May 2012
Indian Healthcare Sector: A Galore of Scope and Opportunity
CONFIDENTIAL
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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
• Revenue Drivers for Tertiary Hospitals
• Operating Models
Opportunities and Growth Strategies
• The Unmet Need
• Opportunities
• Growth Strategies
• Building Functional Efficiencies
Risk Factors and Mitigation
The Way Forward
About MEGStrat Consulting
3
2
4
20
22
27
32
9
29
3 3
• 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, India’s
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
4
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.
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
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
Quality and Affordability Levels
There is a large pool of well-
trained medical professionals in
the country
Compared to countries in the
West and Asia, India has a
comparative cost advantage
Regulatory Support
Government of India aspires to
develop India as a global
healthcare hub
High level of effective policy
support in the form of reduction
in exercise duties and higher
budget allocation for the
healthcare sector
0
50
100
150
200
250
300
2005 2006 2007 2008 2009 2010 2012E 2020E
23 34 38 41 46 50
79
280
(USD
Billion)
5
Industry Revenues
Source: MEGStrat Analysis, IBEF, KPMG
71%
13% 9%
4%
3%
Hospitals
Pharmaceuticals
Medical Equipments and Supplies
Medical Insurance
Diagnostics
3
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
Businesses and laboratories that offer analytic or
diagnostic services including
body fluid analysis
Medical Equipment and
Supplies
Establishments primarily engaged in manufacturing
medical equipment and
supplies, such as surgical, dental,
orthopedic, ophthalmologic, and laboratory
instruments
Medical Insurance
Health insurance that cover an individual’s
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.
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
the sector.
6 Source: MEGStrat Analysis, IBEF
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 under-
penetrated 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.
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.
0%
2%
4%
6%
8%
10%
12%
14%
16%
USA Brazil UK China India Global
15.2%
8.4% 8.7%
4.3% 4.2%
8.3%
% o
f G
DP
Spending as a % of GDP (2008)
India’s healthcare spend is significantly lower when
compared to the global, developed and other similar
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.
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.
68%
32%
Private
Public
Indian Healthcare Spending(2008)
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.
7 Source: MEGStrat Analysis, WHO
3
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
UK USA China Brazil India Global
83%
48% 47% 44%
32%
61%
17%
52% 53% 56%
68%
39%
% o
f T
ota
l H
ealt
hcare
Spend
Public Sector Spending Private Sector Spending
Global Comparison of Healthcare Spend
0
1000
2000
3000
4000
5000
6000
7000
8000
USA UK Brazil China India Global
7164
3222
875
265 122
899
USD
Per Capita Spending (PPP)
0
1000
2000
3000
4000
5000
6000
7000
8000
USA UK Brazil China India Global
7164
3771
721
146 45
854
USD
Per Capita Spending (USD)
The healthcare spend, when
compared on public-private
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.
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.
8 Source: MEGStrat Analysis, WHO
MEGStrat Disclaimer Applicable
9
• India’s population has grown from 1,024
million 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
• India’s 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
to double from 96.4 million in 2010 to
192.7 million in 2030
Population Growth
Old Age Population
An increase in ageing population will boost the
demand for healthcare services.
10
1024
1191
1272
0.0%
0.5%
1.0%
1.5%
2.0%
500
1000
1500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Population (Million People) Population Growth Rate (%)
Population Estimates
Source: MEGStrat Analysis, US Census Bureau, IMF
• 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
Affluence Leading to Health Consciousness
GDP Per Capita (USD)
0
500
1000
1500
2000
2500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
729
1389
2226
Rising affordability
and attention on
quality of life to
increase
healthcare
expenditure
0
5
10
15
20
25
30
35
40
45
2004 2005 2006 2007 2008 2009
27 30
34
42 45 45
Healthcare expenditure per capita (USD)
11 Source: MEGStrat Analysis, WHO, IMF
• India is experiencing fast growth in number
of people suffering from lifestyle related
diseases
• Percentage of population suffering from
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-
specialty hospitals
• This will also lead to increasing margins for
hospitals, since these are the high margin
end of disease spectrum
Accelerating Incidence of Lifestyle Diseases
0.0%
2.0%
4.0%
6.0%
Cardiac Diabeties Obesity Cancer
3.1% 3.0%
1.3%
0.3%
4.9%
3.7%
2.7%
0.3%
Perc
enta
ge o
f Popula
tion
2005 2015
Increase in Lifestyle related Ailments
Ailment-Wise Case Mix (2008)
6%
4%
3%
2%
5%
3%
4%
12%
10% 8%
43%
Cardiac Oncology
Diabetic Orthopedic
Gynecology Neurology
Urology Gastro intestinal
Accidents Fever
Others
12 Source: MEGStrat Analysis, Edelweiss Research
3
• 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 2006-
2007 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
Rising Health Insurance
Health Insurance Penetration
Gross Health Insurance Premiums
0
500
1000
1500
2000
2500
2006-07 2007-08 2008-09 2009-10 2010-11
733.9
1215.3 1320.5
1533.2
2095.3
USD
Million
• 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).
