Industry Voice

Private Healthcare: Growth Unlimited

The transformation of healthcare has been so phenomenal that patients from all over the world, even from developed countries, choose to come to India

The booming healthcare sector in India is set to scale even greater heights in the coming decades and is currently poised at a transition point from where we can reflect on the past drivers and the current shape of this industry and what it promises in the times to come.

Vibrant Economy Fuelling Healthcare Spending in India

Next to China, India has recorded one of the highest GDP growth rates, in the last few years. The Indian economy has grown by eight per cent (average real GDP growth rate) during the period 2004-2007. This is fuelled by high growth rates reported from the booming services sector (which accounts for 55 per cent of GDP) and various manufacturing industries (accounting for 28.4 per cent of GDP) along with a favourable global economy. Goldman Sachs estimates that the Indian economy is likely to grow at five per cent annually for the next 45 years and it is the only BRIC country (Brazil, Russia, India, and China) that will sustain this growth during this period. This rapid growth in the Indian economy has resulted in higher disposable incomes which in turn are reflecting in the higher spending on healthcare. The total expenditure on health per capita in India has increased from $19 in 2000 to $36 (at average exchange rates) in 2005. This incremental spending per capita was largely accounted for by private spending rather than public (government) spending (per capita spending by government increased from $ 4 to $ 7 during the same period). Of note is the fact that among the BRIC countries, India has the highest private expenditure on health as per cent of total expenditure on health and most of this is out-of-pocket expenditure currently. The increasing disposable incomes and thus the increased healthcare spending, coupled with the rise of chronic diseases are the key drivers of the healthcare sector in India which is rapidly expanding and transforming. Over the years, the transformation of this sector has been so phenomenal that patients from all over the world, even from developed countries, choose to come to India to avail of its efficient and cost-effective medical services- quite far from the scenario when the Indian elite traveled to developed countries in search of medical consultation and services that could not be found here in India. The healthcare sector is well supported by the presence of a well-established pharmaceutical industry, which is widely recognised globally because of its low-cost and high quality drugs. Various sources value the Indian healthcare market at $ 35 billion and estimate the market to grow to nearly $ 75 billion by 2012. Much of this growth would be facilitated by the private healthcare providers during this period.

A Paradigm Shift

Inadequate public health infrastructure and shifting disease patterns have led to the growth of private healthcare providers in India.

In addition, there is a great rural-urban divide in terms of access to quality healthcare facilities, much of the population resides in rural areas but the better healthcare facilities are located largely in urban areas. This is further proven by the fact that only 25 per cent of the Indian population has access to allopathic medicine which is mainly practiced in urban areas. With the rapid economic development, increasing urbanisation and the rise in living standards, there is a shift in the disease profile from communicable diseases to chronic or lifestyle-related diseases. However, the inadequate public infrastructure could not cater to the changing disease profiles in the Indian population and this has led to the rapid establishment of private healthcare services in the last decade.

Emergence of Corporate Hospitals in India

Until the 1980s most of the hospitals in India were either run by the government or by private charities and trusts. The concept of corporate hospitals has come into existence with the advent of Apollo Hospitals Enterprise Limited as a public company in the year 1979. The 'corporatisation' of hospitals gained momentum only during early 1990's with the liberalisation of the Indian economy.

In 1991, there was a cut in budgetary allocation for healthcare by the central government which crippled the development of rural health infrastructure. However, this approach of the Government seems to have been favorable for the establishment of private hospitals in India. Further, in 1994, the Government created a list of private hospitals that could be used to avail specific services that were not available (or whose availability was delayed) in Government hospitals or healthcare facilities, as a supplement to the Central Government Health Scheme (CGHS). Currently, many of the State Governments are also reimbursing the cost of services availed in selected private hospitals, under various schemes. This indicates that the Government would look at the private sector to fund the development of quality secondary and tertiary healthcare facilities. The liberalisation of foreign investment policy in January 2000, allowing Foreign Direct Investment (FDI) through automatic route in hospitals in India and mobilisation of capital through other forms like American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), upto 49 per cent, have stimulated the establishment of corporate hospitals. Some of the examples of the hospitals established through the FDI route include Apollo Gleneagles, Columbia Asia and Max Healthcare. Opening up of the insurance market for private players in 2000 was a major initiative by the Government that will further drive the growth of corporate hospitals in the long run. Later in 2002, the Insurance Regulatory Development Authority (IRDA) allowed Third-Party Administrators, which made medical insurance more attractive with cashless hospitalisation. De-tariffing of general insurance in 2007 that allowed creation of customised medical insurance products further accelerated the growth and enhanced the acceptance of medical insurance in India.

