Ashok Reddy, 56, requires dialysis thrice a week after a prolonged tryst with diabetes led to irreversible kidney failure a year ago. The relentless stress of Reddy’s condition was made worse by the two-hour wait at a multi-specialty hospital in Hyderabad, and this was before the five-hour-long treatment could begin. His son, Sriram, 30, patiently endured the long disruptions to their normal life alongside his father. What choice did they have?
The Reddys’ account touches a chord because it could happen to any one of us. The Indian healthcare market is woefully under-served. There are just 1.1 beds and 0.7 doctors for every 1,000 patients compared with three beds and 1.4 doctors per 1,000 patients globally, according to a report by Technopak. The Indian government spends as little as 1.1% of its GDP on public healthcare and private providers make up almost 70% of the country’s healthcare infrastructure.
Much of this investment has been in the form of multi-specialty tertiary care hospitals in cities, complemented by secondary nursing homes and primary clinics. But there still aren’t enough beds to cater to all the ailing in the country — it’s not easy for even private players to scale up, given the ever-burgeoning real estate costs. So, even if some people can afford to pay for private healthcare, many others end up falling into the yawning gap between demand and supply.
It is this gap that brave new formats in healthcare are trying to bridge. They come in the form of single specialty hospitals, day-care centres and low-cost healthcare models. These upstarts are not only aiming for patient segments that aren’t getting enough attention from multi-specialty hospitals but also heading out to towns and villages where the demand-supply gap is even more glaring. Hospital chains like Lifespring and Vaatsalya, for instance, focus on providing affordable birthing options with a focus on reducing infant mortality. Their no-frills services, in fact, cost 50-60% less than private clinics, and only a tenth of what they would cost at a super specialty hospital.
New and improved
Single specialty hospitals can be classified depending on the ailment (such as eye, dental or kidney care) or the clientele they cater to (such as geriatric, maternity and paediatric). There are chains catering to nearly every segment. Where players like Vasan Healthcare, Centre for Sight and Eye-Q are targeting the over $2 billion ophthalmology market, White Dental Care and Narayana Hrudayalaya Dental Clinic are chasing the $1 billion oral health care space.
Chains such as Cloud Nine and Lifespring Healthcare cater to the maternity segments while NephroPlus and Nephrolife are pumping money into kidney care. These formats work better because they are not capital intensive and generate better returns because they take less time to break even. For instance, you can set up an eye care centre targeting a population of around 2 million for just Rs.3-4 crore and it will take about six to nine months to break even while a dental care centre in a city can cost not more than Rs.1 crore and eight months to break even.
“Single specialty models are like teaching your child to become a sprinter but multi-specialty models are like getting him to become a decathlete,” is how Sameer Mehta, director, Dr Mehta’s Hospital, and advisor to several private equity (PE) funds, puts it. “A multi-specialty hospital is very complex as you have to teach him to do 10 different things well.” Is it any wonder that investors are interested in such an asset-light model?
“Single specialty chains in the US have proved to be success stories for PE/venture capital players, and a similar trend is emerging in India.” Mehta adds. Already, private equity has invested around $3.5 billion in healthcare services in the past five years and, of these, the new formats have managed to grab $422 million (see: Checking in).
Single specialty hospitals chains are hot favourites with private equity and venture capital investors
Day care centres however, work on a slightly different approach. A day care centre caters to ambulatory or outpatient surgeries and procedures, where the patient doesn’t require overnight hospital stay. Medical day care centres first emerged in the US in the early 1970s, when overcrowded hospitals caused long waiting periods for patients who needed only minor surgeries.
Today, over 6,500 day care centres perform almost 75% of surgeries in the US compared with just 20% in India. What’s more, Technopak says the unmet short-stay surgeries market in India, which is estimated at $3 billion, is expected to grow to $12 billion by 2022. That’s some market waiting to be stitched up (see: Short on time, high on income).
Short on time, high on income
Short-stay surgery market in India is set to boom as doctors and patients embrace the distributed healthcare model
Here’s a fact that’s very pertinent in this context: the key metric used by the healthcare industry to measure efficiency is average length of stay (ALOS). It’s not only patients who want to go back home quickly; hospitals are just as keen on reducing overhead costs by discharging them as soon as possible.