India’s 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
Medical Tourism: Lower Costs enable Growth
Medical Tourism Industry Size
0
400
800
1200
1600
2000
2400
2010 2015
350
2200
USD
Million
Healthcare Cost Differential
Treatment Cost (USD) India USA Singapore India cost as % of USA
Heart surgery 4,800 100,000 15,312 4.8%
Heart value replacement 4,800 160,000 13,000 3.0%
Bone marrow transplant 30,000 250,000 150,000 12.0%
Liver transplant 69,000 300,000 140,000 23.0%
Knee replacement 5,000 48,000 25,000 10.4%
Hip replacement 5,200 38,000 12,000 13.7%
13
0.08%
0.10% 0.11%
0.12% 0.12%
0.00%
0.02%
0.04%
0.06%
0.08%
0.10%
0.12%
0.14%
2006-07 2007-08 2008-09 2009-10 2010-11 %
of
Nom
inal G
DP
Sources: MEGStrat Analysis, IRDA, WHO, Morgan Stanley Research, PUG Research
3
•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
Boost to the private sector
•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
Pushing investments in rural areas
•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%
Tax incentives
•Incentives and tax holidays are being offered to hospitals and dispensaries offering health travel facilities
Incentives in the medical tourism industry
•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
Drug and Cosmetic Act, 1940
•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
Bio-Medical Waste (Management & Handling) Rules, 1998
•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
Clinical Establishment Bill, 2010
•NABH accreditation of facilities confirms quality assurance and its standards focus on patient safety and quality care
National Accreditation Board for Hospitals and Healthcare(NABH)
•DGCI formulated guidelines in July 2006 for the import and manufacture of medical devices
Drug Controller General of India (DGCI)
•FDI in hospitals is permitted up to 100% under the automatic route
Foreign Ownership
14
3
Focus
On S
maller
cit
ies
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
0
100
200
300
400
500
Metros Tier I Cities
Tier II Cities
Tier III Cities
454.5
340.9
204.5
113.6
Capex per Bed (‘000 USD)
-30%
-20%
-10%
0%
10%
20%
30%
Year1 Year2 Year3 Year4 Year5
Metros Tier I Cities Tier II Cities Tier III Cities
Operating Margins of Hospitals
IRR in Hospitals
0%
10%
20%
30%
Tier-I Tier-II Tier-III
13%
21%
26%
15 Sources: MEGStrat Analysis, PUG Research
3
• 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 lifestyle-related diseases, which is resulting in increased demand for specialized care
Shift from communicable to lifestyle diseases
• Many healthcare players such as Fortis and Manipal Group are signing management contracts to provide an additional revenue stream to hospitals
Management Contracts
• 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
Evolution of telemedicine
• 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
Expat Doctors
• 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
Holistic Well-Being
16
3
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 Global Healthcare Sequoia Capital and Elevar Equity 3.3
Jan-11
Integrated Health and Healthcare
Services Halcyon Finance & Capital Advisors 44.4
Dec-10 BSR Super Speciality Hospitals Aureos Capital 10
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 23
Sep-07 Apollo Hospitals Enterprise Apax Partners 104.3
Mar-07 Fortis Healthcare India Trinity Capital 19.7
Private Equity Deals
17 Source: MEGStrat Analysis
Recent Strategic Deals
Date Target Acquiror Deal Value
(USD Million) Deal Synopsis
Jul-11
Indian Health
Organization Pvt
Ltd
Aetna Inc N.A.
