Developing World Healthcare Blog

Getting Healthcare Reform Wrong…………Indonesia Style

We discussed Indonesia’s healthcare investment climate in July (link here). At that time, we noted the benefits and challenges associated with the phase-in of universal health insurance (Jaminan Kesehatan Nasional or “JKN”) through 2019. In addition, we commented that continuing weakness in the rupiah reduced the country’s investment appeal.

Indonesia’s healthcare stocks have fared poorly this year. The group of nine healthcare stocks below has declined by 29% (including the rupiah’s 12% depreciation.) 


We should mention that Mitra Keluarga, the sole gainer in the group, is up only 9% in local terms (roughly flat in dollar terms) after adjusting for the stock’s initial IPO pop in March.

A Conspiracy of Expectations, Currency, and Healthcare Policy

The poor returns reflect a combination of factors:

    1. High initial expectations that JKN would stimulate demand
    2. Rising costs of imported goods caused by the rupiah’s weakness (foreign products, raw materials for pharma-related companies)
    3. Self-inflicted wounds (Kalbe had a product mislabeling issue)
    4. Decelerating economic growth
    5. Employers dropping insurance coverage in favor of the JKN (hurting private hospitals)

Private Hospitals’ Poor Performance is the Big Surprise

The struggles of the private hospital sector are particularly noteworthy given Indonesia’s inadequate hospital capacity (6 beds/10,000 population rivaling India.) The sector looked like a lay-up at the start of the year with JKN’s expansion. Instead, average revenue growth for the three largest hospital groups has decelerated (Q1:+23%; Q2:+19%; Q3:+16%) during the course of the year. Headlines from the individual companies provide details:

Siloam Hospitals – Lowered guidance with each quarterly report this year (2015 revenue outlook cut from IDR4.9 billion to IDR4.2 billion with EBITDA outlook cut from 18% to 15%.) Consensus 2016 EPS estimates have declined by 24% over the last quarter. At the same time, management continues with its original expansion plan to build 10,000 beds by year-end 2017, up from 4,800 beds in 2014. 

Mitra Keluarga – Inpatient admissions declined by 5% in Q3. Hospitals near industrial estates experienced sharper declines because employers have dropped private coverage in favor of the JKN. Mitra’s expansion plans aren’t as aggressive as Siloam’s, so 2016 earnings forecasts have been stable.

Sarana Meditana – Sarana will be an interesting company to watch from here. The company operates only two hospitals, and hasn’t added capacity. As a result, occupancy is up modestly over last year. That said, two hospitals will open over the next two years (Q1:16, H1:17), doubling capacity. It’s all about the uptake from here…………………..

Currency Has Been the Main Drag on Pharmaceutical Companies

The pharmaceutical sector has suffered in particular from the declining rupiah: rising import costs for raw materials (pharmaceutical salts) have pressured margins. In addition, price increases (where attempted) have dampened demand for imported products.   

Looking Ahead: How Healthcare Opportunities Could Evolve

One major challenge in assessing the environment is that much of the real-time data are anecdotal. Quantifying the impact of each factor (economy, changes in insurance coverage, etc.) is an imprecise exercise. That said, the sector’s outlook could improve based on the following:


    1. Several pharmaceutical companies have started constructing factories to manufacture pharmaceutical salts domestically to reduce their currency exposure.
    2. Indonesia’s public healthcare system was overburdened prior to JKN, and is more so now. As a result, there should be an opportunity for private hospitals to benefit, probably by developing lower cost models to serve middle-income populations.
    3. Government policies (particularly around private hospital reimbursement) could change to make the JKN more attractive to private providers. The main obstacle is cost.

 In closing, let’s hope that 2016 brings good news to Indonesia and elsewhere.