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Indian Healthcare Sector: A Galore of Scope and Opportunity

May 2012

CONFIDENTIAL
The information contained within this document is proprietary to MEGStrat Consulting and it reserves the right to all information
provided. The recipient would treat this material as Confidential Information.
www.megstrat.com

Executive Highlights

Industry Overview

Introduction
Industry Composition
Current Scenario

Key Trends and Growth Drivers

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&A

Operating Models

20

Revenue Drivers for Tertiary Hospitals


Operating Models

Opportunities and Growth Strategies

22

The Unmet Need


Opportunities
Growth Strategies
Building Functional Efficiencies

Risk Factors and Mitigation

27

The Way Forward

29

About MEGStrat Consulting

32
2

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, Indias
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.

MEGStrat Disclaimer Applicable

The Indian Healthcare sector is at a vital juncture, perched for assured growth till 2020. Healthcare expenditure in
India being among the lowest globally, offers tremendous scope and opportunity to the industry stakeholders,
especially in the private sector.
Industry Revenues

300

280

(USD Billion)

250
200
150
100
50

79
23

34

38

41

46

50

2006

2007

2008

2009

2010

0
2005

However, considerable challenges


exist
in
terms
of
service
accessibility and patient care
quality. As such, Government
support would inherently play a
significant role in the overall
development and growth of the
sector.

Robust Demand

Healthcare expenditure in India is


projected to increase by 12% per
annum from 2011 -15

Increasing incomes, greater


health awareness, shift to
lifestyle diseases and increasing
insurance penetration to drive
growth of the sector

Quality and Affordability Levels

Source: MEGStrat Analysis, IBEF, KPMG

2012E

2020E

A Galore of Opportunities

Greater investment is required in


healthcare infrastructure to
increase the number of doctors
and hospital beds to bridge the
demand gap

The Union Government allocated


USD5.6 billion in 2011-12 for the
sector, an increase of 11% from
the previous fiscal year

Regulatory Support

There is a large pool of welltrained medical professionals in


the country

Government of India aspires to


develop India as a global
healthcare hub

Compared to countries in the


West and Asia, India has a
comparative cost advantage

High level of effective policy


support in the form of reduction
in exercise duties and higher
budget allocation for the
healthcare sector

Healthcare

Hospitals

Government
Hospitals
Include
healthcare
centers,
dispensaries,
district hospitals
and general
hospitals

Private Hospitals
Include nursing
homes, mid-tier,
and top-tier
private hospitals

Pharmaceutical

Manufacture,
extraction,
processing,
purification, and
packaging of
chemical
materials to be
used as
medications for
humans or
animals

Diagnostics

Medical
Equipment and
Supplies

Medical
Insurance

Businesses and
laboratories that
offer analytic or
diagnostic
services including
body fluid
analysis

Establishments
primarily engaged
in manufacturing
medical
equipment and
supplies, such as
surgical, dental,
orthopedic,
ophthalmologic,
and laboratory
instruments

Health insurance
that cover an
individuals
hospitalization
expenses and
medical
reimbursement
facility incurred
due to sickness

Market break-up by revenues (2012E)


Hospitals and Pharmaceuticals are
the
top
revenue
generating
subsectors in the Indian Healthcare
industry, accounting for 71% and
13%
of
industry
revenues
respectively.

13%

4%

Pharmaceuticals

3%
Medical Equipments and
Supplies

Other subsectors including Medical


Equipments & Supplies, Insurance
and Diagnostics share a smaller
part of the pie; however, play a key
role in the overall development of

Hospitals

9%

Medical Insurance

71%

Diagnostics

the sector.

Source: MEGStrat Analysis, IBEF

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


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
aggressive expansion plans to scale up their activities and
establish a pan India presence. Various innovative models
are being explored to improve their performance and
profitability, viz. getting into telemedicine, and
increasingly focusing on specialty centers and day care
centers. High upfront investments, long gestation periods,
and rising real estate costs are compelling private players
to innovate with business models and expand into underpenetrated tier II & III cities. As a result, these private
players can capitalize on the opportunity to expand. The
private sector is likely to contribute 80.0% - 85.0% of the
USD 86.0 billion healthcare investment required till 2025.

Indian Healthcare Spending(2008)

32%
Private
Public
68%

As of 2008, the private sector accounted for 68% of


overall healthcare spending. The overall healthcare
spending in India is expected to rise by 12% per
annum.

