Health Services and New Methods of Preventive Medicine and Diagnosis

1. Cluster Profile

1.1. Overview

Croatia’s S3 defines several areas of priority within the theme of Health and Quality of Life, among which is STPA 2: Health services and new methods of preventive medicine and diagnostics. The definition of this STPA will provide the general background and starting point for this document, which aims to assess the position of the health services sector in Croatia.

The analysis that follows aims to understand the current state of affairs on the business of health services delivery, especially from the medical/health tourism perspective. Croatia has a growing medical tourism industry with foreign patients from Italy, Germany, and Austria, taking advantage of price differentials to get elective and dental health services.

• History and Significance of the Industry in Croatia

Croatia has a long history in health care, with the first recorded activities beginning in the middle ages where pharmaceutical and healing services were commonly practiced in monasteries. In 1770, the Empress Maria Theresa issued a law on the organization of public health facilities, which set a basis for the regulatory structure of future systems. By the end of the 19th century and beginning of the 20th century, several regions of Croatia became renowned health care service destinations, owing in part to their favorable climate, which led to the construction of sanatoriums and ‘health’ resorts. The elites of Europe would visit Opatija, Lošinj, Varazdin, Topusko, and Lipik among other places to patronize the thalassotherapy centers, use healing mud, thermal baths, and the like. Today, the influence of this legacy continues to influence the medical tourism industry with a strong focus on ‘wellness’ tourism.

The industry has high hopes of becoming a medical tourism destination for patients around the world. However, in taking a nuanced view to the STPA, wellness services can and should be differentiated from the more comprehensive set of health services. While the scope of STPA 2 includes wellness activities, the primary focus will remain on health services since the former is often more driven by tourism than an actual need for health.

• Government Priorities and Smart Specialization

In 2015, the Croatian health care system was ranked 16 out of 35 countries by the European Health Consumer Index (EHCI), which assesses inclusivity, continuity, and accessibility to universal health services for all citizens. Effective health service delivery is an important priority in any government agenda, not only because of the need for maintenance of public health outcomes but also for the contribution that the sector can make to economic growth and reduction of public debt. In the 2012–2020 National Health Care Strategy of Croatia, the key identified constraints for the health care sector include (a) insufficient connectivity between primary, secondary, and tertiary health care services; (b) uneven quality of care; and (c) uneven availability of health care across regions (Ministry of Health 2012). As a result, the Ministry of Health (MOH) prioritized the following five main areas of needed opportunity in the delivery of health services:

1. Improving connectivity and continuity in health care
2. Standardizing and improving quality of health care
3. Improving efficiency and effectiveness of the health care system
4. Increasing accessibility of health care
5. Improving health indicators

The 2012-2020 National Healthcare Strategy is the overarching strategic framework that governs the development of the sector. A number of subsidiary strategies and implementation plans have also been developed by the Ministry of Health in order to realize the policies laid out by the National Healthcare Strategy. To get a unified view of the various initiatives that have surrounded the National Healthcare Strategy, Figure 1 depicts a timeline of government interventions in the health sector from 2011 to 2020. The timeline also depicts several relevant strategies from the Ministry of Tourism and the Ministry of Economy, Entrepreneurship and Crafts (MOEEC).

Box 2: Description of the National Health Care Strategy and the Hospital Master Plan

The National Health Care Strategy 2012–2020 provides the government’s framework for improving the Croatian health care system. The strategy aims to tackle many long-standing issues such as unplanned expansion of hospital networks. These issues are expected to be resolved through the implementation of the corollary ‘Hospital Master Plan’. As such, the plan specifies a need for consolidation of hospitals into regional networks or associations to create efficiencies. At the same time, national and regional centers of excellence will be defined to create specialties that more effectively manage staffing and equipping of hospitals with pertinent skills and technology, in accordance with their role in the health care system and patient needs (Ministry of Health 2012).

Moreover, both the National Health Care Strategy and the Hospital Master Plan emphasize healing and prevention practices rather than facilities. In this respect, there is a planned integration of preventative/educational networks into secondary and tertiary care facilities. Furthermore, in a bid for more patient-focused services, attention is being paid to improving acute care through the enhancement of day hospitals and expanding the capacities for long-term and palliative care. The plan also aims to connect day hospitals with community health centers, primary health care offices, specialist hospital care, and mental health services in county institutes of public health. The aim of these strategies is to modernize health care delivery and to reduce costs in the process. Desirable development of day hospitals implies building modifications, which will result in easier access to health care professionals (World Bank Group 2014).

