Healthcare Delivery in India: Will consolidation keep pace?

by Nandini Agarwal

Healthcare Delivery is the largest segment of the ~USD 100 bn Indian healthcare industry. The healthcare delivery market accounts for ~70% of the overall industry. The private sector has played a key role in the healthcare delivery industry – the private sector hospital segment was estimated at USD 50 bn in 2015 and expected to witness a strong growth of ~19% to reach USD 120 bn by 2020.

This growth is underpinned by strong macro-economic factors and under penetration of healthcare services. India’s spend on healthcare (at ~4% of GDP) lags behind global peers, bed density is low and infrastructure is inadequate vs the disease burden (India accounts for ~20% of the global disease burden but only 6% of beds and 8% doctors).

At one end, there is under penetration on all fronts, on the other, there is a huge looming demand for healthcare services driven by:
Rising disposable incomes: There exists a strong correlation between rising disposable incomes and healthcare spending as a percentage of GDP
Ageing populations: The proportion of geriatric population is expected to increase from 8% in 2011 to 13% in 2026P
Increasing incidence of lifestyle diseases: Non-communicable diseases are assuming alarming proportions in India. NCDs account for 60% of deaths in the country
Growing insurance penetration: Health care insurance premium has grown at 20%+ CAGR over the last few years – increasing insurance penetration should increase the affordability of healthcare services
Rising Medical Tourism: Increasing medical tourism due to quality infrastructure, highly skilled doctors and lower cost of treatments
Increasing awareness: Greater focus by government, NGOs and private sector on spreading healthcare awareness

The huge demand and inadequate infrastructure has attracted private players to the opportunity – we have seen large corporate chains as well as regional hospitals come over the last two decades shaping the face of the Indian healthcare delivery. Most of the private players have attracted huge investor interest.

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The pace of PE funding picked up pace particularly in 2012-2014 fueled by few large deals in the multi-specialty segment:

DateTargetInvestorValue (USD mn)
Jan-16Care HospitalsAbraaj Group~308
Dec-14Narayana HrudayalayaCDC Group47
Oct-14Manipal HealthTPG171
May-14Aster DM HealthcareOlympus, IVFA65
Oct-13Global Health (Medanta)Carlyle163
Apr-13Fortis HealthcareIFC100
Mar-12Vasan HealthcareGIC100
Despite the growth potential, the industry is fraught with challenges which impact the scalability of businesses.

Key Challenges

Huge capital cost with high gestation period: Hospitals have high capex spend per bed (ranging from Rs 6m – to Rs10m+ in a metro) due to high real estate cost. Gestation period is high with hospitals taking 4-5 years to mature and achieve desired ROCEs

Shortage of health workforce: The number of doctors and nurses in the country lags behind the WHO benchmark. There is an acute shortage of specialist doctors (nephrology, cardiology etc)

Attracting and retaining renowned doctors: There is high attrition among doctors and other medical staff; patients, most often, choose star doctors rather than choosing hospitals

Largely out of pocket expenses: Only 17% of Indian population has access to health insurance. Thus, the spending power of patients on high end procedures is limited

Achieving quick ramp up and high ARPOBs (Average revenue per occupied bed): The key to profitability is achieving quick occupancy levels and high ARPOBs. ARPOBs, in turn, depend on the patient profile and case mix and ability to focus on high end procedures within therapies (e.g. transplants, complex surgeries) which entail high investments (latest medical equipments etc) and costs (doctor fees)

Competitive market: While there are disparities in regional distribution of hospitals, top metro cities have a fairly competitive environment with both Pan-India chains as well as regional hospitals

The private healthcare delivery players have resorted to various strategies to mitigate above operating challenges in the industry. Some of the key strategies followed by players to drive growth and profitability are as below:

Unbundling real estate: Companies are adopting asset light strategies entering into management contract/revenue share models where the partner invests in and owns the fixed assets. For e.g. Narayana Health has adopted an asset right model and has been able to secure low cost land from trust and governments resulting in low gross block/bed (~Rs 2.5 mn/bed as compared with 10m+/bed for other private operators)

Expansion outside metros: Metros / larger cities are saturated (with high entry barriers and long gestation). Tier II/III cities are relatively underserved and provide significant expansion opportunity for multi-specialty hospitals. However, there are some key roadblocks in smaller cities: low availability of specialty doctors/nurses/paramedical staff, inadequate medical infrastructure, and difficult market practices. Another challenge is the economics of the smaller cities with low paying power and large population under government healthcare insurance schemes, which leads to lower ARPOB and also increases the receivable cycle. Private players are adapting their models to be successful in smaller cities (e.g. Apollo developed “Apollo REACH” format for expansion in tier 2/3 cities. These hospitals typically have capacity of 100-200 beds).

Single specialty hospitals: The industry has witnessed emergence of single specialty hospitals focusing on a single therapy area such as cardiology (Narayana, Asian Heart Institute), Oncology (e.g. HCG). These hospitals are relatively easy to scale up because of greater specialization, higher volumes and better returns.

Day care chains: Day care centers have immense potential for growth – in India, only 43% of surgeries are conducted as day care/short stay surgeries compared with global figure of 60%. Some segments which have successfully transitioned from a hospital to an outpatient setting in the last few years include Eye, Dental, Renal. Focus on single therapy in a day care setting ensures higher volumes, operating efficiencies and better quality due to increased specialization. These models offer easy scalability due to lower capex, better margins and faster payback periods.

Variable fee structure for doctors: The ability to retain renowned doctors/consultants with attractive compensation is the key driver for success of hospitals. Many private hospitals have adopted a variable compensation models (sharing a % of revenues with doctors). This helps in retaining the doctors and also turning fixed costs into variable.

Consolidation: Most private players have adopted inorganic strategy to expand into new regions/states, strengthen presence in existing regions. Also with scalability issues and operating challenges, hospitals unable to ramp up are becoming targets for bigger private players. Notably, there have been a slew of high profile inbound acquisitions in the Indian Healthcare Delivery space. These are marked by the desire of the MNCs to gain presence/expand in the high growth Indian healthcare industry

Increasing consolidation in the Indian Healthcare Delivery Industry

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Includes both multi-speciality and single speciality hospitals
Source: Thomson Reuters

The pace of M&A has significantly picked up in the last few years. This is, in part, driven by key inbound acquisitions. Key M&A Deals as below:

DateTargetAcquirorTypeValue (INR mn)EV/bed (INR)
Jun-16Rockland HospitalsVPS Inbound15,000NA
May-16Dr. Ramesh Cardiac and Multispecialty Hospital Aster DM Healthcare Ltd.Inbound1,1009
Oct-15Saket City HospitalsMax Healthcare Ltd.Domestic3,50040
Aug-15 Global HospitalsIHH HealthcareInbound12,84018
May-15Crosslay Remedies Ltd.Max Healthcare Domestic2,47015
Mar-15Continental Hospitals IHH Healthcare Inbound2,82015
Nov-14Westbank HospitalsNarayana Hrudayalaya Domestic1,50029
Source: Company data, Press releases

Conclusion

India’s healthcare opportunity and the huge investment required to bridge the demand-supply gap are well-known. With over 20 per cent of the global disease burden, exploding epidemic of non-communicable disease and ever-increasing gap in providing quality healthcare, India has become a logical expansion choice for international majors. With increasing competition, domestic chains are upping the ante while smaller players not able to ramp up will be pushed out of the business.

There will be significant demand for quality assets which will keep the valuations elevated in the sector. The market will continue to witness increased consolidation as service providers extend their reach, acquire new capabilities and international players look to India to gain access to one of the fastest growing healthcare economies of the world.

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