Foreign Investment in Hospitals in India: Status and Implications Rupa Chanda Professor Indian Institute of Management Bangalore Bannerghatta

Road, Bangalore-560076, India Email: rupa@iimb.ernet.in In collaboration with WHO India Country Office, New Delhi and WTO Cell, Ministry of Health and Family Welfare, Government of India.

Foreign Investment in Hospitals in India: Status and Implications * Rupa Chanda ** * This document is not a formal publication of the World Health Organization (WHO). The study was supported by WHO India Country Office and the WTO Cell, Ministry of Health and Family Welfare, Government of India. However, the views expressed are solely of the author and do not necessarily reflect the opinion or views of the WHO or the Ministry of Health and Family Welfare. The document may, however, be freely reviewed, abstracted, reproduced or translated, in part or whole, with due acknowledgement and citation, but is not for sale or for use in conjunction with commercial purposes. ** Professor, Economics & Social Sciences Area, Indian Institute of Management Bangalore.

Acknowledgements The author is grateful to the many practitioners and managers from various hospitals in Delhi, Bangalore, and Kolkata, as well as industry association experts who spared their valuable time for face-to-face interviews and shared their knowledge and insights for this study. Many of them also replied to repeated queries over email and telephone to elaborate on various issues and helped to sharpen the authors understanding of the many complexities in the healthcare sector. This study would not have been possible without their help and guidance. I would also like to thank Krishanu Rakshit, doctoral student at IIM Bangalore and Sasidaran G., research associate at IIM Bangalore, for all their help in collecting background information and data on hospitals, in tabulation and data analysis, and in the preparation of the report. Without their timely assistance, it would not have been possible to collate all the information and prepare the report on time. I also express my sincere gratitude to Sunil Nandraj and Anagha Khot of the WHO Country Office, New Delhi and Ujjwal Kumar and Rajendra Mehrotra of the WTO Cell, Ministry of Health and Family Welfare, Government of India for their support and guidance throughout the study and for helping to organize a workshop in Delhi for the presentation of the draft report. I am also thankful to them for giving me an opportunity to work on this subject and to contribute in whatever small way towards informing public policy in this area.

Executive Summary Background and Objectives The Indian healthcare delivery market is estimated at US$ 18.7 billion and employs over four million people, making it one of the largest service sectors in the economy today. Total national healthcare spending reached 5.2% of GDP, or US $34.9 billion in 2004 and is expected to rise to 5.5% of GDP, or US $60.9 billion by 2009. The sector comprises of many segments, which include hospitals, medical infrastructure, medical devices, clinical trials, outsourcing, telemedicine, and health insurance, to name some. The industry has grown at about 13 per cent annually in recent years and is expected to grow at 15 per cent per year over the next four to five years. According to a recent study, the industry will account for 6.1 percent of GDP by 2012 and is projected to provide employment to around 9 million people.1 A striking feature of Indias healthcare system is the significant and growing role of the private sector in healthcare delivery and total healthcare expenditures. Public health expenditure accounts for less than 1 percent of GDP compared to 3 percent of GDP for developing countries and 5 percent for high income countries. The private healthcare sector in India accounts for over 75 percent of total healthcare expenditure in the country and is one of the largest in the world. Indias healthcare sector, however, falls well below international benchmarks for physical infrastructure and manpower, and even falls below the standards existing in comparable developing countries. It is estimated that over a million beds have to be added to attain this 1.85 ratio, which translates into a total investment of $78 billion (Rs. 350,830 crores) in health infrastructure. An additional

800,000 physicians are required over the next 10 years, which translates into huge investments in training facilities and equipment. In order to reach even 50-75 percent of the present levels of other developing countries, the sector will require an estimated investment of $20-30 billion.2 Thus, Indias healthcare sector needs to scale up considerably in terms of the availability and quality of its physical infrastructure as well as human resources. Given the growing demand, the emergence of reputed private players, and the huge investment needs in the healthcare sector, in recent years, there has been growing interest among foreign players and non resident Indians to enter the Indian healthcare market. There is also growing interest among domestic and international financial institutions, private equity funds, venture capitalists, and banks to explore investment opportunities across a wide range of segments. This study examines the status of foreign financing (foreign direct investment-FDI as well as other forms of foreign fund inflows) in one of the key segments of the healthcare sector, i.e., in hospitals. It also analyses the implications of such financing for the hospital segment and for the overall healthcare system. The specific objectives of the study include:
1

