Tuesday, February 27, 2018

Corporate healthcare trends in India

A quiet revolution appears to be happening in India's corporate healthcare market. For long, barring a handful of large hospital chains, the Indian market was characterised by several small and family-owned multi-speciality hospital groups focused around no more than 2-3 cities, mostly the biggest ones. These small hospital groups were started by very credible and reputed physicians, whose diligence and commitment over at least 15-20 years helped their institutions acquire good name. But this landscape is changing fast.    

While I could not locate any study or report in this regard, a wave of consolidation may be underway in this market. And driving the consolidation is foreign capital. In particular, the sovereign wealth funds of Singapore and Malaysia as well as some private equity investors have been leading it. While Foreign Direct Investment (FDI) in hospitals had been permitted on automatic route since January 2000, it is only in the recent years that investor interest has spiked.  

Malaysia's IHH Healthcare Bhd, Asia's largest hospital operator, and owned by Khazanah, Malaysia's sovereign wealth fund, has invested in multiple hospitals in just one city, Hyderabad. Others like Temasek, GIC, and private equity institutions are also in the fray

In many of the investments, while the new investors have effective management control in light of their majority stake, the promoters have retained their Board positions. The original intent being that the foreign investors would bring in growth capital as well as latest technologies, and the promoters would use their proven experience, connections, and credibility to run the hospitals. 

But anecdotal evidence suggests that a power struggle is already on between promoters and investors in atleast some places. While there are no good chronicles like this, the new managements in these hospitals are over-ruling the promoters and forcing down efficiency improvements by mandating targets for doctors in terms of procedures and treating different specialities in a hospital as cost-centres competing with each other. I foresee this trend being accentuated going forward. 

A few observations

1. An examination of all the hospital names that have attracted foreign interest shows some features. All of them service the highest end of the market, are equipped with the latest medical technologies, operate predominantly in the largest urban centres, have promoters with very high credibility, and have emerged successful after a long period of struggle and winnowing of the competition. In other words, they represent the cream of private healthcare operators in the world's second largest and rapidly growing health care market. And it is this low risk and juicy assets that foreign capital is snapping up. 

So, is health care providers the latest addition to the long list of markets where the influence and control of foreign capital grows unabated? What does it reflect about domestic private capital that it does not find investing in some of the juiciest assets in a market which can be expected to grow rapidly over the coming decades unattractive? What does it say about domestic entrepreneurship that its pool has not expanded beyond the same old names Apollo, Fortis, Max, Wockhardt etc?

2. What prevents these new investors from recalibrating business plans to attract more foreign medical travellers? Is it in India's interest that the country with some of the worst access to tertiary care facilities and services, ends up being the medical procedures back-office of the developed world? What prevents the consolidation from driving up tertiary care prices, especially given the likely market power exercisable by an entity like IHH in a city like Hyderabad? 

3. The rapid growth of corporate health care and the creeping rise of public health insurance programs, the issue of regulation is never far away. Cases like this and this are likely to become increasingly common. While there are some, largely outdated, regulations, institutions and doctors operate on a virtual regulatory vacuum, and procedures and treatments have minimal or not regulation. But is a weak state likely to be in any position to be able to render effective regulation?

4. Given the poor, even Dickensian, state of government hospitals in most (but not all) states, corporate hospitals have become the default tertiary care option for all but the poorest. And now with universal health coverage being proposed for delivery through an insurance model, the neglect of government facilities and the focus on private alternatives will only increase. And we all know from all of history and documented evidence of any kind that no country has ever managed to achieve universal health coverage with this approach. What is the end-game?

5. It may only be a matter of time before health care debates are taken over by a lobby of corporate care providers, their financiers, and insurers. And in environments where regulations are grossly inadequate and state is out there to be captured, an eventuality playing itself out not just in other industries but in health care itself in state government programs involving the private sector, this danger is very likely. And even for perfectly honest bureaucrats, frustrated and despairing at the scale of the challenge and the utter dysfunctionality of the public healthcare system, the logic of private participation can look very attractive. 

6. It is nobody's case that India does not need foreign capital in health care. It sure needs foreign investors and their technologies. But given the size of the country and vast needs, such foreign capital can be nothing more than marginal contributor. It is domestic capital and entrepreneurs who have to drive this market. Unfortunately, that seems not forthcoming in anything compared to the required scale.

Or, am I being unduly pessimistic in painting this bleak picture and should instead look at the perfectly logical hypothesis around the beneficial effects from private participation. But does the evidence of private health care in India lend credence to such optimism? Also is there any other similarly placed country which has achieved universal health coverage through this approach?

Update 1 (21.03.2018)

The latest hospital to fall to foreign capital is the Gurugram-based Medanta-Medicity Super Specialty hospital. Malaysian IHH Healthcare Bhd has submitted a bid to buy a controlling stake at a reported valuation of Rs 5500-5700 Cr. Carlyle Group and Temasek Holdings Pte already own 27% and 18% of the hospital. Since entering India just in 2015, IHH already owns 51% of Continental Hospitals Ltf and 74% of Global Hospitals Pvt Ltd. Besides, it is actively pursuing buying a controlling stake in Fortis hospitals. KKR recently invested Rs 1300 Cr in Radiant Life Care.

Update 2 (04.01.2019)

Oped in Livemint expressing concern at the trend of PE investments in healthcare. The latest PE investments being KKR-backed Radiant Life Care picking up 49.7% stake for $293 m in Max Healthcare, and General Atlantic investing $130 million to take a minority stake in KIMS hospitals.

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