Opportunities in the international health services arena.

Fundamental changes in domestic healthcare delivery in the '90s have prompted many U.S. healthcare organizations to consider entering international markets. Opportunities available to U.S. organizations include investing in foreign organizations, controlling foreign facilities, and obtaining referrals

To succeed in international service delivery ventures, organizations also may need to make adjustments in the training of healthcare financial managers who will face the international marketplace. Being sensitive to the culture of the countries with which they will be dealing is just as important as knowing the currency and financial regulations.

Traditionally, healthcare services were the most local of products. Physician group practices were located near the neighborhoods they served or the hospitals in which they practiced. Hospitals, with a few notable exceptions, drew their patients from small geographic regions. Differences in the ways countries regulated and reimbursed healthcare organizations further limited the scope of healthcare delivery.

Today, however, international delivery of health care is not only possible, but also desirable. Large healthcare systems, such as Columbia/HCA, Tenet, and HealthSouth, have evolved with adequate capitalization and geographic scope to engage in international marketing and to develop and market facilities and service lines outside the United States. HealthSouth, for example, has announced plans to establish facilities in Australia before the 2000 Olympic Games and has recently purchased Health Images, which operates facilities in the United Kingdom.(a)

In addition, some private insurance programs in other countries will pay U.S. providers for services rendered, freeing these organizations from relying strictly on wealthy, self-pay patients for revenue and thereby allowing them to expand their international business.

Some U.S. healthcare organizations also may be able to obtain funding from investors outside the United States for domestic and foreign facilities. U.S. organizations can benefit from the lower costs of debt and equity financing abroad.

The potential advantages of international financing, however, may accrue only to for-profit organizations. Government and not-for-profit organizations are precluded from participating in offshore equity markets, and the tax advantages of government and not-for-profit debt securities are of no use to foreign investors. Also, because of the high fixed costs of participating in foreign securities markets, only the largest for-profit organizations normally can participate.(b) Where barriers to the free flow of capital exist, there may be differences in the required returns to securities across national boundaries.

Opportunities for International Service Delivery

Opportunities for delivering healthcare services internationally include investing in foreign organizations, controlling foreign facilities, and obtaining referrals from extraterritorial facilities or cooperating foreign healthcare providers.

Investing in foreign organizations. U.S. organizations can invest in foreign providers of services. Wherever private medical care exists (eg, the private health and hospital systems of Chile), so do opportunities for investment as a lender or an equity participant.

Controlling foreign facilities. U.S. organizations also can control, through ownership or lease arrangements, or provide contract services to facilities outside the United States. The Hospital Corporation of America managed hospitals in Saudi Arabia under lease agreements, and HealthSouth Corporation has entered into international activities (eg, delivery of rehabilitation services, sports medicine, orthopedic surgery) in Australia and the United Kingdom. When a U.S.-based organization controls a facility, it is the provider and has full access to reimbursement from the host country. Lease and ownership arrangements, of course, differ in that the lease has a definite termination, and the risk of confiscation of property is not borne by the U.S. provider, but by the owner of the facility. When a U.S.-based organization merely supplies management personnel to the provider, it receives a fee for its services, and political risk is borne by the non-U.S. organization.

Obtaining referrals from extraterritorial facilities or cooperating foreign healthcare providers. Through such referrals, U.S. organizations can provide services in their domestic facilities to non-U.S. residents. Many teaching hospitals market their tertiary care services to non-U.S. residents.

Each of these options not only offers U.S. healthcare organizations opportunities, but also imposes some new forms of risk that healthcare executives should understand before undertaking an international strategy (see Exhibit 1).

Key Considerations

Healthcare organizations involved in any international venture face four key issues that differ in character from [TABULAR DATA FOR EXHIBIT 1 OMITTED] the concerns they face in their domestic operations - reimbursement and cash flow, currency risk, regulation, and political risk.

Reimbursement and cash flow. In domestic operations, reimbursement is made using a few, well-known schemes, such as fee-for-service and capitation payment arrangements. In international markets, however, the variety of payment schemes increases greatly. In Germany, for example, payment to hospitals is based on rates negotiated between each hospital and the insurance plans with which it deals, with virtually no additional payment required by the patient.(c) In Chile, private providers offer their services as part of comprehensive health plans paid for by consumers, while in the United Kingdom, providers may collect charges from the consumer above the level of government reimbursement.(d, e)

Comprehensive healthcare coverage by government or sickness funds (German-style insurance organizations) makes reimbursement almost certain in much of the world, but generally limits reimbursement amounts (sometimes significantly). In most cases, the risk that reimbursement will not be made is low; often, however, this low reimbursement risk is accompanied by low expected amounts of cash.

U.S. organizations that control foreign facilities are most affected by varying payment schemes because they depend on them for cash flow. Control of foreign facilities and direct provision of care puts the U.S.-based organization at great reimbursement risk because payment rules may change. Providing management or clinical services under contract does not expose the U.S.-based organization to such risk, because risk is assumed by the non-U.S. organization that contracts for services.

Currency risk. Any organization that offers services outside the United States or that accepts payment in currencies other than U.S. dollars exposes itself to currency risk due to fluctuating exchange rates. As long as promised payments are denominated in non-U.S. currency, currency risk looms.

