Should regulators make international healthcare franchising a special case?

17 June 2014

Mark Abell

This article by Dr. Mark Abell was first published by the International Journal of Franchising Law on volume 12 (2014) - issue 3.

Many of the developed world’s healthcare services are in crisis, mostly as a result of inadequate funding following an unprecedented fiscal crisis. Meanwhile, the provision of healthcare in the developing world is far below what it should be due to lack of funding, infrastructure and relevant expertise. This article explores how peer to peer franchising could play an important role generating new income streams for underfunded healthcare services in developed countries whilst transferring efficient healthcare infrastructure to developing countries. The author suggests that the unique social role that franchising can play in the international healthcare sector means that it should be exempted from the various franchising regulatory regimes around the world.

Business format franchising is a much used and highly successful methodology for the international expansion of businesses. It is well used in the Restaurant, QSR, retail, hotel, leisure, car rental and other commercial sectors. However, with the exception of geriatric home care, it has not been greatly used in the healthcare sector. With the current growing crisis in healthcare in both the developed and developing worlds that may soon change.

This article considers whether the unique social role that franchising in the healthcare sector may play on the international stage means that it should be exempted from the various franchise regulatory regimes that have taken root around the world since California adopted the first franchising law in 1971. Franchising has been seen by regulators around the world as something akin to the sale of securities and they have sought to regulate their sale accordingly. However, this article concludes that peer to peer social franchising in the healthcare sector is fundamentally different from other forms of franchising and so should be exempted from such regulations.

The need for franchising in the healthcare sector

There is a crisis in the provision of healthcare in the developing world. According to the World Health Organisation, of the 196 States that have signed up to the International Health Regulations (2005) agreeing to develop 13 core public health capabilities, some 118 states (60%) have requested and obtained extensions to 15 June 2014 to meet the agreed targets. Many of these are currently in the process or applying for a further two year extension. The problem is not merely a lack of funding. It is often as much a lack of infrastructure and relevant expertise. The challenge is how they can acquire that infrastructure and expertise quickly, often with relatively modest budgets.

At the same time, many of the developed world’s healthcare services are in crisis, mostly as a result of inadequate funding. The furore around the advent of Obamacare in the US and the current travails of Europe's healthcare providers, such as the NHS in the UK, are just two obvious examples of the need for State funded healthcare providers to reduce expenditure and generate new streams of income. Many state funded healthcare providers are on the edge of an unprecedented fiscal crisis. Pressed on one side by an ever increasing demand for healthcare, an ageing population presented with multiple complex conditions and on the other by mounting funding deficits, these providers have to reconcile the social imperatives of Keynesian economics with the fiscal realities of today's global economy.

In April 2014, for example, the new French Prime Minister, Manuel Valls, announced €10 billion in cuts to the country's healthcare system, which had been rated the world's best in 2001. Meanwhile, throughout 2013 there were widespread fears of a looming healthcare crisis in Spain (fuelled by cuts of over 13% in 2012 alone), with Deloitte predicting that spending there and in Greece may not begin to recover until 2016, whilst Portugal may be a year further behind. Despite the introduction of the much-publicised Obamacare programme, the current US federal budget projects $402 billion in health-related budget cuts over the next decade.

It is essential therefore that those involved in managing healthcare take steps to transform the current crisis into an opportunity to fortify and secure their long term future through innovative processes that create an international free market of best practice and managerial excellence in the healthcare sector. This will also meet the needs of developing countries for improved healthcare.

It is suggested that the most effective way of building such an architecture is the development of what can best described as "International Peer to Peer Social Franchising". This modified form of franchising may have a role in generating new income streams for the underfunded healthcare services in developed countries whilst transferring efficient healthcare infrastructures to developing nations in “turnkey packages” at a fraction of the cost it would take to develop them from scratch and in a fraction of the time. It could encourage a race to the top in terms of the quality of care pathways within the healthcare systems of the developing world that currently lack a robust healthcare infrastructure.

How can franchising be used in the healthcare sector?

