Health-tech has greater potential than fintech to create economic growth and wealth in Africa by 2040.

Creating Tomorrow Series – What we can learn from the retail banking sector to drive innovation in “health-tech” and use models like Direct Primary Care (DPC) to unlock a multibillion-dollar consumer healthcare industry in Africa.

“All these things you’re so sure are true – what if they weren’t?” – Safi Bahcall, author of Loonshots on the Tim Ferriss Show.

COVID19 has forced us to revisit all our assumptions about life, success, happiness and how the world truly operates.

In this essay, we present a thesis - now is the perfect time to make long-term investments in health-tech-backed innovations to drive sustained economic growth in the consumer healthcare sector in Africa over the next 20-40 years. In the process we will build human capacity, reduce poverty, modernize the health sector, and extend life expectancy for all Africans.

Our summary arguments are:

1.    Problem – Without “Good Health & Wellbeing” (SDG3) Africa will never be able to manage the COVID19 pandemic enough to compete in the global economy

2.    Solution - Investors and entrepreneurs can follow the playbook of digital technology in the banking sector to unlock growth in consumer healthcare for Africa.

3.    Market Validation – Banks are ideal allies and co-sponsors to unlock growth in consumer healthcare in Africa

4.    Market Opportunity - The Total Available Market (TAM) for consumer healthcare in Africa is ~600m people and US$180Bn.

5.    Structural Challenges - Three areas of opportunity to formalize the supply and demand side and unlock growth in consumer healthcare in Africa.

6.    Market Innovation - Direct Primary Care (DPC) as a digital enterprise model to unlock growth in consumer healthcare in Africa.

7.    Co-creation Opportunity – We invite impact investors to co-create a DPC model and unlock growth in the multibillion-dollar consumer healthcare market in Africa.

Problem - Without “Good Health & Wellbeing (SDG3) Africa will never be able to manage the COVID19 pandemic enough to compete in the global economy

The COVID19 pandemic has forced everybody to question the status quo. The veil has been lifted and the poor state of health infrastructure across the entire continent is on display on the world stage for all to see. Our health systems are at least five decades behind schedule.

On 23 May 2020, a WSJ article was titled: “Coronavirus might become a “fixture” in Africa for years.” COVID19 hot spots are emerging in African nations that have few resources to tackle infections.

Access to affordable and quality healthcare is especially poor in Africa. In Sub-Sahara Africa, basic primary healthcare in not available. Healthcare infrastructure is not designed to serve the sector and often poorly financed. The continent lags behind with 1.2 hospital beds/1000 population compared to 3.8 beds/1000 for Organization for Economic Corporation and Development (OECD) countries. (World Bank). More than 70% of health expenditure is out of pocket and less than 10%* (120 million) of all Africans are enrolled in any form of health insurance, private (HMO) or National Health Insurance.

In contrast, banking systems across Africa are far more advanced today than they were just 10 years ago. For the past thirty-years, the World Bank and development community has led a dedicated campaign to make access to financial services or “banking the unbanked” a central tool in the fight against poverty in emerging countries. The net effect has been significant wealth creation with many of Africa’s “new” millionaires being former bankers, capacity building for a community of hundreds of thousands of well-trained senior and middle managers, job creation for millions of street traders, lower skilled clerical, facility management and security personnel. This has led to a reduction in poverty and transformation in the social infrastructure of several countries that less than 20 years ago were considered under-developed.

“In the past few years, we have seen great strides around the world in connecting people to formal financial services,” World Bank Group President Jim Yong Kim said. “Financial inclusion allows people to save for family needs, borrow to support a business, or build a cushion against an emergency. Having access to financial services is a critical step towards reducing both poverty and inequality, and new data on mobile phone ownership and internet access show unprecedented opportunities to use technology to achieve universal financial inclusion. 515 Million adults have opened accounts since 2014.” This excerpt was from the World Bank Report - Titled: Financial inclusion on the rise but gaps still remain published on 19 April 2018

The needs of a healthcare customer are the same as the needs of a banking customer: Access, Convenience, Affordability, Reliability and Sustainability. (ACARS).

COVID19 presents us with a unique opportunity to redesign and develop the health infrastructure and operating systems across Africa to operate close to world-class standards, just like the banking sector.

Solution - Investors and entrepreneurs can follow the playbook of digital technology in the banking sector to unlock growth in consumer healthcare for Africa.

