Health Firms Demand Bills Overhaul from Spain to Stem Debt

13.03.2013 -

Healthcare companies are demanding fundamental changes to how Spain's cash-strapped regions pay their bills, worried by the reappearance of a large deficit just months after the central government stepped in to settle billions of euros in debt.

The problems with how Spain pays the private sector for drugs and other provisions echoes a crisis in another struggling euro zone economy, Greece, where the government last year suspended all drug exports in an attempt to prevent shortages.

That is still a long way off in Spain, but multinationals including Roche and Novartis have taken steps including tightening hospitals' credit lines or threatening to slow investment as they press for action.

Madrid has pledged to overhaul the supplier payment system as soon as this summer so that the central government pays companies directly and then discounts the payments from tax transfers back to the country's 17 regional governments.

But in Spain, where regions pass tax revenue to the central government then get funds back to pay for public services, the plan is a political hot potato that companies fear will take some time to come to fruition.

"Centralized payment is what is needed," said a high-level executive at a multinational drug company, who did not want to be named because of the sensitivity of the situation.

"It's like we have 17 countries inside Spain, meaning it's very difficult for them to see the problem in the same way and then move in the right direction together."

As Spain's public finances looked on the brink of collapse last year, the government bailed out debt-ridden regional governments and helped them pay off some €17 billion ($22 billion) in supplier bills.

The rescue by the central government calmed healthcare companies to some extent but they say that the debt has already risen back to €6 billion and that a long-term solution is necessary to encourage investment and faith in Spain.

The world's 13th-biggest economy is a far larger market than other countries like twice-bailed out Greece, meaning it weighs more on companies' books. Its healthcare system has also in the past been looked at jealously by much of Europe as a model of how to balance cost control with choice for patients.

Spain's Economy Ministry said it was working on the new mechanism and expected to launch it in the coming weeks.

"It's very overnight start paying bills in 30 days," said Javier Urzay, deputy director of pharmaceutical lobby group Farmaindustria.

"The process will probably be slow...(but) this would bring a more structural solution," he added.

A source at Catalonia's economy department said while the region, which is moving towards a referendum on independence from Spain, welcomed anything to speed up payments, any change must be accompanied by mechanisms to ensure liquidity to cover its needs.

"You can't pass a law on wishful thinking, knowing that you aren't going to be able to apply it," the source said.

Tentative optimism

Spain, striving to reduce its budget deficit to avoid a bailout like that given to Portugal or Greece, must keep a lid on spending by the autonomous regions to reassure debt markets and its European partners.

The country is already one of western Europe's lowest spenders on healthcare - around 9.5% of its annual GDP has gone on health in past years, less than Greece and well below rates of 11.6 and 11.9% in Germany and France.

Companies in the health sector have cautiously welcomed the steps taken by the government so far, interpreting the mechanisms as a sign Spain means business.

The government launched a liquidity fund, known as the FLA, in 2012 to lend money to cash-strapped regions to pay off bond redemptions and bills.

The fund has eased tensions, according to healthcare executives, but it is a short-term measure and some question its effectiveness.

"The idea behind the FLA was good, to start from zero. What's happening though is it seems the regions are starting to accumulate unpaid debt again and if that is happening it's worrying," said J. Ignacio Conde-Ruiz, an economist at Madrid-based think tank Fedea.

The regions with the highest debt to healthcare providers are Madrid, Andalusia, Valencia and Catalonia. Catalonia has requested €9 billion from the FLA this year.

But Carlos Gonzalez, head of Spain's biggest pharmaceutical distributor Cofares, said even with the FLA in place, pharmacies in some regions have not been paid since the start of the year.

Losing control

Roche tightened credit to several hospitals in Spain last year but the government's action last year has removed any prospect of companies cutting off supplies in the near future.

Lobby groups, however, say unpaid bills mean lay-offs, closure of firms and are a broader threat to investment in a country which desperately needs economic growth.

Novartis said in February it would slow its pace of investment of around €120 million a year in Spain if the government did not implement measures to halt the accumulation of debt to drug providers.

Fenin, a body that represents healthcare equipment markers, said Spain's depressed economy could lead to "technological decline" as companies cut investment to save costs.

"Practical measures to stop the bleed are being taken...which could produce side-effects in the long term," said Daniel Carreno, president of Fenin, adding that unpaid bills constituted a "lethal threat" to the sector.

"Delayed payments in Spain mean that you lose control of your destiny."