Demographic and disease trends drive demand for private health care in Sri Lanka

Sri Lanka’s free, universal public health care system dates back to the 1930s. While the system is rooted in urban centres, public service provision has long since expanded into rural areas and is available island-wide, though concerns persist about the relative quality of these services beyond the major towns and cities.

Structure & Oversight

The Ministry of Health, Nutrition and Indigenous Medicine (MHNIM) is broadly responsible for formulating national public health policy, overseeing service provision, recruiting health staff and managing the country’s largest hospitals. Various units within the ministry organise and administer the delivery of care services, which are categorised as curative – hospital-based – or preventive, meaning provided by health unit medical officers. These include general medical services, which recruit doctors and manage tertiary hospitals and some secondary institutions; and primary care services, which develop primary curative treatment in conjunction with the ministries of Sri Lanka’s nine provinces. Provincial health authorities, in turn, manage the majority of primary and secondary care facilities on a devolved basis, under the guidance of MHNIM policies and strategies.

Public Spending

Nearly all public health spending is financed by general tax revenue and is predominantly managed by the central and provincial public entities. Funding for health budgets on both provincial and local levels also comes mainly from the central government.

Public investment in health care was valued at LKR204bn ($1.3bn) and contributed 1.57% to GDP in 2017, one of the lowest shares in the region; even so, this marks a 6% increase on 2016 spending.

Salaries and wages comprised 52% of spending, while a further 19% covered medical supplies. The largest increase was in the allocation to national level health care development, which grew by 7.5% in 2017.

Overall capital investment increased by 21% in 2017, while capital investment on provincial health infrastructure grew slightly faster, at 26%, a sign of the government’s renewed commitment to regionally inclusive development. Moreover, while gross recurrent expenditure comprised 81% of MHNIM spending, recurrent expenses declined by 1.6% and recurrent expenditure increased by just 3% over 2016.

Investment in curative health care included LKR1.53bn ($9.6m) for non-communicable diseases (NCDs) like cardiovascular disease, diabetes, cancers and strokes. A further LKR1.24bn ($7.8m) was spent to build four new units to treat chronic kidney disease of unknown etiology (CKDu), which is endemic among the farmers of the Northern Central province. An additional LKR104m ($655,000) was spent on equipment to combat an epidemic of dengue fever, a mosquito-borne illness most often transmitted in monsoon season.

Construction of a LKR1.09bn ($6.9m), 359-bed hospital complex in Borella, a suburb of Colombo, and a LKR63.3m ($399,000) pharmaceutical building in Jaffna, the capital of the Northern province, was completed in 2017. Public investment in indigenous medicine totalled LKR539m ($3.4m) in 2017, while allocations of LKR2.39bn ($15.1m) were made to the Department of Ayurveda – an independent government entity – for research to improve traditional medical services.

Investments in preventive care addressed to both communicable diseases and NCDs was LKR3.92bn ($24.7m) in 2017. Spending accelerated on research and screening programmes for CKDu, which has killed over 20,000 residents since it emerged in the early 1990s. In addition, the Triposha food supplement programme received LKR1.69bn ($10.6m) to provide assistance to 1.3m citizens registered as beneficiaries.

Public Policy

Medium-term sector priorities and strategies are guided by the National Health Strategic Master Plan (HSMP) 2016-25, which envisions “a healthier nation that contributes to economic, social, mental and spiritual development” and is organised around the four pillars of universal health coverage – equity, accessibility, quality of service and financial protection – envisioned by the World Health Programme. The plan addresses issues regarding patients’ rights and information, national performance monitoring, the organisation of primary curative care, human resources development and management, hospital statistics and international health research.

The HSMP also proposes reforms to restructure primary curative services, introduce primary care through family medicine, improve healthy lifestyle centres, digitalise health data, monitor service procurement and make changes to the Sri Lanka College of General Practitioners and the Drugs Adequacy Index. With regard to the private sector, the plan identifies the need to bridge existing gaps in data collection, strengthen and enforce the legal and regulatory frameworks for the provision of private care, and facilitate greater participation of private providers in the system.

Access

All health care services, including medication, are free of charge in the public system. The country achieves this in part through efficient service delivery, which keeps costs low. The MHNIM also imposes some supply-rationing measures via purchase, investment and administrative controls, and retains authority to enforce limitations on the purchase of pharmaceuticals and equipment, and the availability of specialists.