These statistics are taken from IBEF, available at www.ibef.org

2

See, Ernst and Young (2007) and CRISIL Research (Feb 2007). (i) 3 See, RBI note on Foreign Investments in India (April 1, 2007). (a) Understanding the nature of foreign funding in hospitals in India, as well as other forms of foreign involvement (not

necessarily financing related) in the hospitals segment in India; (b) Understanding the institutional and other factors facilitating and impeding foreign funding in hospitals in India; and (c) Understanding the realized or likely impact of foreign investment in hospitals in India on various aspects of the healthcare sector and the wider economy (quality, affordability, infrastructure development, technology, accessibility, prices, etc.) In addition to the aforementioned objectives, this study aims to provide policy inputs that would facilitate such investments and enable the realization of the greatest possible benefit from such inflows. It also aims to inform policy makers with regard to Indias commitments in health services for the mode of commercial presence (mode 3) under the General Agreement on Trade in Services (GATS) negotiations in the WTO. Methodology and scope The study is based on primary as well as secondary research. The primary research has been conducted in two parts. One part was outsourced AC Nielsen, which carried out its survey work in two phases. The first phase of the primary research consisted of administering a structured questionnaire to administrators and finance sections of 19 hospitals in 6 cities around the country. All the hospitals were of a minimum size of 100 beds, multi-specialty, and included a mix of for profit private hospitals with and without foreign financing and not for profit private hospitals categorized as charitable/trust hospitals. The second phase of the survey work by Nielsen consisted of 15 semi-structured interviews with various stakeholders (doctors, nurses, owners or managers of hospitals and nursing homes (large and mid size) health consultants, health insurance companies, diagnostics, and medical

equipment suppliers and patients. The second part of the primary research was undertaken by the author. This consisted of 30 indepth discussions with senior management in major corporate hospitals and with other stakeholders such as civil society organizations, industry associations, financiers, doctors, and public sector practitioners across three cities. Status and prospects for foreign investment in hospitals in India The study indicates that the foreign investment policy is very liberal for hospitals. Since January 2000, FDI is permitted up to 100 percent under the automatic route in hospitals in India.3 Controlling stake is also permitted in hospitals for foreign investors. FIPB approval is only required for foreign investors with prior technical collaboration, but allowed upto 100 percent. Current regulations also permit other forms of capital mobilization, such as through ADRs and GDRs, upto 49 percent, which are treated as FDI. FII as well as private equity funding over a certain stake are also permitted under FDI route. In addition, FIIs and private equity funds can individually purchase upto 10 percent and collectively upto 24 percent of the paid-up share capital of the company, through open offers or private placement, or through the stock exchange. Proprietary funds, foreign individuals and foreign corporates can register as a subaccount and invest through the FII, subject to limits of 10 percent and 5 percent, respectively for these sub-accounts. Foreign venture capital investments (FVCIs) are also permitted, though subject to certain restrictions. No major regulatory (ii)

hurdles seem to exist with regard to the setting up of hospitals. Although various forms of financing may be classified as FDI, industry experts distinguish between these various modes as they have different implications for the absorption of costs, benefits to patients, expectations of returns, and improved capacity in healthcare delivery. An examination of the list of approved hospital projects obtained from the Department for Industrial Policy and Promotion and the primary survey indicates that despite the liberal regulatory environment, FDI presence in Indian hospitals is very limited at present. There are only three or hospitals which according to industry persons, qualify as FDI hospitals in India. The rest are FDI approved on paper, and may not have brought in capital. There are also players who have routed funds through other countries but do not see themselves as FDI hospitals as this routing is only for tax purposes and not really FDI type inflows. However, it is perceived that there will be increased inflow of foreign funds into Indias hospital segment in the near future given major expansion plans by existing and prospective corporate players. These include huge Medicities with large super-speciality and multi-speciality hospitals and integrated healthcare services as well as scaling up of existing operations and setting up of new hospitals around the country. Much of the recent capital inflows have been through private equity funds and IPOs and this trend is expected to continue. However, the predominant mode of financing is domestic borrowing and foreign financing constitutes roughly 20 percent of funding in hospitals. Constraints to foreign investment in hospitals in India While there are clearly many drivers to foreign investment in hospitals in India, the study finds that there are external as well as domestic constraints, which explain the limited presence of foreign investment in Indias hospital segment. These constraints include the fact that the number of such foreign players may be