The Decade of Network Hospitals and Medicities (2001 - 2011)

This decade is slated for increased activity in the 'corporatisation' of hospitals in India. Corporate hospitals are focusing on a pan-India basis to have economies of scale in their operations. Most of the corporate hospitals have focused on the hub and spoke model of networking and some players like Apollo Hospitals have a dual, 'horizontal-cum- vertical' model that constitutes wider presence across the country and also vertical integration in terms of its healthcare service offerings, attempting to cover the entire spectrum of services. This decade is likely to see the rise of leading corporate hospitals as major players because of the large expansion plans that are in place. Currently, the Apollo hospitals network includes about 26 hospitals while Fortis Healthcare runs 13 hospitals and 16 satellite centres and Wockhardt has 12 hospitals. There is an emerging concept of medical cities and 'hospotel.' While medicities are mainly focused on the opportunity thrown-up by medical value travel by attempting to provide all the possible healthcare services at a single location, hospotels include hotels within the hospital campuses.

Financing the Booming Healthcare Sector

The booming healthcare sector is in an expansion mode currently and several financing opportunities are available to discerning investors. Apart from the promoter investments, the major players are exploring innovative financing options like joint ventures, franchisees or infusion of funds through Private Equity (PE), financial institutions and through FDI routes. Private equity firms are finding the Indian hospital sector more attractive (which is showing unprecedented growth and is marked by increasing demand for quality infrastructure) compared to the developed countries and even other emerging markets like China and Brazil. PE firms like Global Healthcare Investments and solutions (GHIS), ICICI ventures (through I-Ven Medicare) and evolvence India Life Sciences Fund establishing India specific healthcare funds amounting to $500 million, $250 million and $150 million respectively underlines the attractiveness of this segment. Interestingly, one of the private equity firms, Bluewater International Investment has plans of investing Rs 500 crore for a multi-specialty hospital set-up in India and Ajay Piramal Group, one of the leading players in the Indian pharmaceutical market has launched a PE fund of $200 million focusing on the Indian healthcare market. The other PE firms who have infused funds into the sector are Apax Partners, Chrys Capital, Trinity Capital, IFC, George Soros, Group Limagrain, etc. Some of the notable PE investments in the last few years are listed in the table below. After failure of its IPO to raise Rs 800 crore, Wockhardt Hospitals is looking out for PE investment to fund its proposed 11 brownfield and six greenfield ventures so that its total network of hospitals reaches 32 by 2010.

Growth Drivers

Globally the vibrancy of the healthcare system is associated with the penetration of health insurance as it provides the funding for health costs. This is quite evident from markets like the US, where private spending is high compared to public spending.

Health insurance premium collections in India increased by 55 per cent during 2007-2008 and touched Rs 5,133 crore ($1.2 billion). In fact, health insurance is currently the single largest business segment (after motor insurance) in the non-life insurance sector. With a share of 24.3 per cent, New India insurance is the largest player in the health insurance segment, followed by ICICI Lombard with 17.7 per cent of market share. The other leading players are Bajaj Alliance, Royal Sundaram, IFFCO Tokio, Reliance General Insurance.

India is becoming increasingly recognised as a low cost but good quality healthcare services destination, taking share from other established medical tourism destinations such as Singapore and Thailand. Currently, patients from about 55 countries are treated in Indian hospitals. While most of the patients are from neighboring countries (Sri Lanka, Nepal, Bangladesh, Afghanistan and Pakistan), many are from countries like UK, the US and the Middle East. This is because of the significant cost differentials in tertiary care services and quick access to these facilities in corporate hospitals.

Challenges

Despite the galloping pace of the healthcare sector, there remain many obstacles in its path towards greater growth. Some of the challenges being faced by corporate hospitals include, low penetration of health insurance, the non-availability of required medical staff at all levels, and the difficulty of getting land (and its exorbitant costs) in big cities. While foreign players are allowed to gain direct entry into the Indian hospital sector, there are still factors that limit foreign direct investments into the Indian healthcare sector.(see table).

The Way Forward

The Indian healthcare sector's fortunes may replicate the success story of the Indian IT industry. India's strength lies in its vast clinical resources, available at a fraction of the costs in other developed countries. Patients from about 55 countries are being treated in Indian hospitals. More than 5,000 international patients visit Apollo Hospitals and Fortis healthcare annually. However, despite the inflow of investments in this sector, the demand-supply gap is huge, indicating its massive scope for growth. According to a study by CII-McKinsey, there is an additional requirement of 750,000 beds to meet the increasing demand for in-patient services by 2012 (for a hospital bed to population ratio of 1.9:1000). For creation of such infrastructure an investment of about Rs 1, 000 - 1,400 billion (US$ 24 - 34 billion) would be required by 2012 and nearly 80 per cent of this investment has to come from the private sector. This is just catering to the urban populace. If the healthcare facilities are to be made accessible to more people, the next step in expansion would be to set-up private hospitals and healthcare facilities in tier II and tier III cities and towns of India. Such a scale of healthcare facilities' network would need creation of better infrastructure for increased access to these locations. Hence, that step may take a few decades to be realised.

The writer is Senior Consultant Datamonitor, India
Email: vgunnam@datamonitor.com