Curative care is accessible without any barriers, such as referral requirements. Available services encompass both allopathic and ayurvedic – or western and traditional – health care. Allopathic practices make up a larger portion of the system, and operate in both the private and the public sectors. Public services are available nationwide, while market demand determines the location and extent of private care. Due to the lack of any referral system, all health institutions are de facto primary care providers. Both primary and secondary care institutions can transfer patients to the nearest available tertiary care site when the facilities required to undertake treatment are unavailable.

Major Indicators

Although Sri Lanka is classified by the World Bank as a middle-income country, its health indicators are those of an upper-middle income country. In 2016 life expectancy at birth was 72 years for men and 78 for women, according to the World Health Organisation, while its maternal mortality rate of 33.7 deaths per 100,000 live births is less than half the rate – 70 deaths per 100,000 live births – targeted by the UN Sustainable Development Goals (SDGs). Its under-five and neonatal mortality rates, respectively 10 and 5.8 per 100,000 live births, were also significantly lower than the SDG targets. In 2016 the WHO also certified Sri Lanka as malaria-free.

Challenges remain beneath these top-line metrics. Heavy rains and flooding in early 2017 aggravated the dengue outbreak, which resulted in 186,101 cases of and 320 deaths from the disease in 2017, according to the MHNIM. Structurally, even as Sri Lanka has achieved positive outcomes in disease treatment, regional and urban-rural disparities persist in the quality and quantity of delivered services. Effective treatment of CKDu is still elusive, despite active research efforts to manage the disease and find a cure. In the meantime MHNIM has expanded the number of sentinel sites in the national CKDu surveillance programme to 50 hospitals, and made upgrades to infrastructure and staff training.

In tandem with its push to become an upper-middle-income country, Sri Lanka’s health profile is changing to resemble a developed economy. The incidence of NCDs is rising, and an epidemiological transition is already evident: in 2017 over 75% of deaths were attributable to an NCD, according to a WHO estimate, and care needs are transforming as the population ages and strains the system’s capacity, technology and budget.

The country is also undergoing a rapid demographic shift, as birth rates fall and longevity increases. Between 1981 and 2012 the proportion of the Sri Lankan population aged 60 and older nearly doubled, from 6.6% to 12.4%, and the UN Population Fund projects that share to double again by 2041, to include one-quarter of all Sri Lankans. Looking to the country’s neighbours, in 2012 the shares of the populations in India and Bangladesh aged 60 and older were just 8.5% and 7.3%, respectively.

During the same period Sri Lanka’s median age also increased from 21.4 years to 31 years, while the ageing index grew to 47, meaning that there were 47 over-60 people for every 100 children under the age of 15. This demographic transition has the potential to significantly and adversely affect the country’s fiscal position. Decreased income tax revenues and larger recurrent expenditures on health care will put an impetus on the government and private providers to develop innovative and cost-effective health care solutions.

Public Facilities

Sri Lanka’s public health institutions range from national, provincial, district and teaching hospitals to base and divisional hospitals. There were 612 public hospitals and 506 primary medical care units offering 76,774 beds in 2017. The professional workforce included 20,575 doctors, 33,363 nurses and 8562 attendants. In 2015 the WHO counted 0.881 physicians per 1000 residents, a three-fold increase in doctors per capita over the preceding 25 years.

Despite this influx of professional talent, a patient’s experience of the public system is often one of crowded facilities and long waiting lists. While a shortage of care services might result from a lack of doctors, the Academic Circle on Human Resources for Health at Colombo Medical Faculty attributes this congestion instead to an unequal distribution of care providers. The group estimates that in 2015 the doctor-to-population ratio in the capital district was more than two and a half per 1000 persons, higher than that of Singapore. However, in the Nuwara Eliya district of the Central Province, there were only 0.37 doctors per 1000 persons, nearly one-tenth of the density in Colombo. The expectation is that if doctors were more evenly distributed across the country, the system would function more efficiently.