limited, there are competing investment destinations, there are difficulties for foreign players in entering independently and in maintaining joint ventures that the gestation period in hospital projects is long and that investors may not be willing to make such a long term commitment. More importantly, various domestic factors adversely affect the returns to investment in hospitals in India. These include high initial establishment costs and in particular the prohibitive cost of procuring land, low health insurance penetration in the country which reduces the consumer base for corporate hospitals, restrictions on medical education and training providers which create a supply bottleneck and adversely affects the quality of medical personnel at all levels, the high cost of importing medical devices and the limited domestic manufacturing capacity in this area, other regulatory deficiencies which result in lack of standardization, proper governance, and quality assurance in the healthcare sector, and lack of policy clarity and priority to the healthcare sector. Thus clearly, unless such constraints are addressed, a liberal investment Impact of foreign investment in hospitals in India Overall, if one were to take the survey results as reflecting the way in which foreign funded hospitals function compare to non foreign funded hospitals, and thus the kind of impact they are likely to have on the healthcare sector, then several insights emerge. Such hospitals are likely to focus on more advanced procedures and specialty areas. They are more likely to focus on curative and intervention oriented treatment than on preventive and long-term kind of treatment. (iii)

 They are likely to employ a higher ratio of technology to personnel in their healthcare delivery and thus involve a substitution of human resources with technology and equipment. They are likely to invest much more in medical equipment and devices and also in specialized and experienced medical personnel, thus involving a focus on high-end human resources and high-end technology. Such hospitals tend to have better systems and processes and usage of IT, which creates a more efficient and professional work environment. Foreign funded hospitals pay higher rates to staff at all levels and particularly to senior medical personnel. They are more likely to attract overseas doctors and specialists than other hospitals They are more likely to be accredited domestically and/or internationally. Their costs are likely to be comparable to or slightly higher than those of non foreign funded large hospitals Their costs will tend to be higher than for small and medium size nursing homes and hospitals but this is mainly due to greater capital intensity and focus on quality systems and processes and focus on hygiene There could be positive externalities in other areas, some of which could further drive foreign investment in hospitals Foreign funded hospitals could draw away medical personnel at all levels from other hospitals (both large non-foreignfunded and medium and small size hospitals/nursing homes, and public sector hospitals) and could adversely impact the

quality of medical manpower available to competing institutions There is likely to be closure of substandard institutions, some consolidation of the hospital segment, and new kinds of arrangements could emerge between larger and smaller players as the healthcare sector evolves There could be greater segmentation between the public and private sector with resource flows towards the latter, greater wage disparity, unless innovative arrangements emerge between the two segments and reforms are undertaken in the public sector hospitals While there are clearly concerns about the equity, affordability, and market segmentation implications of growing foreign investor presence in Indias hospital segment, it is evident that the root cause lies in structural problems that are already present in the healthcare sector, such as lack of affordable health insurance schemes or inappropriate regulations on medical education providers. Foreign investment and greater corporate presence in hospitals could aggravate such structural problems. The insights obtained from the discussions with stakeholders suggest that the solution lies in strengthening the public healthcare system, in amending certain regulations that affect all players, and in introducing schemes, which provide affordable access to healthcare for all and not in restricting foreign investment. The benefits of foreign investment in hospitals are likely to outweigh these adverse effects. (iv)

Implications for GATS commitments in hospital services The study examined whether India should further liberalize its offer on hospital services to 100 percent with no prior approval requirement, i.e., bind in its existing FDI regulations in this area? The findings of this study suggest that India could bind in its existing FDI policy in hospitals and permit 100 percent on automatic route. The justifications for such a strategy relate to two facts. First, as investors see a lack of clarity and roadmap for the health sector, a binding commitment would signal that the liberal foreign investment policy for hospitals is there to stay and that the government is committed to facilitating investments in Indias hospital segment. Second, to the extent that additional FDI does flow into hospitals, there are several likely benefits that could accrue while the negatives that could arise will not really be a direct result of foreign investment but of existing structural distortions and inadequacies in Indias health care sector. The study also suggests possible conditions that could be inscribed in Indias commitments to ensure that certain objectives are realized. The existing revised offer puts a technology transfer related condition. Another possible condition could pertain to corporate social responsibility measures, such as outreach and extension services and reinvestment of part of profits in medical research and education or in telemedicine to serve a wider population base if any subsidies or concessions have been granted in related areas. While other conditions could be inscribed, such as requiring tie ups with local players in terms of referral services, education and training of personnel, transfer of older equipment, and pooling of resources, it may not be advisable to impose too many conditions as these could adversely affect incentives for investors and their bottomlines. But the study notes that a liberal binding commitment on FDI in hospitals may not translate into greater foreign investment in Indias hospitals unless the various constraints affecting hospital projects are addressed. Thus, a more reform oriented approach and a shift in attitude would be required in various areas, including in public

