Indian Healthcare is one of the largest sectors in the Indian economy both in terms of revenues and employment. Contributing around 4% to the country’s Gross Domestic Product (GDP), the sector was valued at an estimated $90 billion in the last financial year. It is expected to continue to grow at a CAGR of 15 per cent through 2017 to reach $160 billion. The growth in population, increase in lifestyle related diseases, rising purchasing power of the middle class and higher awareness of chronic illnesses will be the key growth drivers for the sector.The healthcare sector is the third largest contributor to the Indian economy in terms of revenue and employment generation potential. The Indian healthcare sector encompasses hospitals, pharmaceuticals, medical equipment and supplies, medical insurance and diagnostics. Among the primary sub-sectors of the healthcare sector, hospitals and pharmaceuticals account for the largest revenue, contributing as much as 71 per cent and 13 per cent of the total revenue, respectively. The hospital services market, which forms one of the largest segments of the Indian healthcare.
Total healthcare expenditure in India was close to 4% of GDP, compared to 9% for Brazil, 6.5% for Russia and 5% for China. Out of this, out-of-pocket expenditure was 61%, with only 25% of Indians being covered by health insurance of which the share of private insurance was only 5%. This is not to imply that progress has not been made during the last decade. A substantial part of the growth in the sector has come from private healthcare investments.
Meanwhile, the Indian private healthcare sector is highly fragmented with approximately 90% of the hospitals being established and operated by doctors and trusts and the remainder being corporate hospitals (chain of hospitals run by professional healthcare groups). Most of the private hospitals are usually small scale establishments (50-100 beds) that are managed as standalone entities. Corporate hospital chains have been playing a key role in driving expansion and growth in the industry. So far, corporate hospitals have mostly concentrated on expansion in Tier I cities (including metros) with large scale multi-specialty tertiary care facilities. Given the high capital expenditure requirements, increasing cost of real estate acquisition and longer pay back period for expansions that impacts return ratios, companies are exploring new business models, that require lower investment, generate optimal returns sooner and also help expand geographical reach.
While tier II and tier III markets are largely underserved & provide significant opportunity for large private healthcare service players to address the need for multi-specialty tertiary care hospitals in these markets, expansion in these cities has its own challenges and roadblocks such as low availability of specialty doctors/nurses/paramedical staff, inadequate medical infrastructure and difficult market practices. The ability to retain physicians with attractive compensation is the key driver for success of hospitals in Tier II/III cities. Another challenge is the economics of the smaller cities with low paying power and large population under government healthcare insurance schemes, which results in lower revenue per operating bed (ARPOB).
India’s healthcare matrix
India is facing unprecedented pressure due to the poor reach of quality healthcare to millions of its citizens because of issues related to access and affordability. This is compounded as a result of shortages of workforce and infrastructure. India has a ratio of 0.7 doctors, 1.5 nurses and 1.3 beds per 1,000 people compared to the WHO average of 2.5 doctors & nurses and 3.5 beds per 1,000 people. The projected density of doctors, nurses and beds clearly connotes a large demand-supply gap in the Indian health care industry, thus providing a huge untapped potential for healthcare providers. To meet the growing demand for healthcare services in the country, India needs an additional 2.6 million beds, 1.54 million doctors and 2.4 million nurses.
In comparison with other countries, India is lagging behind China and Brazil on many key healthcare parameters. China has 3.0 hospital beds every 1,000 people, whereas Brazil has 2.4. The figures are even more alarming for nurses. In the United States there are 9.8 nurses per 1,000 people and in India there is only 1.5.
Medical tourism grows significantly in India
The cost of medical treatments in India is quite economical, when compared to the west and the country has a number of top rated hospital chains/medical staff. India has the most number of US FDA approved drug manufacturing units and its healthcare system is based on western medicine (predominantly). The country also offers a large number of wellness tourism options like yoga, ayurveda, naturopathy, acupuncture, spa/massages, etc. Most of the traditional medicine systems in India focus largely on prevention.
However, the country needs to work on increasing efficiency at the immigration to make the traveling experience hassle free for patients and also better infrastructure in terms of highways and roads would add to the overall satisfaction of medical tourists. Affordable hotels, availability of language interpreters are a few areas which also need to be given significant consideration to increase medical tourism in India.