Sri Lanka’s only fee-based state hospital and tertiary referral centre is Sri Jayewardenapura General Hospital (SJGH). Founded in 1983 as a state-owned enterprise (SOE) and funded in part by the parliamentary budget, SJGH provides both public and private – free and paid, respectively – health services, as well as educational facilities for undergraduate and postgraduate students. In 2017 SJGH was allocated LKR1bn ($6.3m) to expand and improve its laboratory services, physiotherapy unit, billing system and ward facilities, despite recording losses of LKR121m ($762,000) after tax for the year.

In 2017 MHNIM also opened a 242-bed epilepsy unit at the National Hospital in Colombo, which offers a clinic for neurological disorders; a neurological pharmacy; a mobile electric stimulation unit; a health education unit; and a public call centre. The facility’s construction was funded in full by the Saudi Fund for Arab Economic Development, which has been a long-time supporter of investments in Sri Lankan infrastructure.

Private Facilities

There were 181 private hospitals operating in Sri Lanka in 2017, down from 225 in 2016, according to the Ministry of Finance. However, the longer trend has been one of clear expansion, up from 108 such facilities in 2007, and the recent contraction is likely to be a temporary blip that will reverse course as the population becomes older and wealthier, and the public system continues to face capacity constraints.

In 2015 domestic expenditures on private health care made up 45% of total current health spending among middle-income countries, in line with the 2014 average of 44%. Sector analysts forecast short-term challenges for private sector growth but a strong upside in the medium to long term, should increases in disposable income continue as expected. Colombo-based stock brokerage LOLC Securities projects private health expenditure to increase by an average of 11% per year over 2017-20, alongside strong growth in demand for the private services made available.

The government’s decision to exempt private hospitals from the 15% value-added tax implemented in 2016 – with the notable exception of room charges – is expected to positively affect the private health care industry. However, the gains from this exemption could be offset by a decision by the National Medicines Regulatory Authority (NMRA) in September 2018 to set a price ceiling for certain tests, treatments and surgeries performed by private hospitals, nursing homes, clinics, medical practitioners and specialists. However, the timing of the implementation of this policy change had not been announced as of early 2019.

Ratings agency Fitch expects the expansion of private hospitals to be constrained by shortages of qualified physicians and nursing staff, and does not foresee a solution to this challenge over the medium term. On a more positive note, Fitch also expects more patients to opt for private care as incomes rise and customers prioritise the convenience and higher service standards that the private sector can offer.

The rising incidence of NCDs as the population ages could also drive private growth. Both geriatric care and NCD management usually call for lengthy treatments and the use of long-term medications. Public hospitals are not resourced for an influx of these patients and do not currently provide long-term, inpatient geriatric services, meaning these patients will have to turn to private alternatives for care. Private geriatric and palliative care thus have the potential to become growth segments, particularly in urban areas, where per capita income and the NCD burden are likely to increase fastest. While private hospitals lack professionals trained with requisite skills, the segments’ high potential may incentivise investment in human resources.

One such private facility, Lanka Hospitals, has been accredited by the Joint Commission International since 2014, and currently holds the Medical Tourism Certification from the Medical Travel Quality Alliance. Its diagnostics unit is the only laboratory in the country to be accredited by the College of American Pathologists.

Insurance

With public health care provided free of charge, health insurance is mainly privately derived. In 2017 the Ministry of Education launched Suraksha, a new health insurance programme meant to provide more health care benefits to students. Through Suraksha, the government purchases premiums from the state-owned Sri Lanka Insurance Corporation, which then reimburses parents for claims on students’ outof-pocket expenses and other benefits.

A study from the Institute for Health Policy found that 54% of Sri Lanka’s health spending came from private sources in 2015. Of that sum, 85% was paid out-ofpocket and 5% was paid by private insurance, with the latter figure up from just 1% in 1990. While still small, private coverage is likely to rise as the market matures, per capita income rises and growing costs intensify the incentive to reduce out-of-pocket spending.

Insurance penetration – expressed in gross written premium as a percentage of GDP – stood at 1.24% in 2017, with life at 0.54% and general at 0.70%. These figures were up slightly from 2016 when overall penetration was 1.20%. Moreover, mergers and acquisitions planned for 2019 are expected to consolidate the market and drive a similar, incremental increase in penetration (see Insurance chapter).

