Public and private expenditure continues to rise in response to increasing demand for medical services and specialist care in Saudi Arabia

Saudi Arabia’s health sector currently faces a combination of demand-led growth and major structural change as the government seeks to privatise hospitals and other medical service providers. The interplay of these two forces is likely to influence the sector in the coming years.

Structure & Oversight

The national health care service is owned and operated by the government through the Ministry of Health (MoH) and other government and semi-public entities. Altogether heath and education spending accounted for the largest share of the 2018 budget, at over 36%. The MoH is directly responsible for around 60% of total health care services, with the remaining 40% provided by semi-public entities and the private sector. Among the semi-public entities are dedicated medical services for the National Guard and for employees at Saudi Aramco, the state-owned oil company. The government has indicated its desire to privatise a significant proportion of the health service, including the operation of hospitals.

Since 2016 two primary strategy documents have been guiding health care policies: the National Transformation Programme (NTP), which runs until 2020; and Vision 2030. The former calls for increased private sector participation in the health sector, while the latter is an overall strategic plan for the country that highlights the need to modernise and diversify the economy. NTP objectives include raising private sector participation in health from 25% in 2016 to 35% by 2020, increasing and improving medical facilities, raising the number of internationally accredited hospitals, doubling the number of primary health care visits per capita from two to four, developing a strategy to reduce smoking and obesity, and establishing digital health care systems.

The authorities have recognised a need for more robust health sector performance indicators. The MoH is seeking to introduce a system prepared by the National Centre for Performance Measurement (Adaa). The centre was created in 2016 to measure progress under Vision 2030. At the end of 2018 Adaa was reported to be working on 40 indicators to assess the performance of seven therapeutic areas: emergencies, clinics, surgeries, hospitalisation, intensive care, radiology and laboratories.

Saudi Arabia is a significant importer of medical equipment – around 98% of all medical devices are imported at an estimated total value of $1.8bn per annum. The main source of imports is the US, accounting for 21% of total imports. There is some local manufacture, but it is mainly limited to consumables such as bandages, gloves, syringes and furniture, including non-electrical hospital beds. The government is keen to promote local manufacture of both medical devices and pharmaceuticals. “Opportunities for increasing the local manufacture of pharmaceutical products can be supported by offtake agreements between the public and private sector,” Fahad Al Shebel, CEO of the National Unified Procurement Company, told OBG.

Health Indicators

With an estimated population of 33.6m in 2018, the Kingdom is the second-largest Arab country. Expatriates make up about one-third of the population, while 30.4% are under the age of 15 and roughly half are under the age of 35. The growing population and growing incidence of non-communicable diseases (NCDs) has created significant financial and operational challenges. Demographic change is playing an important part in the food consumption, lifestyle, and health and disease profiles of Saudi Arabia’s population. According to data from the World Health Organisation (WHO), the Kingdom has one of the world’s highest rates of obesity, with 59% of Saudi adults considered physically inactive, 68% overweight, 34% suffering from NCDs due to obesity and 14% diabetic. According to current projections, 2.5m people are expected to be diabetic by 2030. The MoH estimates that the current proportion of the population suffering from diabetes is significantly higher, at 25%.

The Kingdom’s median age of 29.8 years is almost 10 years younger than the average for developing countries. As the population ages, the median age is predicted to rise to 34.7 by 2030. An important shorter-term factor impacting the health sector is Saudiisation – the policy of increasing the overall proportion of jobs held by Saudi citizens and reducing reliance on expatriates. The expatriate population dropped by 6% year-on-year in the first quarter of 2018 to 10.2m, with around 1m leaving between 2017 and 2018. The number of expatriates is predicted to fall by an estimated 5m between 2016 and 2025 as the government seeks to reduce its dependence on foreign workers.