“In the hotel business, the longer the person stays, the more money the hotel makes,” says Avnish Bajaj, MD, Matrix Partners India, which has invested in Centre for Sight and Cloud Nine. “In the healthcare business, it is the other way around — the hospital makes the most in the first 24 hours.” That’s why day care centres make so much business sense. Patients stay on for longer not because they have to, but because the processes aren’t efficient enough.
Well, at least most of the time. Quips Suresh Soni, chairman of the Bengaluru-based Nova Medical Centers, “Unless you have a troublesome mother-in-law back home, no one really wants to stay in a hospital. About 70% of our patients return home the same day.” Nova has 10 centres across the country and plans to add around 25 more by 2015 — the company raised $54 million from Goldman Sachs and New Enterprise Associates (NEA) to fund this expansion. It has thus far raised $90 million to fund its plans.
But it would appear that day care centres less easily persuade patients. “People favour full-service hospitals even for minor procedures rather than a specialty surgery centre,” says Ankur Sahu, co-head of private equity investing at Goldman Sachs in Asia. “This is a culture change that will happen in time.” Most people head to multi-specialty hospitals either because they regard them as a reliable option in tertiary healthcare or that their consultant is attached to a particular hospital. But as the new formats start to flourish and are able to offer a similar patient experience at affordable prices, the transition from multi-specialty hospitals to specialty surgery centres will happen.
Perhaps the biggest advantage these new formats have is their ability to lower the cost of healthcare. Nova claims to offer the same procedures as multi-specialty hospitals at almost 20-25% cheaper rates. “We cut down on real estate and operational costs given the smaller footprint of our centres,” says Soni.
Monthly operating costs of a day care centre end up 75-80% lower than big hospitals because of the space involved: Nova, for instance, runs 25-bed centres in 15,000-20,0000 sq ft of leased space with support staff of 35; a multi-specialty hospital typically needs 100 beds in 100,000 sq ft supported by a staff of 300. As it happens, Nova Medical is also exploring the fertility treatment space with three IVF centres (two more opening in October) and plans to open 30 clinics by 2015 to tap the $1 billion fertility treatments market.
The corporate connection
It’s not that neighbourhood clinics are new arrivals — they have been around for years as single doctor practices in eye and dental care and maternity nursing homes. But now, given their limited ability to scale up, many are joining hands with the upcoming corporate chains. “The writing is on the wall for doctors,” says Matrix’s Bajaj. “A single doctor practice cannot expand beyond a point, so it only makes sense when doctors join these corporate chains.”
That’s already happening in eye care. Single specialty hospital brands such as Vasan Healthcare, Maxivision, Centre for Sight and Eye-Q are scaling up their operations across the country as PE/VC investors place heavy bets on these chains. For instance, Centre for Sight plans to take its 41 centres up to 75 by 2017; and Maxivision wants to expand from 17 to 25 centres in the next two years. And since Vasan’s first clinic opened in Trichy in 2001, the brand has scaled up to an impressive 125 centres across 75 cities where 25,000 patients are treated every day. It branched into dental care in 2011 and has rapidly grown to 20 centres.
Money has not been a problem — PE players like Sequoia Capital and Westbridge Advisors and sovereign funds like GIC Singapore, which have pumped $150 million into the company over the past three years, have nicely supported Vasan. AM Arun, chairman of Vasan Healthcare, expects to have 250 eye care and 100 dental centres in the next three years — he has also fixed ambitious revenue targets of Rs.850-900 crore in FY13 as against Rs.550 crore in FY12. “Given the huge demand-supply gap in healthcare, there is room for at least another 10 players like us to come into the market today,” Arun says.
The successes in the eye care sector are inspiring players such as Alliance Dental Care, Narayana Hrudayalaya Dental Clinic and Axiss Dental, who want to replicate those achievements in the dental care space. Naryana Hrudayalaya Dental Clinic, which has around 35 clinics predominantly in Bengaluru and Kolkata, plans to invest Rs.150 crore to expand to 200 clinics in the next three years, while White Dental Care is looking to set up 100 clinics in the next 18-24 months.
