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Buy-And-Sell Or Build-And-Sell Dichotomy!

2019 could be the most defining year for the hospital industry.

EBITDA, operating margins, and ARPOB for the sector are seeing a steady decline since early 2017. Key contributors have been the  implementation of GST, the cap on prices of stents and knee implants by NPPA, and stiff regulatory action by certain states, including restrictions on procedure rates, levying penalties, placing operational limitations on erring hospitals, and increased debt for some. Yet the hospital as an industry has been growing at an annual rate of 17 percent, poised to touch Rs 900,000 crore in 2022, from Rs 490,000 crore in 2018. The trend is expected to continue.

It has become a high-volume, low-margin venture, resulting in mergers and acquisitions with some owners looking to opt out. Fortis, Max Healthcare, and Medanta Medicity (also scouting for a buyer) are cases in point. In turn, this is also prompting a further consolidation of healthcare by large chains and closure of some individual-driven smaller facilities. What is gradually emerging is the increased interest of PE investments in the hospital segment, which doubled to Rs 4365 crore in 2017 from Rs 2685 crore in 2016.  While this may be perceived as an appropriate method of attracting investment in a fund-starved industry, the entry of PE and venture capital funds is leading to gross commercialization of a business traditionally served by practicing physicians. The focus is on maximizing franchise growth and profitability. Fattening the calf before the slaughter is the underlying principle. The buy-and-sell model is clashing with the buy-and-build model.

On another note, the focus continues to be expansion in large metros with multi-specialty hospitals. In spite of the National Capital Region having seen the sharpest dip in operating margins, investors continue to shy away from areas outside the top Indian cities. It may be attributed to an almost similar CapEx, wherever a hospital is located; similar cost of services; hesitancy of doctors and nurses to stay in remote areas; and low overall paying capacity of the patients.

Will the Niti Aayog proposals and Ayushman Bharat scheme be adequate to resolve these issues?

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