Hospitals and Healthcare
The Healthcare delivery Industry -
According to the Global Health Expenditure Database compiled
by the World Health Organisation (WHO), India’s current expenditure on
healthcare was 3.5% of GDP in 2018. India’s real GDP in fiscal 2019 was Rs
139.8 trillion (constant fiscal 2012 prices). Accordingly, India’ current
healthcare expenditure during fiscal 2019 is estimated at approximately Rs 4.9
trillion. India trails not just developed countries such as the United States
(the US) and the United Kingdom (the UK), but also developing countries such as
Brazil, Nepal, Vietnam, Singapore, Sri Lanka, Malaysia, and Thailand in terms
of healthcare spending as a percentage of GDP as of 2018.
India with 15/10000 beds while other developing countries
like China 43, Vietnam 26 etc. Healthcare delivery industry is estimated to grow
17-18% over next four years with renewed impetus from the PMJAY.
CRISIL estimates that healthcare delivery market, consisting
of hospitals and diagnostic centres account 71%(61+10) of the pie, followed by
domestic pharma (20%) and medical devices (9%).
Barring the momentary setbacks in fiscal 2021, CRISIL
Research estimates the Indian healthcare delivery industry to post a healthy
15-17% CAGR between fiscals 2021 and 2025, driven by pent up demand coming back
onto the system, strong fundamentals, increasing affordability and Ayushman
Bharat Yojana and reach ₹ 7.07 trillion in fiscal 2024.
CRISIL Research’s rankings based on the states’ spending towards healthcare as a percentage of its total spending - Kerala fares as the leading state in India in terms of both better health parameters as well as higher focus on healthcare spending. Andhra Pradesh and Telangana also fall in the quadrant of better health parameters ranked 4th and 9th, respectively, based on NITI Aayog’s report. It shows the scattered development and need for the betterment of hospitals across the states –both qualitative as well as quantitatively.
In India, healthcare services are provided by the government and private players, and these entities provide both IPD and OPD services. However, the provision of healthcare services in India is skewed towards the private players (both for IPD and OPD). This is mainly due to the lack of healthcare spending by the government and high burden on the existing state health infrastructure. The share of treatments (in value terms) by the private players is expected to increase from 58% in fiscal 2021 to nearly 73% in fiscal 2025, the share witnessing a slight dip in fiscal 2021.
Classification of hospitals based on services offered
Primary care/ dispensaries/ clinics
Primary care facilities are outpatient units that offer
basic, point-of-contact medical and preventive healthcare services, where
patients come for routine health screenings and vaccinations. These do not have
intensive care units (ICU) or operation theatres.
Secondary care
Secondary care facilities diagnose and treat ailments that
cannot be treated in primary care facilities. These act as the second point of
contact in the healthcare system. There are two types of secondary care
hospitals - general and specialty care.
General secondary care hospitals - These hospitals are
approached for common ailments, and attract patients staying within a radius of
30 km. The essential medical specialties in general secondary care hospitals
include: internal medicine, general surgery, obstetrics and gynaecology,
paediatrics, ear-nose-throat (ENT), orthopaedics, and ophthalmology. Such a
hospital typically has one central laboratory, a radiology laboratory, and an
emergency care department.
Specialty secondary care hospitals - These hospitals are
located in district centres, treating patients living within a radius of
100-150 km. They usually have an in-patient bed strength of 100-200, 15% of
which are reserved for critical care units. The balance is for private rather
than general ward beds. Apart from medical facilities offered by a general
secondary care hospital, specialty secondary care hospitals treat ailments
related to gastroenterology, cardiology, neurology, dermatology, urology,
dentistry, and oncology. These hospitals may also offer some surgical
specialties, but they are optional. Diagnostic facilities in a specialty secondary
care hospital include: a radiology department; biochemistry, haematology and
microbiology laboratories; and a blood bank. They also have a separate
physiotherapy department.
Tertiary care
Tertiary care hospitals provide advanced healthcare
services, usually on referral from primary or secondary medical care providers.
Single-specialty tertiary care hospitals - These treat a
particular ailment (such as cardiac, cancer). Prominent facilities in India
include: Escorts Heart Institute & Research Centre (New Delhi); Tata
Memorial Cancer Hospital (Mumbai); Healthcare Global Enterprises Ltd Oncology
(Bengaluru); Sankara Nethralaya (Chennai); National Institute of Mental Health
& Neuro Sciences (NIMHANS, Bengaluru); and Hospital for Orthopaedics, Sports
Medicine, Arthritis and Trauma (HOSMAT, Bengaluru).
