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Understanding the looming financial distress for private hospitals in India

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Prashant Khadayate, Practice Head – Healthcare, GlobalData shares his views on how medical tourism, in future, amid COVID-19, will badly hit private hospitals

Amid COVID-19 crisis, medical tourism industry and private hospitals are going through rough patch. The impact on medical tourism industry has further worsened the financial distress for private hospitals which are already affected by a decline in patient numbers in the OPD (Outpatient department) and the deferment of elective surgeries.

 The tremendous growth of medical tourism in India

According to Ministry of Tourism, Government of India, the foreign tourist arrivals (FTAs) in India on medical visas during 2017 and 2018 were estimated at .49 million and .64 million respectively, registering a positive growth of 30 per cent. This growth rate over 2017 could also be attributed to easier norms for medical visas. In 2018, 322,705 patients were from Bangladesh followed by Iraq (59,288), Afghanistan (46,787), Oman (27,501), Maldives (13,589) and Yemen (11,856). Overall, international patients’ arrival in India has grown at a CAGR of 41 per cent for the period 2015 – 2018.

Approximately, 90 per cent of the patients’ arrivals were from South Asia (63 per cent), West Asia (17 per cent) and Africa (eight per cent). Within South Asia, 92 per cent of the patients’ flow is from Bangladesh and Afghanistan; 24.2 per cent of the overall arrivals from West Asia were for ‘Medical Purpose’ followed by Africa (14.6 per cent).

The cost of healthcare services in India is competitive. The presence of qualified and well-trained healthcare practitioners, along with world-class facilities at affordable cost, has made it a popular destination for quality and cost-effective healthcare. The country is further strengthening its position through alternative treatments like Ayurveda and Yoga.

Cardiac and orthopaedic treatments have been the traditional choice for the patients visiting India. However, cancer treatments and transplants and other high-end surgeries like neurosurgery, spine surgery and bariatric surgeries are gaining importance as well.

NITI Aayog (National Institution for Transforming India), a Government of India policy think-tank and Ministry of Commerce had recently included medical travel industry as one of the 12 ‘champion sectors’ they wished to promote under the services promotion council. NITI Aayog has identified it as one of the major growth drivers and a major source of forex earning. The government is also taking various steps to promote medical tourism. Popular ones are through roadshows and films.

Private hospitals already under financial distress

Indians are highly dependent on private hospitals for healthcare facilities. Approximately, 75 per cent of all hospitals in India are run by private hospital chains and standalone players. Almost 70 per cent of total hospital beds in India are provided by private hospitals.

With the majority of healthcare services being provided by private hospitals, it is indeed considered to be a crucial industry. However, private hospitals are facing financial distress due to shrinking profit margins amid reduced margins on implants, drugs and consumables which used to provide huge margins earlier. This is further deepened by the burden of government healthcare schemes like Ayushman Bharat, Central Government Health Scheme (CGHS), and Employees’ State Insurance (ESI). In parallel, the cost is rising due to rents, wages and other factors. Overall, EBITDA has now reduced to single-digit versus double-digit, a few years back.

In addition to consolidation of business, financial distress could also be one of the reasons for divestment of stake in hospital chains like Fortis and Max Healthcare, whereas Medanta was looking to divest its stake to Manipal Hospitals. However, the deal between Medanta and Manipal Hospitals could not reach its conclusion over valuation issues in August 2019 and discussions were called off in-between. Medanta posted sales of Rs 1,278 crores in 2017 compared to Rs 1,384 crores in 2016 and achieved profit after tax margin at four per cent in 2017 compared to 13 per cent in 2016. However, private equity and international investors interest in the hospital sector shows that the long-term outlook is positive and intact with strong fundamentals of the sector.

COVID-19 outbreak drastically impacts medical tourism and likely to aggravate grim position of private hospitals

The COVID-19 pandemic has drastically affected the travel industry globally due to flying restrictions and many countries are under lockdown to control the spread of COVID-19 infection. Large hospitals in India generate 10–20 per cent revenue from international patients. Moreover, the price bands for international and Indian patients are different with international patients considered to be more profitable. Considering the COVID-19 situation in India and other parts of the world, it will at least take six months before we can expect significant activity in the medical tourism industry.

Private hospitals were already affected by low financial performance even before the COVID-19 outbreak. Now, the wave has further impacted hospitals due to fall in the outpatients’ volume in the wake of lockdown. Moreover, elective surgeries have been deferred which has further aggravated the situation along with low bed occupancy rate which is expected to be less than 25 per cent. Outpatient department (OPD) services and elective surgeries are the two major revenue streams for hospitals. Various hospitals have seen a revenue drop of 50–80 per cent since March 2020.

In parallel, overall expenses amid COVID-19 outbreak have increased due to investments in equipment, consumables and other resources to ensure preparedness against coronavirus infection. Seeing the revenue loss and the additional investments, it is making overall private hospitals business highly unstable financially as 70-80 per cent cost is fixed in hospital business and it will further lead to more challenging times in the near future.

Additional factors to negatively impact private hospitals

Private hospitals will lose clinical trial site income. Prices of basic sterile PPE (personal protective equipment) and cleaning products have risen. Moreover, prices of drugs requiring imported API (even generics) or final dosage form have risen due to an increase in the logistic costs decreasing the profit margin.

Government support required to improve private hospitals’ sustainability

Despite unfavourable situation, private hospitals need to pay wages to staff, utility bills, rental and interest on working capital. Therefore, it is critical that the government works with the industry to improve the financial stability of private hospitals and provide confidence to the industry players through working on a long-term plan to make it sustainable. Private hospitals have urged the government to provide six to nine months’ moratorium on all working capital, principal, interest payments on loans and overdrafts, bringing in liquidity and allowing for business continuity.

The government will also need to look at the medical tourism industry problems during these difficult times. Post lockdown and on recommencing of international flights, it is important to reduce restrictions on international patients coming to India with adequate safety measures to ensure that such patients don’t spread COVID-19 infection. Medical tourism industry is important from the forex earnings perspective for the economy and considered to be lucrative for private hospitals as well. Hence, every attempt should be made to minimise the losses post COVID-19 outbreak.

Healthcare facilities will continue to expand in India and private hospitals will continue to play a wider role in delivering healthcare. Moreover, the industry needs to realise that it is not possible to make similar profits which they made a few years back. Therefore, private hospitals will also need to work on three fronts – controlling cost, increasing patients’ inflow, and usage of technology to improve the overall patient services. It is equally important that private hospitals look at the wider opportunities for the expansion as healthcare infrastructure in India is still weak and private hospitals can partner with the government in improving the healthcare infrastructure by setting up hospitals or clinics in under-penetrated parts of the country with respect to healthcare services and in return, this will further help in expanding their patient base.

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