Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Opinion | Indian hospitals in ICU, private equity to the rescue

The private equity model is geared to maximizing returns for its investors who have little skin in the game

Despite persistent misgivings, private equity’s love affair with healthcare in India continues. Last fortnight, global investment firm KKR-backed Radiant Life Care picked up a 49.7% stake for $293 million in Max Healthcare, extending an investment spree that took off in 2012. In June last year, another private equity (PE) major, General Atlantic, invested $130 million to pick up a minority stake in KIMS Hospitals, one of the largest corporate healthcare groups in southern India, with seven multi-specialty hospitals across the region and a capacity of over 2,500 beds.

In the works are more such deals with news reports indicating that Manipal Hospitals, which lost out in the race for Fortis Healthcare hospitals, together with its investors TPG Capital and Temasek, is inching closer to acquiring Global Health Pvt. Ltd, which owns Medanta hospitals, at a valuation of 5,800-6,000 crore (bit.ly/2Qii1Yn).

Data from the Venture Intelligence Indian Private Equity Trend Report 2017 shows that such investments in the hospitals sector nearly doubled to $642 million in 2017 compared to $395 million in 2016. In fact, the largest PE investments in the healthcare sector were aimed at hospital operators.

It could be that under financial pressure, hospital owners are looking to sell their assets. While the mismanaged Fortis hospitals had been haemorrhaging for the last few years before it found a buyer, even the better-run Max Healthcare has of late found the going tough. Its chairman Analjit Singh cited the inability to fund expansion as well as the pressure on margins as reasons for exiting a business he was bullish about till a few years ago.

After years of uninterrupted growth and profits, the last one year has seen profits of healthcare companies suffering. A July 2018 report by rating agency ICRA revealed that profitability of hospitals in India has declined sharply. A large part of this comes from tightening government regulations in the face of what were being seen as usurious practices by many of the privately-run hospitals. Thus, with consumables like medicines and implants contributing over 60% profit margins of hospitals, the cap on prices of these is clearly hurting.

Yet, given the desperate need for funds in the sector, the entry of PE money should be cause for jubilation. Healthcare in India faces huge investment challenges leading to severe shortages. India has just seven hospital beds per 10,000 people and while private investment has been the vital lifeline to increasing the coverage and quality of hospitals, it has also led to steep rise in the costs for patients.

That’s not the only discordant note in the PE-hospitals love fest. Healthcare is considered a specialized business and most entrepreneurs in the sector are practising physicians. Many people, including doctors, say that the entry of PE and venture capital (VC) funds has led to gross commercialization of a business whose stated aim is to serve people. There may be some truth to that. PE firms look to boost efficiency levels and in the process cut costs to the bare bones.

The private equity model by its very nature is geared to maximizing returns for its investors who have little skin in the game and owe nothing to employees or patients. The focus is on maximizing franchise growth and profitability. Already, doctors report being under tremendous pressure to up the charges when billing health insurers, and to sell products and procedures that are not always necessary.

The basic strategy of PE firms is to buy into hospitals which are struggling, help them improve performance dramatically, and then sell them at inflated valuations. This buy-to-sell model clashes with the buy-to-build model that has sustained the growth of institutions such as the All India Institute of Medical Sciences or the Postgraduate Institute of Medical Education and Research, Chandigarh.

The best Indian hospitals are those where profit maximization isn’t the only goal. Narayana Health, one of the best hospitals in India, is driven by the vision and commitment of its founder Dr Devi Shetty while others like Sankara Nethralaya and Tata Memorial are not-for-profit institutions.

However, neither of these has the ability to scale up to a degree where it can address the huge deficit in the sector. That’s where PE-backed hospital chains come in. Modern hospitals need vast amounts of capital to invest in infrastructure, technology, and to build viable scale. In most cases, PE firms are backing large healthcare companies in making these million dollar acquisitions.

Healthcare as a sector appeals to such investors for its resilience even in economic downturns. In addition, PE investors don’t look for instant gratification since the ultimate goal is to seek higher multiples in terms of returns. Individuals or companies do not have such a luxury.

Yet, it is understandable that in the absence of a suitable regulator, a PE-run business in a critical segment like healthcare raises alarms. The Hippocratic Oath that moors the practitioners does not apply to the investors.

What is needed is innovative models of providing healthcare. One such model, the government’s ambitious new health insurance scheme, Ayushman Bharat, seems to have got off to a good start. It may not be enough though and will also need private capital to back it.

Sundeep Khanna is an executive editor at Mint and oversees the newsroom’s corporate coverage.

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