sector institutions, in medical education, health insurance, the medical equipment and devices segment, and infrastructure facilitation, among others. Such supporting measures and reforms would help ensure the benefits while mitigating the possible negatives. Also, negotiators need to look at Indias commitments and domestic policies in other sectors, such as in health insurance and higher education, at their commitments in other modes and sub sectors of health services, and keep in mind the impact of cross cutting regulations. Policy recommendations Overall, the study throws up several policy measures required by government and initiatives required by private players to make the hospital segment more attractive to both domestic and foreign investors if the ultimate aim is to expand capacity, improve standards, and make healthcare affordable and accessible to a wider segment. Some of these measures include: Facilitating land acquisition- some subsidization of initial project costs or PPP arrangements with possible cost discounting or cross subsidization arrangements built into the valuation of land; Consider other forms of obtaining land- through leasing arrangements, joint development with real estate developers and arrangements with public sector units owning land and hospital facilities and government facilitation of such arrangements; Freeing up medical education and encouraging private hospitals to enter into medical education and training to expand the supply of medical personnel at all levels (v)

 Incentivising domestic manufacturing of medical devices and technologies through increased investment in this sector and tie ups with foreign companies and efforts to standardize output Opening up the health insurance sector to enable greater scrutiny of processes and standards of hospitals, which would also help attract foreign funds, as well as introduction of a national or community based health insurance scheme to increase affordability of healthcare and mitigate potential adverse effects of corporatisation on equity; Improving the regulatory framework for health insurance by standardizing norms for payouts, coverage, reduce malpractice; Facilitating public private partnerships in hospitals, with private sector hospitals entering into limited period management contracts with public hospitals, under welldefined revenue sharing arrangement, along with CSR responsibilities through cross subsidization mechanisms Greater sharing of resources (equipment, knowledge, research facilities) between public and private hospitals and between larger private hospitals and smaller local players Establishing a regulatory framework and an independent regulator in the healthcare sector to address issues of standardization, classification, information disclosure, etc.; and Improved regulation and monitoring of mid and small size establishments to improve standards and quality, weed out substandard establishments, and enable consolidation in healthcare delivery.

Perhaps the most important point illustrated by this study is that mere liberalization of the foreign investment regime without putting in place supporting institutional and regulatory frameworks and domestic reforms, will have limited effectiveness. Foreign investment can yield many benefits but if structural and regulatory deficiencies are not addressed, these benefits may not materialize and existing structural distortions may be aggravated. Hence, government needs to take a proactive role by initiating domestic reforms and creating an enabling environment so that the benefits of liberalization do ensue and any adverse effects are mitigated. (vi)

Table of Contents 1 Overview of the Indian Healthcare Sector...................................................................................5 2 Overview of the study....................................................................................................... ..............7

2.1 Scope and objectives...............................................................................................

......................7

2.2 Methodology for the study.......................................................................................................

......8 2.2.1 Details of the Quantitative Survey...................................................................................9 2.2.2 Qualitative survey..................................................................................................... ......10

2.3 Limitations of the primary research.............................................................................................11

3 Foreign Presence in Hospitals in India.......................................................................................12

3.1 Foreign direct investment in hospitals..........................................................................................13

3.1.1 Status of FDI in hospitals...............................................................................................1 4 3.1.2 Prospects for FDI in hospitals .......................................................................................17

3.2 Other sources of foreign investment in hospitals

...........................................................................19

3.3 Pattern of financing in major corporate hospitals.........................................................................20

4 Constraints to foreign investment in hospitals in India...........................................................22

4.1 External factors.....................................................................................................

....................23

4.2 Domestic factors.....................................................................................................

...................23 4.2.1 Initial establishment issues: land and set up issues......................................................26 4.2.2 Medical equipment and technology..............................................................................27 4.2.3 Manpower availability and quality issues.....................................................................29 4.2.4 Health Insurance............................................................................................... ..............31 4.2.5 Other regulatory issues and policy directions...............................................................33 5 Impact of foreign investment in hospitals..................................................................................34

5.1 Key findings from the survey.....................................................................................................

