To ward off greedy investors, fund locals to put up private hospitals

Wednesday March 18 2020

We Kenyans are a docile people. That is why we endure injustices that are capable of provoking massive riots in other societies.

Indeed, the media exposé of the shenanigans at The Nairobi Women’s Hospital should elicit widespread consumer outrage. We have been taken through a lesson on health in a sick society.

Key providers of health insurance have acted by suspending dealings with the hospital and changes have happened in the top management.

But there are broader policy questions about the provision of healthcare by private hospitals. Is the private equity business model suitable when it comes to managing and funding hospitals? What must policy do to support local private investment in private healthcare?

The saga reminded me of a story I recently read in a US magazine with the headline “How private equity makes you sicker”. Then there was this story in the Financial Times with the headline “How private equity has inflated US medical bills”.

Last year, I came across a paper by two American academics, Ms Hellen Appelbaum and Rosemary Batt, whose conclusion was that the design of the private equity business model drives up costs for patient care in private hospitals.


We have seen what obtains when vulture fund-type private equity firms corner and become major investors and operators of private hospitals.

A few years ago, the Dubai- and London-based private equity firm Abraaj came to town and took majority control of a total of five private hospitals and 10 clinics. They included The Nairobi Women’s Hospital, Avenue Hospital, Ladman Hospital and Metropolitan Hospital.

Vulture-type private equity firms invest in companies with a singular objective: Maximisation of short-term returns to investors.

The model is simple. Buy a hospital, triple revenues as quickly as you can and, within five years, sell it at above-market returns, possibly to another private equity firm.

Some of the key findings of the exposé included that private hospitals under management of private equity tend to employ cheap labour and that clinical officers were admitting patients even when such admissions were not necessary.

Then the most egregious and unethical practice: Clinical officers were being paid incentives based on the number of admissions. We saw how clinical officers were constantly under pressure to ensure that the number of patients discharged do not exceed the number of admissions on any one day.

There is a crying need in this country to have healthcare professionals without a mercenary outlook. Excessive greed, blind pursuit of profits and a culture of quick deals are making society to start having a hostile attitude towards private hospitals.

If I were the Competition Authority of Kenya (CAK), I would be stricter when approving mergers and acquisitions, especially in a situation where these vulture-type firms appear to be cornering a segment of providers of healthcare.

I am not against private equity firms per se. But as we have seen in the case of Abraaj, these companies are no paragons of virtue. A company that was well on its way to colonising part of the private hospital sector was found to have been involved in deceiving investors and misappropriating funds by the Dubai Financial Services Authority.

A few years ago in Nigeria, leading American private equity firms were found to have links with companies that authorities in Abuja had fingered as fronts for laundering money for former state governor James Ibori.

The second big policy questions that the hospital saga raises is the dearth of long-term capital and that we have left institutions created to promote entry into big business by local entrepreneurs to die.

These vulture-type equity firms have mushroomed due to failure by policy to build and nurture institutions that provide affordable and long-term credit to local entrepreneurs interested in investing in private hospitals.

I can assure you that the local owners of The Nairobi Women’s, Avenue, Metropolitan and Ladman hospitals did not just sell stakes to those greedy private equity firms for the big money. To put up a private hospital, you buy land and put up buildings for wards, laboratories and other facilities. Where in the world can you sustainably finance real estate development from hospital bills?

The first crop of local entrepreneurs in the hotel industry only survived because of support from entities such as the Kenya Tourist Development Corporation. It is not by chance that some of the best private hospitals in the US are university-based, financed by endowments.

We have to find a way in which local capital and long-term credit can be directed to building private hospitals.

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