Supported Aetna in gaining entry into the Indian market
and getting access to 80,000 customers, 3,000 doctors,
clinics and wellness programmes.
Jun-11 Max Healthcare MAX India 31.2
The deal gave an exit to Warbug Pincus, which had
invested in the Company in 2004 and 2005 through two
tranches.
Apr-11 Super Religare
Laboratories
Fortis
Healthcare
India
178.5
Integrated operations of a hospital company with a
diagnostic chain. SRL has a strong network of laboratories,
wellness centers and collection centers. Fortis has been
looking for acquisitions in new specialties to augment its
current operations.
Jan-11 Dr Agarwal's Eye
Hospital
Dr Agarwal's
Health Care 2.0
The acquirer (promoter) bought 20% additional stake in
the target via open offer to increase promoter stake to
75%.
Aug-09 10 Wockhardt
Hospitals
Fortis
Healthcare
India
185.2
The acquisition costed USD 107,000 per bed, against a
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.
18
0
2
4
6
8
10
12
14
16
2006 2007 2008 2009 2010 2011
Inbound
Domestic
India Healthcare M&A Activity
Sources: PwC, MEGStrat Analysis
MEGStrat Disclaimer Applicable
19
3
Revenue Drivers
Other businesses
Other revenue generating streams such as pharmacies
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
Inpatient share
Typically, inpatients generate ~75.0% of hospital revenues
Average length of stay (ALOS)
First 2-3 days generate maximum revenues from a patient
Average revenue per operating bed (ARPOB)
ARPOB depends on casemix, type of procedures, utilization of
equipment, and pricing
Corporate tie-ups
Result in long-term contracts, however, increase receivable days
20 Source: Industry Research
3
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
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
Hub
Spoke
Spoke
Spoke
Spoke
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 6 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 3 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 1
Parameter 2008 2018 2028
Additional Beds Required 1.1 million 3.1 million 2 million
Bed/1000 population ratio 0.7 to 1.7 4 5
The Requirement
Parameter Annual Production (2011) To fill the gap
Physicians 30,558 993,500
Nurses 114,218 2,510,250
Inadequacy of Public Sector: An opportunity for Private Sector
• Healthcare has received inadequate attention from the
government in India
• 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% of total
healthcare costs, compared to a 60.5% globally
• 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
Infrastructure / services % 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%
Health Infrastructure in Villages
23 Sources: MEGStrat Analysis, IMF, Intel Case Study, KPMG
3
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
• High cost differential in India allows for outsourcing of Pathology and Laboratory tests by International hospital chains
Diagnostic & Pathology Services
• Provides rural areas access to better quality healthcare
Telemedicine
• 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
Healthcare infrastructure
• 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
Contract Research
• The Indian medical tourism industry is poised to grow at a CAGR of 58.3% into a USD 2.2 billion industry by 2015
Medical tourism
• 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
Health Insurance
24
3
Growth strategies
Organic growth
Greenfield projects
Increase in ARPOB & occupancy
Reduction in average length of stay
Inorganic expansion Acquisition of existing
hospitals
Hiring off non-core assets
Hive-off real estate assets to make
operations asset-light
Diversification across the value chain
Build/ acquire businesses such as
pharmacies, & diagnostics labs
Growth by addition of number
of operating beds
Revenue growth by increasing
operating efficiencies
Buy-outs or through operating
& management contracts
Cash infused by sale of real
estate assets, and increase in
ROA
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
25
3
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.
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MEGStrat Disclaimer Applicable
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Risk Factors Mitigation Long gestation periods Hospitals require significant upfront investments and have a long payback period. This makes investments in the sector less attractive
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.
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MEGStrat Disclaimer Applicable
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High investments
in a growing
market, along with
openness to
innovate endorse
well for the sector
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.
2. Encouraging current initiatives on PPP’s 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.
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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. Custom’s 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.
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Enabling [M]easurable [E]ffective [G]rowth Strategies
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