Multi-specialty tertiary care hospitals - These hospitals
offer all medical specialities under one roof and treat complex cases such as
multi-organ failure, high-risk, and trauma cases. Most of these hospitals
derive a majority of their revenue through referrals.
Such hospitals are located in state capitals or metropolitan
cities and attract patients staying within a 500 km radius. They have a minimum
of 300 in-patient beds, which can go up to 1,500 beds. About one-fourth of the
total beds are reserved for patients in need of critical care. Medical
specialties offered include: cardio-thoracic surgery, neurosurgery, nephrology,
surgical oncology, neonatology, endocrinology, plastic and cosmetic surgery, and
nuclear medicine. In addition, these hospitals have histopathology and
immunology laboratories as a part of its diagnostic facilities. Lilavati
Hospital and Hiranandani Hospital in Mumbai, Medanta hospitals in NCR region
and NIMS in Hyderabad are multi-specialty tertiary care hospitals.
Revenue and cost
structure review of hospitals
The primary revenue streams of hospitals are the IPD and out-patient department (OPD) segments. Hospitals derive bulk of their revenue from IPD. Typically in most hospitals, the OPD contributes to three-fourths of total volumes; whereas, the IPD accounts for as much as approximately 70% of the overall revenue. This ratio could vary with hospitals, depending on the type of services rendered and the ailment mix.
The IPD in a hospital generally consists of beds, operation
theatre(s), intensive care unit, supportive services (such as nursing services,
pharmaceutical services, laboratory and diagnostics centres) and central
sterile and supply department. In the OPD, examination, diagnostics and day
surgeries are included.
Surgeries and diagnostics account for the bulk of IPD
revenue for most hospitals; however, the share of these verticals vary across
hospitals, based on the pricing strategies deployed and specialities offered.
However, surgical patients generate more revenue as opposed to medical
patients. Hospitals used to enjoy high margins on the consumables used.
However, after the government has capped the prices of stents and knee
implants, they have rationalized their treatment costs by charging for the
services rendered. Some hospitals have in-house facilities such as diagnostic
centres and pharmacies, while others outsource these services.
Some key terms :
Occupancy levels:
Given the high fixed costs (equipment, beds and other infrastructure),
occupancy levels need to be commensurate for a hospital to break-even. Most
large hospitals operate at over 65-70% occupancy ratio (OR).
Average length of stay (ALOS): Large hospitals usually
operate at high occupancy levels but try to keep the ALOS short, which enables
them to record higher utilization levels and ensure that more patients are
treated at the same time.
The average length of stay in hospitals (“ALOS”) is often used as an indicator of efficiency. All other things being equal, a shorter stay will reduce the cost per discharge and shift care from inpatient to less expensive post-acute settings. The ALOS refers to the average number of days that patients spend in hospital. It is generally measured by dividing the total number of days stayed by all inpatients during a year by the number of discharges. Day cases are excluded.
Regulations pertaining to price controls
The National Pharmaceutical Pricing Authority (NPPA)
regulates prices of drugs/ medicines by bringing them under the ambit of the
National List of Essential Medicines. The medical devices sector is largely
unregulated, except for those who have been notified as drugs under the Drugs
and Cosmetics Act. In February 2017, the NPPA introduced price controls for
cardiac stents – price of bare metal stents was slashed to Rs 8,000 and that of
drug-eluting stents was reduced by approximately 85% to Rs 29,600. In February
2019, however, the NPPA revised their prices upwards in line with the WPI
numbers of 4.2% (with effect from April 1, 2019). The revised price of bare
metal stents stands at Rs 8,261 and that of drug-eluting stents stands at Rs
30,800 at present.
The prices of knee and hip implants were also capped (up to
69%) in August 2017. Cobalt chromium knee implant, which was priced at Rs
158,324 was capped at Rs 54,720 (excluding GST). Implants with special metals,
such as titanium and oxidised zirconium, earlier priced at Rs 249,251 was
capped at Rs 76,600 (excluding GST).)
The NPPA’s initial intention was to bring eight new medical
device segments – all implantable devices, CT scanning equipment, X-ray
equipment, MRI equipment, dialysis machine, bone marrow cell separators,
defibrillators, and PET equipment – under the Drugs and Cosmetics Act. This
would have subjected them to registration and import licensing under the
Medical Device Rules 2017. This was to be done with effect from April 1, 2020.
However, all medical devices are expected to be brought under the scope of
regulation subsequently. NPPA may also consider capping the trade margins
instead of capping the prices of medical devices.