..35 5.1.1 Services and procedures............................................................................................. ....35 5.1.2 Physical infrastructure and medical staff......................................................................38 5.1.3 Human resources: Remuneration and quality issues...................................................41 5.1.4 Costs of services.................................................................................................. ............43

5.1.5 Other features.................................................................................................. ................47

5.2 Perceived impact of foreign investment in hospitals......................................................................50

5.2.1 Positive implications........................................................................................... ............50 5.2.2 Areas of concern................................................................................................... ..........53

5.3 Summarizing the implications and further inferences...................................................................56

6 Implications for GATS commitments in hospital services......................................................57

6.1 Indias autonomous and multilateral liberalization in hospital services........................................57 6.2 Strategy for multilateral liberalization in hospital services............................................................59
7 Summary of findings................................................................................................... ...................602

List of Tables Table-1. Hospitals covered by the quantitative survey....................................................................................10 Table-2. Target groups covered for the in-depth qualitative discussions.......................................................11 Table-3. Approved FDI Hospitals by DIPP (January 2000-June 2006)........................................................15 Table-4. Summary of pros and cons of financing sources for hospitals.........................................................22 Table-5. Summary of key operating and other ratios of major corporate hospitals in India (March 2006 figures)................................................................................................... ............................................25 Table-6. Availability of Services in surveyed hospitals...................................................................................36 Table-7. Availability of Medical Procedures in surveyed hospitals...............................................................36 Table-8. Availability of Infrastructure and Medical Facilities........................................................................39 Table-9. Availability of Medical Staff......................................................................................................... .....39 Table-10. Average monthly remuneration for staff (Rs.)..................................................................................41 Table-11. Status matrix for committed and offered liberalization in Indias hospital services......................58 List of Figures Figure- 1. Structure of Borrowings............................................................................................ .........................21 Figure- 2. Domestic Medical Equipment Market..............................................................................................28

Figure- 3. Health Insurance Penetration in India..............................................................................................32 Figure- 4. Cost comparison for neurology procedures (Rs.).............................................................................43 Figure- 5. Cost comparison for Gastroenterology procedure (Rs.)..................................................................43 Figure- 6. Cost comparison for dialysis (Rs.).....................................................................................................4 4 Figure- 7. Cost comparison for Cardio-thoracic surgery (Rs.)..........................................................................45 Figure- 8. Cost comparison for diagnostic service (ultrasound) (Rs.)..............................................................46 Figure- 9. Cost comparison for diagnostic service (ECG) (Rs.)........................................................................46 List of Boxes BOX- 1 Major Medical City Projects: Proposed and Newly Established.....................................................17 BOX- 2 Stakeholder views on public private partnership arrangements in hospitals..................................48 BOX- 3 Perceived implications for affordability of healthcare......................................................................553

Acronyms ADR American Depository Receipt CEO Chief Executive Officer CII Confederation of Indian Industries CMIE Centre for Monitoring Indian Economy CRISIL Credit Rating Information Services of India Limited CSR Corporate Social Responsibility CT Computerized Tomography DIPP Department of Industrial Policy and Promotion ECB External Commercial Borrowing ECG Electro Cardiogram EHIRCEscorts Heart Institute and Research Centre EMG Electromyography ER Emergency Room FDI Foreign Direct Investment FICCI Federation of Indian Chambers of Commerce and Industry FII Foreign Institutional Investment FIPB Foreign Investment Promotion Board FVCI Foreign Venture Capital Investment GATS General Agreement on Trade in Services GDR Global Depository Receipt HR Human Resources IBEF India Brand Equity Foundation IFC International Finance Corporation ICU Intensive Care Unit IPO Initial Public Offer

ISO International Organization for Standardization IT Information Technology JCI Joint Commission International MRI Magnetic Resonance Imaging NABH National Accreditation Board for Hospitals 4

NABL National Accreditation Board for Laboratories NCR National Capital Region NRI Non Resident Indian OPD Out Patients Department OT Operation Theatre PE Private Equity PPP Public Private Partnership PSU Public Sector Unit RBI Reserve Bank of India Rs. Rupees SAARC South Asian Association for Regional Cooperation SEZ Special Economic Zone TPA Third Party Administrators UAE United Arab Emirates UK United Kingdom US United States VC Venture Capital WHO World Health Organization WTO World Trade Organization 5

