As per the most recent estimates, we Indians spend close to Rs 8 lakh crore or $105 billion annually on healthcare. Of this, we spend Rs 2.5 lakh crore via taxation which the government uses to fund a health system that it almost entirely owns and operates. The rest of the money, which represents the bulk of the money, i.e., Rs 5.5 lakh crore, is spent by us either through, in a small measure, some form of commercial or government-mandated insurance or, most often, when we actually seek healthcare, directly from our own pockets.
However, despite this large aggregate expenditure, the total corporate healthcare sector in India has a market share that, at under Rs 40,000 crore of revenue, barely crosses 5% of the total market, with the rest of the gap being made up by much smaller providers, more than 90% of whom have fewer than five employees.
This is a tiny market share even relative to sectors such as banking in which the formal private sector has always had a much smaller role but despite that has gotten close to 40% of the market. In sectors such as telecommunications which are totally open for corporate sector participation, the market share of the formal sector exceeds 90%.
Managements of these hospital systems and their investors often advance the argument that their growth is constrained because, unlike in other sectors, they have not received the kind of support such as tax holidays and declaration as an infrastructure sector that other industries have benefitted from. Instead, they have been exposed to a high burden of regulation and price control. This burden when combined with the high capital intensity of the sector, they argue, has made growth a challenging prospect.
While some of these factors may have indeed acted as constraints, capital intensity and high levels of regulation are not unique to the healthcare industry and incumbents in other sectors have, on the contrary, benefitted enormously from them because they act as strong entry barriers and provide them with the time and the competitive space that they need to grow.
The core problem in the healthcare sectors instead perhaps lies in the underlying business model that all of these participants have chosen to pursue.
This, while not uncommon in other countries, has not yet been seen in India. Pursuing such a direction also has the potential of making them an engaged partner in the universal healthcare journey that needs to be pursued in India, with enormous gains for consumers of healthcare in the country.
The dominant model being pursued by the largest healthcare players in India could be described as a real estate focussed model. Businesses set up large establishments in the centres of large cities, then attempt to entice ‘star’ surgeons and physicians to ‘rent’ space from them, and follow that up with strong advertising and sales to build their brands and attract patients to come from far-and-wide to visit with them. Such a model is not only not in the best interests of their consumers but from a sheer business model perspective faces several challenges.
A fundamental principle of project finance is that businesses with high leverage need to function with low revenue volatility if they are to remain sustainable and grow. Tertiary care, with its high capital intensity and high fixed operating costs, is exactly such a business. But, for largely historical reasons, unlike other high leverage sectors such as telecom, banking, and power, it chooses to operate with a business model which also has high revenue volatility and a limited addressable revenue pool, even in the best of times. During the most recent Covid-19 period the weaknesses of the current approach have become even more apparent.
Tertiary care is an essential but rare need in the population.
These procedures are also very expensive and in a situation like the one that prevails in India where most patients are required to pay from their pockets when they need care, the proportion of people who can afford to access these hospitals is quite low, significantly reducing the addressable revenue pool. All of the hospital brands narrowly target these populations generating a great deal of volatility in customer footfall per hospital, particularly when combined with the fact that the ‘star’ doctors based on whose affiliation hospitals hope to attract patients have a propensity to move from one hospital system to another.
High leverage is not a problem just in India. Hospital systems around the world, have responded to it by taking several steps to secure their patients and to guarantee their revenue streams. The most promising amongst these is the rapidly increasing trend worldwide of hospitals moving upstream into primary care and moving from their traditional fee-for-service model towards more value-based and capitated membership-plan-based models.
With such an approach, a hospital instead of being focussed only on a narrow segment of upper-income consumers and waiting for them to require tertiary care to sustain itself using its fee-for-service model, switches gears completely and builds out strong primary and secondary care networks and seeks to enrol consumers in a comprehensive wellness plan in which they become members after paying a modest annual fee with all services being completely free thereafter.
Under the current Indian model, a tertiary care facility is required to target a very large population through its advertising to find the patients who truly need tertiary care, who can afford to pay, and who are willing to use the facility. With this process, it experiences a great deal of volatility in its revenue streams, alongside the very real possibility of over-provision of care, and dilution of quality standards.
Moving to an integrated model, on the other hand, will require the facility to focus on a much smaller population, address 100% of its population-level healthcare expenditures. This would quadruple its system revenue base and bring a much-much lower degree of revenue volatility.
Globally, particularly in the United States, where despite the presence of near-universal health insurance, as hospital capacity has increased and similar problems have started to appear, many hospitals have begun to integrate vertically and build entire health systems, with considerable success. Some of the notable examples of this have included Inter-Mountain, Geisinger, Providence, and Henry Ford, including, of course, the textbook example of such a system, Kaiser Permanente.
For Indian health systems to head in this direction investors and shareholders of large hospitals will need to think far more strategically than they have. On the regulatory front, there will need to be a recognition that health insurance and healthcare are two sides of the same coin and it will be necessary to allow hospital systems and insurers to operate in an integrated manner so that the customer is offered a ‘complete product’ which she can compare with other such products, using price and quality benchmarks. BloombergQuint