However, beyond the delivery of public health outcomes—a mandate of the MOH alone—there is a joint interest in health services that is split across the purview of various other ministries. As such, policies that influence the sector are also developed by the Ministry of Science, Education, and Sports (which has an interest in health-related education of health care professionals) the Ministry of Tourism (which has an interest in wellness tourism development), and the Ministry of Economy, Entrepreneurship and Crafts (which has an interest in the private health care industry).

Croatia’s S3 further reflects the interest of the Ministry . The MOEEC aims to improve the efficiency and effectiveness of private health service delivery through support of research and development (R&D) activities of the private sector as well as through the adoption of key enabling technologies (KETs) (Republic of Croatia 2016). Most notably, the S3 specifies a need for both information and communication technology (ICT) integration in health care systems and development of a private sector that is more adept at delivering prevention-focused health care services.

The S3 strategy specifies a range of R&D topics and KETs that can be utilized to support private sector competitiveness in health service delivery. In summary, the scope of these KETs and R&D topics includes the following potential areas:

• Novel methods of preventive medicine
• Novel diagnostic and therapeutic tools and applications (for example, advanced medical imaging, targeted diagnostics and personalized medicine, pharmacogenomics, and technology to identify and validate novel biomarkers)
• Clinical research
• Regenerative medicine and tissue engineering
• Systems, applications, and solutions for public health management and monitoring and improvement of the quality of health services
• Medical wellness multimodal programs and tools focused on the cornerstones of good health to create fresh, personalized wellness products and services
• Thalassic therapy products and services
• Equipment, systems, applications, and solutions used in research and testing of new treatment and diagnostics methods and monitoring disease changes
• Equipment, systems, applications, and solutions with purpose of consulting, diagnostics, treatment, and remote operations (telemedicine)
• Equipment, systems, applications, and solutions used in sports with the purpose of prevention, diagnostics, and treatment (The Republic of Croatia 2016)

Such areas may be important for achieving innovation in the health services sector. Moreover, it will be necessary for the private sector to engage in many of these topics to contribute to better delivery of health care in the public sector systems.

2. National Supply Profile

The following sections take stock of how the Croatian industry is performing now—particularly in the perspective of global value chain (GVC) participation—and then map a set of relevant actors, agents, and organizations that represent the ‘cluster’ associated with this sector.

2.1. Service Availability

Across the country, there are a range of different types of health service providers. The Central Healthcare Information System in Croatia (CEZIH), which connects the health records of individuals across entities, records more than 17,000 user organizations across the entire health care system in Croatia. This includes approximately 2,350 general practice/family medicine offices, 270 pediatric offices, 270 gynecological offices, 1,900 dentist offices, 1,150 pharmacies, 120 primary health care laboratories, 153 school medicine offices, and 800 out-of-hospital specialist health care providers (Ministry of Health 2012). In 2016, FINA reported financials for 1,470 private (or semi-private) entities registered as providers of Human Health (Q86) or Residential care (Q87).

Conventionally, the supply of health services is often defined in terms of their facilities. In terms of inpatient health care facilities, it is further specified by the number of beds; there are 9,789 beds in clinical hospital centers, 7,049 beds in general hospitals, and out-of-hospital maternity facilities, and 8,179 beds in special hospitals and treatment centers. After changes to the Public Health Care Service Network in 2010, the number of beds increased in clinical hospital centers, clinical hospitals, and clinics by 13.8 percent, as well as in special hospitals and treatment centers by 2.6 percent. The total annual utilization of acute beds was 75.19 percent in 2010 (as against 85.5 percent in 2001), which is more than that in the Czech Republic, Slovenia, and the EU members before and after 2004 (Ministry of Health 2012).

