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Indian Healthcare Sector report meg strat consulting

  1. 1. Indian Healthcare Sector: A Galore of Scope and OpportunityMay 2012CONFIDENTIALThe information contained within this document is proprietary to MEGStrat Consulting and it reserves the right to all informationprovided. The recipient would treat this material as Confidential
  2. 2. Executive Highlights 3Industry Overview 4• Introduction• Industry Composition• Current ScenarioKey Trends and Growth Drivers 9• Conducive Demographics• Rising Affordability• Increase in Lifestyle Diseases• Health Insurance and Medical Tourism• Regulatory factors Boost Reach and Quality• Market Trends• Deal Activity • Private Equity • M&AOperating Models 20• Revenue Drivers for Tertiary Hospitals• Operating ModelsOpportunities and Growth Strategies 22• The Unmet Need• Opportunities• Growth Strategies• Building Functional EfficienciesRisk Factors and Mitigation 27The Way Forward 29About MEGStrat Consulting 32 2
  3. 3. • The Indian healthcare industry, valued at USD 40.0 billion in 2011, is highly fragmented and dominated by private players. The sector is expected to grow at 24.1% p.a. till 2020, fueled by large investments from existing corporate hospital chains and new entrants backed by private equity investors.• Demand for Healthcare services is poised to grow exponentially owing to a growing old age population with rising incidence of lifestyle diseases, rising incomes and affordability, and increased penetration of health insurance• India only spends 4.2% of GDP on healthcare, compared to an average of 8.3% globally, and lower than other emerging countries like Brazil (8.4%) and China (4.3%). As such, India’s current healthcare infrastructure would not be adequate to meet the exponential demand expectations.• Government-run facilities have inadequate equipment and poor quality. As a result, private players can capitalize on the opportunity. The private sector is expected to contribute 80.0% - 85.0% of the USD 86.0 billion investment required in healthcare till 2025.• The sector has attracted private equity players, who have been playing a significant role in various strategies of Indian hospitals, including organic & inorganic growth, and to make hospitals asset-light enterprises.• Most hospital chains have aggressive expansion plans to scale up their operations and establish a national presence. Increasing entry barriers like high Capex intensity and reserve crunch will favor existing players to pursue accelerated growth.• Indian hospitals are exploring various innovative models to improve their performance and profitability, viz. introducing telemedicine, focusing on specialty centers and day care centers.• There is increased penetration into tier II & III cities that have lower Capex & costs and higher IRR, using models such as hub & spoke and operating & maintenance contracts to expand reach. 3 3
  4. 4. MEGStrat Disclaimer Applicable 4
  5. 5. The Indian Healthcare sector is at a vital juncture, perched for assured growth till 2020. Healthcare expenditure inIndia being among the lowest globally, offers tremendous scope and opportunity to the industry stakeholders,especially in the private sector. Industry Revenues 300 280 250 (USD Billion) 200 150 100 79 41 46 50 50 34 38 23 0 2005 2006 2007 2008 2009 2010 2012E 2020EHowever, considerable challengesexist in terms of service Robust Demand A Galore of Opportunitiesaccessibility and patient care  Healthcare expenditure in India is  Greater investment is required inquality. As such, Government projected to increase by 12% per healthcare infrastructure tosupport would inherently play a annum from 2011 -15 increase the number of doctorssignificant role in the overall and hospital beds to bridge thedevelopment and growth of the  Increasing incomes, greater demand gapsector. health awareness, shift to lifestyle diseases and increasing  The Union Government allocated insurance penetration to drive USD5.6 billion in 2011-12 for the growth of the sector sector, an increase of 11% from the previous fiscal year Quality and Affordability Levels Regulatory Support  There is a large pool of well-  Government of India aspires to trained medical professionals in develop India as a global the country healthcare hub  Compared to countries in the  High level of effective policy West and Asia, India has a support in the form of reduction comparative cost advantage in exercise duties and higher budget allocation for the healthcare sectorSource: MEGStrat Analysis, IBEF, KPMG 5
