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India's growing healthcare funding crisis

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My Article in Business Today on India's growing healthcare funding crisis

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India's growing healthcare funding crisis

  1. 1. Print Close India's growing healthcare funding crisis Kapil Khandelwal�����November�4,�2018� The�issue�of�leverage�is�haunting�many�players�in�the�healthcare�sector�in�India.�Leverage� to�hospitals�has�rapidly�increased�and�is�at�an�all-time�high�of�around�4.5�times�of�EBITDA� (earnings�before�interest,�tax,�depreciation�and�amortisation).�Right�from�Fortis,�Seven� Hills�Hospitals�to�Care�Hospitals'�investee�Abraaj�Capital�and�Max�Healthcare,�the�issue�is� plaguing�a�lot�of�players.�In�fact,�the�credit�rating�by�some�of�the�leading�credit�rating� agencies�to�the�hospitals,�over�the�last�year,�has�deteriorated�from�stable�to�negative.�So� why�has�the�positive�outlook�towards�healthcare�sector�in�India,�in�the�backdrop�of� programmes�such�as�Ayushman�Bharat,�suddenly�changed? Liquidity�in�the�system�is�stretched�with�delays�in�disbursements�of�capital�expenditure� committed�to�newer�hospitals�by�banks�and�NBFCs; Rising�interest�rate�regime�coupled�with�rupee�depreciation,�has�shot�up�the�cost�of�the� capital; Increased�costs�of�operations�by�100-150�basis�points�due�to�project�and�regulatory� delays,�gestational�losses�due�to�delays�in�starting�operations; After�demonetisation,�during�which�the�cash�transaction�was�limited�to�up�to�Rs�2�lakhs� in�healthcare,�there�has�been�a�decline�in�cash�payments�and�therefore�inpatient� utilisation; Limited�opportunities�to�raise�equity�fund�as�investors�have�become�discreet�on� platforms�given�after�market�corrections�valuation�are�at�all-time�high. Mismatch�of�tenures�between�short,�medium�and�long-term�fund�raises;� Strategies�focused�on�EBITDA�improvement�and�creative�accounting�to�manage� EBITDA�growth�and�trading�off�long-term�value�creation�in�healthcare�delivery� business;�and� Delayed�buy-back/exits�and�IPOs�for�investors.� Unlike�past,�the�current�healthcare�asset�bubble�is�about�to�burst�due�to�unprecedented� leverage�pile�up�and�needs�correction.�Many�operators�facing�the�liquidity�desperately� need�capital�infusion,�to�tide�over�the�current�situation,�created�due�to�the�leverage-backed� EBITDA�expansion�strategies�of�the�past.� What�can�be�done�to�set�this�right? Breaking�the�cycle�between�incremental�leverage�and�asset-creation�cycles�with�short� and�medium-term�leverage; Evaluating�asset-light�business�models,�with�focus�on�EBITDAR�(earnings�before� interest,�taxes,�depreciation,�amortisation,�and�restructuring)�value�creation;
  2. 2. Focusing�on�operational�efficiency,�with�newer�business�models�to�expand�into�tier�II� and�III�towns�for�demand�aggregation�at�their�hubs�with�asset-light�strategies; Manage�clinical�talent�supply-chain�to�reduce�operating�costs�and�improve�efficiencies; Redesigning�the�expansion�strategies�from�asset-heavy�campus�to�community-based� asset-light�chains,�offering�full�suite�of�clinical�services�(mother�&�child,�day-care� surgery,�ophthalmology,�etc); Innovative�healthcare�financing�models�that�cut�out�the�intermediaries�such�as�re- insurer,�distributors,�TPAs,�etc.�that�eat�into�insurance�pool�available�for�healthcare� services;�thereby�offering�bang�for�the�buck�to�the�insured�and�higher�reimbursements� to�the�care�providers; Transforming�into�a�consumer-friendly�provider�for�the�healthcare�consumerism�biased� customer;�and Moving�closer�to�the�funder�(payers�and�capital�providers�such�as�REITs) In�my�various�articles,�I�have�highlighted�the�financial�and�operational�expansion� strategies�that�operators�need�to�adopt.�Our�fund's�internal�analysis�on�funding�required�to� break-even�for�asset-light�operators,�ranges�from�0.72-1.11�times�of�funding,�versus�over� 2.0-11.0�times�for�heavy�business�models�in�healthcare.�This�validates�the�current�crisis,� due�to�the�asset�bubbles�being�built�up.�The�current�market�analysts�are�rewarding�asset- heavy,�over-leveraged�operators�by�valuing�them�on�EBITDA�multiples,�while�penalising� the�asset-light�players.�With�the�few�asset-heavy�players�going�belly�up�through� tumultuous�times,�reality�is�sinking�in�that�EBITDA�multiples�is�not�the�right�metrics�for� comparing�asset-heavy�and�asset-light�business�models.�EBITDAR�is�now�being�looked�at� to�compare�the�two�different�business�models.�At�this�point,�I�would�like�to�highlight�that� strategies�for�investment�in�different�specialties�of�healthcare�also�vary�and�is�depicted�in� the�chart�below:� The�right� approach� would�be�to� aggregate� demand�in� the�top-18� cities�of� India� through� multi- specialty� hospitals� and�centres� of� excellence� in�a�certain�specialty,�while�single-specialty�chains,�day-care�surgery�centres�in�the�tier�II� and�III�cities,�which�become�a�feeder.�This�would�optimise�the�financial�returns�trading�off� with�issue�of�fast�scalability�and�maturing�of�inpatient�bed�capacity.
  3. 3. Moving out of the current crisis A�recent�CRISIL�report�states�that�private�sector�healthcare�networks�require�Rs�4,700� crores�to�build�their�referral�networks�in�2018-19�alone.�With�the�leverage�levels�in� healthcare�at�an�all-time�high�and�asset�bubbles�being�created,�the�options�for�funding� long-term�are�very�limited.�To�mitigate�the�stress�at�PBT�and�PAT�levels,�the�interest� outgo�and�serving�of�leverage�have�to�be�petered�down�to�a�conservative�3.0X�EBITDA� levels.�There�are�very�few�financial�strategies�that�are�available�for�healthcare�operators�to� get�out�of�the�current�situation.�They�can�only�move�ahead�by�monetising�the�assets�and� moving�towards�asset-light�models,�for�funding�the�growth�and�EBITDA�stabilisation�in�the� medium�term�as�inpatient�occupancy�stabilises�on�their�mature�beds.�Some�of�the�options� are�compared�in�the�table�below: It's�time�for� them�to� shift�out�of� high- interest� leverage- backed� asset- growth�to�a� benevolent� capital�source.�Else�the�last�vice�of�leverage�will�not�only�haunt�the�healthcare�operators�in� India�but�also�push�up�healthcare�costs,�given�the�demand-supply�gap�for�healthcare�led� by�the�current�investment�gap. (Kapil Khandelwal is Managing Partner of Toro Finserve LLP, India's First Healthcare Infrastructure Fund and Director EquNev Capital Pvt Ltd.) Print Close URL for this article : https://www.businesstoday.in/opinion/columns/india-growing-healthcare-funding-crisis/story/288261.html @�Copyright�2018�India�Today�Group.

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