Foreign Investment in Hospitals in India: Status and Implications 1 Overview of the Indian Healthcare Sector The Indian healthcare delivery market is estimated at US$ 18.7 billion and employs over four million people, making it one of the largest service sectors in the economy today. Total national healthcare spending reached 5.2% of GDP, or US $34.9 billion in 2004 and is expected to rise to 5.5% of GDP, or US $60.9 billion by 2009. The sector comprises of many segments, which include hospitals, medical infrastructure, medical devices, clinical trials, outsourcing, telemedicine, and health insurance, to name some. The industry has grown at about 13 per cent annually in recent years and is expected to grow at 15 per cent per year over the next four to five years. According to a recent study, the industry will account for 6.1 percent of GDP by 2012 and is projected to provide employment to around 9 million people.1 Hence, by all estimates, this is a sector, which is growing rapidly and is seen to have considerable potential. This growth and potential is due to the growing demand for healthcare services in the Indian market, which is driven by rising incomes, a growing propensity to spend on healthcare, a shift to lifestyle related diseases, and demographics, among other factors. Notwithstanding the sectors rapid growth and potential, in many respects, Indias healthcare sector falls well below international benchmarks for physical infrastructure and manpower, and even falls below the standards existing in comparable developing countries. The total number of doctors (all kinds included) per thousand persons stood at only 1.27 in 2006 and 0.5 physicians per thousand persons in India, compared to a world average of 1.5. The number of nurses per thousand persons stood at 0.9 in 2006 compared to a world average of 1.2. Added to this deficiency is the mal-distribution between rural and urban areas and shortages of specialized personnel. These ratios are projected to

remain below the existing world averages even in 2016. The current ratio of beds per thousand persons is a mere 1.03 (well below the WHO norms) compared to an average ratio of 4.3 for developing countries like China, Korea, and Thailand, and in the best of circumstances is projected to reach 1.85 per thousand persons by 2012. It is estimated that over a million beds have to be added to attain this 1.85 ratio, which translates into a total investment of $78 billion (Rs. 350,830 crores) in health infrastructure. An additional 800,000 physicians are required over the next 10 years, which in turn translates into huge investments in training facilities and equipment. In order to reach even 50-75 percent of the present levels of other developing countries, the sector will require an estimated investment of $2030 billion.2 Thus, Indias healthcare sector needs to scale up considerably in terms of the availability and quality of its physical infrastructure as well as human resources so as to meet the growing demand and to compare favourably with international standards.
1 2

These statistics are taken from IBEF, available at www.ibef.org See, Ernst and Young (2007) and CRISIL Research (Feb 2007). 6

3 4

Technopak (February 2007). Ernst and Young (2007) and IBEF.

A striking feature of Indias healthcare system is the significant and growing role of the private sector in healthcare delivery and total healthcare expenditures. Public health expenditure accounts for less than 1 percent of GDP compared to 3 percent of GDP for developing countries and 5 percent for high income countries. The private healthcare sector in India accounts for over 75 percent of total healthcare expenditure in the country and is one of the largest in the world. An estimated 60 percent of hospitals, 75 percent of dispensaries, and 80 percent of all qualified doctors are in the private sector. However, private healthcare delivery is highly fragmented with over 90 percent of private healthcare being serviced by the unorganised sector, according to a recent consulting firm report.3 Some 2 to 3 percent of hospitals are 200-bed plus, some 6-7 percent are 100200 bed size hospitals, and the bulk 80 percent of private sector hospitals are very small, less than 30 beds. Studies by the Central Bureau of Health Intelligence have shown that a majority of Indians trust private healthcare despite a higher average cost of US$ 4.3 compared to US$ 2.7 in government-owned healthcare agencies. Only 23.5 percent of urban residents and 30.6 percent of rural residents choose government facilities, reflecting the widespread lack of confidence in the public healthcare system. The private sectors role is expected to grow in the future. It is estimated that out of the 1 million beds to be added by 2012, the private sector will contribute 896,000 beds. Government spending on healthcare infrastructure (excluding land) is projected to rise only marginally, by 0.12 percent of GDP and is expected to meet only 12 percent of the huge investment required in the healthcare sector, with the private sector providing some 88 percent of investment requirements.4 Hence, the private sector

