Indonesia has entered the final stages of its universal health care system rollout, which is set to stimulate continued growth across the private sector. The public scheme will provide an alternative to the country’s private system, addressing the lack of access for Indonesians who cannot afford private coverage but do not qualify for state-funded care. Universal health care will encompass preventive treatment, emergency visits, prescriptions and other services, and the government hopes that increased access will improve the country’s public health indicators, including maternal and child mortality rates. The plan is ambitious. Ensuring access across the world’s largest archipelago will demand significant financial and material resources, and continued involvement from private sector partners will be vital. With universal health care sparking increased demand for provider training, hospital infrastructure, medical devices, generic drugs and other key supplies, Indonesia’s health care sector remains a promising destination for foreign investment.
Structure & Oversight
The national health insurance programme (JKN) is administered by the Social Insurance Administration Organisation (BPJS) and guarantees coverage for every Indonesian. (The JKN is the programme and the BPJS is the agency, but the latter acronym is commonly used in Indonesia to refer to the system). “The main target of the JKN is to provide better access to health care for all Indonesians. There is more urgency to ensure proper access for people who cannot afford to pay the full premium,” Iwan Pasila, president director of Mandiri Inhealth, told OBG. The concept of a universal health system was originally proposed in the late 1990s, following the end of President Suharto’s administration. The labour movement at that time proposed a system to protect those they felt were being left behind during Indonesia’s period of rapid economic growth.
Years in the making, Indonesia’s universal scheme will be the world’s largest, but the government has yet to reach targeted levels of coverage or funding to guarantee the programme’s sustainability. A limited plan was first introduced in January 2014 to cover 48% of the population, although this fell short of its initial target. However, coverage increased in each successive year, and by September 2017, 70% of the population was enrolled in the JKN.
The final phase of the JKN rollout will take place in 2019, but there is concern in the public and private sector as to whether the coverage target is too ambitious, especially given that health care spending remains low relative to the overall government budget. Spending is expected to rise from 2.98% of GDP in 2017 to 3.29% by 2027. However, per capita spending is projected to more than double over the same period, jumping from $114bn to $269bn.
Financing Public Health
The system is designed to work as follows: all salary earners are charged premium based on individual income, and resources are pooled in the insurance fund to finance health care costs. Hospitals and other registered care facilities bill the government for reimbursement for services provided to policyholders, and these transfers are made from the pooled insurance funds. The system requires that all hospitals – both private and public – provide services to patients, and private insurance remains a coverage option. As with any healthcare system – be it public or private – the practicalities of implementation are complex, particularly when it comes to funding. There is a high proportion of low-income earners in Indonesia, and their premium are low: under BPJS, they fall between Rp25,500 ($1.81) and Rp80,000 ($5.67). As such, the cost of care for this cohort often exceeds the value of their paid premium. “The BPJS currently runs a deficit because the premiums paid by patients do not correlate with the real operational costs for hospitals,” Irawan Yusuf, director of the Mochtar Riady Institute for Nanotechnology, told OBG. “Many patients pay premiums of Rp80,000 ($5.67) set per month, but the operational costs for a cardiac arrest are around Rp250m ($17,700).” This shortfall is meant to be covered through higher premium for the wealthy. Higher-income earners are expected to pay a 5% levy on their salaries but no more than Rp8m ($567). Collecting these charges has proved challenging, however, due to frequent under-declaration of salaries. This leads to greater out-of-pocket costs and can also have the effect of discouraging facilities from providing services.
These challenges are creating large deficits for the BPJS, with the funding shortfall estimated at Rp6.8trn ($482m) in 2017. These funding gaps led the state health insurance provider to request a Rp16.5trn ($1.2bn) bailout in September 2018.
Against this backdrop, the government is devising new methods to generate revenue and recover health costs. One approach to rebalancing the cost of public health has been a tax on tobacco sales. Indonesia has one of the world’s highest smoking rates, and smoking is a major contributor to the increasing prevalence of cardiovascular disease, a trend that is compounding the financial burden on the new public health system. While policymakers have traditionally been reluctant to tax cigarettes, the urgent need for BPJS funding saw the administration of President Joko Widodo inject as much as 75% of its tobacco taxes into the health system. Additional levies are reportedly under discussion.
As Indonesia’s economy has grown, the country has continued to make strides in the overall health of its citizens. Since the 1990s diagnosis rates of communicable diseases such as tuberculosis, polio and malaria have declined substantially, in line with improved sanitation, access to vaccinations and rising income levels. Life expectancy has simultaneously increased, from 48.7 years in 1960 to 69.2 in 2016.