Pharmaceuticals

A central procurement system supplies the sector with medical drugs based on the requirements of each institution. The major actors involved in domestic production, manufacturing and procurement are the State Pharmaceuticals Manufacturing Corporation (SPMC); the State Pharmaceuticals Corporation, a supplier and importer of essential medicines and surgical devices for all state hospitals and other institutions; and Sri Lanka Ayurvedic Drugs Corporation, which manufactures and distributes Ayurvedic products to both public and private practices. Various industry stakeholders – importers, distributors, local and foreign manufacturers, wholesalers and retailers – are together represented by the Sri Lanka Chamber of the Pharmaceutical Industry (SLCPI).

Sri Lanka spends LKR45bn ($283.4m) annually on drug imports, which make up 88% of the market. Efforts are under way to increase local production, with the goal of eventually becoming totally self-sufficient in pharmaceutical procurement. In 2014 drug prices were frozen by a government declaration that pharmaceuticals were essential goods. The NMRA was established by the Parliament the following year to regulate the sector and proceeded to cut prices of 38 different medicines.

More recently, costs have risen at retail pharmacies across the distribution chain, and industry officials say the cost of imported drugs rose 7-8% in the first weeks of 2019, driven chiefly by the rupee’s depreciation. “About 85% of the drugs are imported, and the exchange rate is a very important component of this [cost increase],” Shyam Sathasivam, the president of the SLCPI, told local media in September 2018. In response to narrowing margins and rising inflation, pharmaceutical companies have begun calling for price caps to be increased at six-month intervals.

In January 2019 the minister of health, Rajitha Senaratne, told local press that by 2020 Sri Lanka will produce 85% of the medicine it requires. Six manufacturers have already commenced production, and the SPMC has signed agreements with 46 investors to produce drugs in-country. Their investments in the equipment, technologies – including raw materials like packaging and machinery – and skills development necessary for localising production will be key to achieving this goal.

In early 2018 SPMC announced it was developing a dedicated pharmaceutical manufacturing centre in partnership with Pharma Zone, a Malaysian investment firm. The output from their joint venture alone is expected to meet around 60% of domestic demand by 2020. The government is also spending LKR1.4bn ($8.8m) on a new facility that will manufacture and reduce the price of drugs used in cancer treatment.

Beyond private investment in pharmaceuticals, Vision 2025 – which outlines reforms to make local producers more internationally competitive and drive more inclusive growth – encourages the use of public-private partnerships and build-operate-transfer (BOT) models to attract private players into the health sector. Under a BOT model private firms develop small and medium-sized infrastructure projects, which are then leased and transferred to the government. These projects could be especially effective in the health sector, where public expenditure on infrastructure tends to be high.

Digitalisation

Vision 2025 also states that the government will engage the private sector to lay the foundation for an electronic medical information management system that can better trace patients’ medical histories, and improve diagnoses and treatments.

In January 2019 the NMRA launched phase one of its digitalisation project in partnership with the SOE Information and Communication Technology Agency of Sri Lanka and Epic Technology Group, a private digital solutions provider. At the launch Asita de Silva, chairman of the NMRA, announced to local media, “We need to reduce out-of-pocket expenses on medicines and the percentage spent on medicines from the health budget. Developed countries spend about 18% of their health budgets on medicines, whereas developing countries such as ours spend about 35-40%.”

The new e-government system should increase NMRA’s productivity and reduce operational costs, while the digitalisation of pharmacy regulation, personal user licences, profile creation and opioid management should help overcome existing obstacles related to data gaps and poorly maintained databases.

Outlook

Government officials across administrations have relied on the political support garnered from the provision of free public health services to enact economic reforms in other sectors. While the provision of free care is costly, this contract has held together during challenging times, even during the ethnic fracture of the civil war between 1983 and 2009. However, as the population ages and becomes wealthier, and as the public system becomes increasingly stressed by a rising burden of NCDs, private health care will likely have a larger role to play in the system, especially in the provision of long-term care and in the treatment of chronic conditions associated with the longevities and lifestyle choices of upper-middle income economies.

Sri Lanka’s epidemiological and demographic transitions may force the public system to change sooner rather than later. The government appears open to cooperating with providers of both private services and insurance, and its willingness could help introduce innovative solutions to current imbalances – especially in terms of geographical access disparities and shortage of specialist care – in the sector going forwards.