The suggestion that franchising may have a role to play in improving the fortunes of the healthcare sector is not a new one. In February 2014, in the wake of the Mid-Staffs inquiry, the UK government announced a review to look at how to end the isolation of failing hospitals from the best NHS management and practice. At the time, a potential role for franchising models in achieving this was suggested by a number of commentators. Franchising is already used in the healthcare sector by a number of private health service providers, including optical chains such as Boots and Specsavers, dental businesses such as White Cross, geriatric care providers such as Home Instead and Brightcare, chiropractices such as NuSpine, and medical practitioners such as the Appletree Medical Group in Canada, Doctors Express in the USA and Apollo Hospitals in India.

Franchising cannot effectively be used to regulate or ensure the provision of technical clinical excellence. That is a matter for the medical profession. It can, however, be used to ensure that medical services are managed and delivered in the most efficient, cost effective and patient service oriented manner possible. It cannot be used to ensure that heart surgery is carried out to an acceptable standard. It can however, ensure that cardiology units are run to a uniformly high standard and so help to ensure the delivery of healthcare in accord with agreed KPI's.

P2P social franchising

The unique nature of the healthcare sector suggests an approach and architecture that achieves the "collaborative mutualisation of best practice" through a form of social franchising that is best described as "Peer to Peer Social Franchising" (P2P Franchising). In essence, P2P Franchising would work as follows. Healthcare providers which have developed "Best of Breed" care pathways based upon patient care, financial management and so on, for the management of, say A&E or paediatric units would offer other healthcare providers who employ or would like to employ the same care pathway access to its format (together with on-going development of it).

This will develop a free international market in healthcare management that will encourage healthcare providers to develop best of breed formats that can be "monetised" and turned into income streams.

The more successful the international healthcare market judges a format to be, the more funding it will attract. The better the formats that healthcare providers in developing countries take franchises for, the better able they will be to meet their desired KPIs in a cost effective manner.

Franchisor healthcare providers would need to develop the resource to transfer their know how to their franchisees and regularly monitor compliance with quality standards. This would involve incurring costs and acquiring new skill sets through recruitment, but these would be covered by the income streams generated from franchisees.

Generating new income streams from international markets

Both private and state funded healthcare providers need to “think out of the box” in their search for new income streams. Exploiting their expertise on the international front has often been touted as one possible way of securing new sources of income. However, the big brave schemes often suggested, such as a healthcare provider licensing a hospital in the Middle East to operate under its name, are usually ridden with political and reputational, let alone legal and financial risk. The risk profile and logistical demands of such big box proposals substantially detract from their appeal. However, that does not mean that the international market does not offer healthcare providers a more appropriate and manageable way of generating income. The discreet franchising of individual care path ways offers a less risky and more manageable approach. that can be developed, over time and in an incremental manner, into multiple and diverse income streams.

Care pathways rather than clinical excellence

Franchising cannot be used to ensure the provision of technical clinical excellence in a foreign hospital. That is a matter for the local medical profession. It could, however, be used to enable hospitals in developing markets to deliver desired care pathways to the same high standard as an acknowledged centre of excellence in the more developed markets. A healthcare provider with a care pathway that is recognised as a centre of excellence could become a franchisor and franchise an appropriate foreign hospital to replicate the care path way. Healthcare providers with centres of excellence would franchise their care pathways to their peers in foreign markets.

So, for example Great Ormond Street Hospital could franchise selected paediatric care pathways to suitable foreign hospitals. This strategy would not be limited to the larger better known healthcare providers. Whilst well known teaching hospital care pathways may be much sought after by large prestigious hospitals, the centre of excellence care pathways of more humble regional hospitals could well be very attractive to smaller regional foreign hospitals.

A healthcare provider with a care pathway that was regarded as a centre of excellence would allow its foreign peer not only to use the care pathway, but also to advertise the fact that it was using the care pathway and through that delivering world leading excellence. In return for this training, support and use of the brand, the franchisee would pay the franchisor an agreed fee, comprising both an upfront amount and an on-going regular payment.

The market for these international care pathway franchises would include not only healthcare providers in developing markets, but also any healthcare providers, public and private, in more developed economies that wish to access best of class know how.

Removing regulatory barriers

P2P franchising in the healthcare sector could thus help alleviate the current crisis in both developing and developed economies. However, there is a potential regulatory barrier that, whilst not insuperable, may at worst discourage key potential players from becoming involved in it and at best increase the cost of becoming involved in it.

