Diagnosis: expect growth spurt: Poland leads health insurance modernization among the former Soviet satellite states.

Key Points

* Poland is embracing private health insurance and healthcare, but the foundations of the health-care systems are in poor shape.

* By law, every Polish citizen is entitled to health care, regardless of the ability to pay.

* Poland is working on improving its health-care market by implementing major reforms such as funding control and self-regulation.

A private health insurance market in Poland is poised to take off, following the election of a new president and new parliament this past fall.

Poland and nine other countries that have joined the European Union are embracing private health insurance and healthcare, but the foundations of the healthcare systems are in poor shape. Bribes have been an accepted method of paying for medical care and less than 1% of each country's total health expenditure has been paid by health insurance.

The new E.U. member countries in addition to Poland are the Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Slovakia and Slovenia. Of the 10, only Cyprus and Malta were not Soviet Union satellite states. Each of these countries spends less per person for medical care than the European Union average.

Common U.S. health-care efficiencies are just starting to be addressed in these countries. In 2004, the average length of a hospital stay in Poland was 6.9 days, compared with 4.9 days in the United States, according to Centers for Disease Control and Prevention. Poland's average hospital stay today is the same as what it was in the United States in 1980.

By law, every Polish citizen is entitled to healthcare, regardless of the ability to pay. It's just that some citizens have a greater ability to pay, and many are willing to pay more. It is estimated that approximately 13.7% of all health expenditures in Poland in 2003 were in the form of bribes made by 2 million patients. These payments, known as "out-of-pocket" expenses, are often extorted from patients by doctors or used to shorten waiting times.

Every year, many doctors and nurses leave Poland and other new E.U. member countries to work in countries where salaries are higher. For instance, in 2005 a Swedish entrepreneur started a project there called "Dental City." Every dentist in the clinic is from Poland, earning more in their six-month rotation than imaginable back in Poland. Also, 4,000 doctors filed the paperwork in 2005 to practice medicine outside of Poland. This is classic "brain drain" and a significant challenge for any market. While the state and university hospitals are where doctors advance their careers, the pay is low compared with the private market.

Voluntary Controls

Many of these countries are moving to improve their health-care markets by implementing major reforms focusing on funding control and self-regulation. Poland's public system relies on primary care physicians acting as "gatekeepers" to coordinate patients' healthcare needs--managing medical referrals, diagnostic tests, and specialists visits and hospital stays. In Poland, 40% of all health-care expenses are paid individually--the true out-of-pocket.

As one can imagine, the private healthcare provider market is robust: Poland has more than twice as many private primary-care clinics as there are state owned (2,800 private vs. 1,112 public ones). There are three times as many private specialist clinics as those owned by the state, 100 more private diagnostic centers than state owned, and double the number of private dialysis centers vs. state owned.

These private outpatient centers are well positioned to capitalize on the advent of modern medical management, as few are burdened by a legacy inpatient hospital infrastructure--the outdated, large hospitals built during the Soviet era. The government owns nearly 600 of these hospitals, nearly all needing new medical equipment. Today in Poland there are fewer than 100 private ones.

Clearly 100 private hospitals are not enough for Poland's 38.6 million people. The lack of hospitals is not due to a sluggish competitive market, but rather government legislation that resulted in an underdeveloped health insurance market. Since the early 1990s, it has been possible to sell private health insurance in Poland. By 2001 there were only three companies doing so. Yet, while the insurance sector stood by waiting for additional reform measures, a few companies took another approach.

Employers React

Through the 1990s Polish companies were faced with the need to attract a growing number of employees, paying more in salaries and taxes. And with this increase in payrolls and taxes, which also results in an increase in disposable income, higher expectations, and demands for better standards of care, a number of employers in Poland started to contract directly with medical organizations for either medical services or management advice. These arrangements, when properly structured, allowed for full tax deductibility, including a pass on the Polish social security taxes. In effect, group health maintenance organizations became free of personal income tax.

That established a type of health maintenance organization in Poland. Medical providers such as Medicover, LuxMed, LIM Center, EnelMed, and Medycyna Rodzinna started offering their services on a subscription-fee basis, in effect creating prepaid medical plans. These medical plans were very attractive employee benefits and increased staff motivation. And in many cases, the medical management processes led to a reduction in sick-leave costs and generally improved worker productivity. These HMO-like organizations grew to provide services to nearly 600,000 Polish employees and dependents. That's 600,000 subscribers receiving nontaxable benefits.