In the 2015 Report - Growth and Innovation in Retail Banking in Africa by McKinsey they outlined a playbook for growth of the banking sector which we believe could be easily adopted to the consumer healthcare sector in Africa. In 2019, Africa Business Magazine reported the top 100 banks in Africa posted a total profit of US$18.874Bn in 2018. Only one, Banco de Poupanca e Credito in Angola, made a loss of -US$87m. The best performer was Standard Bank of South Africa with a profit of US$2.267Bn (an outlier) and the worst performers were Development Bank of Ethiopia with US$14m and Arab Tunisian Bank with US$13m. Imagine that, a consumer service sector in Africa where the top 100 companies, located across more than 21 countries, all making average profits of US$188m.

Therefore, we propose studying the playbook of the banking industry as a basis for innovation and to unlock growth in the consumer healthcare sector.

1.    Geography Matters – Over 94% of revenues of banks is tied to their geographical footprint. 5 countries – South Africa, Nigeria, Egypt, Angola, and Morocco account for over 86% of the total banking revenues on the continent. High real estate cost and the urban/rural population mix means density of banks in Africa is at 5 branches/100k people versus 13 branches/100k inhabitants in emerging Asian countries. This makes Africa an ideal candidate for any business that can leverage digital technology to acquire more customers and grow rapidly. Banking and healthcare are ideally suited for such a growth strategy.

2.    Right Segment, Compelling Offers – Over 70% of revenues for banks come from the “middle”, these are people earning between US$6,000 – US$36,000. About 13% or revenues came from those earning below US$6,000 though this remains the growth segment. There is ongoing tension between impact investors with a preference for business models that target the “low income or the Bottom of the Pyramid” market and traditional private equity that seeks above market returns within a short period of 3 – 5 years. I believe consumer healthcare entrepreneurs should adopt a strategy similar to the banking industry. Priority should be to start in the middle with customers with ability to pay, then grow organically and build offerings for the lower tier of the population over time.

3.    Leaner, Simpler Banking – Africa has a high cost to asset ratio, so banks, like hospitals, clinics and even equipment suppliers are subject to high cost to asset ratio. Innovation across industries is needed to reduce the high cost of customer acquisition. Most famous example is the marriage between telecom (Safaricom) and digital retail banking that gave birth to M-Pesa, one of the world’s most successful mobile banking platform in Kenya. M-Pesa by 2017 generated over US$1Bn in economic activity, created over 860k jobs and added 6.5% to the GDP of Kenya. Similarly, the success of Orange Money cannot be overstated. After 10 years in operation by 2017, they had acquired 38.7 million customers, 13 million users a month across 17 countries and €26bn in transactions in 2017. Later we will discuss how the Direct Primary Care (DPC) model can be used to manage millions of healthcare patients conducting daily or monthly financial transactions in return for unlimited access to quality healthcare services.

4.    Digital First – COVID19 has created a new normal and accelerated the acceptance of virtual operating platforms even for the more established and traditional of industries like government. Earlier this March 2020, SAP and Microsoft partnered with Standard Bank South Africa, in Project Embrace, an enterprise platform to manage the entire patient journey on a digital ecosystem. In the McKinsey 2018 banking sector survey, over 40% of customers preferred digital channel transactions. In Morocco, “L’ Bank lik” was launched in 2016 as the fully digital and mobile banking arm of Attijariwafa Bank. By 2018 they had 7 million connections per month and 31% market share. The following were cited as additional ways to drive digitization:

• Digitize current operations target profitability per transaction of 70%+
• Partner with telecommunication companies to increase data equity and for a more intimate relationship with “customers” who increasingly use their smart phones to conduct most of their business and personal financial transactions
• Build a full digital offering from scratch. Almost every bank in Africa today can provide full customer service using their digital platform. The same should be the case for a healthcare service provider once the customer is registered.

In healthcare, telemedicine, a service platform that has struggled for mass acceptance over the past 20 years, is suddenly part of the standard operational requirement for all healthcare providers. Healthcare is finally ready to go “Digital First”.

5.    Innovate on (credit) risk - Banks across the world have standard performance Management metrics - Return On Assets (ROA), Return On Equity (ROE) and Net Interest Margin (NIM). To mitigate the unusually high consumer credit risk across Africa, banks offer average interest rates at 20% or higher along with a 120% collateral to loan value requirement. Despite such expensive rates, small businesses are increasingly able to secure working capital loans as their operating and credit history is built over time. These measures help to keep Non-Performing Loans (NPL) at a minimum, which are amongst the leading cause of loss of NIM and profitability.