will be a key player in driving the future growth of Indias healthcare sector, including in segments such as hospitals. Given the growing demand, the emergence of reputed private players, and the huge investment needs in the healthcare sector, in recent years, there has been growing interest among foreign players and non resident Indians to enter the Indian healthcare market. There is also growing interest among domestic and international financial institutions, private equity funds, venture capitalists, and banks to explore investment opportunities across a wide range of segments (drugs and pharmaceuticals, medical devices, hospitals, etc.) in the Indian healthcare sector. In the hospitals and medical devices segment alone, there are reportedly at least 20 international players competing to have a share on the Indian healthcare market. These players are entering mainly through joint ventures with Indian companies and also through technology and training collaborations. The growing presence of corporate players and foreign investors in Indias healthcare sector, although highlighted and also documented in various reports by industry associations and consulting firms, is not yet well understood in terms of its current status as well as its implications for the healthcare system at large. For example, while the emergence of corporate hospitals or foreign funding and tie ups in the hospital segment can have many positive implications, such as helping to improve physical infrastructure, standards, quality of healthcare, technology, and delivery systems and processes along with spill over benefits in areas such as medical devices, pharmaceuticals, outsourcing, and research and development, it may also result in higher costs of healthcare and greater segmentation between the public and private health sectors. Thus, there is a need to examine the state of play so as to better understand the nature and extent of foreign 7

presence in selected segments of Indias healthcare sector and its realized as well as likely impact on the concerned segment and on the healthcare system at large. 2 Overview of the study 2.1 Scope and objectives This study examines the status of foreign financing (foreign direct investment-FDI as well as other forms of foreign fund inflows) in one of the key segments of the healthcare sector, i.e., in hospitals. It also analyses the implications of such financing for the hospital segment and for the overall healthcare system. The specific objectives of the study include: a) Understanding the nature of foreign funding in hospitals in India, as well as other forms of foreign involvement (not necessarily financing related) in the hospitals segment in India; b) Understanding the institutional and other factors facilitating and impeding foreign funding in hospitals in India; and c) Understanding the realized or likely impact of foreign investment in hospitals in India on various aspects of the healthcare sector and the wider economy (quality, affordability, infrastructure development, technology, accessibility, prices, etc.) In addition to the aforementioned objectives, this study has two broader goals. The first is to provide policy inputs that would facilitate such investments and enable the realization of the greatest possible benefit from such inflows. The second is to inform policy makers with regard to Indias commitments in health services for the mode of commercial presence (mode 3) under the General Agreement on Trade in Services (GATS) negotiations in the WTO.

A few points are worth noting at the outset regarding the scope of this study and the approach taken on specific issues in the course of the discussion. First, while the original scope of this study was to understand the status of FDI through automatic route and through FIPB route in hospitals in India, it was deemed appropriate to enlarge the scope to examine foreign financing more generally. This is because it became evident in the initial stages of the study that there are multiple modes of foreign funding in the hospitals segment in India and that these are more prevalent than FDI. Hence, if the study was to derive any useful insights and policy recommendations and understand how liberalization of the investment environment in hospitals is impacting the segment, it was necessary to go beyond FDI and to examine all kinds of foreign financing, explicit as well as forms that are not so directly visible. Thus this study looks at FDI, joint ventures, Foreign Institutional Investment, investments by private equity funds, Diaspora investment, and possible foreign investment in the context of placements in capital markets. Second, in several sections of this study, the discussion also touches on forms of foreign presence, which go beyond mere financing. These include tie-ups, technical collaborations, and research and development and education related arrangements. While these are not under the direct purview of this study, these are also considered, as they are prevalent in Indias healthcare sector. These are both influenced by the investment environment and also influence the overall investment environment. Third, although the study started with a focus on foreign investment, in the course of the study it became evident that a more generalized approach to investment was appropriate. This is because many of the factors driving or impeding foreign investment in hospitals are also pertinent to 8