  6. 6. Healthcare Medical Medical Hospitals Pharmaceutical Diagnostics Equipment and Insurance Supplies Manufacture, Establishments Government extraction, primarily engaged Health insurance Hospitals processing, Businesses and in manufacturing that cover an Include Private Hospitals purification, and laboratories that medical individual’s healthcare Include nursing packaging of offer analytic or equipment and hospitalization centers, homes, mid-tier, chemical diagnostic supplies, such as expenses and dispensaries, and top-tier materials to be services including surgical, dental, medical district hospitals private hospitals used as body fluid orthopedic, reimbursement and general medications for analysis ophthalmologic, facility incurred hospitals humans or and laboratory due to sickness animals instruments Market break-up by revenues (2012E)Hospitals and Pharmaceuticals arethe top revenue generating 13% Hospitalssubsectors in the Indian Healthcare 9%industry, accounting for 71% and 4% Pharmaceuticals13% of industry revenues 3%respectively. Medical Equipments and SuppliesOther subsectors including MedicalEquipments & Supplies, Insurance Medical Insuranceand Diagnostics share a smallerpart of the pie; however, play a key Diagnosticsrole in the overall development of 71%the sector.Source: MEGStrat Analysis, IBEF 3 6
  7. 7. The Indian healthcare industry, valued to be worth USD 40.0 Billion in 2011, is highly fragmented and dominated by private players. The industry is rapidly developing and is being fueled by large investments from existing corporate hospital chains and new entrants backed by private equity investors. A growing old age population with rising incidence of lifestyle diseases, combined with rising incomes & affordability and increased penetration of health insurance are fuelling growth of the industry. Government-run facilities have inadequate equipment and Indian Healthcare Spending(2008) low quality. A chronic shortage of healthcare infrastructure exists, especially in rural areas and tier II & III cities, with potential requirement of 1.75 million new beds by the end of 2025. Most hospital chains have 32% aggressive expansion plans to scale up their activities and establish a pan India presence. Various innovative models Private are being explored to improve their performance and Public profitability, viz. getting into telemedicine, and increasingly focusing on specialty centers and day care 68% centers. High upfront investments, long gestation periods, and rising real estate costs are compelling private players to innovate with business models and expand into under- penetrated tier II & III cities. As a result, these private As of 2008, the private sector accounted for 68% of overall healthcare spending. The overall healthcare players can capitalize on the opportunity to expand. The spending in India is expected to rise by 12% per private sector is likely to contribute 80.0% - 85.0% of the annum. USD 86.0 billion healthcare investment required till 2025. The sector is expected to grow at 24.1% p.a. till 2020, Spending as a % of GDP (2008) witnessing significant interest from private equity players, 15.2% who would play an integral role in the strategies employed 16% by Indian hospitals, such as organic & inorganic growth, 14% and making hospitals asset-light enterprises. 12% 10% 8.7% % of GDP India’s healthcare spend is significantly lower when 8.4% 8.3% compared to the global, developed and other similar 8% emerging economies. 6% 4.3% 4.2% In 2008, the healthcare spend in India was close to half 4% the global average in percentage terms, when 2% evaluated on a “percentage of GDP” basis. 0% USA Brazil UK China India GlobalSource: MEGStrat Analysis, WHO 7
  8. 8. Global Comparison of Healthcare Spend 90% The healthcare spend, when 83% compared on public-private 80% 68% contribution basis, exhibits% of Total Healthcare Spend 70% a skewed scenario. The 61% 56% Private Sector contribution 60% 52% 53% 48% 47% to the healthcare sector at 50% 44% ~68% is amongst the highest 39% 40% 32% in the world in percentage terms. Public spending, 30% 17% however, is amongst the 20% lowest in the world and is 10% ~29 percentage points lower than the global average. 0% UK USA China Brazil India Global Public Sector Spending Private Sector Spending The Indian healthcare spend, on a per capita basis, both in terms of USD (at average exchange rate conversion) and in terms of Purchasing Power Parity (PPP), is amongst the lowest globally. When compared to the global average, the per capita Indian healthcare spend is ~95% lower on an average exchange rate basis and ~86% lower on a PPP basis. Per Capita Spending (USD) Per Capita Spending (PPP) 8000 8000 7164 7164 7000 7000 6000 6000 5000 5000 3771 USD USD 4000 4000 3222 3000 3000 2000 2000 854 875 899 721 1000 1000 265 122 146 45 0 0 USA UK Brazil China India Global USA UK Brazil China India Global Source: MEGStrat Analysis, WHO 3 8
