Are Indian Hospitals Profitable?

By Dr. Lisha Ruparel

India’s demographic fundamentals favour the country’s $61 billion healthcare industry. Then why is the hospital industry reeling? Dr. Lisha Ruparel finds out.

People dread falling sick of course. However, it is not always about physiological suffering. It is the rising costs of healthcare that has the Indians, especially the middle-class, shatteringly worried. The case where a 8 year old dengue patient was billed 18 lakhs at a hospital made headlines in the country and created a huge outcry from citizens. In another instance, it was seen that a hospital refunded Rs. 15.68 lakh charged to patient’s family after health minister intervened. To reduce out-of-pocket burden for citizens, Government has imposed price cap on select medical devices, implants and drugs. However, this move by the government has adversely impacted hospital’s profitability.

India has a low penetration of hospital beds and doctors, a large population beset with high prevalence of communicable ailments and the added burden of lifestyle diseases. The burgeoning middle-class along with an increase in affordability and  quality services[3] , as well as India as a destination for medical tourism has increased the demand for higher standards of care.

On the providers’ end, costs are on the rise as well. Updating medical technology with the newest and most advance, paying high-figure salaries to specialists and spending on branding have become a hospital survival mantra in this day and age, all of which comes with a luxurious price tag. Hospital chains are losing their grasp over pricing as health care costs become a political subject across the world. It is ironical though that the Indian hospital industry which stands at  Rs. 4 trillion (US$ 61.79 billion) in FY17 and has a massive growth potential and is expected to reach Rs. 8.6 trillion (US$ 132.84 billion) by FY22 can be derailed and impeded by the above factors.

Government price capping interventions in pharma, medical device and more recently the hospital sector is further putting them under immense pressure, almost questioning their financial sustainability. One of the mightiest policies which shook the hospital industry was the price cut of stents and knee implants in 2017 by over 70%, besides the regular revision of the Drugs and Cosmetics Act. Oncology drugs have also been price-capped.

It is important to know the history of Indian healthcare to understand the rising costs and the Government’s recent price-capping policies, says Mr. Narendra Karkera, Director, Hosmac India Pvt. Ltd. “Decades ago, healthcare was only provided by Government and trust hospitals with the aim of charity. It was with the establishment of corporates like Apollo that healthcare started paying attention to profit margins; hospitals started being viewed as a business. The corporate hospitals were listed entities and hence owed it to the shareholders to maximise their profit. Prior to the establishment of corporate chains like Apollo and Fortis, the healthcare market was fragmented with local doctors running standalone hospitals. Over the years, India’s private healthcare sector has evolved to become much more organised, allowing these players to have a greater say in setting the rules of the game. This gave the private players better negotiating advantage with the pharmaceutical and medical device industry.” The focus became to raise capital to expand in metros and tier I and Tier II hospitals where there is a lacunae of healthcare services and multi-specialty hospitals are in demand. With large capital investment towards building tech-enabled hospitals, also came higher cost of treatments.

“A host of factors—ranging from price control to regulatory overreach and safety of the caregivers in hospitals—have threatened to derail the robust growth of the sector. However, this should be seen as an opportunity to relook at the functioning of hospitals, regulatory framework and overall scenario ranging from the pharmaceutical industry to the medical devices industry to build a new healthcare ecosystem,” says Mr. Karkera.

Continuing in the same thread, Dr. Hiren Ambegaokar Regional Medical Director, Fortis Healthcare Ltd for the South and West Region, says, “Due to decrease in margins in stents and drugs, hospitals have increased the rates of procedures in order to maintain the profit margin. Since majority of the hospitals are trust or charitable, 20% of beds are mandatorily reserved for the poor. Hospitals have to this recover cost of treatment from paying patients. Secondly, majority of hospitals are concentrated in cities and metros. Due to competition from other metro-based hospitals it has become difficult to increase rates of procedures. The only way for hospitals to increase their profit margins is to optimise processes and ensure no wastage in hospital.”

Shedding light on the declining profit margins, Dr.Vivek Desai, Managing Director, Hosmac India Pvt. Ltd., says, “Due to the current price control regulations hospitals have seen their EBIDTA margin decreasing from about a range of 10 percent to 15 percent to a low of 6 percent. As the rates of the procedures are low under Ayushman Bharat, the margins of hospitals will decrease further. The hospitals will have to use innovating methods to maximise their margins. Hospitals can reduce the cost of electricity by adopting energy saving measures by ensuring the building is environmentally friendly. Try to reduce the cost of departments like housekeeping, kitchen and laundry. Smaller hospitals should form groups for procurement of drugs and consumables as bulk purchase will aid in savings. Technology should be leveraged to reduce unnecessary manpower. Wherever possible, processes which do not require human intervention can be automated thereby saving manpower cost. One of the major expense of a hospital is the salaries of the hospital staff and consultants. Instead of hiring full time consultants, the hospital can engage visiting consultants who are remunerated as per the number of procedures performed.”

To deliver quality healthcare to each and every citizen in a country of more than a billion, it is necessary to build a robust system that can serve both the urban and rural areas. This requires the cooperation of the public and private sectors. As of now the Indian government’s health care spends as a percentage of gross domestic product is among the lowest in the world. In February 2019, Union Health Minister J. P. Nadda said that the Government was committed to increase its overall health allocations to 2.5 per cent of its GDP, as enunciated in the 2017 National Health Policy.

We need to focus on a healthcare system which focuses on a complete array of services from primary care to super specialty advance services along with diagnostic centres. In order to provide healthcare in remote health care areas technology can be leveraged most optimally by means of telemedicine. We have to challenge traditional ways of rendering care and instead use disruptive technology to scale reach and reduce costs.