Others

Others

In 2010, in Mumbai’s densely populated industrial suburb of Marol, an upscale 1,500-bed hospital came up, promising the best medical services to a city that didn’t have large corporate hospital chains. To make its presence felt, the hospital managed to get Bollywood superstar Aishwarya Rai to deliver her first baby there. That gave much publicity to the new entrant into Mumbai’s health care scene.Now, eight years later, the hospital is battling poor financial health. It has amassed a debt of Rs 1,200 crore, filed for insolvency and is waiting for a suitor to buy it and salvage operations. The extent of Seven Hills ’ distress might make it something of an outlier but the specter of financial stress is now troublingly common across India’s top private hospital chains. The troubles at Fortis might have causes that run deeper than business weakness, but the pressure on margins, strain on occupancy levels and regulatory price controls are all concerns at other companies as well.Four of India’s large publicly traded hospital chains — Apollo Narayan Health , Fortis and Max India — have cumulatively lost `6,300 crore in market cap in the last two years, an analysis by ET Intelligence Group showed. A report by rating agency ICRA in July revealed that profitability of hospitals have touched a multi-year low.“The health of the hospital sector has been deteriorating since early CY2017 due to several factors that have adversely affected its profitability,” said Kapil Banga, assistant vice-president at ICRA.India’s demographic fundamentals favour the country’s $61 billion health care industry. We have low penetration of hospital beds and doctors, a large population beset with high prevalence of ailments such as diabetes, tuberculosis, cardio-vascular disease and much else, and rising purchasing power. But costs are rising too. Rents, wages and other factor costs are rising and hospital chains are losing their grasp over pricing as health care costs become a political subject across the world, and increasingly susceptible to regulation in India.Indian government’s health care spends as a percentage of gross domestic product is among the lowest in the world. Its way of compensating for it, however, has recently been to push pharma companies, medical device makers and now hospitals to cut prices through various policy interventions. One of the biggest was the cut in the price of stents and knee implants in 2017 by over 70%, besides the regular revision of the Drugs and Cosmetics Act.Consumables such as medicines, stents, implants etc typically contribute two-thirds to the profit margins of hospitals, with services contributing the rest. Most private hospital chains were caught unawares when these policies came in. Additionally, state governments in Karnataka and West Bengal have implemented the Clinical Practice Establishment Act, bringing in accountability on how hospitals price their cost of services to patient, and penal provisions for violations.“We believe government policies will continue, with focus on access, quality and affordability. We expect most medical products to come under price caps, though hospitals should be able to offset the impact through service costs over the medium term,” wrote Piyush Nahar, an analyst with brokerage firm Jefferies in a recent report titled Unmet Demand Conundrum.Kaustav Ganguli, MD of Alvarez and Marsal, an investment banking firm, also believes that hospitals reinvent the wheel looking new reality to survive."Directionally the government is keen contain the payout from patients. So pricing control is here to stay, and so the basis for competition and survival also changes,” Ganguli explains.Two decades ago, before large hospital chains established themselves in India, the care market was fragmented with local doctors running standalone hospitals. Over the years, India’s health care has evolved to become much more organised, allowing private players to have a greater say in setting the rules of the game. Hence the focus became to raise capital to expand in large metros with multi-specialty hospitals.With large capital investment, also came higher cost of treatments. While by and large they are still among the lowest in the world, they proved unaffordable for Indian patients. The presence in metros ensured that hospitals could manage to obtain close to 20% operating margins on their average bed occupancy rate (ABOR—total no of beds divided by number of occupied beds). But over the years, the supply of beds has risen so much with increased competition that analysts estimate that rate to have come down to single digits.The sharpest dip is witnessed in the National Capital Region (NCR), where operating margins have declined by 21 percentage points, according to ICRA. The unmet demand is outside the top cities and at affordable pricing levels, the Jefferies report explains. But what has stopped corporate hospitals from addressing this market is the cost structure and capex model. Though the cost of setting up a multi-specialty hospital in a tier-two town might be cheaper than a metro city, but profitability is much lower, too.In smaller towns, getting doctors is one of the biggest challenges and besides real estate the other cost of services almost remains at par with what it costs in metros, says Srinath Reddy, CFO of Dubai-headquartered Aster DM Healthcare. As a business policy, Aster DM has decided to stay out of the smaller towns despite the competition coming from being in large metros. Reddy thinks that the over-regulation by the government is not helping either patients or hospitals and he fears ultimately patients will end up getting poor quality of care.“You can’t squeeze a lemon so much that it turns bitter,” Reddy adds, wryly. While health care has been among the most vibrant sector for large private equity investors across the world, in India expectations of high valuations have turned them away. Being in the red has not stopped hospital chains from demanding high valuations, according to an investment banker who is advising private equity investors.In the run up to the 2019 elections, most industry watchers believe that regulations will only increase, if anything, considering how emotive a subject health is. It was no coincidence that during the UP assembly elections a couple of years ago, one of the campaign highlights for the BJP was the cut in stent prices. So what does the future hold for these private chains?Ganguli of A&M suggests that like in most mature markets, health care laggards are decided on who runs an efficient shop. Hospitals will have to look at vender consolidations, and some standard usage policy of their consumables. A new pricing model, where all the resources used in a procedure are factored in, might also have to be considered.Ashish Jha, director at Harvard Global Health Institute, says there is no denying that private health care is here to stay in India as the public sector alone can’t provide the service.“How do we ensure that private sector grows in a way that improves the health of the people in India, is financially sustainable and treats people fairly? The prescription is we have to have open and transparent pricing policy. When patients walk into a hospital they need to know exactly how they will be paying.The analogy I would like to use is that is if you went to a car dealer to buy a car and if they said this is how much it is for seat, engine, etc, it won’t be a great thing. What you want is a single price for the whole thing. And that has to be open and transparent with no surprise billing at the end.”But private players like Reddy of Aster says that despite all these solutions, the fundamental issue remains that India simply lacks enough doctors and this is one reason why despite adopting cost-efficient ways to deliver health care services, the demand-supply gap of qualified doctors makes private health care an expensive proposition. Unless we increase the number of highly-qualified medical professionals through policy changes, we will continue to be in this chicken and egg situation, Reddy says.