  9. 9. MEGStrat Disclaimer Applicable 9
  10. 10. Population Growth • India’s population has grown from 1,024 Old Age Population million in 2000 to 1,191 million in 2010 and is expected to reach 1,272 million by 2015, at a CAGR of 1.3% over 2010 – 2015 • Increasing population will impose pressure on the already inadequate healthcare infrastructure, creating a severe need for more hospital beds • India’s average life expectancy has increased from 57.0 in 1990 to 65.0 in 2009. This, coupled with a declining population growth rate, implies that the number of people in old age groups (>60 years) is likely to increase • Population above the age of 60 is likely An increase in ageing population will boost the to double from 96.4 million in 2010 to demand for healthcare services. 192.7 million in 2030Population Estimates 1500 2.0% 1272 1191 1.5% 1024 1000 1.0% 0.5% 500 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Population (Million People) Population Growth Rate (%)Source: MEGStrat Analysis, US Census Bureau, IMF 10
  11. 11. Affluence Leading to Health Consciousness • In the recent decade, India has witnessed rapid growth in income levels and wealth • GDP per capita has grown from USD 729 in 2005 to USD 1,389 in 2010, and is expected to reach USD 2,226 by 2015 • Increasing wealth and standard of living has led to greater health awareness, resulting in higher healthcare spending • Healthcare expenditure per capita in India has increased from USD 27 in 2004 to USD 45 in 2009 • Rising affordability and the resultant quality consciousness along with increasing healthcare spending is a major factor driving the demand for the healthcare industryGDP Per Capita (USD) 2500 2226 2000 1389 1500 1000 729 500 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Healthcare expenditure per capita (USD) 45 45 42 45 40 34 35 30 Rising affordability 27 and attention on 30 quality of life to 25 increase 20 healthcare 15 expenditure 10 5 0 2004 2005 2006 2007 2008 2009Source: MEGStrat Analysis, WHO, IMF 11
  12. 12. Accelerating Incidence of Lifestyle Diseases Increase in Lifestyle related Ailments • India is experiencing fast growth in number of people suffering from lifestyle related diseases 6.0% • Percentage of population suffering from 4.9% cardiac diseases, diabetes, obesity and Percentage of Population cancer are expected to rise from 7.7% in 2005 to 11.6% in 2015 4.0% 3.7% • As of 2008, lifestyle related diseases 3.1% 3.0% comprised 13% of total ailments in India, 2.7% which is expected to increase to 20% by 2018 • This increase is likely to trigger additional 2.0% demand for specialized treatment, which 1.3% can be provided better in specialty or super- specialty hospitals 0.3%0.3% • This will also lead to increasing margins for hospitals, since these are the high margin 0.0% Cardiac Diabeties Obesity Cancer end of disease spectrum 2005 2015Ailment-Wise Case Mix (2008) 6% 4% Cardiac Oncology 3% 2% 5% Diabetic Orthopedic 43% 3% Gynecology Neurology 4% Urology Gastro intestinal 12% Accidents Fever Others 10% 8%Source: MEGStrat Analysis, Edelweiss Research 12
  13. 13. Rising Health Insurance Gross Health Insurance Premiums • Health insurance is gaining high momentum in India 2500 2095.3 • Gross health insurance premiums have increased at a CAGR of 30%, from USD 733.9 million in 2006- 2000 1533.2 2007 to USD 2,095.3 million in 2010-2011 USD Million 1215.3 1320.5 1500 • Penetration as % of GDP has risen from 0.08% in 2006-2007 to 0.12% in 2010-11 1000 733.9 • Reduction in out-of-pocket expenses on health from 500 92.2% of total private expenditure in 2000 to 74.4% in 2008 clearly indicates the increase in health 0 insurance 2006-07 2007-08 2008-09 2009-10 2010-11 • Penetration of health insurance will significantly Health Insurance Penetration increase the affordability of healthcare services for 0.14% 0.12% 0.12% the population, while improving the quality of 0.12% 0.11% 0.10% % of Nominal GDP healthcare 0.10% 0.08%Medical Tourism: Lower Costs enable Growth 0.08% 0.06% • Treatment for major surgeries in India cost ~10.0% of that in developed countries; further, the Indian 0.04% tertiary and specialty hospitals boast of a high level 0.02% of quality 0.00% 2006-07 2007-08 2008-09 2009-10 2010-11 • Medical tourism is attractive for patients from developed countries (due to the cost advantage) as Medical Tourism Industry Size well as emerging countries (due to better quality). 