New dilemma looms for India's private hospitals: More beds, but few can lie in them

Economic Times

6 days ago

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MUTED PROFITABILITY
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There is a new dichotomy looming on the horizon for India's private hospitals Capacity expansion lined up by top players and recent record investments and blockbuster deals in the sector may result in a transition from capacity crunch to overcapacity in a short span in major urban areas, even as the number of beds continue to be an issue in small cities and towns.According to estimates by leading healthcare consultants and industry experts, more than 50,000 beds are likely to be added in the organised hospitals sector in the next three-four years, with chains like Apollo Healthcare, Aster DM Healthcare, Fortis Healthcare and Max Healthcare leading the way.But affordability problems persist, though the situation is improving. While the addition of more beds can help close the gap in India's poor bed to patient ratio—1.4 beds to 1,000 people—data shows that 75% of the healthcare infrastructure in metro cities is catering to a third of their population.The World Health Organization(WHO) recommends about three beds per 1,000 people; Indian public health standards recommend a minimum of one bed, desirably two.In India's metros, there are 2.5-3.5 beds per 1,000 people, but when it comes to quality, the bed density varies from as low as 0.4 to 1.0, estimates Kaivaan Movdawalla, partner and Healthcare Sector leader at EY-Parthenon India.The numbers point to the need for more affordable healthcare delivery from private hospitals, something that can enable an increase in capacity utilisation and drive long-term profitability.The good news is that demand for private healthcare has been growing. 'Post Covid, we are seeing a much greater momentum towards organised quality private healthcare,' said Movdawalla.'The key supply drivers are the high disease burden, expanding middle class and unlocking of demand for the bottom of the pyramid through social insurance,' he added.'A discernible shift of demand towards organised quality hospital segments is evident now. We see a demand-supply gap for quality beds to the tune of 25-40%,' he added.But without affordability, filling them might remain a problem.Analysts also warn that the flow of investment and the wave of capacity expansion lined up by leading chains in the next 3-4 years could weigh on profitability and margins of the leading hospital chains.Global financial services firm Macquarie in a recent report maintained a cautious stance on Indian hospitals due to an upcoming capacity deluge with organic bed addition in the next four years slated to be four times that of what was added in the last five years. The report stated that profitability improvement in existing hospitals remained muted and even small bed capacity expansion was driving profitability compression. 'We expect private hospitals to add 40% capacity organically in the next 3 years… Eight large-listed hospital chains are slated to add over 15,000 beds in the next 3-5 years versus addition of about 3,400 in the last five years,' the report said.Challenges notwithstanding, the sector which has seen a flurry of investments in the last few years — especially post Covid — continues to remain a private equity favourite. Last week, Bengaluru-based Manipal Hospitals bought Pune-based Sahyadri Hospitals Group from Canada's Ontario Teachers' Pension Plan (OTPP) for around ?6,000 crore. Integration of Sahyadri with it will take Manipal's total capacity to about 12,000 beds.Another Bengaluru-based hospital chain, Aster DM Healthcare, recently became the second largest healthcare chain in the country in terms of revenue after its merger with Blackstone-backed Quality Care. The company is eyeing the number one position, deputy managing director Alisha Moopen told ET.In terms of bed capacity, Aster DM may be leading by a whisker with a total of 10,300 beds after the merger compared with the country's largest pan India hospital chain by revenue, Apollo Hospitals, which has a bed capacity of 10,187.Aster DM plans to add 3,300 beds in the next couple of years, taking the total number of beds to 13,600. Apollo Hospitals plans to invest ?6,000 crore to add 4,300 beds. 'In the short-term, supply will outpace demand,' said an analyst with a leading brokerage. 'The primary growth driver for most multispecialty hospitals was not volume but it was ARPOB (average revenue per occupied bed — an industry metric), which was led by rate hikes of beds and procedures,' the person said.Data from private equity firm Avendus shows that the hospital market in India is estimated to grow to $110 billion in the next 3-4 years from the current $76 billion, growing at a compounded annual rate of 10% driven by strong tailwinds from a rise in lifestyle diseases and increasing affordability. In 2019, or pre-Covid, the healthcare delivery market was $47 billion. Private hospitals and trusts currently constitute a 67% market share. Experts say that rising demand for quality healthcare, higher disposable income in small towns and rural areas and increasing insurance coverage will continue to drive more consolidation and M&As with a sharper focus on patient-centric models.While large multispecialty hospitals are expanding through a combination of greenfield and brownfield expansion, single-specialty hospitals are increasingly gaining traction with rising demand from small towns.'The share of single specialty will become larger in the next four years and the organised players will more than double,' said Anshul Gupta, managing director and head of healthcare investment banking at Avendus Capital.The single-specialty format, where a hospital typically would have 40-50 beds, presents an opportunity for greater geographical depth compared to multispecialty hospitals where the average size is about 250-300 beds. Specialisations seeing demand include mother and child care, IVF and ophthalmology.That is sparking consolidation. Large eye care chains like Dr Agarwal's Eye Hospital, Maxivision and others with PE backing have been acquiring anywhere between eight and 10 smaller players every year.'Demand for quality care is going up in rural areas with rising disposable income and for quality care there will be takers. There are a lot of untapped cities where there is demand,' said Bhanu Prakash, partner and Healthcare Services Industry leader at Grant Thornton. 'Focus will be on optimising capacity utilisation and improving ARPOBs,' he said. This is where single-specialty models will play a crucial role, he said.Total private equity investments in the single-specialty sector crossed $3.7 billion, accounting for over 35% of total hospital investments in the last 10 years. About 70% of these investments have gone to established specialties such as IVF, eyecare, mother & childcare, dialysis and oncology.There is also a significant growth opportunity — especially for single specialty hospitals — in smaller cities such as Lucknow, Vizag, Jaipur, Kochi, Siliguri, Guwahati, Bhubaneswar, Patna, among others, with an increasing number of consumers wanting access to quality healthcare closer home.The rising demand and lack of supply are prompting larger players also to expand in non-metros. Aster DM, for instance, will expand operations to cities such as Indore, Raipur, Aurangabad and Bhubaneshwar.