It is also important to differentiate between ownership structures in hospital beds. Public hospitals account for over 98 percent of all hospital beds supplied in Croatia. Just under 2 percent of hospital beds are provided by entities registered as private not-for-profit organizations (e.g. special hospital) or as private for-profit enterprises. While a variety of systems for the provision of hospital services exist across Europe (See Figure 7: Number of Hospital Beds by Ownership Structure across Europe (2015)), it is apparent that the Croatian system is almost entirely supplied by public providers. However, defining healthcare supply by the number of beds is not indicative of healthcare services. In Croatia, as well as in most European countries, there is a stated desire to reduce the number of hospital beds, while improving healthcare outcomes by focusing on improved care rather than improved facilities.

2.2. Health Service Imports and Exports

International trade in services is becoming more prevalent with the increased ease in international travel (low cost and high connectivity of flights and especially the mobility of EU populations) and with the decreased barriers to international trade in services. While there are several definitions of medical tourism (each with severe limitations in how health service exports are counted in the data), a number of regimes have attempted to quantify both the amount of medical tourism and the value of trade in services (McKinsey 2008). The exports of trade in services broadly reflect health tourists that come to Croatia for some medical treatment, whereas imports of health services are those Croatian citizens, who go abroad for some medical treatment.

Croatia has also had some success in marketing health care services to foreign populations. The majority of such services are provided to other Europeans; however, a fraction of income originates from nontraditional markets such as Africa and the Commonwealth of Independent States (CIS) countries. Within the EU, the highest sales volumes are from Italy, Slovenia, Austria, and Germany. Visitors from those countries mainly utilize dental services that are significantly cheaper (see price comparison Table 2).

2.2.1. Dental Tourism

The volume of trade in health service exports is primarily fueled by the Croatian dental services industry. A comparison of the average cost of dental treatments in Table 2 shows price differences in services across several EU member states. There are notable price differences between Croatia and neighboring Italy and Slovenia, which could explain the trade data in Figure 12: Main EU Export Destinations (EUR, thousands). The differences in costs with these countries could also indicate that trade originating from these countries is likely driven by cost-conscious consumers.

It is also interesting to note that trade in health services is somewhat seasonal and is primarily growing in the coastal areas. However, the price signals are so strong that health care facilities in the continental regions are incorporating dental services into their activities as well. The most successful dental service providers are Poliklinika Rident in Rijeka and Poliklinika Bagatin in Zagreb. Many other dental services companies (such as Identalia) are even beginning to incorporate other experience-based packages—such as discounts to tours, transport services, wellness, gastronomy, cosmetic health services, and specialist medical services—into their service offerings. These companies are also the most likely to utilize consultancy services to attract foreign customers. On the whole, the rise in dental tourism has spurred the industry to become organized. Recently, the industry has put forward petitions to have the government subsidize marketing activities that will enable stronger activity and territorial branding (Eva Jurišić 2017).

3. Industry Functioning

The health care industry is undergoing rapid change globally, and institutions such as the EU and the World Bank are helping Croatia upgrade the performance of its health systems19. For its part, the private sector has had variable performance in the delivery of cost-efficient and outcome-effective health services. The most successful Croatian models are based on cost leadership strategies, such as in dental services. Other private health care providers have struggled to deliver health services on par with advanced market standards. This is a result of the fact that the (predominantly domestic) patient pool has access to all necessary health services through the public system free of charge.

3.1. Economic Geography

3.1.1. Number of Firms

The Croatian health services industry largely consists of small enterprising health service providers. While the Health Services sector is largely represented by small firms, there are a few medium sized enterprises that do exist (although there are no large firms)23. In terms of medium sized firms, there are five Medical or Dental Practices, two residential care, one hospital and one other health service provider. Typically, medical and dental practices are family-run firms, where the owner and manager is usually also the expert service provider. Similarly, residential care and other health service providers tend to be small, given the types of individualized services provided.

3.1.2. Clustering of Firms

Basic health services are available throughout the country; however, there is some natural concentration of private health service activities in Zagreb, Split-Dalmatia, Primorije-Gorski Kotar, Osijek-Baranja, and Istria (see Figure 14: All Health Service Providers). Outside of Zagreb, there is a noticeable clustering of activities along the coastal areas, which likely were positioned to leverage the advantage of the sun/sea combination to promote the facilities as a preferential medical tourism destination. Most of the health services happen around areas where there is sufficient support infrastructure, such as hotels, restaurants, walkways, and so on. In the continental parts of the country, thermal baths are likely a reason for location of facilities.

