Everything you need to know about the Healthcare Investment

Last Updated at: Mar 11, 2020

India’s healthcare sector majorly comprises hospitals and diagnostics and is going to be worth of almost USD 145 billion by 2021, clocking a healthy CAGR of 15%. The major growth is because of both the domestic demand for high-quality tertiary and the quaternary care as well as a expanding medical tourism industry. We have discussed some of the issues in this article to look-out during the evaluation of investment in India’s healthcare sector.

Responsibility towards the Economically Weaker Sections

Some state-level legislations levy necessity for the reservation of free beds for the members of the economically weaker sections (EWS) for the facility of free treatment or treatment at highly-subsidized rates. These compulsions are naturally encountered in the circumstances where there is a government grant of the real estate to the hospital operating company with sometimes, the grant documents themselves striking such necessities.

Being a local law issue, the exact modalities vary from state to state. While generally implementation is lacking, of late, implementation appears to have been stepped up with demands for disgorgement of profits made in violation of these responsibilities. In view of this, it is vital to understand the nature of EWS responsibilities and assess the state of agreement with the same.

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Medical Negligence

Medical negligence is a crucial hazard in the healthcare sector and a robust consumer protection law provides easy redressal mechanism for the families of patients looking for compensation for the alleged medical negligence. Cases of the professional negligence usually make the hospital operating body along with the apprehensive medical professional as parties.

As mitigants, the capability of professional negligence insurance obtained by individual doctors or insurance cover obtained by the hospital operating entity should be assessed. Further, this could also lead to reputational issues for the hospital or individual doctor and result in financial charges because of the hostile outcomes and impact the business from going forward.

In-House Pharmacies

In-house pharmacies are very common in Indian hospitals, as they not only provide medicines that are essential by in-house but also cater them to out-patients and walk-in clients. In terms of the Indian exchange control guidelines, foreign investment is allowable up to 51% in multi-brand retail under the government consent route and is subject to numerous conditions. Therefore, a mainstream investment by a foreign investor in a hospital entity functioning an in-house pharmacy could create regulatory issues.

Real Estate-related Issues

A surplus of permissions and consents containing no-objection certificates from the respective fire department and an occupation certificate from the local municipal authorities are required to be acquired and kept current in order for a building to be engaged and run like a hospital. Further, buildings must also conform to the zoning rules and regulations that inflict requirements where the building is located in a coastal area. A breach of these permissions and regulations can hugely impact operations going onward including sealing or shutting down of the hospital. Often, lapse of time itself is no guarantee that the violation has been ignored.

Understanding the Business Model

Traditional hospital businesses are capital intensive and are asset-heavy. As a result of this, the newer asset-light models are being installed that has a plunge on leasing assets which free-up cash that is well operated elsewhere. While this eases some of the apprehensions around the adequacy of owned real estate, the complexities of the arrangements, mainly under the typical hospital management structure, which tend to be difficult. Understanding the finer print of the management contracts including the flow of cash, responsibility of undertaking the capital expenditure of maintenance of capital assets and tax consequences become integral to the sustainability of the business model.

With much of India’s healthcare sector fastening under the pressure of mounting debt, many hospital operating companies present attractive procurement targets at realistic valuations. Consolidation is currently the new flavor of the season not only as the means to expand to the newer geographies but also to achieve improved economies of scale and drive growth. With demand for the medical services slated to increase gradually, India’s healthcare sector remains a tempting proposition for global investors. However, investors with an interest in India’s healthcare sector must be aware of some of the issues and the challenges that come with such an investment.