Healthcare Reform in Ukraine Opens New Horizons for Investors

Exploring new markets is a complex issue, requiring a sound knowledge of the political, legal and social landscapes in a specific region. The Ukrainian medical services market has always held significant potential for healthcare providers, but ever-changing geopolitical approaches, unstable public financing, lack of mandatory healthcare insurance, and a limited reimbursement meant that potential investors often postponed their plans for Ukraine when considering expansion of their business. Fortunately, a new Ministry of Health team, led by acting minister Ulana Suprun, is bringing clarity to the reform process in Ukraine,  offering hope to medical services providers who either operate in the country or are planning to enter its market.

Recently, new legislation on the operation of public healthcare facilities and the funding of medical services has been adopted by Parliament, providing a new approach to the financing of healthcare institutions and individual healthcare practitioners. Currently, budget funding in the healthcare sector is provided only to public hospitals, but this new approach suggests that private healthcare institutions and individual practitioners will be able to benefit from state budget financing after entering into an agreement with a newly created National Healthcare Service. The existing "pay-per-bed" approach will be substituted by a "money follows the patient" principle - instead of funding specific hospitals, the state will pay for the number of patients referring to the specific HCP/family doctor. Also, institutions will be able to decide where to conduct laboratory diagnostics and how to expand their operation functions. This opens up a number of opportunities.

The law stipulates that the state will pay for health services on primary, secondary, tertiary levels; emergency and palliative care; medical rehabilitation; medical aid to children under 16; and medical aid related to pregnancy and labor, as well as reimburse the costs of medicines. Payment for a higher level of services will be made directly to institutions, based on their reports on the quantity and types of services provided under specific tariffs to be set by law. A nationwide e-system for tracking patients' health history will be implemented, starting in 2019. In addition, the new system should reduce the problem of self-treatment in Ukraine - the patient will be incentivized seek treatment from a doctor, since reimbursement will only be provided upon the prescription of the healthcare professional.

The introduction of a new system on the primary level is planned for 2018, while the reform of other levels will be gradually conducted until 2020. The reform will affect not only the financing but  the overall structure of the healthcare services market. Access to budget funds will stimulate the development of private medicine: currently, the healthcare services market is dominated by the public institutions (around 90%); only 10% are private facilities. The private healthcare market is dominated by dental services (around 50%), followed by diagnostics services (18%), dermatology and cosmetology (15%), gynecology and reproductive health (14%) and others (3%). The possibility to attract more patients through state-guaranteed payments will motivate foreign and local investors to enter the market, steering competition and increasing overall services quality and diversity.

Additionally, the clinical trials sphere will greatly benefit from reform, as efficiently competing institutions will channel more funds into developing the infrastructure of the clinics. Ukraine, having a population of approximately 42.5 million, has a great potential as a clinical trial site, which has not yet been fully utilized. Ukraine offers advantages for conducting clinical trials, such as high quality of data, a large pool of potential study subjects, and highly motivated and experienced investigators. The greater autonomy and independence provided for by the reform will simplify cooperation between potential sponsors and the relevant clinics, and will create a greater pool of potential clinical study sites and contribute to establishing independent clinical research centers.

From a legal standpoint, the regulatory framework for the establishment and operation of medical business in Ukraine by foreign investors is similar to that applied for domestic investors. Given the absence of any specific requirements, a business may be established in the form of a limited liability company, a private enterprise, or even a joint stock company. The form that is adopted will depend on a deep understanding of the legal specifics. In the light of recent legislative approaches, choosing a joint stock company might not be a sound decision for the investor; opting for an LLC may be best and the most flexible way of operating business in Ukraine. Choosing the vehicle to enter Ukrainian healthcare services market also needs to be based on anticipated business scales and the short- and long-term aims of the investor.

Acquiring an existing medical business is an alternative option for investors. However, before such an acquisition, the investor should conduct a preliminary investigation of the target company, with a focus on the transparency of the company's legal structure and assets; the existence of past and pending court disputes; potential tax debt and financial obligation; corruption risks; absence or expiry of licenses; and breaches of intellectual property rights, etc.

Undoubtedly, the reform will be painful for public healthcare institutions, and will seriously affect the business models of private ones. It will involve dealing with large government orders (although public tariffs are much more modest than those for private institutions). In order to benefit from the reform, a new way of thinking is warranted. To compete for clients, healthcare institutions will have to amend their approach to staff selection, cost effectiveness, and the quality of hospital services. But these changes should shape a market for medical services in Ukraine that is practically absent today. As public and private institutions compete in the same growing market, it will become more attractive for potential investors - both Ukrainian and foreign.

Lana Sinichkina and Anna Zorya are Partners at Arzingerlaw office, Ukraine.