Digital technology and enterprise management systems such as Direct Primary Care (DPC) make it easier for consumer healthcare providers to collect revenues and develop a customer credit system for personal and corporate clients that is more effective than what banking uses.

Market Validation – Banks are ideal allies and co-sponsors to unlock growth in consumer healthcare in Africa.

Consumer healthcare companies will be best served to incorporate a digital enterprise management platform to facilitate interoperability with other operators. They should develop digital dashboards to track financial performance and productivity.

Banks should set-up dedicated healthcare desks and assess consumer healthcare companies on the following financial performance management metrics:

1. Revenue - Number of paying customers
2. Productivity – Is the business making the best use or optimizing (not maximizing) the key resources like doctors, nurses & technicians, medical imaging and lab equipment and facility (cost/square meter).
3. Profitability - Is the business making a sustainable Net Margin on services provided? Are we keeping current customers and adding new customers over time? Customer Lifetime Value (CLV) is a good indicator of profitable growth.

Let us address the issue of poor cashflow and banking credit risk for healthcare SMEs. Today across Africa, most banks do not have a dedicated healthcare desk. When an entrepreneur submits a request for a working capital facility or loan, the bankers still ask the entrepreneur to validate their “offtake”. To show contracts with HMOs or other assurances that they will have customers.

This is an outdated approach and it is wrong. If you take into account the fact that public and private health insurance together covers less than 10% of all Africans and their reimbursement rates to doctors are often far too low to be of any significance to the economic sustainability of a healthcare practice, you will appreciate the ineffectiveness of the current bank system of establishing credit for a healthcare business.

Market Opportunity - The Total Available Market (TAM) for consumer healthcare in Africa is ~600m people and US$180Bn.

According to Statista, the number of Africans with bank accounts has grown from 171m in 2012 to 298m in 2017 and projected to reach 456m by 2022. In addition, McKinsey quoted in the 2017 article, Lions Still on the Move: Growth in Africa's Consumer Sector that “Technology is opening many new doors for consumers. Mobile money, for instance, is growing five times faster in Africa than in any other region. By 2020, half (50%) of Africans—up from 18 percent in 2015—are expected to own a smartphone, which they can use to buy and sell products and services, pay bills, and make remittances.”

“In terms of size, Africa’s current banking market is approximately $86 billion in revenues before risk cost. Our projected growth for Africa’s banking-revenue pools of 8.5 percent a year between 2017 and 2022 will bring the continent’s total banking revenues to $129 billion.” - African Retail Banking's Next Growth Frontier - Feb 2018 McKinsey & Co.

Africa has about 11% of the global population but carries 24% of the global disease burden. Africa also needs an estimated US$25Bn - US$30Bn in investment in healthcare to meet basic needs. IFC Healthcare in Africa.

If we use the banking sector as a proxy for consumer healthcare, we suggest a conservative estimate for the Total Available Market (TAM) for consumer healthcare in Africa at about 600 million people or US$180Bn*. In Nigeria alone, total outpatient health expenditure per year are ~US$12Bn and over 70% is out of pocket. (*Calculated based on US$300/person per year or a heavily discounted cost of a full annual medical exam including all imaging and blood tests).

Since 2018, African private equity funds have raised less than US$20Bn, less than 2.5% of funds raised by emerging markets. Returns have been well below expectations, minimum investment commitments of US$50m mean only established sectors like banking, manufacturing, telecom, insurance, and Fast-Moving Consumer Goods (FMCG) get any attention. Perhaps consumer healthcare would present an area of opportunity for private equity and impact investors.

Structural Challenges - Three areas of opportunity to formalize the supply and demand side and unlock growth in consumer healthcare in Africa.

As a professional, I have spent the past 10 years focused on developing health technology and infrastructure solutions for the Africa market. Most recently as a Founder of Yako, we spent the past 3 years to develop and test various models of service delivery with the private and public sector across Nigeria and Cameroon. Our thesis thus far has been to use access to medical technology to support physicians deliver affordable access to quality care to all. A "Capex to Opex" model. Though we understood the challenges, we may not have fully appreciated the magnitude of the structural challenges.

Below are the 3 structural challenges we identified that have informed our current strategic pivot:

1.    Problem #1 - The supply side (primary care doctors and specialty hospitals) is far too fragmented to meet demand at scale

• Solution #1 – Direct Primary Care (DPC), a digital enterprise-grade management system that manages an ecosystem of healthcare providers with a goal to dramatically improve patient access and clinical outcomes while lowering overall operating costs and passing on savings to the consumer.

