New Delhi: Last year, brothers Malvinder Mohan Singh and Shivinder Mohan Singh sold their cash-strapped hospital chain, Fortis, for around Rs 4,000 crore. This year, a majority stake in Max Healthcare was sold in a multi-crore deal, bringing the chain out of founder Analjit Singh’s control. India’s top cardiologist, Dr Naresh Trehan, is also reportedly looking for an exit from his super-speciality hospital chain, the Gurugram-based Medanta.
Despite a huge demand in India for private healthcare providers to set up new hospitals, the families owning well-established chains are either looking for buyers or have already sealed big-ticket deals to wash their hands of the business.
According to rating agency ICRA, the total value of mergers and acquisitions in the hospital sector in the financial year 2018-2019 posted a record rise of 155 per cent, totalling Rs 7,615 crore — the highest in over five years — against Rs 2,991 crore in financial year 2018.
Why hospitals are on sale
India’s healthcare sector is in poor shape: The country has less than one hospital bed for every 1,000 people, way below the World Health Organization (WHO) benchmark of 3.5 beds.
But industry insiders say the existing private players are feeling the heat of shrinking profit margins driven by a slew of regulatory actions such as caps on prices of cancer drugs, cardiac stents and knee implants that often include massive margins for hospitals.
“Gone are the days when hospitals boasted of decent profits. After years of growth in revenues till FY17, the hospital sector experienced diminishing returns in FY18 and FY19,” said Dr Aashish Chaudhry, the managing director of Aakash Healthcare Super Speciality Hospital, Dwarka, who also operates the well-known coaching chain Aakash Institute.
“Any stable corporate hospital should have EBIDTA (earnings before interest, tax, depreciation and amortisation, a measure used to gauge a company’s current operating profitability) in the range of 12 per cent to 18 per cent,” Chaudhary added. “But EBIDTA is decreasing, there are low margins, there has been an increase in the bankruptcy rate of private hospitals, with increased defaulters in loan payment, and closure of new hospitals.
“It is not the ideal time for any new hospital to come up unless the brand equity of the clinicians on board has a pied-piper effect,” he said.
Dr Girdhar J. Gyani, director general of the Association of Healthcare Providers, India (AHPI), which represents 2,500 speciality and 8,000 smaller hospitals across India, echoed the view.
“Earlier, hospitals had an EBIDITA of around 20-25 per cent, which has now come down to single digits,” he said. “Blame the regulatory pressures that have curtailed the margins.”
The burden of government healthcare schemes is also eating into profits, industry experts said.
“Schemes like Ayushman Bharat have drastically reduced profits of healthcare service providers,” said Chaudhary.
Ayushman Bharat and other government initiatives like the Central Government Health Scheme (CGHS) and Employees’ State Insurance (ESI) are aimed at sparing beneficiaries out-of-pocket expenses on quality medical care, which can be deeply expensive in private establishments.
However, insiders told ThePrint that government reimbursement is driven by a price list that is about 11 to 15 per cent less than the costs of a procedure/surgery.
“The government needs to understand the financial sustainability of hospitals,” said Gyani. “The market has a fear that no new investment will come in and even the hospitals that are running could go on sale or get shut.”
ThePrint reached Fortis and Medanta for comment through email but there was no response. Max Healthcare was unable to comment due to the absence of their spokesperson.
Who are the buyers and why are they buying?
Over the last four years, the exit of founding families has seen several international investment firms take the reins of Indian hospitals as promoters.
For instance, American investment firm TPG Capital and Singapore-based Temasek, which back Indian hospital chain Manipal, are now reportedly trying to buy Trehan’s Medanta.
Another leading Indian hospital firm, Radiant Life Care Private Limited, which has acquired Max Healthcare, is backed by American investment firm KKR.
IHH Healthcare, a Malaysian-Singaporean private healthcare group that is Asia’s largest, bought Fortis last year.
Hyderabad-based super-speciality Continental Hospitals and Global Hospitals was also acquired by IHH Healthcare.
In 2016, Hyderabad-based Care hospitals were acquired by private equity firm Abraaj Group of Dubai.
Despite the recent underperformance of the sector, there is a good appetite for quality healthcare resources among reputed international investors, experts said.
“While the industry has been facing a challenging phase over the last two years, we believe that the worst is behind the sector and performance is likely to improve from hereon, sans any additional regulatory measure,” said ICRA assistant vice-president Kapil Banga.
“The cost of healthcare services in India is competitive and their quality… good, which creates large opportunities from a medical tourism perspective as well,” he added.
How investment firms help
According to industry insiders, investment firms help optimise operations in a sector that relies on heavy cash investment.
“The hospital business is phenomenally capital-intensive with high real estate prices and medical equipment costs,” said a senior official working with a global consultancy involved in performing feasibility studies with the investment firms.
“These investment firms are experts in strategising plans to reap the maximum return. They start by fine-tuning the policy and processes,” the official added. “They invest in innovative techniques to make healthcare delivery more efficient and cost-effective.”
Establishing a hospital requires a long-term uninterrupted supply of funds. According to insiders, the future is going to be tough for private hospitals if they do not get three things right — enough capital, huge scale of business and a new skill set.
“In the future, we are likely to see changes in the hospitals’ billing patterns, treatment in packages format for the customers and increased used of data analytics to reduce wastage of resources,” said Banga of ICRA.
“Indian hospitals should come up with innovative methods to cut costs, increase revenue by working on procurement efficiencies, using data analytics, and modern management techniques,” the senior official quoted above added.