U.S.-based organizations that operate facilities abroad have an especially high currency risk exposure, because they can expect to be compensated in foreign currency for all facility services. Further, the provider's local expenses will be denominated in local currency. Even charitable providers, with no revenues to translate into dollars, are affected by the currency risks surrounding their local payments for personnel and supplies. A rapid decline in the dollar's value could make provision of services unexpectedly expensive and render the entire enterprise economically unviable.

U.S. organizations should negotiate international service agreements that control currency risk. Tactics they should use include negotiating all contracts in dollar values (usually not a relevant option for the sellers of services), requiring the party with whom one is negotiating to bear all currency risk, and hedging one's currency exposure in the options or futures markets.(f) At present, actively traded hedging instruments are available for nine nations' currencies (see Exhibit 2). Because some currencies' values are, or are likely to become, highly correlated as a result of cooperative agreements, such as the proposed monetary union of European currencies into Eurodollars, currency risk in many more than those nine countries may be hedged effectively.

Regulation. Health care is, almost everywhere, a highly regulated activity. Familiar U.S. regulations do not apply abroad, and regulatory differences may impose additional costs and burdens on providers seeking to internationalize their activities.

Political risk. In the United States, political risk is an unfamiliar concept to most organizations because of the country's stable political environment. Outside of North America, Western Europe, and a few Pacific Rim countries, however, political stability is rare. Coups and "temporary" military rule are commonplace in Latin America, Africa, and Asia. Rule outside constitutional limits is common in much of the world.

Healthcare executives who consider doing business abroad should assess the political risks in each proposed market. Political risk can involve anticipated cash flow reductions, loss of property, and even loss of life.

EXHIBIT 2: FOREIGN CURRENCIES WITH ACTIVELY TRADED HEDGING
INSTRUMENTS

Country and                  Futures          Option       Option on
Currency                    Contract        Contract        Futures

Australia/Dollar                -               -
Brazil/Real                     -                              -
Canada/Dollar                   -                              -
France/Franc                    -
Germany/Deutsche mark           -               -              -
Japan/Yen                       -               -              -
Mexico/Peso                     -
Switzerland/Franc               -               -              -
United Kingdom/Pound            -               -              -

Source: Wall Street Journal

Preparing to Operate Internationally

Whether or not to engage in international activities is a product line decision. International activities are in an organization's best interest only if the net cash flows the activities offer (including indirect cash flows and properly valued embedded options) have positive net present values when measured in U.S. dollars.(g) Some services will meet that test in some locations, and innovative healthcare organizations should explore those opportunities. Expected cash flows, reimbursement risk, currency risk, political risk, and regulation all help determine the net present values of an opportunity. Given all the types of risk involved, the appropriate discount rates for evaluating those opportunities may be high indeed.

Offering services abroad, however, requires new competencies on the part of healthcare organizational leadership. Academic health administration programs have not devoted much attention to developing those competencies.(h)

Selling services and controlling facilities abroad requires knowledge of the language and culture of the host country. One cannot, for example, take a medical history from a non-English-speaking patient without being able to communicate with the patient in his or her own language. In many parts of the world, sexual mores impose constraints on the relations between male physicians and female patients that are not present in the United States. Similarly, there are places a female physician can practice freely and places she cannot.

To make an informed discounted cash-flow-based decision, it is necessary to convert cash flows denominated in a foreign currency into dollars and to hedge the attendant currency risk. Healthcare executives need to learn how to hedge, either by training their existing staff, hiring more sophisticated financial professionals, becoming better educated on hedging themselves, or contracting with knowledgeable outside parties. They also need to master the less demanding, but still important, problem of accounting for transactions in foreign currency.

Conclusion

For most healthcare providers, international operations require "thinking outside the box." The results of such thinking include new sources of patients and foreign-currency-denominated revenue, new lenders and investors, and new sources of referrals for domestic facilities. With these opportunities come new types of risk, which affected healthcare providers must learn to manage.

a. Langley, Monica, "HealthSouth to Acquire Health Image in Stock Swap Valued at $270 Million," Wall Street Journal, December 3, 1996, p. A4.

b. Eitman, David K., Stonehill, Arthur I., and Moffett, Michael H., Multinational Business Finance, 7th edition, Reading, Massachusetts: Addison-Wesley Publishing Company, 1995, chapters 10 and 11.

c. Leidl, Reiner, "Hospital Financing in Germany." in U.S. Congress, Office of Technology Assessment, Hospital Financing in Seven Countries, OTA-BP-H-148, Washington, D.C.: U.S. Government Printing Office, May 1995, chapter 5.

d. Montova-Aguilar, Carlos, and Marchant-Cavieres, Luis, "The Effect of Economic Changes on Health Care and Health in Chile," International Journal of Health Planning and Management, October-December 1994, 9(4), pp. 279-294.

e. Appleby, John, Financing Health Care in the 1990s, Buckingham, U.K.: Open University Press, 1992.

f. McLean, Robert A., "Futures Markets Provide Risk-shifting Option for Providers," Healthcare Financial Management, April 1987, 41(4), pp. 80-87.

g. McLean, Robert A., Financial Management in Health Care Organizations, Albany, New York: ITP Delmar Publishers, 1997, chapter 10.

h. Jain, Sagar C., "International Activities in Health Administration Programs in the United States and Other Countries," Journal of Health Administration Education, Spring 1992, 10(2), pp. 263-308.

ABOUT THE AUTHOR

Robert A. McLean, PhD, CFA, is associate professor of health services administration, University of Alabama at Birmingham, Birmingham, Alabama.