Spending as a % of GDP (2008)

The sector is expected to grow at 24.1% p.a. till 2020,


witnessing significant interest from private equity players,
who would play an integral role in the strategies employed
by Indian hospitals, such as organic & inorganic growth,
and making hospitals asset-light enterprises.

emerging economies.
In 2008, the healthcare spend in India was close to half
the global average in percentage terms, when
evaluated on a percentage of GDP basis.

15.2%

14%
12%
% of GDP

Indias healthcare spend is significantly lower when


compared to the global, developed and other similar

16%

10%

8.4%

8.3%

8%
6%

4.3%

4.2%

4%
2%
0%
USA

Source: MEGStrat Analysis, WHO

8.7%

Brazil

UK

China

India Global

Global Comparison of Healthcare Spend

90%

The healthcare spend, when


compared on public-private

83%

% of Total Healthcare Spend

80%

contribution basis, exhibits


a skewed scenario. The
Private Sector contribution
to the healthcare sector at
~68% is amongst the highest
in the world in percentage
terms. Public spending,
however, is amongst the
lowest in the world and is
~29 percentage points lower
than the global average.

68%

70%

61%

60%
48%

50%

56%

53%

52%
47%

44%

40%

39%
32%

30%

17%

20%
10%
0%
UK

USA

China

Brazil

Public Sector Spending

India

Global

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)
8000

7164

7000

7000

6000

6000

5000

5000
3771

4000

USD

USD

8000

Per Capita Spending (PPP)

7164

4000

3222

3000

3000

2000

2000
854

721

1000

146

45

899

875

1000

265

122

0
USA

UK

Brazil China India Global

Source: MEGStrat Analysis, WHO

USA

UK

Brazil China India Global

MEGStrat Disclaimer Applicable

Population Growth
Indias population has grown from 1,024
million

Old Age Population

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

Indias

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


demand for healthcare services.

to double from 96.4 million in 2010 to


192.7 million in 2030
Population Estimates
1500

2.0%

1272
1.5%

1191

1024
1000

1.0%

0.5%

500

0.0%
2000

2001

2002

2003

2004

2005

2006

2007

Population (Million People)


Source: MEGStrat Analysis, US Census Bureau, IMF

2008

2009

2010

2011

2012

2013

2014

2015

Population Growth Rate (%)

10

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 industry
GDP 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)


42

45
40
35
30

45

45

34

Rising affordability
and attention on
quality of life to
increase
healthcare
expenditure

30

27

25
20
15
10
5
0
2004

2005

Source: MEGStrat Analysis, WHO, IMF

2006

2007

2008

2009

11

Accelerating Incidence of Lifestyle Diseases


Increase in Lifestyle related Ailments

India is experiencing fast growth in number


of people suffering from lifestyle related
6.0%

diseases
Percentage of population suffering from

4.9%
Percentage of Population

cardiac diseases, diabetes, obesity and


cancer are expected to rise from 7.7% in
2005 to 11.6% in 2015
As

of

2008,

lifestyle

related

diseases

comprised 13% of total ailments in India,


which is expected to increase to 20% by 2018
This increase is likely to trigger additional
demand for specialized treatment, which
can be provided better in specialty or super-

3.7%

4.0%
3.1%

3.0%

2.0%

2.7%

1.3%

specialty hospitals

0.3%0.3%

This will also lead to increasing margins for


0.0%

hospitals, since these are the high margin

Cardiac

end of disease spectrum

Diabeties
2005

Obesity

Cancer

2015

Ailment-Wise Case Mix (2008)


6%
4%
3%

Cardiac

Oncology

Diabetic

Orthopedic

Gynecology

Neurology

Urology

Gastro intestinal

Accidents

Fever

2%
5%
43%

3%
4%

12%

8%
Source: MEGStrat Analysis, Edelweiss Research

10%

Others

12

Rising Health Insurance

Gross Health Insurance Premiums

Treatment for major surgeries in India cost ~10.0% of


that in developed countries; further, the Indian

tertiary and specialty hospitals boast of a high level


of quality
Medical tourism is attractive for patients from
developed countries (due to the cost advantage) as
well as emerging countries (due to better quality).
Indias huge expat population itself is a large target
market
The medical tourism industry is expected to increase
from USD 350.0 million in 2010 to USD 2.2 billion in
2015; Specialty care and tertiary hospitals are
estimated to account for USD 1.0 - 1.5 billion of the
total potential revenue

