02 Dec 15 Seven key trends driving India’s hospital sector

India’s healthcare and hospital sector appears immune to recessionary trends. Growth in recent years has averaged 14-15%, even as other parts of the economy have struggled. We (ValueNotes) believe that double-digit growth will continue for at least a decade, if not more. This is driven by the chronic (and substantial) shortage of hospital and healthcare capacity, coupled with rapid growth of the middle class as well as health insurance.

This is well known, but the sector is also transforming rapidly – with implications for all stakeholders. This article seeks to highlight a few key trends.

Rising Insurance penetration and premiums

The fact that health insurance in India is under-penetrated is well known. Given the aggressive stance of private insurance players, and increasing awareness – premiums have more than doubled in the last four years. Not only are more people insuring, but many are paying larger premiums. This has implications on demand for more expensive procedures, as well as greater heft for private sector hospitals.

Growth is in the private sector

In the last fifteen years, the capacity (hospital beds) in the private sector has more than quadrupled, while public sector capacity is only up by ~2/3rds from 1999. This means that more than 3/4ths of bed capacity increase has come from the private sector. While this has negative implications on healthcare access for the poor, the trend is likely to persist, as most State governments show little inclination to increase budgets.

FDI and private equity creating larger companies in Indian healthcare

Commensurate with demand growth and private sector involvement, private equity (PE) has grown steadily. Unlike other investment themes, healthcare remained popular through the downturn – and investments in the last couple of years are 3-4x of what they were say, 5-7 years ago. Apart from multi-specialty hospitals, niches like eye care, oncology, daycare, fertility, cardiac, cancer are also attracting interest from investors. This is expected to accelerate the rise of medium and large hospital chains, with greater bargaining power.

Low cost chains

Apart from the likes of Apollo and Fortis, several “low-cost” or “affordable” providers (e.g. Narayana Health) have attracted PE funding. If such organizations can scale, they can bring much larger numbers of consumers into the formal market. However, given their commitment to affordable solutions, their purchasing patterns will be quite different, and present new challenges for medical equipment providers.

Small single specialty hospitals transition to small multi-specialty

In the past two decades, apart from growth of large hospitals, we’ve seen significant growth in small and medium single-specialty hospitals (typically < 60 beds). These are typically set up by doctor-entrepreneurs. The shift we see today, is that several such entrepreneurs are now coming together to create small multi-specialty hospitals. This creates benefits of scale, capacity utilization, cross-selling and risk sharing. This trend will accelerate, and we expect to see consolidation in this segment.

Disease profile

There has been a radical shift in the disease profile primarily due to increasing urbanization. The share of non-communicable or lifestyle diseases has increased from around 35% to >60% in the last four decades. By 2030, this is expected to be around 75%. Apart from increased demand for specialty providers for diabetes, oncology, cardiology, etc.; this shift will continue to fuel demand for OPD (Out Patient Department) and diagnostic centers.

Growth in Tier 2 and Tier 3 cities

While investment in metros and leading Tier 2 cities continues, we’re seeing enhanced interest in smaller towns and cities. Patients from small towns often have to go to a larger city for specialty treatment, and many are not able to do this – leading to substantial unmet demand. While demand growth in small towns will make healthcare suppliers happy, servicing these needs will require significant investment in distribution and after-sales.

In summary, the sector is not only growing rapidly, but also growing in diversity. For medical equipment and healthcare suppliers, demand will certainly go up – but so will complexity. Those that can service diverse buyer types (with distinct buyer behavior) spread over a larger geographical footprint will be the most successful.