Healthy Diet

Taking these trends into account, one conclusion is that both government and public opinion will demonstrate growing interest in healthy lifestyles and eating habits. In September 2018 the Saudi Food and Drug Authority launched a healthy food strategy, which included voluntary commitments from the local subsidiaries of major food manufacturers such as Kellogg’s, Mars, Coca-Cola, PepsiCo and Nestlé to cut the sugar, salt and fat content of their products. Kellogg’s said the company had launched a new version of its Coco Pops breakfast cereal with 40% less sugar, specifically for the GCC regional market, while Mars said it was lowering the saturated fat content in its chocolate products and reducing the sodium content by an average of 20% across its entire food portfolio by 2021. Nestlé also conducted nutritional research that identified a way to achieve up to a 30% sugar reduction in breakfast cereals aimed at children and teenagers.

The healthy food strategy was launched after research showed that a large proportion of the population does not heed healthy eating recommendations. According to the Saudi Health Interview Survey, a household questionnaire conducted in 2013 across all administrative regions of the Kingdom, dietary guideline recommendations are met by only 5.2% of respondents for fruits, by 7.5% for vegetables, 31.4% for nuts and 44.7% for fish. The researchers concluded that programmes to improve dietary behaviours “are urgently needed to reduce the current and future burden of disease”. Alaa Adel, general manager for the Middle East department of Cerner, a US-headquartered health IT company, told local media in September 2018 that it will be an uphill struggle to combat obesity in the Kingdom. “The problem is that fast food is quick, many people prefer the taste of unhealthy options, and hectic work schedules or sedentary lifestyles do not leave much room for exercising,” he said.

Exercise & Lifestyle

One response by the government has been to promote healthier lifestyles and exercise. The General Sports Authority (GSA) conducted the first national sports survey in 2015. This sought to determine how many people regularly participate in sporting activities. For the purpose of the survey they were defined as “individuals who engage in a specific type of physical activity, i.e., planned, structured and repetitive, for the main purpose of improving health and maintaining fitness at least once a week”. The survey found that only 13% of the country’s inhabitants aged 15 years and over said they exercised at least once a week. The survey was repeated in the first quarter of 2018, showing significant progress, with the proportion exercising at least once a week rising to 23%. A separate survey carried out by the General Authority for Statistics found that 16.5% of citizens aged 15 and over said they are active for at least 150 minutes per week.

To increase the proportion of citizens who exercise regularly, the GSA has taken on raft of initiatives. It has sought to encourage more gyms in urban areas, including women-only gyms. It also organises mass-participation public events, such as the Riyadh marathon and the Neighbourhood League of Football, which has 800 teams and 30,000 players.

Disability-adjusted Life Years

International health organisations such as the WHO use the concept of disability-adjusted life years (DALYs) to measure the burden of disease. DALYs measure the relative magnitude of losses of healthy life associated with different causes of disease and injury. According to research conducted in 2010, the leading causes of DALYs were major depressive disorders, road traffic injuries and diabetes. Notably, Saudi Arabia has one of the world’s highest rates of traffic accidents. The Kingdom has seen an increase in the incidence of NCDs, which are estimated to account for over 78% of total deaths. The latest available data, released in 2016, indicates that other major contributors to DALYs include neck and back pain, migraine, diabetes, and depressive and anxiety disorders.

Expanding Demand

A range of projections by different bodies all point to expanding demand for medicine and health care. A white paper published in 2018 by retail brokerage Colliers said that if the population continues growing at its current compound annual growth rate (CAGR) of 2.65%, it will reach 77.2m by 2050. According to the more conservative World Bank annual growth forecast of 1.02%, the population will reach closer to 45.1m by the middle of this century. If the higher of the two forecasts is correct, the country will need up to $37.3bn of new health care investment by 2030, the paper said. A total of at least 50,000 new hospital beds and 40,000 more doctors would also be required. The requirement for hospital beds could be even higher if the ratio of 2.23 beds per 1000 members of the population increases closer to the world average, which currently stands at 2.7 beds per 1000.

