Developing World Healthcare Blog

Indonesia: Changing Healthcare Landscape Versus the Rupiah

Indonesia is one of the most interesting developing countries in Asia when it comes to healthcare:

  1. The population of 253 million is #4 in the world to China, India, and the US.
  2. Per-capita income growth has been 3.8% - 4.8% annually over the past five years.
  3. Healthcare spending is 3% of GDP (versus the global average of 10%.)
  4. Medical infrastructure is in short supply with 6 beds and 200 physicians per 10,000 people.
  5. The government started phasing in universal health insurance (Jaminan Kesehatan Nasional or “JKN”) last year with a target of 100% coverage by 2019.

Indonesia (like every other country) has its risks: some of the positives listed above cut both ways, and there are macroeconomic concerns. First, the implementation of universal health insurance is straining the government’s finances to the point that many observers doubt that the government will hit the 2019 target. Second, shortages and misdistribution of infrastructure have started to strain the healthcare delivery system during the JKN’s initial rollout.

JKN: A Promising and Challenging Driver of Demand

Prior to January 1, 2014, a variety of health insurance programs for the poor/near poor, civil servants/military, and private sector employers covered 63% of Indonesia’s population, leaving 37% uninsured. The JKN consolidated these programs into one and intends to expand coverage to the balance of the population over the following five years. The program’s year-end 2015 target for coverage is 70%.

JKN faces significant challenges with cost and access. Indonesia’s Social Security Management Agency for the Health Sector, which administers JKN, has reported that the program ran a $116MM (3.8% of premiums) deficit in 2014. There could be more deficits this year. The development has several implications. The government likely will have to increase premiums in 2016, and possibly in future years. Benefit cuts are an option, but appear to be a last resort. In addition, private insurers have been concerned about coordination of benefits with the JKN because of the potential credit risk.

The access issues come in several forms. As noted earlier, Indonesia has inadequate numbers of doctors and hospitals beds. Regional disparities are worse. There are just under 9 doctors per 10,000 population in Jakarta compared to 3 doctors per 10,000 population in rural areas. According to the Ministry of Health, hospital occupancy rates in Jakarta and East Java (20% of Indonesia’s population combined) exceed 100%.

Presidential Decree Number 111/2013 required all employers to enroll their employees in the JKN, but many employers have refrained from doing so out of concern that the coverage will be inadequate. A January 2015 article published by the Economist Intelligence Unit noted that private-sector employees enjoyed “mid-tier” health benefits under the old system, but now have to wait alongside other participants under the JKN at primary care facilities rather than seeing their existing physicians.

A final concern is that the government is starting to enforce a mandate that all private hospitals start accepting JKN patients. The plan’s reimbursement rates are relatively low, so this requirement will increase margin pressure and undercut the "premium" nature of these facilities.

You Can’t Overlook the Rupiah in Assessing the Opportunities

The most significant macroeconomic hurdle to investing in Indonesia is the rupiah, a currency that has depreciated by 32% over the past five years and remains vulnerable (down roughly 7% YTD against the US dollar). An investor can hedge the exposure, but the cost is high. In addition, some healthcare companies face ongoing margin pressure because they import their raw materials. Indonesia’s listed healthcare companies do not have substantial exports, so they lack a natural hedge.

Indonesia Has a Small Number of Healthcare Stocks, But the Quality is Pretty Good

The universe of investable listed healthcare companies is small. There are ten companies with market capitalizations in excess of US$50 million, and only the first three have significant liquidity. Most companies have a controlling shareholder. Several of these companies (particularly Kalbe Farma, Mitra Keluarga, and Siloam International) have comprehensive investor relations programs. Four of the companies are private hospital operators, reflecting the construction boom that is underway to address the shortage of beds.

 

Indonesia Healthcare Stocks

 

One “back door” investment vehicle for Indonesia healthcare is Singapore-listed First REIT, which purchases and leases back hospitals to Siloam International. The current yield is 5.6% and the lease structure partially mitigates the currency risk of the rupiah.

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The bottom line is that Indonesia’s healthcare landscape offers some interesting opportunities, particularly if the markets develop confidence in the currency.