The medical tourism market in India is projected to hit $3.9 billion mark this year having grown at a compounded annual growth rate of 27 per cent over the last three years. The inflow of medical tourists is expected to cross 320 million by 2015. The medical tourism industry in India gets maximum patients for heart surgery, knee transplant, cosmetic surgery and dental care as the cost of treatment in India is considered to be the lowest in Asia, much lower than Thailand, Indonesia, Singapore and Hong Kong.
Investment in the sector
- Sterling Group of Hospitals has entered into a joint venture with India Home Health Care (IHHC) to set up Asilia Home Healthcare that would cater home healthcare services segment.
- UniverCell plans to foray into the health and fitness category by launching a wireless health monitor, B.O.L.T in collaboration with American Megatrends India. The device interprets the body's vital information and lets a user access it through a specially designed cloud enabled smart app.
- Narayana Health has planned to buy out Westbank Hospital for around Rs 200 crore ($31.5 million). This move would help Narayana Health to increase its presence in the eastern part of the country.
- Medanta Group is working on a plan to set up five hospitals in next five years with an investment of Rs 1,500 crore. The company has already invested more than Rs 60 crore to start the 160-bedded hospital in Indore and has plans to expand it to 500-bed units in next 2-3 years with an estimated investment of Rs 600 crore.
- Diversified group Vatika has forayed into the healthcare sector with plans to invest Rs 200 crore to open about 15 diagnostics laboratories over the next two years. The group has acquired diagnostic labs Health Square from Spry Hospitality, including two centres, for Rs 30 crore and has been rebranded as Vatika Medicare as part of its expansion in the healthcare sector.
Positives for the industry
Govt. to allow 100% FDI in medical devices
The department of industrial policy and promotion (DIPP) has moved a Cabinet note to allow 100% foreign direct investment (FDI) in medical devices as part of a strategy to not only reduce imports but also promote local manufacturing for the global market, which will be worth over $400 billion in 2015. Over the past few months, the government has eased FDI rules in defence and construction to promote domestic manufacturing as PM Narendra Modi made a pitch for ‘Make in India’ and boost investment and economic activity. The proposal on medical devices will be a carve-out of the FDI policy in pharmaceuticals, said an official, adding that there will be no need for government approval in this segment. Currently, India imports over 70% of medical devices used here.
At present, medical devices come under the purview of the Drugs and Cosmetics Act and FDI in the sector is governed by the same rules as that for pharmaceuticals or medicines. Though the government allows 100% FDI in pharmaceuticals, companies are required to comply with certain conditions. For instance, in case of pharmaceuticals, ‘non-compete’ clause would not be allowed except in special circumstances with the approval of the Foreign Investment Promotion Board (FIPB). Similarly, in case of FDI in existing pharma manufacturing units, the government may incorporate the conditions while granting approval.
Govt. likely to introduce free primary healthcare via public facilities The Narendra Modi government aims to move toward a new healthcare regime in which primary care will be offered free to all through public facilities. Aside from this, an assorted list of secondary and tertiary services will be bought by the government, mainly from public healthcare facilities and to a limited extent from private players. A large chunk of this plan is proposed to be funded through taxes, at least for 70% of the economically weaker sections. People with a per capita monthly consumption expenditure of less than Rs 1,640 in rural areas and Rs 2,500 in urban areas at current prices will qualify for such assistance to start with. The draft policy also makes the case forcefully for more than doubling public spending on health to at least 2.5% of GDP. The document has clearly spelt out that, of the sum, the Centre is committed to spending close to 40%, and this is commendable.
Challenges for the Industry
Healthcare workforce remains inadequate:
India has a ratio of 0.7 doctors, 1.5 nurses and 1.3 beds per 1,000 people as compared to the WHO average of 2.5 doctors & nurses and 3.5 beds per 1,000 people. The shortage of qualified professionals is one of the key challenges for the Indian Healthcare Industry. The situation is aggravated by the concentration of medical professionals in urban areas. Many Indians, especially those living in rural and semi urban areas, are still receiving services from unqualified providers. The Industry needs an additional 1.54 million doctors and 2.4 million nurses to match the global averages. Furthermore, there is an acute shortage of paramedical and administrative professionals in the country.
Inadequate number of Public Private Partnerships (PPP):
The Public Private Partnership (PPP) model is yet to gather momentum. If the PPP model is implemented widely it can enhance the quality of health care services in the country as the healthcare infrastructure can be provided by the government and management skills can be provided by the private sector. Such initiatives will enhance the quality of healthcare services at affordable price points.
