Case study - health insurance

THE DÔVERA health insurance company is the largest privately owned health insurer on the Slovak market. It has 11,000 contracted health care providers and around 750,000 insurance clients, giving it a 14 percent market share. Penta Investments also has a minority share in the Apollo health insurance firm, which the firm regards as a portfolio investment, unlike in the case of Dôvera.

1. Entry of private equity investor

Penta entered the Dôvera health insurance firm at the end of 2002, buying an 80 percent stake from the founder. Through ownership stakes in other companies in its group (ZSNP and VSŽ), Penta was also the majority owner of the Sidéria health insurance company.

2. Carrying out aims - restructuring

Main problems encountered:

* a passive relationship to insurance clients and an orientation towards the health care provider market;
* no differentiation between health care providers on the basis of quality;
* a passive approach to the use of sophisticated technology in purchasing health care;
* low level of standardization among contractual relations with providers of health care services, payments for provision of health care provided judged more on a regional and individual basis built on personal relationships (regional health insurance director vs. concrete health care providers);
* non-transparent accounting due to the functioning of health insurance as a public service institution (i.e. 'fund' budgeting, the result of which was a surplus or a deficit);
* inefficient administration and recovery of insurance receivables;
* low professional level of internal legal department, gross discrepancies in records of court cases, unpaid liabilities, lack of professionalism in area of legal compliance;
* non-functional system of motivating employees;
* mostly formal controls on provision of health care and subsequent billing, management fraud.

Main steps taken by investor:

* redefining product structure, standardizing and improving relations with health care providers;
* increasing emphasis on controls of the quality of the health care provided, as well as on whether health care was actually provided to the extent claimed;
* increased emphasis on administration and recovery of insurance receivables;
* as of January 1, 2007 achieving a fusion of Dôvera and Sidéria into the Dôvera health insurance firm, meaning unified management, clear goals, vision and strategy, and a slimmer and more efficient organizational structure;
* basic changes to the motivation system and to personnel policy.

3. Further aims and exit

Unlike in the case of its other investments, with health insurance companies Penta has no set date by which it wants to sell its holdings. Penta's goal is for Dôvera to become the leader in providing quality care to clients, to achieve a 30 percent market share, to offer the best unified prices for providers, and to develop the concept of individual supplementary health insurance. The prospects of the private equity investor at the moment are limited mostly by the legislative initiatives that have been announced, whose goal is to fundamentally change the macro-environment to the detriment of private health insurance houses and to strongly support the state-owned health insurance houses.

Penta Investments investment director Eduard Maták:

"When a private equity investor sees that a firm is not functioning well but could prosper under better management, he becomes interested. Health insurance in Slovakia in inefficient, and health insurers are poorly administered. State insurers are influenced by political and various group interests whose primary concern is not efficiency.

"On the other hand, insurance houses that use their resources effectively could catalyze the recovery of the whole system by putting pressure on the whole chain: on hospitals to optimize their bed numbers and personnel, and to engage better equipment or services; on doctors to prescribe only those drugs the patient really needs; and generally eliminating corrupt practices.

"The main motivating factor here has to be a desire for profit and fear of making a loss. State insurers, or private houses that have been "forbidden" to make a profit, will not have any motive to help revitalize the sector.

"Expected rewards are a primary motivation for any activity, and in business these take the form of profit. Even the freeways the state builds from public money are not constructed by non-profit groups but by entrepreneurs doing it for a profit. In making a profit we are not taking anything away from our clients - our patients don't have to wait for operations, and our contracted doctors don't have monthly limits. Our profit in health insurance comes from the savings we generate with the efficient purchase of quality care.

"Arguments that the state has the right to decide where the people whose health care dues it covers will be insured is both illogical and illegitimate. The state pays for no one out of its own money, but from money collected through taxes from insurance clients. We believe that private health insurance companies buy health care services better than state houses, and the more clients we represent, the sooner we will introduce efficiency and quality into the health care system. If the state were to take such a step, it would set the whole health care system back many years. All of the political intentions that have been announced endanger the goals of making the health care system more efficient and higher in quality."

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