An important conclusion of the report is that over the next three decades there will be a sharp increase in demand as on average approximately 80% of an individual’s health care treatment typically occurs after the age of 40-50. This is mainly due to the spread of lifestyle-related diseases such as diabetes, coronary and other obesity-related illnesses. As life expectancy continues to rise, so too will the need for long-term health care.

Public Spending

According to statistics from the MoH, the government budget allocated SR67.8bn ($18.1bn) to the health sector in 2017, representing an increase of 7.6% on the preceding year. Combined spending on health and social development accounted for 14% of the total budget in 2017. In comparison, the largest share of the budget was allocated to military, security and regional administration, at 32%, followed by education with 23%. The combined budget for health care and social development was reported to have increased by 10.5% in 2018 to reach SR147bn ($39.2bn).

The government budget for 2019 was announced in December 2018. According to press reports, it totalled SR1.1trn ($293.3bn), up by 7.3% on the preceding year, and was designed to propel growth and lower the fiscal deficit. Officials have stated that the budget was formulated on the prediction that GDP would grow by 2.6% that year, after an expansion of 2.3% in 2018 and a contraction of 0.9% in 2017. Notably, the 2019 budget was the first time planned spending on education exceeded spending on military and security. Combined public spending for health care and social security also increased, to SR172bn ($45.9bn), or 15.6% of the total. According to US agency Export.gov, total health care spending in Saudi Arabia – including public and private sectors, as well as current and investment spending – is around $34.4bn per annum, equivalent to 5.3% of GDP. Within this total, $7.4bn is allocated to purchasing medicines and consumables.

Health Policy

The sector features prominently in both the NTP and the longer term development plan, Vision 2030, which call for increased investment in primary care, e-health and training. Widened health insurance coverage is seen as an important source of extra funding for the system. In addition to these overarching strategies, the government is pursuing a health care investment plan, which identifies 40 different areas that require funding, including service provision, education and training, medical device manufacturing, pharmaceuticals manufacturing, support services, and digital information management. In September 2018 Tawfiq Al Rabiah, minister of health, outlined some of the challenges the administration was facing. He estimated that overall the value of the sector’s activity was around SR150bn ($40bn). The minister also identified some of the major issues as being the rising cost of health services, the scarcity of qualified staff, demographic changes, the impact of an ageing population and the spread of chronic diseases. According to the minister, an important goal is to separate regulation and policy formulation from operational management. Through privatisation and restructuring, achieving this separation would enable the MoH to “focus on its fundamental role of formulating policies and legislation to guarantee the quality and standards of health services”. Existing reforms focus on a range of objectives, including developing preventive health, promoting healthy eating, increasing service quality, and developing a culture of competition, transparency and performance management.

In line with the aims of the NTP, private companies are likely to play a more important role in the sector’s future. “The private sector has been in anticipation since 2016, but with large-scale public sector investments being pushed through, and the increasing attention to public-private partnerships, amid stabilising oil prices, we can begin to be more optimistic about our outlook,” Dr Ahmed Serag, general manager and country chair for Saudi Arabia of France’s pharmaceutical company Sanofi, told OBG.

Insurance

Company health insurance schemes are now obligatory in Saudi Arabia. In December 2018 the Council of Cooperative Health Insurance said it was introducing new punitive measures for any company that fails to offer a health insurance plan to its employees and their families. Under existing regulations companies are required to insure staff members and their dependants. Companies that do not offer this are liable for fines equal in value to the insurance of each member of staff and can be denied access to government services such as IT networks. Companies must also provide electronic data confirming that their employees are insured. This is integrated with other government databases and systems, such as the National Information Centre, in order to ensure compliance.

Electronically confirming membership of a company health insurance scheme is now part of the process by which expatriates are granted residency, or visa renewal and extension. According to a report by the Saudi Press Agency (SPA), as of the end of 2018 a total of 10.8m citizens were covered by company health insurance. This total included over 1m Saudi employees and 1.8m of their dependants, and more than 6m expatriates and 1.9m of their dependants. The SPA said that as a result of tightened enforcement, it was expected that another 2m people would receive health insurance coverage from their employers during the course of 2019.