2095.3

USD Million

2000
1215.3

1500
1000

1533.2

1320.5

733.9

500
0
2006-07 2007-08 2008-09 2009-10 2010-11

Health Insurance Penetration

0.14%
% of Nominal GDP

Medical Tourism: Lower Costs enable Growth

2500

0.12%
0.10%

0.10%

0.11%

0.12%

0.12%

0.08%

0.08%
0.06%

0.04%
0.02%
0.00%
2006-07

2007-08

2008-09

2009-10

2010-11

Medical Tourism Industry Size


2200
2400

2000
USD Million

Health insurance is gaining high momentum in India


Gross health insurance premiums have increased
at a CAGR of 30%, from USD 733.9 million in 20062007 to USD 2,095.3 million in 2010-2011
Penetration as % of GDP has risen from 0.08% in
2006-2007 to 0.12% in 2010-11
Reduction in out-of-pocket expenses on health from
92.2% of total private expenditure in 2000 to 74.4% in
2008 clearly indicates the increase in health
insurance
Penetration of health insurance will significantly
increase the affordability of healthcare services for
the population, while improving the quality of
healthcare

1600
1200

350

800
400
0
2010

Healthcare Cost Differential

Treatment Cost (USD)


Heart surgery
Heart value replacement
Bone marrow transplant
Liver transplant
Knee replacement
Hip replacement

India
4,800
4,800
30,000
69,000
5,000
5,200

USA
100,000
160,000
250,000
300,000
48,000
38,000

Sources: MEGStrat Analysis, IRDA, WHO, Morgan Stanley Research, PUG Research

Singapore
15,312
13,000
150,000
140,000
25,000
12,000

2015

India cost as % of USA


4.8%
3.0%
12.0%
23.0%
10.4%
13.7%

13

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 financing

Pushing 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 years

Tax 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
facilities

Drug 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 & cosmetics

Bio-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 & environment

Clinical 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 requirements

National Accreditation Board for Hospitals and Healthcare(NABH)


NABH accreditation of facilities confirms quality assurance and its standards focus on patient safety and
quality care

Drug Controller General of India (DGCI)


DGCI formulated guidelines in July 2006 for the import and manufacture of medical devices

Foreign Ownership
FDI in hospitals is permitted up to 100% under the automatic route

14

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)

Focus On Smaller cities

500

454.5

IRR in Hospitals
26%

30%

400

21%

340.9
20%

300

13%

204.5

200

113.6

10%

100
0
Metros

Tier I
Cities

Tier II
Cities

Tier III
Cities

0%
Tier-I

Tier-II

Tier-III

Operating Margins of Hospitals


30%
20%

10%
0%
Year1

Year2

Year3

Year4

Year5

-10%
-20%
-30%

Metros
Sources: MEGStrat Analysis, PUG Research

Tier I Cities

Tier II Cities

Tier III Cities

15

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 lifestylerelated diseases, which is resulting in increased demand for specialized care

Management Contracts
Many healthcare players such as Fortis and Manipal Group are signing management contracts
to provide an additional revenue stream to hospitals

Evolution 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 India

Expat 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 Europe

Holistic 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

16

Private Equity Deals

Date

Target

Acquirer

Deal value
(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

Mar-11

MedPlus Health Services

Mount Kellett, TVS Capital and Ajay Piramal


Group's healthcare fund

88.4

Jan-11

Sequoia Capital and Elevar Equity

3.3

Jan-11

Global Healthcare
Integrated Health and Healthcare
Services

Halcyon Finance & Capital Advisors

44.4

Dec-10

BSR Super Speciality Hospitals

Aureos Capital

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

Sep-07

Apollo Hospitals Enterprise

Apax Partners

104.3

Mar-07

Fortis Healthcare India

Trinity Capital

19.7

10

23

3
Source: MEGStrat Analysis

17

India Healthcare M&A Activity


Inbound

16

Domestic

14
12
10
8

6
4
2
0
2006

2007

2008

2009

2010

2011

Recent Strategic Deals


Date

Target

Jul-11

Indian Health
Organization Pvt
Ltd

Acquiror

Deal Value
(USD Million)

Deal Synopsis
Supported Aetna in gaining entry into the Indian market

Aetna Inc

N.A.

and getting access to 80,000 customers, 3,000 doctors,


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

Apr-11

Super Religare
Laboratories

Fortis
Healthcare
India

diagnostic chain. SRL has a strong network of laboratories,


178.5

wellness centers and collection centers. Fortis has been


looking for acquisitions in new specialties to augment its
current operations.
The acquirer (promoter) bought 20% additional stake in

Jan-11

Dr Agarwal's Eye
Hospital

Dr Agarwal's
Health Care

2.0

the target via open offer to increase promoter stake to


75%.
The acquisition costed USD 107,000 per bed, against a

Aug-09

10 Wockhardt
Hospitals

Fortis
Healthcare
India

185.2

greenfield cost of USD 133,000 per bed. Also, the deal

gave Fortis a strong presence in Mumbai and Bangalore,


where it did not have presence earlier.