Franchise regulatory regimes generally comprise a mixture of pre-contractual disclosure, mandatory provisions and registration on public registers. These aim at protecting the interests of potential franchisees and have their origins in the view that the sale of franchises is akin to the sale of securities and therefore should be regulated in a similar way. These regulatory regimes are found not only in developed markets such as the USA, Canada, Australia, France, Spain, Sweden, Belgium and Korea but also in more developing markets such as Indonesia, Khazakastahn and Vietnam. There is also a pro-regulatory wave of sentiment which makes it likely that more developing countries will adopt franchise regulations in due course. As was the case in Romania and the Baltic States when they were preparing for their membership of the EU, the regulation of franchising is often seen as the mark of a more developed regulatory environment befitting a more developed country. Even the WTO seems to see the regulation of franchising as the mark of a more developed economy and so forced China to adopt franchise regulation before it was able to accede to the WTO. These regulatory hurdles can cause delay and cost.

Given the unique social role of franchising in the healthcare sector and the barriers to international franchising that some regulatory regimes create, it is suggested that it would be appropriate to exempt P2P social franchising in the healthcare sector from such regulatory regimes.

Wholesale exemptions from franchise regulations are not unknown. For example, in the US there are a number of such exemptions to the Federal Trade Commission Rules. The point is that the sort of P2P social franchising envisaged in the healthcare sector will be focused on socially desirable objectives and is likely to involve deals between relatively sophisticated players which are already involved in the healthcare sector and involve relatively substantial amounts of money. Both franchisors and franchisees will have a good understanding of that sector, what they require from the deal and how much they can afford to invest in it. During the course of the negotiations the franchisee organisations will no doubt require and receive material information from the franchisor organisation that equals or exceeds the disclosures required by franchise regulations.

It is therefore suggested that regulators may want to consider exempting peer to peer social healthcare franchises from disclosure and registration requirements. Exemptions based upon the size of the deal and or the size of the franchisee could be introduced more generally of course, following the example of the US FTC Rule. However experience suggests that this is likely to be resisted by many regulators. However, given the broader political and social context of peer to peer social franchising in the healthcare sector, restricting the exemptions to P2P franchising in that sector would probably encounter little if any resistance from regulators.

This would obviously mean having to define what type of transaction qualifies to come with in the definition of P2P franchising. It is suggested that it should require at least one of the bodies involved to be entirely or partially state or NGO funded. This would ensure that the benefits are not be used exclusively for the generation of profits.

Conclusion

According to the WHO the provision of good quality healthcare in developing countries is far below what it should be. At the same time healthcare providers in developed countries are undergoing difficulties of their own. Private healthcare providers are facing more intense competition from their competitors than ever before and need to find more ways of generating income streams. State funded healthcare providers in many developed markets are currently facing an unprecedented funding crisis.

The effective management and exploitation of intellectual property rights through open ended peer to peer social franchising of care pathway formats by healthcare providers will maybe a step towards solving all of these problems in both developed and developing nations. This will create an international free market in healthcare that will enable the collaborative mutualisation of best practice in a financially responsible and socially appropriate manner. This will ensure that free market forces and socially desirable objectives work in tandem to help guarantee the provision of high quality healthcare, free at the point of delivery for the coming generations.

The international peer to peer social franchising of centre of excellence care pathways to other healthcare providers can deliver those healthcare providers with valuable know how the opportunity to access substantial long term funding, without the need for substantial working capital or the need to invest in new technology or HR resource. With appropriate guidance from those experienced in international social franchising, they can “monetise” their assets on the international market by granting franchises to foreign healthcare providers in a way that sits comfortably with the ethical values of state funded healthcare systems and provides access to extra funding without incurring the inappropriate risk profile associated with “big box” projects, but with the potential to grow exponentially from small beginnings into a truly global high yield business.

Regulatory barriers may reduce the willingness of some players in the healthcare sector to become involved in franchising. It will certainly increase the cost of such deals. It is therefore suggested that WHO and the governmental departments that are in charge of healthcare services in those of its member countries that have franchise regulations may want to canvas their national regulators to introduce healthcare sector exemptions from franchising regulations as outlined in this article.

Authors