Regulations were revised in 2004. As a result, employee benefit expenses are no longer treated as a company cost. Instead, they are a taxable expense for employees and no longer a deduction for employers. Nevertheless, these plans are experiencing an annual growth rate of approximately 25% without any tax advantages. Employer demand for employees continues and employer health benefit costs have increased 70% in the past five years. Clearly, demand is so great that companies are forced to incur these additional costs without the tax treatments so favorable in the United States. And, perhaps more amazingly, employees pay additional income tax on these benefits.

However, classic group health insurance sold in Poland has retained its tax-advantaged treatment for employers and has always been a means of meeting employer goals for employee retention despite the fact that employees still pay personal income taxes on group benefits. The changes in tax treatments of prepaid medical plans has resulted in more than nine insurance companies selling group insurance and competing in this market of nearly 40 million. Yet, as in the 1990s, the inherent challenges to group insurance remain: They are limited to outpatient benefits, with few exceptions such as one-day surgery. (Note: Same-day surgery as a covered benefit was introduced by the co-author of this article while working as head underwriter at the Polish health carrier Cigna STU.)

Looking Ahead

Unlike in the United States, the European Union allows "freedom of services" where financial institutions, such as insurance companies, can open branch offices in member countries without the need for additional licensing, policy filings, or compliance with local regulations. As a point of reference, this is akin to the cost savings that would accrue to U.S.-based insurance companies if they didn't have to file with each state's insurance department.

Nearly 1 million Polish residents have some form of private health insurance, the majority of which is a form of "critical illness" or single, lump-sum payment. A 2003 survey indicated 87% of respondents wanted to purchase private insurance to cover inpatient medical treatments.

After joining the European Union, last year there were high expectations that the freedom of service status would immediately bring carriers from the new member countries, particularly in the area of health given that Poland is the European Union's fifth-largest healthcare market. More than one year after joining the European Union, Poland has seen only one company, Danish International Health Insurance, enter the market, offering comprehensive medical plans for groups of at least three people. Danish International was recently purchased by U.K.-based medical provider BUPA.

International Medical Group or IMG, which is based in the United States and underwritten by a U.K.-based carrier, recently entered the entire E.U. market with a product that allows for private medical care in any country. More a mixture of indemnity and travel policy, this is an example of the innovation necessary for emerging markets such as Poland.

As with other emerging economies, the health-care market in Poland is expected to shortly enter a phase of consolidation--not only through mergers by medical providers but also clear and tight contracting between insurance companies and the providers. Reminiscent of the 1980s in the United States, contracting has begun between insurance companies and medical providers. For example, in November 2005 one insurance company, Signal-Iduna, launched a product based on its network agreement with medical provider LuxMed. The interesting twist in Signal Iduna's new product is the ability to have the insurance pay for some inpatient treatments in public hospitals.

Poland's new government has announced its intention to bring significant change to the private health-care market. As in other E.U. member countries, these changes most certainly will include a strengthening of the regulations in support of private health insurance. But what about the medical providers? How can a country, faced with aging hospitals, dated or nonexistent information technologies, and classic brain drain, continue to provide "free" health care for all citizens as is required by law? How can a country continue to keep separate public and private healthcare delivery and financing options? And how can a country, whose economy is growing at a rapid pace, continue to ignore the growing market demands for choices in quality and service?

The answers can be seen in the actions of the new market entrants. First mover advantages are not gained by entry into mature markets. To quote the head of health insurance at one of those companies, "Our training costs are astronomical, but we need to do it."

By the numbers Poland's Health

14

The number of visits to a medical professional the average Pole will make a year.

1 in 8

The number of Poles on average who are hospitalized in a year.

2,800

The number of private health clinics, nearly three times as many as the number of public clinics.

60%

The percentage of men who smoke.

68

The average life span in years.

1 million

The number of Poles who suffer from chronic heart disease.

40%

The percentage of health-care expenses paid by individuals.

Contributors: Chris Wasilewski, Business Development, PHM International in Olsztyn, Poland and Hank Kearney, president of PHM International, Orlando, Fla.