However, with improvements come new challenges, and the medical system is now being confronted with a shifting burden of care for an ageing population. Diagnosis rates of diabetes, stroke and heart disease are on the rise, as they are in many developed and middle-income countries. HIV is also increasing in prevalence across the country, and the social stigma attached to the disease has exacerbated the challenge for public health initiatives. “The government only contributes 0.09% of GDP to healthcare research and this funding is not managed well. Indonesia also has more than 700 ethnicities and every ethnicity has particular sensitivities to certain diseases. Practitioners, therefore, should increasingly apply psychosocial medical approaches,” Yusuf told OBG.
Indonesia’s maternal mortality rate is currently at 126 per 100,000 live births, according to a 2015 figure from UNICEF, although data from a survey conducted by the government in the same year put the total at 305 per 100,000. While this figure is in line with the average across the Asia-Pacific region, it is considered to be high by global standards. One aim of the BPJS system is to mitigate these trends by expanding education and preventive medicine, both of which were difficult for many Indonesians to access until recently.
Faced with widening funding deficits in the public insurance system, the government is considering a number of creative solutions, some of which will affect private providers. Under the public system, private hospitals can function autonomously and continue to operate as for-profit companies. However, in an effort to provide universal services to Indonesians and address the shortage of hospitals in underserved areas, the government is increasingly relying on private providers to offer services under the public umbrella.
Although the system has always required private operators to provide services to BPJS patients, this was intended largely as a stop-gap measure to make up for unforeseen shortfalls. In response, private hospitals have set up separate medical wards for those using private services and those using public services. In theory, this should be a boon for private facilities that can tap the massive public service pool of Indonesian patients. However, there have been frictions between private providers and the government with regard to late payment and, in some cases, underpayment of bills. Local media have reported instances of private hospitals turning BPJS patients away, and this in turn has elicited warnings from the minister of health, who has highlighted that private facilities are legally obliged to treat these patients.
Confronted with BPJS-related losses, hospitals are exploring more opportunities to provide services that can be covered by private insurers. Privately insured patients pay higher premium and hospital bills, thus effectively subsidising BPJS patients.
Indonesia has a chronic shortage of hospitals, and this presents an immense challenge under the new mandate to provide universal services. To address the problem, the government embarked on an ambitious construction programme to bring more hospitals to underdeveloped regions, especially in the eastern part of the archipelago. As of April 2018 Indonesia had 26,938 health facilities at which patients could access treatment under the single-payer system, including 9863 community health centres and 2139 hospitals. There are also 1194 dentists and 1058 opticians. However, more facilities and providers are needed to meet the growing demands of universal care, as well as international benchmarks. Indonesia has 1.21 hospital beds per 1000 people and 16.06 physicians per 100,000 people, which is markedly less than the 1:600 doctor-to-patient ratio that the World Health Organisation recommends. According to consultancy PwC Indonesia, part of the need for facilities and personnel will be met through public-private partnerships (PPPs). Several facilities have already been earmarked for development as PPPs using the government’s Project Development Fund, including Medan City Hospital and Darmais Jakarta Cancer Hospital. BPJS authorities are also looking at ways to address the lack of medical professionals in public health care facilities. Compounding the current shortage are restrictions on foreign doctors working in Indonesia. This is putting additional pressure on already strained medical resources, especially in rural areas where access to facilities is minimal. With demand for medical professionals set to rise further, Indonesia is investing more in its medical education system, as well as in efforts to prevent brain drain and to filter graduates into the local workforce.
As BPJS enrolment increases, the number of individuals accessing care in Indonesia and demand for medication, particularly generics, will continue to rise going forward. This situation is attracting the attention of large pharmaceutical companies, which are eyeing the expansion in both the generics and name-brand markets.
Fitch Solutions, the research and risk analysis arm of international credit ratings agency Fitch, estimates annual pharmaceutical sales in Indonesia to be higher than those in Malaysia and Thailand combined. It forecasts sales will rise from Rp94.2trn ($6.7bn) in 2017 to Rp300.3trn ($21.3bn) by 2027. As is the case in many price-sensitive markets, Indonesia’s pharmaceuticals industry is dominated by local producers of generic medicine. Generics are expected to remain in high demand through 2019 and beyond, as they will be prioritised for their affordability under the universal health scheme. Indeed, 92% of drugs on the BPJS Essential Medicines List are mandated to be generics.