The employer-funded health insurance market is providing big opportunities for the private sector. In late 2018 international insurance group AXA said it was launching specially tailored “prestige” and “prestige plus” plans for the Saudi market. The plans include comprehensive cancer benefits, and cover for kidney dialysis and for life-threatening congenital conditions. The company said that the combination of mandatory health insurance and a large expatriate community made the Kingdom a key market for its health insurance products. It was also seeking to offer multi-layered insurance to appeal to both global and local employers.

Growing Market

According to the government’s Council of Cooperative Health Insurance and a 2018 report by UK-based property consultant Knight Frank, there are around 27 insurance companies offering health coverage in the Kingdom. The total number of beneficiaries covered by health insurance is around 11m, slightly higher than the SPA estimate. Of the total, the majority are expatriates. However, some analysts believe that the pool of health insurance beneficiaries could widen by another 5m with the inclusion of Saudi civil servants and their families. It is estimated that gross premiums totalled $5bn in 2015, up by 20% on the preceding year. The report concluded that there are significant growth opportunities in the health sector. It noted that between 2017 and 2035 the population aged 40 to 59 will grow by 150%, while the population over the age of 60 will grow by 300%, meaning that there will be more demand for health services and specialist care, in turn increasing demand for insurance.

Digital System

The authorities are seeking to improve the Kingdom’s health care by adopting digital information systems. Plans include developing a standard e-Health card for all citizens, creating comprehensive patient digital records, and building systems that are capable of delivering online prescriptions and health insurance claims and improved management. The NTP sets a target of increasing the proportion of patients that have a digital health record from virtually 0% in 2016 to 70% by 2020. According to industry estimates, annual spending on developing digital information platforms for health is estimated at approximately $500m and this is expected to double in the near future.

Some of the operational problems currently experienced in the public health system could indeed benefit from new, data-based technology. Saudi Arabia currently has long waiting times for some types of treatment, high appointment no-show rates and underutilisation of some resources. Cerner’s Adel told local media that there are digitally based technological solutions to some of these problems. “If we can increase the percentage of care delivered outside the four walls of the hospital using the available technology and by relying more on primary health care centres, we should see natural improvement in these challenges,” he said.

Physician e-visits – which are conducted over the phone or through video conferencing software – may help to speed up the treatment process, with the added benefit that a virtual waiting room reduces the risk of cross-contamination between patients. According to Adel, having a single patient file shared across different health care providers offers significant potential to increase the efficiency and coordination of health care services.

Pharmaceuticals

Demand for medicines is expected to increase rapidly over the next few years based on projected population growth figures, rising living standards, growing incidences of lifestyle-based NCDs, development of medical infrastructure and increased medical insurance coverage. The rising importance of disorders related to body sugar levels will drive the growth of the diabetic medicines segment. Demand for drugs to treat cardiovascular diseases is also likely to rise. In 2016 total medicines sales were estimated at $5.2bn, up by 6% on 2017. More recent estimates describe Saudi Arabia as the largest pharmaceuticals market in the MENA region, with sales of around $7.6bn in 2017.

UK-headquartered research company Future Market Insights has predicted that the pharmaceuticals market will increase at a CAGR of 9% in 2016-26, reaching a value of $12.2bn by the end of that period. However, projections by other leading players are more conservative. A report by BMI Research suggests the market will grow at a CAGR of 4.6% between 2018 and 2022. The report notes that “given Saudi government spending has tended to correlate with global oil prices over the last decade, we expect that health care market growth, and thereby pharmaceutical market growth, will be supported by stronger oil market dynamics from 2018 onwards”.