domestic investment in hospitals. Hence, the discussion on drivers and impediments often considers investment more generally, i.e., both foreign and domestic investment, and refers to corporate or private hospitals without necessarily distinguishing between them in terms of sources of funding. 2.2 Methodology for the study The study is based on primary as well as secondary research. The secondary sources consist of existing reports on the health sector by national and international agencies, consulting firms, industry associations, academics, and popular media. The latter sources have been used to gather information on the general state of Indias health sector, on the hospitals segment, including the profiles and financials of major hospitals in India, on related areas such as medical devices and technologies, health insurance, and manpower, and on the investment scenario in Indias hospital segment, including the institutional and procedural aspects of such investments. In addition, primary research has also been conducted for this study in two parts. One part was outsourced AC Nielsen. The latter in turn carried out its survey work in two phases. The first phase of the primary research consisted of administering a structured questionnaire to administrators and finance sections of a small sample of hospitals around the country. This questionnaire was designed on the basis of pilots conducted in Bangalore. This questionnaire was designed as a self-completion questionnaire as some sections had to be left behind with the respondent for completion, although an attempt was made to obtain as much of the information as possible through a face-toface interview. The target cities/regions for this survey were the National Capital Region, Bangalore, Kolkata, Hyderabad, Mumbai and Chennai. No quotas were assigned to individual cities and the sample was drawn up depending on the response from the field.

The criteria for selecting hospitals for the quantitative survey included size, i.e., all hospitals were of a minimum size of 100 beds, they were all multi-specialty hospitals, and they included a mix of for profit private hospitals with and without foreign financing and not for profit private hospitals categorized as charitable/trust hospitals. An initial list of institutions that have been approved for foreign direct investment was obtained from the Department of Industrial Policy and Promotion. This list was used for the initial selection of hospitals. The survey aimed at collecting information on the key features of hospitals, including their infrastructure, human resources, range of healthcare facilities, prices, technology and equipment, and financials and to compare across the different categories of hospitals, in particular between foreign funded and non funded hospitals for these various dimensions. The second phase of the survey work by Nielsen consisted of semi-structured interviews with various stakeholders who could provide views on the role and implications of foreign financing in hospitals. A total of 15 in-depth discussions were carried out in this phase. The respondents included doctors, nurses, owners or managers of hospitals and nursing homes (large and mid size) health consultants, health insurance companies, diagnostics, and medical equipment suppliers and patients. Customized in-depth discussion guides were used for this purpose. These qualitative discussions were aimed at supplementing the information obtained from the survey and getting varied perspectives on how liberalization of investments in hospitals would affect different stakeholders in the healthcare sector. The second part of the primary research was undertaken by the researcher. This consisted of a total of 30 in-depth discussions with senior management in major corporate hospitals and with other 9
5

In some cases, hospitals were not willing to participate in the survey due to legal reasons, such as going for an IPO. In some cases, they were not willing to participate due to internal

administrative reasons. In one case, senior management did not grant approval. stakeholders such as civil society organizations, industry associations, financiers, doctors, and public sector practitioners, in the NCR, Bangalore, and Kolkata. 2.2.1 Details of the Quantitative Survey Quantitative data was collected for 19 hospitals around the country through the survey questionnaire administered by Nielsen. It is important to note that it proved very difficult to carry out the quantitative part of the primary survey. Many large hospitals were not willing to participate in the survey and provide background information, despite assurances of confidentiality of information.5 Hence, for hospitals, which were considered necessary for inclusion in the list of surveyed hospitals and for which qualitative discussions could be used to corroborate findings, secondary sources were used to gather background information. The latter consisted of 6 major hospitals around the country. These secondary sources included consulting firm and research reports and annual reports of hospitals. The status report for the data collection is provided in the table below. 10

Table-1. Hospitals covered by the quantitative survey Sl No. 1 2 3 4 5 6 7 Hospital Indraprastha Apollo Max Healthcare Fortis a/ Escorts Healthcare a/ Woodlands Anandlok Hospital Jitendra Narayan Ray Sishu Seva Bhavan and General Hospital Apollo Gleneagles a/ Sarvodaya Hospital Suguna Ramaiah Hospital Pvt Ltd Chinmaya Mission Hospital Columbia Asia Hospital Pvt. Ltd Wockhardt Hospitals a/ Manipal Hospitals a/ Narayana Hrudayalaya CSI Kalyani City New Delhi New Delhi New Delhi New Delhi Kolkata Kolkata Kolkata

8 9 10 11 12 13 14 15 16

Kolkata Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Bangalore Chennai

17 18 19 20

21 22

23 24 25

General Hospital KHM Hospitals Kumaran Hospitals (p) Ltd Apollo Hospitals a/ P.D.Hinduja National Hospital and Medical Research Centre Joy Hospital Sir H.N. Hospital and Research Centre Sowmya Hospital Pacific Medical Centre St. Theresas Hospital

Chennai Chennai Chennai Mumbai

Mumbai Mumbai

Hyderabad Hyderabad Hyderabad