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Change in the Hospital Market – Some Challenges, Many Opportunities

Credit Suisse report on Swiss healthcare, focusing on the hospital market

Credit Suisse today published a report on "Swiss Healthcare System 2013 – Change in the Hospital Market." In terms of land mass, Switzerland has the fourth-highest hospital density in the OECD. Around 98% of its population are able to reach a hospital by car within 20 minutes. The new hospital financing regime is likely to ensure a welcome move toward greater competition and consolidation in the Swiss hospital market in the medium term. In view of growing hospital demand, Credit Suisse economists believe the opportunities provided by this structural change will outweigh the risks. In particular, they forecast especially strong growth in demand in the wider agglomerations surrounding Zurich, Geneva, and Lausanne. The outdated building infrastructure seen in many cases, however, is a problem that entails financial challenges for the hospitals concerned. On a nationwide basis, construction projects worth nearly CHF 9 billion can therefore be anticipated – on a rising trend.

Employing around 140,000 people, hospitals constitute the most important sub-sector and biggest area of costs in the healthcare industry. The new hospital financing scheme that was introduced at the start of 2012 is aimed at systematically driving competition on quality and curbing the ongoing rise in costs. The extent to which competition is actually taking place remains to be seen. There is currently evidence that the cantons are not implementing the amended Health Insurance Act (KVG) on a uniform basis, which is likely to result in a distortion of competition. This creates considerable uncertainty, not only for hospitals and healthcare politicians but also for providers of private-sector funding solutions such as the banks.

Strong Growth in Demand in Zurich and Geneva/Lausanne Regions
The hospital sector is characterized by two opposing trends: On the one hand, the shift from inpatient to outpatient services is set to continue and will further reduce average treatment times and therefore the required bed capacity. On the other, demand for healthcare services in hospitals will go on growing. Owing to differences in population growth and age structure, however, growth exhibits a divergent picture across the different regions. In the future, according to the Credit Suisse growth forecast model, demand is likely to grow at an above-average rate in the wider conurbations around Zurich, in Central Switzerland, and – with the exception of the core cities of Geneva and Lausanne – in the Lake Geneva region. Demand is likely to develop at a below-average rate, however, in many peripheral regions as well as in the Basel and Bern areas.

High Density of Supply in Urban Centers and Large Swathes of French-Speaking Switzerland
The hospital market is heavily tied to distance. The future development of regional demand and density of supply will therefore play an important role in the new competitive environment. Density of supply – in other words, hospital supply compared with hospital demand – is above-average, particularly in the large urban centers. The study also highlights a divide between the western and eastern halves of the country. Density of supply is higher in the cities of Geneva, Basel, Lausanne, and Bern than it is in Zurich. In regions with low future growth in demand and a high current density of supply, smaller hospitals in particular face challenges and are increasingly likely to be forced into specialization and cooperation with other institutions – including across cantonal borders. Unless politicians intervene in a bid to preserve existing structures, this development will inevitably result in a consolidation process – likely accompanied by many a political storm.

Impressive Hospital Provision – Need for Consolidation Creates Opportunities
The Swiss population are highly demanding when it comes to their ability to get to a hospital in a short time. Indeed the figures are impressive: Despite Switzerland's difficult topography, 98.4% of the population are currently able to reach a general hospital by car within 20 minutes. Central hospitals providing state-of-the-art medical care can be reached by more than 90% of the population within half an hour, according to the study. This dense coverage is costly and is not purely advantageous from a care standpoint. Many small hospitals offer a wide range of treatments, resulting in the fact that some treatments are performed very rarely. It is widely accepted that the quality of a specific treatment improves as the number of cases increases. For that reason, consolidation is desirable not only for efficiency reasons but also from a care and quality perspective.

Hospital Buildings Suffer Major Investment Backlog
In an environment shaped by competition, hospital properties take on greater significance. Those that are efficient to operate, as well as designed with the needs of patients in mind, are instrumental in terms of successful positioning in the market place. Given that some buildings are now showing their age, however, hospitals face major financial challenges. Although spending on hospital services has almost doubled since 1995, investment in new and refurbished general hospitals in 2011 was only 8% above the 1995 level. The degree to which hospital infrastructure is geared up for the new environment varies sharply from canton to canton. For example, the period up to 2011 saw a distinctly high level of investment relative to hospital admissions in all cantons in Central Switzerland with the exception of Schwyz. Cantons from all areas of the country – including both Appenzells, Jura, and Ticino – can be found at the other end of the scale. In terms of their ability to fund infrastructure, hospitals are far from enjoying a level playing field when it comes to this new competitive environment. In many cases, there is now a need to make up for past failings. Construction projects worth in the region of nearly CHF 9 billion are currently anticipated on a Swiss-wide basis. The amount of investment proposed over the coming 5-15 year period is equivalent to the volume of construction undertaken in the last 17 years. However, the planned volume is likely to be just the tip of the iceberg as far as the hospitals' plans are concerned.

New Environment: Challenges As Well As Opportunities
The challenges facing the hospitals and cantons can essentially be solved. Supported by coordinated hospital planning on a cantonal and ideally cross-cantonal basis, competing hospitals must join forces to offer complementary services. Another opportunity exists in the extension of scale economies at a single location, while other hospitals are operated as satellites to the primary care service. These changes do not necessarily go hand in hand with a reduction in staff and service provision in the hospital industry. Instead, the result is more likely to be a shake-up within the sector. Overall, however, costs are likely to fall and quality to increase. The new financing regime also offers scope for private investors to take over and run existing or additional services that extend beyond core medical services at a particular location. In an ideal scenario, a hospital will boost its profitability by outsourcing these services and position itself more successfully in the market place through attractive additional offerings. In the future, therefore, hospitals will require an entrepreneurial mindset as well as qualified doctors and care staff.