The Bureau of Indian Standards is in the process of
finalising quality control orders for medical devices, which will require all
medical devices to be registered with the Central Drugs Standard Control
Organisation in the first phase (of 12-18 months). After this period, they will
have to conform to the quality standards of the Bureau.
Further, some state governments (such as Karnataka, West
Bengal and Delhi) have been contemplating capping costs of medical procedures
too in addition to medical devices.
TECHNOLOGY AND HOSPITALS
Electronic health records
EHRs are designed to manage detailed medical profile and
history of patients such as medication and allergies, immunization status,
laboratory test results, and radiology images. Information stored in EHRs can
be in a combination of various formats including picture, voice, images,
graphs, and videos. Besides storing information, EHRs have the capability of
analyzing data with respect to a specific ailment, generating customized
reports, setting alarms and remainders, providing diagnostic decision support, etc.
EHRs can be shared between multiple systems allowing doctors
from various specialties and hospitals to share the same set of patient data.
This feature helps improve coordination between doctors, saves time, and
prevents redundancy of recreating medical records. EHRs allow medical histories
to be transferred quickly and accurately, thereby ensuring effective and timely
treatment. They can be secured with various privacy settings.
Radiology information system
Radiology information system (RIS) is a tool that allows
managing digital copies of medical imagery such as X-ray, MRI, ultrasound, and
associated data on a network. RIS is used by doctors to access medical imagery
data from multiple locations. It is connected to medical equipment such as
X-ray, MRI and ultrasound machines, which generate diagnosis results in the
form of images and graphs. The RIS directly captures results and feeds them to
EHRs, central databases or remote databases. RIS systems are integrated with a
dedicated picture archiving and communication modules which ensures that the
pictures are stored in a systematic manner and transferred accurately to the
intended database or recipient.
Implementation of RIS allows hospitals eliminate the need of
generating and maintaining medical imagery on expensive films. RIS enable
hospitals to store complete radiology history of patients together. This
feature allows generating detailed analytical reports on patient's medical
history.
Clinical decision support system
Clinical decision support system (CDSS) is a software
designed to assist doctors in taking decisions pertaining to the diagnosis and
treatment of patients. A CDSS is supported by a large database that has
detailed information on ailments with data aspects ranging from symptoms to
diagnosis. The database is supported by a set of rules that help generate
accurate results for the query made by the user. It also contains patient
specific information such as medical history, allergies, etc, which helps
doctors to make effective decisions on the treatment. CDSS databases are
open-ended to allow addition of information on newly discovered diseases,
procedure and medications, rectification of erroneous procedures, and updating
of patient information.
GROWTH ASPECTS –
With improving life expectancy, the demographic profile of
the country is also witnessing a change. As of 2011, nearly 8% of the Indian
population was of 60 years or more, and this is expected to surge to 12.5% by
2026. However, the availability of a documented knowledge base concerning the
healthcare needs of the elderly (aged 60 years or more) remains a challenge.
Nevertheless, the higher vulnerability of this age group to health-related
issues is an accepted fact.
According to the Report on Status of Elderly in Select
States of India, 2011, published by the United Nations Population Fund in
November 2012, chronic ailments, such as arthritis, hypertension, diabetes,
asthma, and heart diseases, were commonplace among the elderly, with
approximately 66% of the respective population reporting at least one of these.
In terms of gender-based tendencies, while men are more likely to suffer from
heart, renal and skin diseases, women showed higher tendencies of contracting
arthritis, hypertension, and osteoporosis.
Growth in household incomes and, consequently, disposable
incomes, are critical to the overall growth in demand for healthcare delivery
services in India. The share of households falling in the income bracket above
Rs 0.2 million is expected to go up to 35% in fiscal 2022 from 23% in fiscal
2017. They provide a potential target segment (with more paying capacity) for
hospitals.
Growing health insurance penetration to propel demand
Low health-insurance penetration is one of the major
impediments to the growth of the healthcare delivery industry in India, as
affordability of quality healthcare facilities by the lower-income groups
remain an issue. Health insurance coverage has increased from 17% in fiscal
2012 to approximately 36% in fiscal 2020. As per the Insurance Regulatory and
Development Authority, nearly 499 million people have health insurance coverage
in India (as of fiscal 2020), as against 288 million (in fiscal 2015), but
despite this robust growth, the penetration in fiscal 2020 stood at only 36%.