2200 India’s huge expat population itself is a large target 2400 market • The medical tourism industry is expected to increase 2000 USD Million from USD 350.0 million in 2010 to USD 2.2 billion in 1600 2015; Specialty care and tertiary hospitals are 1200 350 estimated to account for USD 1.0 - 1.5 billion of the 800 total potential revenue 400 0 2010 2015Healthcare Cost DifferentialTreatment Cost (USD) India USA Singapore India cost as % of USAHeart surgery 4,800 100,000 15,312 4.8%Heart value replacement 4,800 160,000 13,000 3.0%Bone marrow transplant 30,000 250,000 150,000 12.0%Liver transplant 69,000 300,000 140,000 23.0%Knee replacement 5,000 48,000 25,000 10.4%Hip replacement 5,200 38,000 12,000 13.7%Sources: MEGStrat Analysis, IRDA, WHO, Morgan Stanley Research, PUG Research 3 13
  14. 14. Boost to the private sector•The benefit of section 10 (23 G) of the IT-Act has been extended to financial institutions that provide long-term capital to hospitals with 100 beds or more•Government is encouraging the PPP model to improve availability of healthcare services and offer healthcare financingPushing investments in rural areas•The benefit of section 80-IB has been extended to new hospitals with 100 beds or more that are set up in rural areas; such hospitals are entitled to a 100% deduction on profits for five yearsTax incentives•Custom duty on life-saving equipment has been reduced from 25% to 5% and exempted from countervailing duty•Import duty on medical equipment has been reduced to 7.5%Incentives in the medical tourism industry•Incentives and tax holidays are being offered to hospitals and dispensaries offering health travel facilitiesDrug and Cosmetic Act, 1940•Regulates the import, manufacture, distribution, and sale of drugs and prohibits the manufacture and sale of drugs which are misbranded, adulterated, spurious, or harmful. Specifies license requirements for manufacturer / distributor of drugs & cosmeticsBio-Medical Waste (Management & Handling) Rules, 1998•Regulates the mode of treatment & disposal of bio-medical waste. Requires the institutions that generate waste to, ensure that waste is handled without adverse impact on health & environmentClinical Establishment Bill, 2010•Makes it mandatory for all clinical establishments to register under the act. The act is to be eventually implemented nationwide and may lead to closure of nursing homes which do not meet the requirementsNational Accreditation Board for Hospitals and Healthcare(NABH)•NABH accreditation of facilities confirms quality assurance and its standards focus on patient safety and quality careDrug Controller General of India (DGCI)•DGCI formulated guidelines in July 2006 for the import and manufacture of medical devicesForeign Ownership•FDI in hospitals is permitted up to 100% under the automatic route 3 14
  15. 15. Higher Profitability in Hospitals in Tier II & III Cities • The healthcare market in tier II & III cities is expected to grow at a CAGR of 17.9% till 2023, ~5.0% higher than a CAGR of 13.2% for healthcare market in metropolitans • Hospitals in tier III cities require Capex of USD 113,600 per bed, as compared to the Capex requirement of USD 454,500 per bed in metropolitans • Operating costs in tier II & III cities are ~30.0% lower than metropolitans & tier I cities • The IRR in hospitals in tier III cities is double of that of the ones in tier I cities • A tier II & III city hospital attains operating profitability in the 1st or 2nd year of operations, as compared to a tier I city hospital that reaches this stage around the 5th year Capex per Bed (‘000 USD) IRR in Hospitals 500 454.5 26% 30% 400 340.9 21% Focus On Smaller cities 300 20% 204.5 13% 200 113.6 10% 100 0 0% Metros Tier I Tier II Tier III Tier-I Tier-II Tier-III Cities Cities Cities Operating Margins of Hospitals 30% 20% 10% 0% Year1 Year2 Year3 Year4 Year5 -10% -20% -30% Metros Tier I Cities Tier II Cities Tier III CitiesSources: MEGStrat Analysis, PUG Research 3 15
  16. 16. Shift from communicable to lifestyle diseases• Due to increasing urbanization and the problems associated with modern-day living in urban settings, disease profiles are shifting from infectious to lifestyle-related ones• It is estimated that by 2012, 50% of the spending on in-patient beds would be for lifestyle- related diseases, which is resulting in increased demand for specialized careManagement Contracts• Many healthcare players such as Fortis and Manipal Group are signing management contracts to provide an additional revenue stream to hospitalsEvolution of telemedicine• Telemedicine is evolving fast in India, supported by the ICT sector• Several major private hospitals such as Apollo, AIIMS, Narayana Hrudayalaya have