Update 19 July 2022
I hope that you are enjoying nice summer weather (not too hot as in southern Europe and not too wet as in parts of northern Europe). Typically, updates cover between two and four different news items. However, this update will focus only on current developments and announcements from the government that will have a very large impact on the overall Dutch elderly care sector and will raise new strategic challenges for all types of organizations that are involved (directly or indirectly) with the sector. In earlier updates I have covered the plans of the government (see update of 12 April for an initial view on the plans to not build any additional nursing homes and the update of 1 June giving an overview of the government’s plans for reducing healthcare expenditure.
In recent statements the government has clarified some of the issues resulting from the earlier statements and has clearer plans for implementing many of the suggested changes. Based on this, it makes sense to present a broad overview of the plans presented by the government and give a first-cut view of what the suggested changes entail for the different types of organizations active in the sector.
Changes to Dutch elderly care will have strategic consequences for all participants
The Netherlands, as most other countries, is facing the challenge of how to deal with increasing healthcare costs. The Netherlands has a relatively high per capita spend on healthcare (USD 5.739, 40% higher than the OECD average) and currently spends 11% of GDP on healthcare. In addition, currently one out six employed people work in the healthcare sector.
Due to demographic changes (strong increase in the number of elderly) and higher costs related to technology and pharmaceuticals spend on healthcare will double by 2040 and will then be more than 20% of GDP. In addition, one in four people in the workforce will be active in the healthcare sector. These projected developments are seen as being untenable, and the Dutch government has started two broad programs to limit the expected growth in healthcare costs (and improve the quality of care provided):
- IZA (Integraal Zorgakkoord) (Integral Healthcare Agreement)
- WOZO (Wonen Ondersteuning en Zorg voor Ouderen) (Housing, Support and Care for the Elderly)
IZA is a program that is being developed in cooperation between the Ministry of Health and forty-eight organizations from the healthcare sector. The overall goal of IZA is to improve the overall health of the Dutch population and reduce costs by focusing on prevention, improving primary care, and making the overall healthcare system more efficient. In principle, IZA covers the whole healthcare sector, but the primary focus is cure (financed by healthcare insurance). To reach these goals IZA has seven main themes:
- More regional cooperation and concentration of operators
- More cooperation between social care (municipalities) and primary care for mental healthcare patients
- Consolidation in the homecare sector by making it more complicated for patients / clients to use non-contracted providers
- More focus on prevention and life-style improvements
- More focus on appropriate care (from the viewpoint of the patient)
- Focus on eHealth and digital transfer of data
- Making the healthcare sector more attractive for (new) staff and improving retention
The strategic implications of these themes are limited (with an exception for operators providing non-contracted homecare) as they are very broadly formulated. In addition, the work process is facing delays and it is highly uncertain when any recommendations will be translated into actions, laws and regulations that will have an impact on operators and investors.
The situation for WOZO is very different as a variety of announcements have been made that will have important consequences for operators and investors. The overall goal of WOZO is to give the elderly as much control over their own lives as possible and to provide the elderly with all relevant healthcare services in their homes. Within WOZO there are five lines of activity that should lead to more prevention, moving care to lower cost locations, and replacing formal (i.e., conducted by professionals) healthcare by informal care provided by family and friends. The five lines of activity are:
- Helping the elderly to stay vital, healthy, and independent
- Developing good primary care accessible to the elderly in the neighborhood where they live
- Developing appropriate elderly care across borders and limitations created by different financing systems
- Developing appropriate housing for the elderly (250.000 units by 2030)
- Improving usage of appropriate technology and improving work processes
While these lines of activity also sound quite general the relevant Minister (Conny Helder) has given more details on what she is planning to implement under the banner of WOZO:
- Developing a “new normal” for developing appropriate elderly care “Do it yourself (if possible) at home (if possible) digitally (if possible)”
- Fundamentally changing the way that long-term to the elderly is provided:
- o Enforcing more cooperation between organizations
- o Giving insurance companies more opportunities (and pushing them) to sign multi-year contracts
- o Giving insurance companies more power to force appropriate change at operators
- Reducing the role of nursing homes in providing elderly care
- o Stopping the central government financing of new nursing home capacity (essentially forcing operators to move to VPT-financing, where the client pay for their own accommodations)
- o Enabling the development of 250.000 homes that are appropriate for the elderly by 2030
The key message from the Minister is that in the (near) future most elderly care (including complex care that is currently provided in nursing homes) will be delivered in a home setting. A key point is that “home” does not have to be the place where the elderly has lived for the last 10-20-30 years as these will often not be appropriate nor will it be possible to redevelop them as age appropriate. Rather, “home” will be a new location, often in a clustered setting, where the elderly person is responsible for their own living arrangements and will pay rent themselves.
These changes will have dramatic effects on most types of elderly care providers active in the Dutch market and investors in this market (real estate or others).
The overall consequences for homecare providers (both traditional non-profit and commercial organizations) will be positive. The suggested changes will lead to a robust growth in demand for the services of homecare companies. However, they will need to make new strategic choices:
- The care required by their clients will become increasingly complex. Should they develop the capabilities to help their clients with the increasingly complex issues that appears as their clients age, or should they focus on the lighter care required earlier in the client journey?
