Hospitals

Lalit Mohan Rana From Sapnawat Village of Distt Ghaziabd Says -

Corporate Hospitals In Health Care

• Employees Health Check-Up
• Paediatric Work-Up
• Gynaec Work Up
• Diabetic Work-Up
• Renal Work-Up
• Cardiac Work-Up
• Chest Diseases Work-Up
• Oncology Work-Up
• Orthopaedic Work-Up
• Geriatric Work-Up
• Diagnostic Facilities

HOSPITALS RUN on commercial lines with profit as the primary objective, and of course listed too -- corporate hospitals -- are a couple of decades old in India.

The unmet demand for good healthcare in India coupled with the growing opportunities to raise resources through the capital market set off a few hospital projects in the last decade. A few years and many disappointments later, there are questions if a hospital run on purely business lines will survive at all.

One success story is Apollo Hospitals Enterprises. But its success has come in the backdrop of failure of a few other high-profile projects. Barring a couple of smaller hospitals and those that are a division of multi-business companies, the prognosis is bad.

To take a look at the viability of corporate hospitals and their investment prospects, it may be necessary to draw lessons from the projects that disappointed.

The potential

The marginal presence of the government in healthcare leaves the door open for alternative suppliers. India spends about 0.7 per cent of its Gross Domestic Product on public health against an average of 0.9 per cent of GDP for low-income countries. The world average is 3.2 per cent of GDP.

Financial distress seems to be the dominant theme in any discussion on the state of government finances, and with dramatic changes unlikely in the foreseeable future, private healthcare organisations are bound to grow. Other than the cold fact of marginal presence in healthcare delivery, government centres are anyway not the people's choice. Whenever possible, patients seem to opt for private healthcare providers.

Corporate hospitals, with their high-profile and profit-driven approach, are located mainly in urban centres. Another dimension of the urban areas is the relatively high incidence of institutional support for an individual's healthcare needs. Apollo, for instance, has tie-ups with a number of corporates to take care of the healthcare needs of their employees. And the advent of private health insurance companies is likely to be biased towards urban areas, at least initially. These factors suggest that there is space for different types of private healthcare providers in India.

Technology in medicine and cost factor

Over the last couple of decades the progress made in information technology and imaging has had a major impact on medicine. Advanced diagnostic equipment are available that greatly help doctors assess ailments. Diagnostic equipment such as CT scans (computed tomography) that combine IT with imaging technology have become commonplace. Dr P. C. Reddy, Executive Chairman, Apollo Hospitals Enterprises, estimates that there are about 2,000 CT scans in the country from none two decades ago. CT scans are now to be found in large numbers even in smaller urban centres.

Sophisticated diagnostic equipment have had a big positive impact on the practice of medicine, though the cost of installing them is fairly high. And given the rapid progress in technology, the likelihood of obsolescence is high. The cost of constantly upgrading diagnostic equipment is heavy -- a factor that appears to have a played a role in pushing corporate hospitals floated in the last decade into heavy debt.

Heavy debt, in turn, leads to a vicious cycle of hospitals charging heftily for diagnostics to cover the interest cost. But this may affect the frequency with which these diagnostics are used. The outcome is that the income generated may simply not be enough to cover the cost of loans. For instance, a couple of years ago, Tamilnad Hospital -- located near Chennai -- had to pay an interest charge of Rs 14 crore when the total income was Rs 11 crore.

Other disappointments

Diagnostics are an expensive affair, but that has not been the only reason for hospital projects turning unviable. Another failing has been the illegal diversion of funds. This problem has hurt a number of companies that raised public money in the early 1990s with a specific objective. At times, the money was diverted to other uses and on occasions to pay for inflated project cost.

An industry observer suggests another reason for hospital project failing: Objectives in conflict with the principle of a commercial venture. Corporate hospitals that were promoted to fulfil a grand vision and merely because some had a dream and a piece of land, but were not backed by careful planning, have failed.

Debt, the crucial ingredient

A look at the financial statements of corporate hospitals indicates that the common problem was the high debt component. Hospitals are long-gestation projects. Therefore, the right mix of debt and owned funds is critical to their success.

The ideal mix is anybody's guess. An industry observer feels that if more than one-third of the hospital project cost were to be funded by borrowings, as against owned funds, the viability would be in doubt.

A look at Apollo's funding pattern is interesting. In the early 1990s, it borrowed Rs 2 for every rupee of owned funds. At the time, the company's interest payment was about 13 per cent of its income, far higher than the top-rung companies across other sectors. By 2000, Apollo had reduced its borrowed capital to 50 paise for every rupee of its owned funds. Simultaneously, the interest cost had fallen to about 6 per cent of its income. If Apollo had not controlled its borrowing, the company might have gone the way of other disastrous hospital projects.

Are corporate hospitals viable?

The unpleasant experience investors may have had with a few corporate hospitals promoted in the last decade could well provoke the question. Financial institutions seem to be thinking on the same lines -- ICICI is believed to have stopped lending to hospital projects. And not just investors, a doctor running a successful community hospital asks the same question. The reasoning being that in the Indian context -- looking at the patient's ability to pay, and other costs -- the need to include repayment costs to borrowers in the hospital's charges may render the project unviable.

Apollo may be an example of a corporate hospital that has succeeded. It is, however, a moot point if Apollo's success will be replicated. There are a few striking similarities between corporate hospitals and other businesses promoted at the same time by raising public money. The most obvious ones are poorly conceived projects based on unrealistic assumptions and a lack of accountability. The story was repeated in other sectors, notably steel. Many dotcom ventures may go down the same path too.

Take away these common shortcomings, corporate hospitals may not be an unviable proposition if they are based on sensible assumptions and are managed rationally. If there is no internal impulse to do so, there may soon be some from outside: Private health insurance companies.

Implication of health insurance

The low level of health coverage in India suggests that insurance companies have enormous potential. The success of insurance companies will hinge on keeping a tight leash on the cost of healthcare delivery. Such a tight check is likely to propel corporate hospitals towards more efficient functioning. By their ability to command or distribute big business, insurance companies are likely to have the clout to nudge hospitals into running a tight operation.

As the experience in the US shows, the growing importance of insurance or Health Maintenance Organisations (HMOs) does not necessarily guarantee a system free from trouble. These organisations seem to create a unique set of problems. But what appears almost certain is that the advent of private health insurance will tighten the screws on corporate hospitals and thereby nudge them towards greater efficiency.

Till such time, investors may consider avoiding an exposure to corporate hospitals.