adopted telemedicine services and some have developed PPPs• Currently, about 650 telemedicine centers exist throughout IndiaExpat Doctors• Medical professionals of Indian origin practicing abroad are willing to return and settle in India• This trend is being supported by Improved healthcare infrastructure in India, increase in medical tourism, improved compensation structures and growing restrictions on licensing and practicing in UK and EuropeHolistic Well-Being• Holistic well-being is a combination of modern and traditional medicine• Various hospitals have tied-up with holistic health centers to combine traditional healthcare knowledge and practices with conventional systems• Various services offered in wellness centers are diet & nutrition, yoga, herbal medicine, humor therapy and biofeedback 3 16
  17. 17. Private Equity Deals Deal value Date Target Acquirer (USD Million) Jun-11 Angels Health Pvt Ltd Housing Development Finance Corp NA Jun-11 Vaatsalya Healthcare Solutions Aquarius India & Seedfund 10 May-11 Jeevanti Healthcare Seedfund 2.2 May-11 Super Religare Laboratories Sabre Partners 11.2 Apr-11 Super Religare Laboratories Avigo Capital Partners 22.5 Mount Kellett, TVS Capital and Ajay Piramal Mar-11 MedPlus Health Services Groups healthcare fund 88.4 Jan-11 Global Healthcare Sequoia Capital and Elevar Equity 3.3 Integrated Health and Healthcare Jan-11 Services Halcyon Finance & Capital Advisors 44.4 Dec-10 BSR Super Speciality Hospitals Aureos Capital 10 Nov-10 Medfort Hospitals TVS Shriram Capital & ePlanet Ventures 13.1 Aug-10 Dr Lal PathLabs TA Associates 34.8 Jun-10 Metropolis Health Services Warburg Pincus 84.9 May-10 Nova Medical Centres GTI Group and New Enterprise Associates 5.3 Apr-10 Manipal Health Systems Kotak PE 33.5 Feb-10 HealthCare Global Enterprises Milestone Religare Advisors 10 Nov-09 Krishna Institute of Medical Sciences Milestone Religare Advisors 12.9 Mar-09 Vaatsalya Healthcare Solutions Oasis Fund and Seedfund 3.7 Feb-09 Kavery Medical Centre and Hospitals India Venture Advisors 17.8 Jun-08 CARE Hospitals Ashmore Group 23 Sep-07 Apollo Hospitals Enterprise Apax Partners 104.3 Mar-07 Fortis Healthcare India Trinity Capital 19.7 3Source: MEGStrat Analysis 17
  18. 18. India Healthcare M&A Activity Inbound 16 Domestic 14 12 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011Recent Strategic Deals Deal Value Date Target Acquiror (USD Million) Deal Synopsis Supported Aetna in gaining entry into the Indian market Indian Health Jul-11 Organization Pvt Aetna Inc N.A. and getting access to 80,000 customers, 3,000 doctors, Ltd clinics and wellness programmes. The deal gave an exit to Warbug Pincus, which had Jun-11 Max Healthcare MAX India 31.2 invested in the Company in 2004 and 2005 through two tranches. Integrated operations of a hospital company with a diagnostic chain. SRL has a strong network of laboratories, Fortis Super Religare Apr-11 Healthcare 178.5 wellness centers and collection centers. Fortis has been Laboratories India looking for acquisitions in new specialties to augment its current operations. The acquirer (promoter) bought 20% additional stake in Dr Agarwals Eye Dr Agarwals Jan-11 2.0 the target via open offer to increase promoter stake to Hospital Health Care 75%. The acquisition costed USD 107,000 per bed, against a Fortis greenfield cost of USD 133,000 per bed. Also, the deal 10 Wockhardt Aug-09 Healthcare 185.2 Hospitals gave Fortis a strong presence in Mumbai and Bangalore, India where it did not have presence earlier.Sources: PwC, MEGStrat Analysis 18
  19. 19. MEGStrat Disclaimer Applicable 19
  20. 20. Other businesses Corporate tie-ups Operating beds Other revenue generating streams such as pharmacies Result in long-term contracts, Number of beds based on Capex however, increase receivable days and project execution Average revenue per operating bed (ARPOB) Occupancy RevenueARPOB depends on casemix, type Drivers Number of beds occupied; 80% is of procedures, utilization of considered to be “full” capacity equipment, and pricing Average length of stay Outpatient to inpatient (ALOS) conversion Inpatient share First 2-3 days generate maximum Higher revenues come from revenues from a patient Typically, inpatients generate inpatients than outpatients ~75.0% of hospital revenues Source: Industry Research 3 20
