about 1.6 million, live in London. As a result, both Madrid and London are generously provided with private hospitals. However, Madrid is underprovided relative to the national average. Similarly, Barcelona, with nearly 10% of insureds, is also underprovided, whereas the London market is well ahead of the national average and may be close to overcapacity.

Furthermore, PMI in Spain has a much broader scope, and usually includes maternity and emergency treatment. In the UK, private acute hospitals are stuck in a Catch-22 scenario: none offer emergency treatment because it is not reimbursed by insurers. Meanwhile, insurers do not cover emergency treatment, presumably because private hospitals do not offer it.

On this basis, unless there is a significant increase in PMI scope and penetration, UK private hospitals are destined to remain small, and focused on elective care. While NHS waiting lists might prompt more to take out PMI, this effect could end up being a temporary one should the NHS successfully tackles the backlog. And it still does not necessarily mean that any uptick in penetration would result in the scope of insurance being extended to sustain new ‘full service’ private hospitals in UK.

Private payors self-funding

In both Spain and the UK, corporate policies are a significant component of the market. Hence, penetration falls in retirees, just as PMI gets more expensive. With significant waiting lists in both countries, growth in self-funded treatment has been strong. The UK self-funded market grew by 7.5% CAGR 2014-19, compared with 2.7% for the market overall. Comparable figures aren’t available for Spain, but out of pocket spending on inpatient and day care (which includes co-payments as well as self-funded care) grew by 8.0% CAGR 2015‒19, compared with 5.2% for the total private acute market.

However, self-funded treatment tends to be focused on specific elective procedures, particularly those that are discrete episodes of care rather than requiring ongoing (open-ended) treatment and cost. Hence, in the UK, self-funding is concentrated in ophthalmology, orthopaedics, and some general surgery and diagnostics, such as endoscopy. Self-funding is therefore unlikely to stimulate an expansion in the scope (or capacity) of British private hospitals on its own. While the scope of self-funding is likely to be similar in Spain, it augments existing activity in ‘full service’ general hospitals.

Public payors

Another significant difference between Spain and the UK is a clearer distinction between public and private provision. Both the Spanish and UK health services contract with private hospitals. Some 41% of the Spanish private acute market is accounted for by public funding, compared with 31% in the UK (almost entirely in England).

Many UK NHS hospitals earn private patient income, including through operation of private patient units (PPU). Hospital trusts in England earned £681.3m from private patients in 2019/20, but 63% of this was earned by the top 10 trusts, all in London. The most successful, the Royal Marsden, earned £136.6m alone. There is no equivalent in Spain – public hospitals only serve publicly funded patients.

In both Spain and the UK, the public health systems outsource activity to private acute hospitals. In the UK, that typically means private hospitals serve NHS patients in the same facilities, perhaps with some differences in the level of non-clinical service. In 2019, 2.9% of NHS funded activity was delivered by private hospitals. Spain has a similar system, so-called ‘partial conciertos’, where the public system commissions a volume of activity in private hospitals which otherwise serve private patients. This accounts for 10% of revenue.

However, Spain also has private hospitals which exclusively serve the public system. ‘Structural conciertos’ are private hospitals whose only source of income is public payors and account for 25% of private acute beds. They are fully integrated into the public health system and serve publicly funded patients. Most are in Catalonia (28 hospitals) with another ten are spread across Spain, including one in Madrid.

Spain has also deployed Public Private Partnerships (PPP), with 8% of private sector beds in PPP hospitals in Valencia and Madrid. Partnerships usually have 25-year build and operate contracts where hospitals, as with structural conciertos, are fully integrated into the public health system. The main difference with PPPs is the public health system has the option of taking ownership at the end of the contract period.

Hence, some of Spain’s large ‘full service’ private hospitals exist because they have been developed together with and funded by the public health system. The UK currently lacks the architecture to deliver anything similar.

The Private Finance Initiative (PFI), comparable to Spain’s PPP, has been discontinued and continues to be criticised for burdening the NHS with significant costs. While Independent Sector Treatment Centres are, in principle, like structural conciertos – developed under contract and integrated into the NHS – they are, like most private hospitals,  focused on straightforward elective care.

The other option might be private operation of an NHS hospital, but Circle’s management of Hinchingbrooke Hospital ended in failure.

Conclusion

Despite similar public health systems, Spain has developed a parallel private acute hospital market. Indeed, private hospitals in Spain have more in common with countries like Germany or France, where Bismarckian social insurance puts private and public hospitals on a level playing field in an integrated market.

It remains extremely unlikely that the UK would develop ‘full service’ private hospitals, with emergency rooms and capacity for complex care, without NHS support, and there is nothing to suggest the NHS is about to enable this to happen in any UK country.

Nevertheless, there is nothing inherently wrong with a private acute market focused on a limited range of elective procedures in a limited range of specialisms. Even if the clinical service is identical to the NHS, there will always be people who want to pay for better quality ‘hotel’ services, and, notwithstanding the debate about equity, pressure on the NHS can still be relieved as people opt to self-fund, use PMI or the NHS itself contracts with private hospitals.

There is a broader debate about how far the UK is willing to let this go, but given the ongoing capital constraints the private sector could play a significant role in augmenting elective capacity. First, though, it’s about winning hearts and minds. Private acute providers need to be seen as a solution to the problem and a partner to the NHS.