When the two dominant insurance companies in Peru started snatching up hospitals, medical centers and laboratories about six years ago, they were met with suspicion. Consumer watchdogs, healthcare advocates and the country’s leading association of private hospitals issued warnings of the grave dangers that vertical integration of the healthcare industry — that is, combining healthcare insurance and healthcare delivery — posed for Peru. These groups predicted that while the move might be a financial windfall for insurers, it was bound to be a bust for patients, for whom the quality of care was sure to decline.
Indeed, concerns about this type of organization in the health sector led neighboring countries Colombia and Chile to restrict vertical integration. In contrast, in Peru the law explicitly encourages it and puts no limit on how much of its network an insurance company may own.
Now, however, half a decade after the two largest insurers, Rimac and Pacifico, began these acquisitions, many of the critics’ concerns have not materialized. There’s a broad consensus that the quality of healthcare at the acquired establishments has actually improved. More importantly, perhaps, the two companies are also credited with stimulating a long-overdue modernization of the entire private healthcare system and with expanding access to quality private hospitals beyond the limits of Lima’s wealthiest neighborhoods.
“Insurance companies play with deductibles and copays and make it cheaper for the their customers to be treated in their own establishments as opposed to those they don’t own,” says Sebastian Cespedes, the president of the Peruvian Association of Private Clinics, which was highly critical of vertical integration when the process began. “At the same time, they have generated competition, and competition is always good. On balance, the quality of healthcare has improved at both integrated and non-integrated clinics.”
Peru’s private insurance market is still relatively small. As of 2015, the most recent year for which statistics are available, nearly 2 million Peruvians, out of a total of 31.4 million citizens, are affiliated with a private health insurance policy. But prior to 1997, private insurance was a luxury item accessible to only the richest Peruvians. That year, then President Alberto Fujimori liberalized the government’s social security health insurance system, allowing private insurance companies to form so-called EPSs (the Spanish acronym for Health Provider Entity). These groups can collect a portion of social security payroll deductions in exchange for offering private insurance to employees, effectively creating a private insurance market. Over the next two decades, as Peru experienced some of the strongest economic growth in Latin America, the number of workers incorporated into the formal economy, and therefore eligible for social security health coverage, expanded. In 2015, just under 750,000 employees in Peru were enrolled in an EPS.
According to Flor de Maria Philipps Cuba, a former manager at Pacifico Salud, one of Peru’s two major insurers, as the country’s economy improved, demand for medical services began to increase, and the costs clinics wanted to charge insurers increased with it.
“We were drowning,” recalls Phillips, who has also served, until very recently, as the National Health Superintendent, a position that oversees the quality of healthcare throughout the country. “Patients didn’t want to pay more and we were at risk of losing affiliates,” she says. “We began to see the advantages of having our own clinics, of moving towards vertical integration.”
Pacifico and its primary competitor, Rimac, which together control 80 percent of the private insurance market in Peru, dusted off a provision of the 1997 law that allowed for vertical integration in the health sector.
And they went shopping.
Between 2011 and 2012, Pacifico acquired five hospitals, three of which are outside Lima; six medical centers; an ambulatory oncology center; the country’s largest dentistry chain; and a medical supply company. In early 2015, it acquired yet another major hospital in Lima, as well as a chain of medical laboratories, by entering into a 50 percent partnership with Chilean health giant Banmedica.
Rimac, which declined a request for an interview, already owned one hospital. But beginning in 2011, it also started to aggressively expand. Today, it owns multiple healthcare delivery facilities in Lima and outside the capital, including five hospitals, an oncology center, and over 100 contracted clinics located in private companies across the country.
By offering lower copays and deductibles at Pacifico-owned facilities, the company has been able to steer 30 percent of all its affiliates’ medical visits to its own medical establishments, said Guillermo Garrido-Lecca, the general manager of Pacifico Salud, in an email. But the company, which continues to open new medical centers, is aiming to increase that percentage.
While Rimac declined to provide similar numbers, Cesar Chaname, the manager of the Peruvian Association of EPS, says Rimac-owned facilities do not provide more than 35 percent of the medical attention its affiliates receive.
In a vertical integration model, the same company is ultimately accountable for fiscal and clinical outcomes. This can be a cause of concern for policymakers and patient advocates, who worry that quality of care might suffer even if the costs of insurance decline. But in Peru, the quality of healthcare at the acquired establishments has been widely reported to have actually improved, even if some believe that it has made the insurance policies more — not less — expensive.
