Dr Vishal Arora
Principal Consultant Healthcare
PWC

COVID-19 impact – Private hospitals struggling to make ends meet

In the pre-COVID era, for the private healthcare sector in India, the April to June quarter worked out to be the peak season with most of the hospitals grazing an occupancy levels of close to 80–85 percent owing to the increase in seasonal flu cases and planned surgeries going up. The COVID-19 pandemic has had an adverse impact on the private healthcare sector, leading to drop in occupancy level to the tune of 25–40 percent in April 2020, with reduced surgical case counts, reduced diagnostics, and almost zero medical tourism, resulting in overall decreased turnover and reduced average revenue per occupied bed (ARPOB) – a key financial indicator for the hospitals.

Currently, private healthcare sector, unlike other sectors, is facing a double burden – it has to be prepared for all the worst-possible scenarios by investing in additional equipment and consumables (that too being procured at a higher cost owing to increased demand) and the sharp dip in patient OPD and IPD footfalls at the hospital. Many small hospitals and nursing homes, especially in Tier-II and Tier-III cities, have been forced to shut their operations since their cash flows have completely dried up.

Typically, hospital EBITDA margins are in the range of 12–18 percent with fixed costs contributing to 60–65 percent of the total cost heads, and variable costs contributing to 35–30 percent of the remaining cost base. With the dip in overall revenues, and fixed costs remaining constant, it is estimated that the already stretched private healthcare industry shall end the 1QFY21 with -35 to -30 percent EBITDA margins with limited cash flows even to pay the complete salaries of their staff for the months of April and May 2020.

Currently, arranging for staff salaries and doctor’s payouts – which constitutes 35 percent to 45 percent of the hospital cost – is becoming a nightmare for the hospital administrators, and hospitals have started resorting to various measures to combat this situation. Many hospitals are planning for a 10–30 percent salary cut of the staff for the month of April 2020, whereas some hospitals have even asked a significant percentage of their employees to go on forced leave without pay for few weeks in April to save on salary cost. Similarly, for consultants and other doctors, the hospitals are planning to pay only 30–50 percent of their monthly salaries. Annual appraisal cycle which stands due in April and bonus payouts for FY2021 have been deferred for the foreseeable future.

Given the current scenario, assuming that the lockdown ends in May, and the life begins to get back to usual, it shall at least take 3–5 months for the hospital industry to restore normalcy and achieve occupancy levels of 75–80 percent with positive cash flows to sustain their businesses, which they used to enjoy in the pre-COVID era. It is estimated that the hospital industry shall end this FY at (30)–(20) percent revenue growth, and EBITDA margins being negative or positive in the lower single digits for FY21.

The healthcare sector to revive from this crisis, is now looking at the government to announce some measures to provide short-term relief and improve cash flows of the hospitals. Measures like income tax refund, zero tax deduction at source for this FY, immediate clearing of outstanding CGHS and ESI payments, subsidies in power tariffs, window for PF and ESI payments, short-term subsidized loans, reduced customs duty on essential products, etc., to improve the liquidity conditions have become crucial for the existence of healthcare providers in the country.

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