Sources: PwC, MEGStrat Analysis

18

MEGStrat Disclaimer Applicable

19

Other businesses

Corporate tie-ups
Result in long-term contracts,
however, increase receivable days

Average revenue per


operating bed (ARPOB)
ARPOB depends on casemix, type
of procedures, utilization of
equipment, and pricing

Other revenue generating streams


such as pharmacies

Revenue
Drivers

Average length of stay


(ALOS)
First 2-3 days generate maximum
revenues from a patient

Source: Industry Research

Inpatient share
Typically, inpatients generate
~75.0% of hospital revenues

Operating beds
Number of beds based on Capex
and project execution

Occupancy
Number of beds occupied; 80% is
considered to be full capacity

Outpatient to inpatient
conversion
Higher revenues come from
inpatients than outpatients

20

Hub & Spoke Model


1. 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 towns
2. 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

Spoke

Operating & Maintenance Contracts


1. A corporate chain (like Fortis or Apollo) takes over management of a hospital owned by a trust
2. The corporate hospital may or may not acquire an equity stake in the target
3. In return, the corporate hospital gets a fixed annual management fee or a share of the revenue/
EBITDA

Corporate hospital
(such as Fortis or
Apollo)

Target Hospital

21

MEGStrat Disclaimer Applicable

22

Healthcare infrastructure deficiencies


The penetration of healthcare infrastructure in India is much lower than that of developed countries and even lower
than the global average in terms of healthcare infrastructure and manpower.
Indicators

Year

India

USA

UK

Brazil

China

Hospital Bed Density (per 10,000 population)

2000-2009

12

31

39

24

30

Doctor Density (per 10,000 population)

2000-2009

27

21

17

14

Births attended by skilled health personnel (%)

2000-2009

47

99

NA

97

98

No of doctors

2009

6,43,520

7,93,648

1,26,126

3,20,013

18,62,630

No. of Nurses

2009

13,72,059

29,27,000

37,200

5,49,423

12,259,240

No. of Dentists

2009

55,344

4,63,663

25,914

2,17,217

1,36,520

Avg. no. of doctors per bed

2009

0.6

0.81

0.53

0.69

0.46

Avg. no. of nurses per bed

2009

1.27

0.16

1.18

3.02

No. of doctors per 1,000 population

2009

0.6

2.7

2.1

1.7

1.4

No. of nurses per 1,000 population

2009

1.3

9.8

0.6

2.9

The Requirement

Parameter
Additional Beds
Required
Bed/1000
population ratio

2008

2018

2028

Parameter

1.1 million 3.1 million

2 million

Physicians

0.7 to 1.7

Annual Production (2011) To fill the gap

Nurses

30,558

993,500

114,218

2,510,250

Inadequacy of Public Sector: An opportunity for Private Sector

Health Infrastructure in Villages

Healthcare has received inadequate attention from the


government in India

Infrastructure / services

Indian government spends 4.1% of its total budget on


healthcare, compared to a global average of 13.9%
The government contributes only 32.8%
healthcare costs, compared to a 60.5% globally

of

total

Government-run healthcare facilities are not well managed,


and are known to have poor quality of services and
inadequate infrastructure & equipment
The shortage is more severe in rural areas, where only 43.5%
villages in the country have a doctor
Bridging the gap requires high investments; this opportunity
can be capitalized by private players to expand operations
into smaller towns which lack good quality private hospitals
Sources: MEGStrat Analysis, IMF, Intel Case Study, KPMG

% of villages

Connected with roads

73.9%

Having any health provider

95.3%

Having trained birth attendant

37.5%

Having Anganwadi worker

74.5%

Having a doctor (private & visiting)

43.5%

Having a private doctor

30.5%

Having a visitor doctor

25.0%

23

India has a competitive advantage in healthcare over peers, owing to its large skilled manpower, low
cost 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