Branded prescription drugs account for over half of total sales. However, generic medicines are also set for growth as health care insurance providers recommend their use to keep costs under control. Around 80% of sales are conducted through retail pharmacies, with the remainder coming from hospital pharmacies. The key firms operating on the local market include Saudi Arabia-headquartered Tabuk Pharmaceutical Manufacturing and Saudi Pharmaceutical Industries and Medical Appliances Corporation (SPIMACO), as well as international companies such as Pfizer, GlaxoSmithKline and Novartis. The government’s decision to allow 100% foreign direct investment in the sector has boosted the interest of international companies in the local market.

International Standards

In April 2018 the office of the US Trade Representative placed Saudi Arabia on the watch list of its “Special 301 Report”, which aims to identify countries that do not provide adequate and effective protection of intellectual property rights. Partly in response to these concerns, the government has announced the creation of the Saudi Intellectual Property Authority and a revision of regulations that is designed to bring the country more in line with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights.

Domestic pharmaceuticals production has been on the rise, mainly for generic and over-the-counter (OTC) medicines. A number of local companies have licensing agreements with international companies. The domestic industry has limited research and development capabilities. According to industry sources, uncertainty over future prices can hold back investment decisions. The government seeks to provide incentives for local manufacture, including import tariff exemptions, interest-free credit and subsidised utilities. The NTP aims to locally produce 40% of pharmaceuticals by 2020.

Challenges

Pharmaceutical industry executives had mixed reviews for the sector’s market performance in 2018 and the outlook for 2019. There had been some turbulence and uncertainty in the market in 2018 due to regulatory changes, such as the Saudiisation policy, which requires that a minimum of 40% of pharmaceutical company sales and marketing staff be Saudi nationals. There have been concerns that it may be difficult to recruit the required quota of suitably trained Saudi staff due to the fact that the job is perceived as difficult, requiring up-to-date technical knowledge of new medicines and details of health trial results. As a result, many Saudis may be deterred from a career in the pharmaceuticals industry. In the hospital and institutional sector pharmaceutical sales are largely relationship-driven, and a high staff turnover – either on the sales side or the medical side – can be disruptive.

Meanwhile, tighter regulations also had a negative short-term impact on pharmaceutical sales. For example, the OTC sale of many antibiotics has been prohibited, impacting approximately 30% of all such medicines, which now require a prescription. However, some executives have suggested that despite some short-term damage to sales figures, the decision will ultimately be positive in the long term, as it would reduce and prevent the overuse or incorrect use of antibiotics, and in turn help to strengthen patients’ confidence in the effectiveness of appropriately prescribed medicines.

Despite the immediate setback, there is evidence that the industry will soon bounce back from the dip in sales. According to Ahmed Elshaarawy, global marketing director of SPIMACO, over the longer term the decision to limit antibiotics to sale by prescription will be a positive change for Saudi Arabia. However, the decision, along with a general trend of increasing regulation and underlying uncertainty in the sector, pointed to sales remaining relatively unchanged in 2019. “As the outlook for sales is flat, it is better for us to try and work on the bottom line – cutting costs – rather than on the top line – boosting total income,” Elshaarawy told OBG.

Outlook

Although there may be some short-term challenges, the outlook for health services in Saudi Arabia looks positive in the long term. Short-term external risks include uncertainty over oil prices and the global economy, both of which are expected to grow moderately. There are also some concerns that regulatory changes, including Saudiisation, localisation of pharmaceuticals manufacturing, and price reductions for certain services and medicines could have a negative effect on the industry.

Despite this, there are strong long-term positives. The combination of a growing population and concern over lifestyle-related NCDs means that underlying medical demand is set to rise for at least the next decade. The government has made it clear that it needs increased foreign participation and investment to be able to meet that demand. Research shows that the country will need a major expansion of the number of hospital beds and physicians. The government’s spending on health has been increasing in the high single-figure percentage range, and private expenditure, which is increasingly funded by medical insurance, can also be expected to rise.