An analysis of the geographic concentration is given by NACE code groupings in the Figures below in order to distinguish between different categories of health service providers. Figure 15: NACE Q8610 maps the distribution of 83 hospitals, of which 21 are in Zagreb and 10 in Primorje-Gorski Kotar counties. The vast majority of these are public hospitals.

Figure 16 shows that there are 504 medical and dental practice firms clustered in a commercial hub around the City of Zagreb. Outside of Zagreb, the highest concentration of medical and dental practice firms is in the coastal counties (where there is also a strong tourism sector) as can be seen by the clustering around Rijeka and Istria (see Figure 16). Activities are focused on medical services such as dentistry and cosmetic surgery that are easily incorporated with tourism offers. The dental industry is strongly represented in this group of medical and dental practice firms. Other noteworthy specialist activities in the sector include orthopedics, postoperative rehabilitation, internal medicine, gastroenterology, otolaryngology, cardiology, and thalassotherapy. Figure 17 shows firms offering services to the elderly and palliative care (Q8760 and Q8690) are mostly concentrated around the City of Zagreb (92 firms), Split-Dalmatia county (49 firms), and Zagreb county (44 firms).

3.2. Profitability Analysis

Taking an aggregate view of all Human Health and Residential Care activities from 2014 to 2016, it is apparent that private industry (as a whole) has expanded its assets, equity, revenues and employment. Moreover, financial indicators for Return on Assets, Return on Equity and Profit Margin also improved considerably, although these results varied across indicators and sub-activities as shown in the table below. As explained earlier, the health services industry comprises several different types of providers, which are detailed in the following sections.

3.2.1. Assets, Debt, and Revenue

A comparative breakdown of the 2014-2016 compounded annual growth rates (CAGR) is given by sub-activity for revenues, assets, equity, and liabilities in Figure 19.

Increased revenues can be observed across all activities in the health sector. Notably revenues have increased the fastest in medical and dental practice firms, which grew at a CAGR of 14 percent between 2014 and 2016. They are followed closely by the firms performing Other Health Service Activities (12 percent) and Residential Care (10 percent) respectively. Medical/Dental practice firms have by far the highest percentage growth in equity over the period observed, while other human health activities experienced a marked drop in equity and assets.

3.2.2. Cost Structures and Margins

The industry for health services can be lucrative for some, yet margins are quite volatile for others. Medical & Dental Practice firms have the most consistently high margins, followed by Other Human Health service firms, which have been improving their performance over the past three years. During the same period, residential care providers have seen their margins shrink. Private and special hospitals, which have reported their financial data, show the weakest (and most variable) performance. The reason for this performance is often due to the uncertainty in revenue and cost streams created by public contracts with HZZO. The effectual profitability of such contracts can vary considerably depending on exogenous factors. For example, when hospitals sign a contract with HZZO, the terms specify that 120 beds must be reserved at all times; however, if only 80 are used, they will be paid for just those. The variability of use affects the bottom line from year to year.

3.2.3. Employees

Employment in health service has been growing in private sector firms across all analyzed health service activities since 2014. The employment share is the highest in medical and dental practices, which is followed by residential and other health care provider firms. Together residential care and other health care firms comprise a greater share of employment than Medical/Dental Practice firms, despite the fact that there are far fewer of these firms. From this it is apparent that medical and dental practice activities have a relatively low employment intensity.

3.3. Productivity and Innovation

3.3.1. Productivity

Trends in productivity have improved across all subsectors from 2014 to 2016. Productivity increased fastest in medical and dental activities, which was followed by other human health services and hospital services. On the whole, the NACE codes analyzed show a progression of productivity per employee from EUR 35,838 in 2014 to EUR 38,256 in 2016. The increase in productivity is encouraging; however, performance measures often need to be customized to specific businesses in the industry, especially ones that require qualitative evaluation for assessing contribution to public goods.