  21. 21. Hub & Spoke Model1. Under a hub and spoke model, a super-specialty hospital (hub) is established in a major city of a region, with smaller multi-specialty hospitals or day care centres in surrounding towns2. Enhances profitability by ensuring better treatment at the spokes, and transfer of patients to hubs only if required, increasing occupancy and ARPOB Spoke Spoke Hub Spoke SpokeOperating & Maintenance Contracts1. A corporate chain (like Fortis or Apollo) takes over management of a hospital owned by a trust2. The corporate hospital may or may not acquire an equity stake in the target3. In return, the corporate hospital gets a fixed annual management fee or a share of the revenue/ EBITDA Corporate hospital (such as Fortis or Target Hospital Apollo) 3 21
  22. 22. MEGStrat Disclaimer Applicable 22
  23. 23. Healthcare infrastructure deficienciesThe penetration of healthcare infrastructure in India is much lower than that of developed countries and even lowerthan the global average in terms of healthcare infrastructure and manpower.Indicators Year India USA UK Brazil ChinaHospital Bed Density (per 10,000 population) 2000-2009 12 31 39 24 30Doctor Density (per 10,000 population) 2000-2009 6 27 21 17 14Births attended by skilled health personnel (%) 2000-2009 47 99 NA 97 98No of doctors 2009 6,43,520 7,93,648 1,26,126 3,20,013 18,62,630No. of Nurses 2009 13,72,059 29,27,000 37,200 5,49,423 12,259,240No. of Dentists 2009 55,344 4,63,663 25,914 2,17,217 1,36,520Avg. no. of doctors per bed 2009 0.6 0.81 0.53 0.69 0.46Avg. no. of nurses per bed 2009 1.27 3 0.16 1.18 3.02No. of doctors per 1,000 population 2009 0.6 2.7 2.1 1.7 1.4No. of nurses per 1,000 population 2009 1.3 9.8 0.6 2.9 1The RequirementParameter 2008 2018 2028 Parameter Annual Production (2011) To fill the gapAdditional BedsRequired 1.1 million 3.1 million 2 million Physicians 30,558 993,500Bed/1000population ratio 0.7 to 1.7 4 5 Nurses 114,218 2,510,250Inadequacy of Public Sector: An opportunity for Private Sector Health Infrastructure in Villages• Healthcare has received inadequate attention from the government in India Infrastructure / services % of villages • Indian government spends 4.1% of its total budget on Connected with roads 73.9% healthcare, compared to a global average of 13.9% Having any health provider 95.3% • The government contributes only 32.8% of total healthcare costs, compared to a 60.5% globally• Government-run healthcare facilities are not well managed, Having trained birth attendant 37.5% and are known to have poor quality of services and Having Anganwadi worker 74.5% inadequate infrastructure & equipment• The shortage is more severe in rural areas, where only 43.5% villages in the country have a doctor Having a doctor (private & visiting) 43.5%• Bridging the gap requires high investments; this opportunity Having a private doctor 30.5% can be capitalized by private players to expand operations Having a visitor doctor 25.0% into smaller towns which lack good quality private hospitalsSources: MEGStrat Analysis, IMF, Intel Case Study, KPMG 23
  24. 24. India has a competitive advantage in healthcare over peers, owing to its large skilled manpower, lowcost of surgeries, vast opportunity in Research & Development and medical tourism.Opportunities for investments in Healthcare Diagnostic & Pathology Services • High cost differential in India allows for outsourcing of Pathology and Laboratory tests by International hospital chains Telemedicine • Provides rural areas access to better quality healthcare Healthcare infrastructure • An additional 2 million beds and 993,500 physicians are required for India to bridge the gap and prepare for demand estimations in 2025 • To achieve these targets an investment of USD 86 billion will be required Contract Research • Contract research is a rapidly growing segment in the Indian health care industry • Foreign players are entering into contract research to reduce their operational and clinical cost • About 60% of the global clinical trials is outsourced to developing countries Medical tourism • The Indian medical tourism industry is poised to grow at a CAGR of 58.3% into a USD 2.2 billion industry by 2015 Health Insurance • Less than 15% of the Indian population is covered through health insurance • Increasing healthcare cost and burden of new diseases along with low government funding is raising demand for health insurance coverage • Many companies are offering health insurance coverage to employees, driving market penetration of insurance players • With increasing demand for affordable quality healthcare, the penetration of health insurance is poised to grow exponentially in the coming years • The health insurance premiums are expected to grow at a CAGR of over 28% for the period spanning from 2008-09 to 2012-13 3 24