Long gestation period and capital intensive nature of the sector:
The healthcare sector is capital intensive with long gestation and payback periods for new projects. Land and infrastructure costs account for 60-70% of the capital expenditure in case of hospitals. Further, the business also requires capital for up-gradation/ maintenance / replacement of equipment and expansion. Therefore, availability of capital at a reasonable cost remains a key challenge for the industry.
Rising real estate costs:
One of the key constraints in expansion for the private sector is the high cost of real estate. Over the last few years, land cost has risen and the land acquisition process has only become more complex with increasing regulations, making projects in many large city locations, unviable. Hospitals are looking to mitigate this by shifting to a rent model or looking at other alternatives which could provide asset light growth & expansion opportunities.
Budget Expectation
After relaxing FDI policy for medical devices sector, the government is expected to announce an incentive package, including tax benefits, in the forthcoming Budget for domestic manufacturers. In its Budget proposals, the Commerce and Industry Ministry has suggested to Finance Minister Arun Jaitley to increase import duty on medical devices product, including syringes and pacemaker.
It has recommended that the basic customs duty be hiked from 5 per cent to 10 per cent in the next Budget to be presented on February 28. There is an issue of inverted duty structure on these products currently. This means customs duty on the final product is less than the duty on some raw materials essential for domestic manufacturing of syringes.
FICCI's recommendations for the healthcare industry:
- Increase budget share to the healthcare sector with greater provision for the National Rural Health Mission and National Urban Health Mission.
- Medical Insurance Premium for senior citizen should be subsidized or the limit increased to Rs 50,000 per annum.
- Government has to withdraw service tax on health insurance premiums, thereby leading to a lowering of cost/premium for the consumer. Mediclaim insurance Premium may be exempted from levy of Service Tax.
- All input services, in cancer treatment, should be considered for service tax exemption to reduce the cost of health care providers.
- All Healthcare Education and Training services, especially life-saving ones, should be exempted from service tax.
- The amount of tax deduction provided for preventive health check-ups introduced by the Finance Act, 2012 should be made over and above the provision of Rs. 15,000 towards the health insurance premium paid currently under section 80D of the Act.
- Income Tax/ MAT exemption for at least 15 years for domestically Manufactured Medical Technology products to promote “Make in India”.
- 250% deduction for approved expenditure incurred on operating technology enabled healthcare services like telemedicine, remote radiology etc. should be allowed for improving accessibility, affordability & quality healthcare in remote areas.
- Exemption from Excise Duty on equipment manufactured or assembled in India, wherein the value of imported raw material content does not exceed 50% of complete equipment cost.
- Zero custom duty on all imported raw materials by manufacturers, wherein the imported raw material content is limited up to 50% of complete equipment cost.
- Any new capital expenditure towards replacement of old machinery/equipment in hospitals, at any time, be entitled to 100% deduction.
- 250% deduction of approved expenditure incurred on R&D activities related to indigenous development of medical technology should be provided.
- Manufacturers of indigenous medical technological products to be granted complete tax exemption from MAT.
- R&D Cess to be Cenvatable with Excise duty.
- Increase in Tax holiday from current five year to ten year time frame under section 80-IB for private healthcare providers in non-metros for minimum of 50 bedded hospitals instead of current 100 beds.
The Indian Healthcare delivery segment provides a robust growth opportunity for private healthcare organisations given the increase in lifestyle related diseases, demographic changes and rising awareness levels. A continuing lack of adequate healthcare infrastructure and limited access to quality healthcare delivery services will result in private players playing a larger role in bridging the demand supply gap in the industry. Healthcare Companies will continue to explore various options and business models in order to expand their presence both from a geographic and a therapeutic segment perspective.
Given the capital intensive nature of the business, organisations will endeavor to look actively at various funding options including private equity and other avenues of capital availability. While shortage of healthcare professional will remain a challenge, the companies that have an established brand name will continue to attract and retain the best available talent pool. With the public healthcare system being inadequate to address the population’s healthcare needs, PPP models should be given momentum in order to garner higher private participation and provide the much needed access and quality healthcare services to the population.
Resouce: - http://money.livemint.com/news/sector/outlook/healthcare-sector-seeks-increase-in-import-duty-on-medical-devices-361069.aspx#sthash.lEzIIN5W.dpuf
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