CRISIL Research sees that while low penetration is a key
concern, it also presents a huge opportunity for the growth of healthcare
delivery industry in India. With the PMJAY scheme and other growth drivers, the
insurance coverage in the country is expected to increase to nearly 46% by
fiscal 2025.
With health insurance coverage in India set to increase,
hospitalisation rates are likely to go up. In addition, health check-ups, which
form a mandatory part of health insurance coverage, are also expected to
increase, boosting demand for a robust healthcare delivery platform.
Medical Tourism
The healthcare costs in developed countries is relatively
higher than in India. India is also an attractive destination due to the
presence of technologically advanced hospitals with specialised doctors and
facilities, such as e-medical visa.
Non-communicable diseases
As opposed to the decreasing rate in communicable diseases,
lifestyle-related illnesses or non-communicable diseases (NCDs) have been
increasing rapidly in India over the past few years. The contribution of NCDs
to the disease profile has risen from 30% in 1990 to 55% in 2016. Statistics
show that these illnesses accounted for nearly 62% of all deaths in India in
2016.
As per the World Economic Forum, the world will lose nearly
$30 trillion by 2030 for NCD treatments and India’s burden from this will be
$5.4 trillion.
In 2016, of the total disease burden, the contribution of
group of risks (unhealthy diet, high blood pressure, high blood sugar, high
cholesterol and overweight), which mainly causes ischemic heart disease, stroke
and diabetes, had risen to nearly a quarter. The combination of these risks was
highest for states such as Punjab, Tamil Nadu, Kerala, Andhra Pradesh and
Maharashtra, but has increased in all other states as well. There were 38
million cases of cardiovascular diseases in 2005, which rose to nearly 64
million cases in 2015.
CRISIL Research believes that NCDs exhibit a tendency to
increase in tandem with rising income. WHO projects an increasing trend in NCDs
by 2030, following which CRISIL forecasts demand for healthcare services
associated with lifestyle-related diseases such as cardiac ailments, cancer and
diabetes to rise.
Another emerging market in the country is orthopaedics,
which currently comprises a very small proportion compared with NCDs, but has a
potential market in the country. The orthopaedics market can be classified into
four different segments, viz., knee, hip, trauma, and spine, of which the
knee-replacement market holds the biggest share, followed by trauma and spine.
Hip replacement in India is still a very small segment compared to knee
replacement, whereas it is the opposite around the world.
Lifecycle of hospitals over years showing regulatory and
operational bottle necks
Different Hospital, different specialty :
This involves further bifurcation of the specialities like
Cardiology, oncology, orthopedics etc which shows concentration and
competitiveness in specific niche. Eg KIMS cardio science vis a vis Shalby's
orthopedic etc
With withdrawl of covid, hospitals have been deleveraged and
now planning to come up with new capex cycles
Hospitals mainly earn by number of beds occupied. The
image below shows the capacity each chain has and the growth potential among
peers
The hospitals not only share niche in terms of treatments
but also in terms of geographical presence. Eg AEHL and Fortis being quite
diversified whereas KIMS and KMCHL having concentrated in geographical South of
the country. This can be a double edged sword and leaves the hospitals with how
efficient their operations are overall.
One measure to know the operational efficiency of hospital
is average Occupancy rate i.e. number of beds occupied/ total beds available
and ALOS i.e. the average number of days a patient stays and MCap to no.of
operational Beds.
Other operational ratio is the ARPP or Average Revenue per
Patient metric
Comparing financials of major hospitals :
The data shows comparison between leading hospitals in the
country
Among the peers compared above the lowest ARPOB was reported
by KMCHL (at Rs 16,200) and KIMS Ltd (Rs 18.307) however KIMS Ltd depicted an
ROCE of -22% in FY20, highest among the peers considered. KIMS Ltd is one of
the affordable hospital chains, among the multispecialty hospital chains
compared above, with an ARPP of RS 79,526. KIMS Ltd has an ARPP almost 41%
lower than the average ARPP depicted by players above.
Medanta – Global Health Care
Flagship hospital located in Gurugram, there hospitals are
located in Indore, Ranchi, Lucknow and Patna. operate five multi-specialty
clinics at DLF Cybercity, Delhi Airport, south Delhi, Darbhanga and Patna. 2,176
total bed capacity.
Revenue :
Primary
source of revenue is from IPD admission, accounting for 81.29%, 80.65% and
83.69% of the income from healthcare services in Fiscals 2019, 2020 and 2021,
respectively.