- A key driver of homecare costs is travel timer between clients. Should homecare companies (in cooperation with other parties) develop clustered living locations where they have the responsibility for all healthcare related activities?
Traditional Dutch non-profit elderly care companies
These organizations typically provide a broad range of services (including nursing homes) for the elderly within a defined geographical region. The companies typically finance the care provided in their owned nursing homes with ZIN-financing. This financing form is an all-in payment from the central government (via the purchasing offices run by the healthcare insurance companies) that includes payments for real estate. Typically, organizations that can make the split, report losses on their healthcare activities and profits on their real estate (sometimes due to low depreciation).
These companies will most probably continue to receive full financing (including real estate) for their current portfolio of nursing homes (and any new nursing homes that are in the process of being built). However, according to WOZO, they will not receive any real estate financing for new capacity required to meet the growing demand for elderly care within their geographical scope.
These providers will face a fundamental strategic choice. They can choose not to expand capacity to meet expected growth in demand and focus on providing the most complex care that will still receive real estate financing in their existing locations. Given that these operators, while being relatively small, often have a dominant position in their geographical markets, this strategy will meet resistance from local government and the healthcare insurance companies.
An alternative strategy is to strengthen their homecare activities and to play an active role in the development of new service concepts that are based on the provisioning of “homecare” to clients living in a clustered environment. With this strategy the traditional operators can provide a continuum of elderly care from light home care (in the “home” where the elderly person already lives to complex homecare in a clustered setting where the client pays his/her own housing costs, to highly complex care that can only be provided in a nursing home.
Developing and implementing such a new strategy will demand that the traditional elderly care provider develop new skills (development of new services and processes using all available technology, marketing, collecting rent from clients, etc.) and/or develops new partnerships. The need for new partnerships will result from the expected disintermediation of the existing services provided by the operators. Examples of disintermediation include developing models where individual parts of the current services are provided by other operators, and working together with investors responsible for the real estate component of the total service provision and other service providers who become responsible non-care related services for the clients (social, etc.)
Commercial nursing home providers
The Netherlands has a small but growing commercial nursing home sector with distinct types of operators ranging from subsidiaries of the large French stock-exchange listed companies (Korian and Orpea) to single-location “mom & pop” operations. These operators have tended to focus on the top-end of the market providing high-quality nursing home services in luxurious small-scale locations. However, there is a move, certainly among the big operators, to expand their offering into the middle-market and homecare services.
Most, if not all, of these companies have a large advantage in dealing with the coming changes as they are already using VPT-financing for their healthcare services and get paid directly from their clients for rent and additional services. In the eyes of the government and the purchasing offices these companies are already providing “homecare.” Therefore, the commercial nursing home providers are well positioned for the suggested changes.
Real estate investors
Real estate investors have been very active in the Dutch healthcare sector with annual investment volumes in the range of €1 billion for the last few years. Most of the investments made have been in nursing homes and with an initial focus on real estate for commercial nursing home providers. However, there is growing trend for the larger investment companies to also finance real estate (either buying existing locations or building new locations) for traditional non-profit elderly care providers. Typically, the real estate investors have entered into a long-term rental agreement (20 – 25 years) with the operator. The operator then takes on capacity-related risks and is responsible for collecting rents from the client (in the case of VPT-contracts).
The new structure of the market envisaged by WOZO will result in new challenges for real estate investors. There will clearly be an even larger need for investments by professional real estate investors to realize the Minister’s plan to develop 250.000 new homes for the elderly between now and 2030. It is highly unlikely that the elderly care companies can make these investments themselves and the government will not finance the building of these homes / locations. Will the current real estate investors be willing and able to develop new concepts for this market, or will it require a new type of investor more focused on senior living to achieve these goals?
Another challenge that real estate investors will face is how to adjust to the situation where more operators (certainly the traditional non-profit organizations) will have to switch to a business model where they provide “homecare” to a large share of their clients. It might even be the case that if they purchase an existing nursing home location from an elderly care company that the organization loses the right to get ZIN financing (where the central government pays for the real estate) for the clients in that location. If this is the case, the potential market for acquiring existing real estate within the current business model will shrink dramatically.
The real estate investors will need to carefully consider how they wish to deal with situations where the elderly care providers want to provide “homecare” in a clustered setting where clients have various care needs (ranging from light to complex) and pay for rent and services directly. If the elderly care companies are willing and able to take on the capacity-related risks for this type of service it is not a problem, but this is probably unlikely. Will existing real estate investors be comfortable moving toward a setting where they are essentially providing a senior-living type of service directly to the clients? An alternative for the real estate investors will be to find / develop an intermediary party to manage the non-healthcare related services being provided to the client.
Investors / Private Equity
Investors / private equity interested in the Dutch nursing home market (directly or via real estate) will not face any direct consequences of the new approach to elderly care to be rolled out. However, when looking at specific investments they will need to carefully consider and understand whether the acquisition target has a clear and logical strategy for dealing with the new situation.
While there are some minor comments and questions related to the WOZO-plan from the sector, it has broad support and is extremely likely to be implemented. As suggested above, this will result in dramatic changes to the Dutch elderly care sector. These changes represent both opportunities and threats to the distinct types of organizations active in the sector. There is no one right answer, but each organization will need to think carefully about its position in the market and the most appropriate strategy that it should follow.