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Greenfield projects

Organic growth

Increase in ARPOB &


occupancy

Growth by addition of number


of operating beds

Revenue growth by increasing


operating efficiencies

Reduction in average
length of stay

Growth strategies

Inorganic expansion

Acquisition of existing
hospitals

Buy-outs or through operating


& management contracts

Hiring off non-core


assets

Hive-off real estate


assets to make
operations asset-light

Cash infused by sale of real


estate assets, and increase in
ROA

Diversification across
the value chain

Build/ acquire
businesses such as
pharmacies, &
diagnostics labs

Example: Fortis acquisition of


Super Religare Labs in May
2011 for USD 178.5 million

Asset-light model
is the preferred
growth strategy
for Private Equity
investors

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Apart from infrastructure improvement, capacity addition and development of manpower


being critical for the Indian healthcare sector, it is also necessary that the existing facilities
are operated in an efficient manner. This can be ensured through various measures such as
Accreditation, adoption of Cost Accounting Procedures and increased penetration of
Healthcare Insurance.
Accreditation
Accreditation is one of several models of external evaluation used by healthcare entities
throughout the world to regulate, improve and promote health care services. Domestically,
accreditation is sought from the National Accreditation Board for Hospitals and Healthcare
Providers (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 been
accredited by this body.
Trends of Accreditation
To 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 is
involved in the accreditation of blood banks, diagnostic centres, nursing homes, dental clinics
and Ayurvedic centres in addition to private hospitals, nursing homes. As of January 1, 2008,
only 12 medical facilities were accredited by NABH.
Advantages of Accreditation
Patients benefit in terms of high quality of care and patient safety. They are serviced by
credible medical staff and their rights are respected and protected.

Accreditation results in continuous improvement of the overall services of the hospital in order
to provide high quality care with least possible risks. Accreditation provides an objective
system of empanelment by insurance and other third parties. It provides access to reliable and
certified information on facilities, infrastructure and level of care with education on good
practices to improve business operations.

26

MEGStrat Disclaimer Applicable

27

Risk Factors
Long gestation periods
Hospitals require significant upfront investments and have a
long payback period. This makes investments in the sector
less attractive

Mitigation
Increasing number of hospital acquisitions are happening
through operating & maintenance contracts which have
short gestation periods and faster revenue ramp up.

Lack of qualified staff


Finding qualified staff & specialized doctors is a major
challenge for hospitals in India, especially for new start ups,
leading to wage inflation and inadequate quality

Stringent license requirements abroad and improving health


infrastructure in India is encouraging doctors to return to
India. Medical education & training is seeing growing
investments, especially by healthcare companies such as
Manipal.

Rising real estate prices


Increasing real estate prices lead to higher initial outlay or
higher lease payments, resulting in decreasing profitability

Substantial amount of growth in the industry is driven from


tier II & III cities, mainly because of lower real estate cost.
Some have adopted the leased model to offset high real
estate prices.

Lack of capital
Huge capital will be required to meet the growing demand of
healthcare. However, long gestation periods make the sector
unattractive

The growth prospects of the industry have led to a rapid


increase in investments in hospitals. Private equity players
have invested USD 373.4 million in the sector since 2010, and
existing players are rapidly deploying capital for expansion.

Increasing operating cost


Increasing costs of equipment and labor lead to margin
pressure and lower profitability

Equipment manufacturers like GE and Philips are increasingly


focusing on India to sell healthcare products, resulting in
favorable terms of supply.

28

MEGStrat Disclaimer Applicable

29

Public Sector and Government Interventions Current and Going Forward


Improving the Reach and Quality:
1. The government plans to build 6 super speciality tertiary care hospitals with research and
education centres across the country. These would cater to the weaker sections making
high end clinical care available to the masses.

High investments
in a growing
market, along with
openness to
innovate endorse
well for the sector

2. Encouraging current initiatives on PPPs 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 Chiranjeevi
4. 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.

30

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. Customs 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.

31

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 issues
through 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 and
applied in terms of client impact, clients' customers, employees and revenues.
For more information on MEGStrat Consulting, please visit www.megstrat.com

Enabling [M]easurable [E]ffective [G]rowth Strategies


info@megstrat.com | MEGStrat Consulting (P) Ltd. | Website: www.megstrat.com | Board: +91-124-471-1910 | Mobile: +91-981-018-4350
MEGStrat Consulting, Level - 6, JMD Regent Square, Mehrauli Gurgaon Road, Gurgaon - 122002, Haryana, India.

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