2.    Problem #2 – The supply chain is too inefficient leading to high Total Cost of Ownership (TCO) for critical capex such as medical equipment, laboratory tests, pharmacy, and consumables

• Solution #2 – A Managed Equipment Services (MES) or operating lease model that offers affordable local currency financing, reduced collateral requirement, bundled equipment rental and service in return for a fixed unitary payment. (A Pay per use model for doctors and clinics that serve the masses.)

3.    Problem #3 – Demand side. The customer experience remains at an all-time low, leading to lack of trust, low patient/customer flow and high customer acquisition cost for operators.

• Solution #3 – A bundled offering - unlimited access to qualified primary care physicians and discounted medical diagnostic, pharmacy, and specialist referral services - in return for a monthly subscription fee to members (the DPC model).

Market Innovation - Direct Primary Care (DPC) as a digital enterprise model to unlock growth in consumer healthcare in Africa.

Direct Primary Care (DPC) provides one of the best solutions to address cashflow risk for the operator and end-user credit risk for the operator.

In the US, DPC is an innovation that is disrupting the status quo in a highly inefficient healthcare industry controlled by interest groups that for decades have struggled to put the interest of the customer/consumer at the center. The US healthcare system faces many structural challenges such as: US$500Bn annual administration cost, a 10 to 1 admin to doctor ratio, US$20,000/year average cost of family health insurance premium, over 67% of bankruptcies tied to medical issues and a Net Promoter Score (NPS) of 14 for health insurance companies.

In the US, DPC offers the following customer-focused solution: US$70/month average DPC membership fee, >20% annual savings for employers that implement DPC, >50% healthcare cost attributed to primary care referrals and 70+ NPS score by DPC patients for DPC providers, greater revenue, quality of life and less burnout for primary care doctors.

At Yako, we define Direct Primary Care (Yako DPC) as an enterprise-grade and provider-led management platform that powers an integrated ecosystem of virtual clinics, standardized primary care clinics and specialty care hospitals to dramatically improve patient access and clinical outcomes while lowering overall costs of care.

The opportunity for Africa is to use the DPC model as a vehicle for innovation to deliver consumer healthcare and in the process, transform the lives of the average person in the working-class community, just like banking and financial services transformed the low to middle class segment. Structurally, the benefits of DPC for Africa are:

• Market-Maker – A “first of its kind” direct care model serving government, corporations, employees & beneficiaries, and the average person led by doctors.
• Access – Patient-centric, serving private and public sector, allows doctors to be proactive and put emphasis on “keeping patients healthy”.
• Convenience – 24-hour virtual connectivity to doctors, clinics located close to home & work, world-class clinical protocols backed by experts & telemedicine.
• Affordability – Efficient & tiered monthly subscription (US$10/month – US$50/month) for bundled services means each segment of population can afford basic primary care.
• Reliability – Digital performance management tools to build capacity and optimize supply chain, health provider and facility utilization.
• Sustainability/Profitability - Lower total healthcare costs, better recruitment and retention, better productivity and employee engagement, sustained savings/profitability (>30%) for all stakeholders.

Co-creation Opportunity – We invite impact investors to co-create a DPC model and unlock growth in the multi-billion-dollar consumer healthcare market in Africa.

Yako is collaborating with the US market leaders (>50%) in customized and integrated digital technology and a physician-owned provider network of the fast-growing innovation called Direct Primary Care (DPC) to develop a customized DPC offering for the Nigeria/Africa market.

We invite impact investors, development finance institutions and others with a mandate to build sustainable solutions in the healthcare sector in Africa. We have outlined a 2-3 years plan to:

·      Prototype – Test the DPC Model with at least 10,000 enrolled members

·      Standardize – Validate the market assumptions with up to 100,000 members

·      Scale – Expand to DPC model to at least 1,000,000 members

Though we are a small shop, we believe we have the right DNA, operational culture, and local market experience to be such a company that can build Market-Making projects that become market leaders.

Many of the old standards for assessing the viability of a deal or the risk/return profile of an investment are probably no longer relevant. All the infrastructure and consumer services that Africa needs to become a growth economy have yet to be built or developed.

We are living in a New Normal in Africa and globally, join us to Create Tomorrow!

“There are no experts in the future.” – Safi Bahcall, Loonshots!

Ngu H Morcho

Founder & Managing Director, Yako Medical Africa, Ltd.

Ashoka Fellow

ngu.morcho@yakomedical.com.