3.3.2. Innovation

The S3 indicates a robust system of institutions for innovation within Croatia (Republic of Croatia 2016). Public education in the sciences contributes to this through top-ranked subjects in Croatian sciences, including medicine (1st place) and biochemistry, genetics, and molecular biology (7th place) (Kilroy and Trpkov 2016). More broadly, innovation in biotechnology is believed to account for more than 80 percent of all R&D business expenditure in Croatia. Of the 25 patents that have been registered by Croatian applications in the biotech sectors since 2014, several have a noticeable focus on health service innovations (Kilroy and Trpkov 2016). The full list of biotech/health care patent titles is provided in Table 4.

4. Cluster Figures: Market-Based Actors

4.1.2. Medical & Dental Practices

Table 6: Top Five Medical and Dental Firms by Revenue (EUR)

The statistics from Table 6 show that Rident has, by far, the largest margins, while Poliklinika Medikol has much higher assets. A description of each company profiled is listed:

• Rident is a dental services clinic that offers a range of basic/advanced treatments. It caters specifically to the medical tourism market and it is recognized by nondental practitioners (cosmetic surgeries and laser eye correction services) as the premier business model.
• Poliklinika Medikol is a large facility that offers diagnostic and secondary care services in a vast range of practice areas.
• Poliklinika Sunce is another facility that offers diagnostic and secondary care services but with a focus on early detection and prevention.
• Poliklinika Svjetlost is a leading ophthalmology clinic offering complete ophthalmic services.
• Poliklinika Aviva has the fifth highest revenue in this category. However, since it joined the Agrokor group in 2012, shocks from the company have contributed to negative profitability.

Besides dental and other cosmetic services, the percentage of foreign patients who utilize these companies is small. Most of the firms have an interest in internationalization.

Notable Medical & Dental Firms:

4.2. Supporting Firms

4.2.1. Input Providers

When analyzing the Croatian health care industry, several different types of input providers have been identified, including pharmaceutical and medical device suppliers. There are more pharmaceutical companies than medical device companies in the Croatian market. According to the U.S. Department of Commerce, Croatia has only a small number of firms engaged in medical device production and around 92 percent of devices are imported (International Trade Administration 2015). As such, Table 9 presents some pharmaceutical suppliers and one medical device company, which are present in Croatia:

4.2.1.1. Pharmaceuticals and Medical Devices

Several notable Croatian input suppliers to the health services industry are Pliva, Belupo, JGL, and BioGnost. The pharmaceutical companies tend to be quite large and maintain good profits, but their bargaining power is constrained (by design) due to the single payer system of HZZO. The receivable payment period for such suppliers averages 300 days or more; for example, Vukovar Hospital’s payment period is about 1,000 days. BioGnost is a small Do-It-Yourself (DIY) medical device manufacturer for diagnostics.

4.3. FDI in the STPA

FDI has the potential to be an important contributor to competitiveness enhancements at the sectoral level and a source for economic growth more broadly. In fact, FDI is one of the most common drivers for countries’ participation in GVCs, which often brings many benefits to host countries, including capital, jobs, skills, knowledge, and technologies. In this respect, foreign investors can bring specialized knowledge and technologies that can help the Croatian industry adapt to the new and emerging segments. In this way, FDI can be a powerful mechanism for helping capture more value for the Croatian industry. FDI can also be a powerful indicator of a country’s factor endowments and markets.

Foreign investments in the sector are particularly driven by the tourism industry with spillovers to health services and particularly wellness. In a newspaper report, the Tourism Minister Gari Cappelli noted that a new law is enabling investments worth EUR 350 million in health tourism projects. Cappelli said that “travel agencies will, for the first time, be able to offer health service packages in specialised hospitals, health resorts and private clinics.” It is further purported that under the new legislation, health institutions will be able to include those packages through travel agents. The minister cited the Daruvar hospital, the Lovran hospital, and a EUR 20 million Chinese investment in the Krapina hospital as examples (Government of the Republic of Croatia 2017).

The motivation for FDI—be it resource seeking, strategic asset seeking, market seeking, or efficiency seeking—varies across the different industries and companies. Most FDI in the health sector is mainly motivated by strategic asset-seeking incentives.

The MOH keeps a catalogue of investment projects in health tourism (see Figure 24: Catalogue of Investment Projects in Health Thermal Tourism), which are mostly expected to be financed and initiated through private capital contributions (Ministarstvo zdravlja 2016a).

Figure 24: Catalogue of Investment Projects in Health Thermal Tourism