Aster DM Trims Costs As Mandatory Health Insurance In GCC Markets Hurts

Aster DM Healthcare, the multi-speciality hospital chain says it is seeing some downward pressure on package rates and delays in payments from insurance companies in the Gulf Cooperation Council (GCC) countries, especially UAE, where the healthcare provider gets the lion’s share of its revenues.

Most countries in GCC have been adopting mandatory health insurance for people living and working in their countries. Insurance companies, who are now the chief payers of healthcare services, are aggressively renegotiating the package rates of various medical procedures and the payments are often coming in late by 90 to 120 days, putting severe pressure on the liquidity of hospitals.

“Thirty years back it was 5 percent insurance, it gradually climbed up. Three years ago it was 50 percent insurance, and 50 percent out-of-pocket, so suddenly they provided with mandatory insurance coverage for all the people in Dubai, where we have a large presence,” said Dr Azad Moopen, Chairman of Aster.

“Insurance companies are trying to squeeze our margins, and they will have definite ways to negotiate and reduce the prices (of medical procedure package rates). There is some pressure on topline, but we are able to withstand given our scale and presence across segments such as clinics and pharmacies,” Moopen said.

Around 82 percent of Aster’s revenue comes from the GCC countries, of which UAE accounts for a major chunk. The rest comes from hospitals in India.

Aster has 909 operational beds in GCC and 2,461 operational beds in India as of June 30. But GCC has been a cash cow.

The average revenue per occupied bed (ARPOD) in the first quarter of FY20, at Rs 173,600 is six times that of Indian hospitals. The average length of stay, a measure of the hospital’s ability to efficiently monetise assets stood at 1.9 days for GCC, compared to 3.5 days for Indian hospitals. To be sure, most of the GCC assets of Aster are mature ones, compared to India.

Despite these favourable metrics, there is a contraction of the earnings before interest, tax, depreciation and amortisation (EBITDA) margins of GCC hospitals. The EBITDA margins of GCC hospitals have contracted by 60 basis points year-on-year to 12.1 percent in Q1FY20.

Moopen said he is focusing on efficiency improvement and cost optimization to ensure the margins aren’t impacted due to the pricing pressure.

The company has undertaken a major shake-up of human resources deployment.

“We are able to significantly reduce our costs by smart manning as well as by way of shared services where some people are being sent to India and we have started that process, which we hope that bring down the cost by about 3 percent during this financial year,” Moopen said.

Moopen said he is trying to leverage economies of scale in driving down the procurement costs and preventing the leakage of revenues at certain hospitals.

“Now, all this together, we hope that we can improve our margins or at least maintain at whatever current levels. So the only way and now going forward will be by controlling the margins rather than looking at increasing the prices,” Moopen said.

Moopen stated the mandatory insurance coverage in GCC countries, is also having a positive fallout, as more patients undergoing major surgeries such as organ transplantation and bypass surgeries are now referred to India, where the costs are significantly lower. – Moneycontrol

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