There are more than 200 pharmaceutical companies in Indonesia, most of which produce low-priced, nonbranded medications for the domestic market. Under the Indonesian system, pharmaceutical companies sell almost exclusively to hospitals. Doctors at local hospitals then prescribe medication to patients, and either redeem the funds directly or by billing the public system. This stands in contrast to other countries in the region, among them Thailand and Cambodia, in which a robust consumer market allows patients to purchase prescription medications directly from the pharmacy. Foreign pharmaceutical companies can therefore leverage the private health care market, which caters to higher-earning local and foreign patients who pay for branded medications in cash or through private insurance companies.
One of the challenges for the pharmaceutical industry in 2018 was the weakening of the Indonesian rupiah, which made imported materials more costly. Approximately 90% of the pharmaceutical industry’s raw materials are imported, and upwards of 75% of pharmaceutical companies’ production costs stem from importing foreign materials. Estimations of this figure vary, however. “Some 99% of raw materials for pharmaceuticals are imported, especially active ingredients,” Jorge Wagner, president director of Novartis Indonesia, told OBG. Foreign companies report strong growth in the Indonesian market, but some say they are still being restricted from competing in many areas. This is despite the 2016 opening of pharmaceuticals to 100% foreign ownership. Major international pharmaceutical companies with a presence in Indonesia include Novartis, Merck, Boehringer Ingelheim, Pfizer and Bayer, the latter of which invested some $9.5m into the expansion of its factory in West Java over the course of 2017.
Foreign companies are permitted to produce generic medications; however, the practice can be complex. Foreign pharmaceutical companies are advised to enter into local joint ventures to produce generic medications and to source materials locally. This can squeeze already thin margins in this segment, and the premium brand market remains the most competitive. Although smaller than the generic market, the name-brand drugs market is expected to show strong growth, in line with that of the economy and the purchasing power of the expanding middle class.
Equipment & Technology
With demand for hospital and clinic construction being driven up by the BPJS rollout, the medical devices and equipment segment is also likely to see continued growth. While local companies typically produce low-value equipment, such as surgical gloves, bandages and IV systems, more advanced medical equipment is imported from countries such as Germany, the US, China, Singapore, South Korea and Japan. The value of imported medical devices roughly doubled in 2016-18, largely due to demand for CT scanners and other radiological imaging equipment. The government’s Making Indonesia 4.0 initiative aims to propel the country away from low-cost manufacturing and towards advanced technology industries. In the health care sector, this means innovation and technology will be adopted in almost all stages of consultation, treatment and record-keeping, including online portal access. The country also hopes to localise medical technology production, though this may be a longer-term ambition.
“It is still very challenging to compete with US- or European-made devices for high-end users, and Japanese-, South Korean- or Taiwanese-made devices for mid-range users,” Ade Hidayat, president director of medical technology manufacturer Sugih Instrumendo Abadi, told OBG. “Medical device distributors in Indonesia should also become manufacturers, which will allow Indonesia to become known as an internationally recognised medical device hub, and promote the manufacture of mid-tech medical devices,” he added. Localised production would stand to benefit from partnership with local distributors.
Although BPJS will be the world’s largest universal health care system once it is fully implemented, Indonesia still lags behind other countries in the region as a medical tourism destination. Singapore, Malaysia and Thailand rank as Asia Pacific’s most formidable medical tourism competitors. Thailand has become a top destination as a result of its government-supported private system. Indeed, wealthy Indonesian patients often look abroad to nearby countries, including Thailand and Singapore, for premium and boutique treatment, leaving Indonesia with a medical deficit. In 2015 approximately 600,000 Indonesians sought medical treatment abroad, up from 350,000 in 2006. To stem the outflow, Hidayat suggests that foreign direct investment be directed towards speciality hospitals. This would boost training for local doctors, while improving Indonesia’s reputation for medical tourism.
The administration of President Widodo has attempted to improve Indonesia’s investment appeal across the board by cutting red tape, catalysing investment in infrastructure and easing restrictions on foreign ownership. While the success of the BPJS will largely depend on efficiency in mobilising tax revenue, the new system also creates space for local and international investors in the provision of drugs and medical equipment. Developments in medical technology should catalyse progress in both the public and private sector, and reduce the sector’s import bill. This will likely be aided by a stronger rupiah in 2019.
Significant opportunities exist across the growing health sector. PPPs in particular could help the archipelago overcome its various infrastructure gaps and expand coverage to more remote areas. Such advances would play a significant role in Indonesia’s progress towards universal health care enrolment.