In-patient
revenue in Fiscal 2021, 62.07%, 23.07%, 8.55%, and 6.31% were paid in cash, by
third party administrators, through Central Government Health
Scheme/Ex-servicemen Contributory Health Scheme/Indian Railways, and through
others respectively.
Outstanding Litigation –
Gurugram
hospital is required to provision for 5% free beds for patients from the
economically weaker section of the society as per the land allotment conditions
in Gurugram. HUDA’s Policy Guidelines dated August 13, 2008 for ensuring
implementation of terms and conditions of allotment regarding free treatment of
patients belonging to the economically weaker section (“Policy Guidelines
2008”) and increase in the requirement
from 5% free beds to 10% free beds.
ON
MANAGEMENT
Dr.
Naresh Trehan is the
Chairman and Managing Director of the Company.He has also been appointed as the
‘Chairman - Heart Institute & ‘Chief Cardiac Surgeon’ for a period of five
years with effect from August 1, 2021. He holds a bachelor’s degree in medicine
and surgery from the Faculty of Medicine, University of Lucknow and has been
awarded a certificate in specialty of thoracic and cardiac surgery by the
American Board of Thoracic Surgery. He has been awarded the ‘Padma Bhushan’ in
2001 and the ‘Padma Shri’ in 1991 by the Government of India, and Dr. B.C. Roy
Award by Medical Council of India in 2005.
Ravi Kant
Jaipuria, as the Chairman of Varun Beverages Limited (“VBL”), one of
their Group Companies, and Ravi Batra, as the Chief Risk Officer & Group
Company Secretary (“CRO”) of VBL, received summons dated January 20,
2021 and January 4, 2021, respectively, from SEBI requesting them to appear
before the Investigating Authority to investigate certain matters with respect
to certain dealing of securities of VBL.
Contingent Liabilities – 10.814Cr. (Income Tax matters)
Numbers
Revenue from
operations 1446.74 Cr for March 2021, 1500.42Cr. for March 2020, 1455.80Cr for
march 2019
Working
Capital – 20-30% of the revenue
Profit after
tax 28.805, 36.32, 51.30 Cr. For march 2021,2020 and 2019 respectively.
Operating
profit before working capital changes 221.5 Cr. (March 2021)
Cash flows
from operations - 258.16 Cr. For 2021, 231.24 Cr for 2020 and 233 Cr for 2019.
CFO/PAT –
258.16/28.805 = 8.9 (FY2021)
Employee
expense = 466.33 Cr. i.e. approximately 1/3 of the revenue.
Intangible
Assets (Software mainly) increased from 2.5Cr in 2018 to 8.5Cr in 2020.
Cost of
materials consumed 24.11% of total total expenses for Fiscal 2021
IPO Objective– OFS + Fresh Issue for repayment of 375/765.5 Cr of debt.
Key Risks
1.
Covid and other related disruption - In Fiscals 2019, 2020 and 2021, the share of
total income from healthcare services derived from international patients was
11.79%, 11.22% and 3.95%, respectively. Any disruption affecting international
travel can distort revenues quite heavily.
2.
High Attrition - a team of more than 5,300
medical professionals, including over 1,100 doctors and over 3,300 nurses and
850 paramedical personnel. The attrition rate for on-roll and retainer doctors
was 26.79%, 33.79% and 27.80% for Fiscals 2019, 2020 and 2021, respectively.
3.
High operating costs – Complex machinery and
trained manpower which means high operating costs. medical equipment amounted
to ₹3,053.12 million, representing 24.24%, of
property, plant and equipment.
4.
Concentrated presence (in North India)
5.
unforeseen legal, regulatory, contractual, labor
or other issues.
6.
Increased competition in the healthcare industry
could be caused by
a.
existing or new hospitals
b.
development of alternative health care delivery
systems
c.
nursing homes, rehabilitation and therapy
centers, physician group practices.
d.
the development of new health care cost cutting
initiatives
e.
pricing pressure as well as challenges in talent
acquisition.
7.
Failure
or malfunction of our medical or other equipment
Thesis – Well established brand, Reputed doctors, North dominated markets, operating leverage stretches the terminal value.
Conclusion
Major expenditure of hospitals include doctor costs,
followed by consumables and operating costs.
Hospitals are coming up with salary + equity models so that
doctors too have a skin in the game and improve the overall efficiency of
the institution
Coming up of affordable healthcare, increasing insurance
penetration and various schemes coming up by the government has made hospital
industry a hot place to invest. Which inturn has pushed the valuations through
the roof by FIIs. The growth story remains intact and it is the choice of the
investors on what niche they want to bet.