  25. 25. Growth by addition of number Greenfield projects of operating beds Increase in ARPOB & Organic growth occupancy Revenue growth by increasing operating efficiencies Reduction in average length of stay Acquisition of existing Buy-outs or through operatingGrowth strategies Inorganic expansion hospitals & management contracts Hive-off real estate Cash infused by sale of real Hiring off non-core assets to make estate assets, and increase in assets operations asset-light ROA Build/ acquire Example: Fortis’ acquisition of Diversification across businesses such as the value chain pharmacies, & Super Religare Labs in May diagnostics labs 2011 for USD 178.5 millionAsset-light modelis the preferredgrowth strategyfor Private Equityinvestors 3 25
  26. 26. Apart from infrastructure improvement, capacity addition and development of manpowerbeing critical for the Indian healthcare sector, it is also necessary that the existing facilitiesare operated in an efficient manner. This can be ensured through various measures such asAccreditation, adoption of Cost Accounting Procedures and increased penetration ofHealthcare Insurance.AccreditationAccreditation is one of several models of external evaluation used by healthcare entitiesthroughout the world to regulate, improve and promote health care services. Domestically,accreditation is sought from the National Accreditation Board for Hospitals and HealthcareProviders (NABH), an entity under the control of the Quality Council of India.JCI, an international accreditation arm of the US joint commission also provides accreditation.Few hospitals in India like Moolchand Hospital and Fortis hospitals, have already beenaccredited by this body.Trends of AccreditationTo date, only 17 Indian hospitals are JCI-accredited and all are large corporate entities,including hospitals in the Apollo, Fortis, and Wockhardt Hospital systems.As of March 2007, over 700 Indian hospitals had applied for NABH accreditation. NABH isinvolved in the accreditation of blood banks, diagnostic centres, nursing homes, dental clinicsand Ayurvedic centres in addition to private hospitals, nursing homes. As of January 1, 2008,only 12 medical facilities were accredited by NABH.Advantages of AccreditationPatients benefit in terms of high quality of care and patient safety. They are serviced bycredible medical staff and their rights are respected and protected.Accreditation results in continuous improvement of the overall services of the hospital in orderto provide high quality care with least possible risks. Accreditation provides an objectivesystem of empanelment by insurance and other third parties. It provides access to reliable andcertified information on facilities, infrastructure and level of care with education on goodpractices to improve business operations. 3 26
  27. 27. MEGStrat Disclaimer Applicable 27
  28. 28. Risk Factors MitigationLong gestation periodsHospitals require significant upfront investments and have a Increasing number of hospital acquisitions are happeninglong payback period. This makes investments in the sector through operating & maintenance contracts which haveless attractive short gestation periods and faster revenue ramp up.Lack of qualified staff Stringent license requirements abroad and improving healthFinding qualified staff & specialized doctors is a major infrastructure in India is encouraging doctors to return tochallenge for hospitals in India, especially for new start ups, India. Medical education & training is seeing growingleading to wage inflation and inadequate quality investments, especially by healthcare companies such as Manipal.Rising real estate prices Substantial amount of growth in the industry is driven fromIncreasing real estate prices lead to higher initial outlay or tier II & III cities, mainly because of lower real estate cost.higher lease payments, resulting in decreasing profitability Some have adopted the leased model to offset high real estate prices.Lack of capital The growth prospects of the industry have led to a rapidHuge capital will be required to meet the growing demand of increase in investments in hospitals. Private equity playershealthcare. However, long gestation periods make the sector have invested USD 373.4 million in the sector since 2010, andunattractive existing players are rapidly deploying capital for expansion.Increasing operating cost Equipment manufacturers like GE and Philips are increasinglyIncreasing costs of equipment and labor lead to margin focusing on India to sell healthcare products, resulting inpressure and lower profitability favorable terms of supply. 3 28
  29. 29. MEGStrat Disclaimer Applicable 29
