Too Small to Play? M&A in the Nigerian HMO Space
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According to the World Bank, out-of-pocket (OOP) payments represented over 70% of Nigeria’s current health expenditure in 2018. This high burden of out-of-pocket spending creates barriers to the access and use of healthcare in the country. Public and private health insurance provides financial protection that substantially reduces the amount of money people spend directly on healthcare. In Nigeria, public insurance is provided through the National Health Insurance Scheme (NHIS) while private insurance is provided by health management organizations (HMOs).
The NHIS was established under the National Assembly Act No. 35 in 1999 by the Federal Government of Nigeria and became operational in 2004. The NHIS provides basic healthcare coverage for Nigerians for a fixed, pre-paid monthly fee (i.e., a premium) of up to 15% of a workers basic salary. As of 2015, the NHIS covered only ~4% of the Nigerian population. The majority of NHIS members are in the formal sector (mostly civil servants) and live in urban areas. In addition to the provision of healthcare coverage, the NHIS also regulates the private health insurance sector which is operated by HMOs.
A health maintenance organization (HMO) is a private or public incorporated company that is registered by the NHIS to manage the provision of healthcare services through a network of NHIS-accredited healthcare facilities. HMOs largely provide employer-sponsored healthcare coverage for their corporate clients, as well as large family plans and small business (SME) plans. Some HMOs also manage the coverage of NHIS members, in public-private collaborations with the NHIS.
With such a high patient OOP burden in the healthcare system, it is important to examine the financial regulation and activity within the country’s HMO sector. There are currently 61 NHIS-accredited HMOs operating in Nigeria, representing a ~21% decrease from the 77 HMOs in 2015. This suggests that there has been consolidation within the HMO industry in the last few years, largely through mergers and acquisitions (M&A). Interestingly enough, most of these M&As can be traced back to a single NHIS-issued government policy in 2012.
In October 2012, the NHIS issued a reaccreditation of HMOs to assess their minimum capital requirements to operate. The reaccreditation was to ensure that any HMO that plans to operate at the national level should have a minimum share capital of N400 million (~$2.5 million in 2012). HMOs that plan to operate at the zonal and state level would need a minimum share capital of N200 million (~$1.2 million in 2012) and N100 million ($600,000 in 2012), respectively. This reaccreditation policy was likely in an effort to reduce the financial risks borne by HMOs and their service providers.
Since this reaccreditation was issued, different types of M&As have occurred in the HMO space, namely:
Mergers between two or more HMOs
Acquisition of HMOs by foreign companies
Acquisition of HMOs by large general insurance companies
This article will briefly explore specific case studies for each M&A type described above.
Case Study #1: Mergers between two or more HMOs
According to the SEC annual report, a merger between Expatcare Health International Limited and Capex Medicare Limited was approved in 2014. As a result of the reaccreditation requirement by the NHIS, Expatcare entered a merger agreement with Capex Medicare Limited, a subsidiary of Capital Express Assurance Limited.
However, this merger was dissolved shortly after as a result of “ethics and business strategy differences”. Neither of these HMOs are on the accredited list, likely as they were unable to meet or maintain the N400 million reaccreditation requirement.
Case Study #2: Acquisition of HMOs by foreign companies
In 2016, Total Health Trust Limited, one of the largest HMOs in Nigeria, was acquired by Liberty Holdings Limited, a financial services and property holding company that is registered and headquartered in South Africa.
According to their 2016 annual financial statement, in August 2015 Liberty Holdings acquired the remaining non-controlling interest of almost 50% in Total Health Trust at a net asset value of R44 million (~N680 million / ~$3.4 million in 2016). Shortly after the acquisition, Liberty Holdings’ 2017 annual financial statement indicated that Total Health Trust Limited had a share capital of N400 million (~1.1 million in 2017), thus meeting the NHIS’ N400 million reaccreditation requirement. Total Health Trust Limited is currently listed on the NHIS accredited HMO list as a national operator.
Case Study #3: Acquisition of HMOs by large general insurance companies
In 2017, Consolidated Hallmark Insurance (CHI) Plc, a general business insurance company, raised N500 million (~$1.5 million in 2017) to acquire a life insurance firm and set up an HMO, Hallmark HMO. As a result of this acquisition, the gross premium written for CHI Plc grew by almost N1 billion from 2017 to 2018. While Hallmark HMO is yet to be listed on the NHIS accredited HMO list, its website indicates that the HMO has reached the necessary N400 million share capital required by the re-accreditation, indicating that its accreditation is likely still ongoing.
Beyond mergers and acquisitions of HMOs, there has been a growing trend of HMO-provider partnerships. Several large hospital networks have partnered with or developed their own associated HMOs that are accredited by the NHIS, particularly in Lagos.
MetroHealth HMO advertises St. Nicholas Hospital as the flagship of its network - St. Nicholas is a large, private tertiary hospital network with several facilities in Lagos and MetroHealth HMO is headquartered at the St. Nicholas Hospital location in Lagos Island. Similarly, Redcare HMO advertises Reddington Multi-specialist Hospital as the flagship of its network, allowing enrollees to access care at the Reddington facilities even if they are not registered at those centers.
Hygeia HMO and Lagoon Hospitals are subsidiaries under Hygeia Nigeria Limited, a leading West African provider of integrated healthcare. In line with Lagoon Hospital’s ambitious growth strategy, Hygeia Nigeria Limited acquired Gold Cross Hospital in 2017. Gold Cross Hospital is a 35-bed multi-disciplinary, tertiary care hospital - Hygeia Nigeria Limited also acquired Gold Cross MRI Diagnostics in Ikeja, a fully operational diagnostic center with MRI, CT scan and other diagnostic facilities.
So what does the consolidation of the HMO industry mean for healthcare access in Nigeria?
One could argue that bigger is better given that the resulting consolidated HMOs will likely be financially healthier and more well-suited to handle the risks associated with providing insurance coverage for their members. In addition, a lot of the private HMOs manage NHIS patients, so this could potentially translate to expanded public insurance coverage in the country as HMOs are able to take on more NHIS members as they grow and consolidate.
However, as HMOs get bigger competition within the space will likely decrease. This means that HMOs have more bargaining power to charge higher premiums for their members, as demonstrated by the Consolidated Hallmark Insurance case study. Higher premiums potentially lead to less accessible health insurance for Nigerians, particularly as unemployment and inflation continue to grow in the country.
Key Takeaways from TC Health: In order to expand health insurance accessibility in Nigeria, the NHIS should continue to encourage growth and financial stability in the HMO industry through its policies. However, antitrust policies should be pursued in parallel to maintain sustainable growth within the industry that does not create significant barriers to healthcare access. Lastly, the Nigerian government should direct investments to the NHIS to allow for the expansion of public health insurance coverage beyond ~4% of the population, particularly to allow for coverage of informal sector workers that make up almost 90% of the population and have poor access to and utilization of healthcare services.