Prior to vertical integration in Peru, there were only a very few high quality hospitals in the country. Private hospitals and medical centers were largely doctor-owned. While doctors certainly had the medical side covered, they lacked the massive amounts of capital needed to expand their operations or to make major investments in infrastructure updates and new technology, says Juan Carlos Escudero, a mergers and acquisitions attorney for CMS Grau, one of Peru’s top law firms. These doctors also lacked the business acumen needed to seek or secure strategic partners who could provide that capital.
“There were no international health services in Peru at the time the insurance companies made their first acquisitions,” Escudero says. “Within Peru, it was the insurance companies that were closest to the sector that had been closely monitoring what was happening in it. They took the lead and bought the clinics they could buy. They were the ones who saw the opportunity first.”
Pacifico spent some $225 million in purchasing facilities, infrastructure improvements and technology between 2011 and 2016, according to Garrido-Lecca. He says the company was the first to bring some of the latest cutting edge cancer detection and treatment devices to the country. Two of its facilities now have Accreditation Association of Ambulatory Healthcare (AAAHC) certifications. In 2013, the company signed a collaborative agreement with Johns Hopkins International to improve safety and quality of care. For its part, two of Rimac’s hospitals have been accredited by the Joint Commission International.
Beyond the quality of care, the insurance companies also did a lot to expand access to quality healthcare outside the nation’s capital. “It is the insurers that increased the supply of healthcare,” says Hernan Ramos, a principal health researcher for consulting firm Videnza and a former deputy superintendent of health. “The fact is that there are now good hospitals in places like Trujillo, Piura, Chiclayo, Arequipa and Cuzco — good hospitals with international accreditations where there were none. This started with the vertical integration. They drove the market. They fomented the increase in access to healthcare.”
These improvements in quality, experts say, pushed others to expand operations, seek international accreditations and invest in their infrastructure and the latest medical technology.
But for health economist and public health specialist Margarita Petrera, the savings these companies made via vertical integration have not been passed onto the affiliates but have gone straight into company coffers in the way of profits. “There is a positive side to vertical integration in Peru but it is an onerous one: You can have good health insurance by paying excessively,” she says. Petrera explains that companies can get away with high premiums because they have a “captive market.” The alternative to private insurance is state-run hospitals where the quality of care is inconsistent and where patients can wait more than a month for an appointment for surgery.
Pacifico’s Garrido-Lecca said that it is not true that the company is making money hand over fist. He says Pacifico’s average profit margin in recent years has been 2.7 percent. The company would not reveal information on how much their premiums have increased in recent years, but Hernan Pena, Peru’s Deputy Superintendent for Health, says that insurance premiums have increased across the board, not just at integrated companies. Flor de Maria Philipps says that the savings are being passed on to the consumers, and that considering the runaway increases in the cost of medical technology, premiums likely would have increased much more if they hadn’t integrated vertically.
Unfortunately, there are no studies that accurately compare premiums for private insurance affiliates in Peru with those in neighboring countries where the industry is more tightly regulated. But according to Ursula Giedion, a healthcare expert with the Inter-American Development Bank, vertical integration is not the bogeyman many make it out to be. More important than whether or not a country restricts vertical integration, at least according to Ramos, is how well a government regulates the quality of the healthcare that’s delivered.
While in Peru the Health Superintendent regulates quality of care and coverage issues, the government does not have the power to regulate the price of insurance premiums, something Giedion says is very troubling and in stark contrast to other countries in the region. Some observers say the real problem with the cost of insurance in Peru is not vertical integration but rather a distorted market — an oligopoly for private insurance with a very weak competitor in the state-run system.
But stiffer competition is emerging. A number of the larger, independent private hospitals offer their own healthcare plans — which are not technically considered insurance in Peru but referred to as pre-paid healthcare plans. Affiliates of these plans can only seek treatment at the hospital complex that issues the plan. According to Solon King, an expert in healthcare and the CEO of Peruvian marketing strategy firm Total Market Solutions, affiliations to these plans have grown significantly in recent years, and he only expects more growth in this area. “They are going to continue to take away affiliates from Rimac and Pacifico and they are bringing other new clients into the private insurance market,” says King, adding that they are 15 to 20 percent cheaper than the other private insurance policies.
Two of the bigger hospitals in Lima with these kinds of healthcare plans are expanding rapidly and more growth is only expected to come. For instance, one of these, the Ricardo Palma Hospital, entered into a strategic partnership with Spain’s largest healthcare company, Quironsalud, in December 2016. Quironsalud is owned by Helios, Europe’s leading hospital operator.
That, of course, is just vertical integration approached from the healthcare-delivery side rather than from the insurance side. It may be new competition for the insurance companies, but even if it thrives it will validate the approach as a successful one in Peru.
— Catherine Elton
Catherine Elton is a freelance journalist and business writer based in Lima, Peru.