  30. 30. Public Sector and Government Interventions – Current and Going ForwardImproving the Reach and Quality: High investments in a growing1. The government plans to build 6 super speciality tertiary care hospitals with research and market, along with education centres across the country. These would cater to the weaker sections making openness to high end clinical care available to the masses. innovate endorse well for the sector2. Encouraging current initiatives on PPP’s in the sector should continue.3. The government should continue flagship programmes such as Rashtriya Swastha Bima Yojana (RSBY) and State level Insurance schemes like the Arogyashri and Chiranjeevi4. To improve availability of medical staff in rural and far-flung and inaccessible areas, doctors, specialists and para-medicals are given monetary benefits such as 25% hike to those posted in rural and distant areas and 50% hike for those in areas that are almost unreachable by road.5. A truncated medical course designed by the Central Government from the Chinese “barefoot doctors model” that is assumed to produce 145,000 rural doctors every year, would cover most primary level needs. The existing health sub-centres, the first point of care for villagers, are now being manned by Auxiliary Nurse Midwives (ANM).6. Through NHSRC, the NRHM (National Rural Health Mission) is encouraging almost 200 hospitals to go for a sustained Quality Accreditation program and this is sought to extend to 400 hospitals.7. CGHS (Central Government Health Services) has made it mandatory for all healthcare institutions and diagnostic centres providing care to have either NABH / NABL certification.Healthcare Education:1. To meet the demand for more human resources, especially the doctors and nurses, the government has reduced land requirements from 25 acres for medical colleges to 10 acres in urban areas. The INC norm of 4 acres for nursing colleges has also been relaxed.2. Private medical colleges are allowed to conduct their own CET and the reservation criteria for government seats and management quota have been relaxed with a uniform pre-decided fee. Only the NRI reservation is maintained at 15%.3. Private medical colleges are now allowed to register under Section 25 Act, unlike earlier when they had to be under the Charitable Trust banner. 3 30
  31. 31. Public Sector – Action Items:1. Special benefits, Viability Gap Funding, and subsidies on cost of care for PPP initiatives would make it more attractive for the private sector to participate.2. Awareness drives, IEC for Health Insurance schemes covering both the rural and urban poor to be initiated through collaborative approaches.3. Incentivize corporate sector to take up healthcare initiatives for CSR activities.4. The current compulsory rural stint for medical professionals should be continued; however, it needs to be augmented with better facilities and support systems.Import Duty Concessions:1. Reduction in Import duty on equipment from 25%to 5%.2. Customs Duty reduced from 16% to 8% for medical and veterinary furniture.3. Custom’s duty on 24 medical equipment like X-ray, tele-therapy stimulator equipment, goniometer have been reduced to 5%.4. Depreciation on medical equipment raised from 25% to 40%.Medical Device Interventions:1. The government announced a USD 69 million in October 2009 to promote domestic device/ manufacture to enable price control of critical equipment including stents, catheters and heart valves, among others.2. Central government to set up the first specialised device centre ‘National Centre for Medical Devices’ in Gujarat to promote indigenous R&D efforts.3. Medical Devices Regulation Bill has been tabled and is under consideration.4. Enabling IT driven healthcare to improve the reach and costs. Tele-medicine, as a branch of diagnosis and treatment, should be encouraged and widely implemented to help ensure availability and accessibility of care to all areas in spite of infrastructural inefficiencies. 3 31
  32. 32. MEGStrat Consulting is a Research based Consulting firm based in Gurgaon, India. Privately held since 2011,MEGStrat participates with its clients to address their most important and challenging business issuesthrough integrated research based consulting services comprising of market research, business research,strategy consulting and corporate advisory.The firm is on a growth track with fresh industry knowledge and ideas, which are continuously tested andapplied in terms of client impact, clients customers, employees and revenues.For more information on MEGStrat Consulting, please visit www.megstrat.comEnabling [M]easurable [E]ffective [G]rowth | MEGStrat Consulting (P) Ltd. | Website: | Board: +91-124-471-1910 | Mobile: +91-981-018-4350MEGStrat Consulting, Level - 6, JMD Regent Square, Mehrauli Gurgaon Road, Gurgaon - 122002, Haryana, India. 32