White is owned by Alliance Dental Care, a 70:30 joint venture between Apollo Hospitals and Trivitron Healthcare. It is currently in talks with investors to raise almost Rs.60 crore via debt and equity to fund its expansion plans and aims to make the leap from the projected Rs.35-40 crore in FY13 to Rs.100 crore once the expansion comes to a close.
Interestingly, the dental chain’s expansion will be across formats: mostly neighbourhood clinics, but also four or five dental spas and seven-eight corrective surgery studios. The current 25 clinics include a seven-star dental spa in Chennai, where you can add the sparkle of Swarovski crystals to your grin, or have a pedicure to take your mind off the buzz of the drill. “We want to take the pain out of dentistry,” says VS Venkatesh, CEO, White Dental Care. “A healthcare provider cannot have just one business model, so we decided to explore
formats for all segments.”
High cost of living
Clearly, the new delivery models aren’t only about affordability and easy access to healthcare services — there’s an entire segment dedicated to luxury healthcare. While Apollo and Fortis have been targeting the high-end maternity segment through chains like The Cradle and La Femme, newer players like the Bengaluru-based Cloud Nine (which broke off from being part of The Cradle to form an independent entity) are also finding their niche in this space. The five-year old boutique maternity chain positions itself as “celebrating” childbirth — so new mothers can get professional portraits photographed of their baby and recuperate in ultra luxurious suites decorated with flowers and pink or blue balloons.
Cloud Nine, which also offers paediatric care, currently operates out of four centres in Bengaluru — there’s a fifth one coming up in the next couple of months. It has received a little more than $10 million from Matrix Partners to fund its expansion plans, which includes setting up centres in Chennai and Mumbai over the next year. This business model, though, will take longer to scale up — every centre costs about Rs.20 crore to set up and four years to break even. “We cannot scale up our operations as quickly as ophthalmic or dental chains,” says MA Rohit, director of Cloud Nine. “Our biggest challenge is to make sure we don’t lose our personalised touch as we expand,” he points out.
Single specialty, short stay and day care centres clearly fulfil a need in the acute medical care space — whether it is for minor surgeries or maternity — but will the neighbourhood clinic concept work as well in cases requiring chronic care? Certainly, insist several industry observers, pointing to the success of Davita (1,800 centres) and Fresnius (2.300 centres) as the perfect example — the top-two dialysis chains in the US control 70% of the market between them.
The case in India, though, is not the same. Only 70,000 of the 1 million kidney failure patients in the country have access to dialysis — there is such a shortage of dialysis machines that even people who can afford it aren’t able to access treatment. Now, dialysis chains like NephroPlus and Nephrolife are hoping to serve this market by setting up centres across the country. “Given that you need lifelong treatment, you don’t want to travel great distances to get dialysis done at hospitals,” explains Siddharth Nautiyal, director, Bessemer Venture Partners India, which has invested in NephroPlus. “There is a definite need for standalone dialysis centres in the country today.”
Affordability is moot — each dialysis session costs around Rs.800-3,000, depending on where you get it done. To get over this dilemma, companies are entering into varied public private partnerships (PPP) where the government subsidises the treatment through various schemes such as the state-run Arogyasri in Andhra Pradesh.
After raising funds from Bessemer in 2011, NephroPlus currently operates out of 12 centres with plans to open 100 across the country in the next three years. “The economics works firmly in our favour only if we scale up to around 100-150 centres,” says Vikram Vuppula, managing director and CEO, NephroPlus. There are, of course, other battles to be fought. “With only around 900 nephrologists in the country, one of the biggest challenges to scaling up is finding resources,” worries the 35-year-old Vuppula.
Naturally, not all chronic diseases can be handled by neighbourhood clinics — for instance, oncology is more capital intensive than other specialties (see: Horses for courses). It fares better with a hub-and-spoke model, where the hospital has a centre to handle surgeries, and day care counterparts in smaller towns offer standard treatments like chemotherapy and radiation. HealthCare Global, India’s largest oncology chain with 25 centres including three centres of excellence is following this model.
Horse for courses
The single specialty model may not work in capital-intensive chronic illnesses such as cancer
But the chain found it difficult to snare its first set of investors. “Most investors we spoke to didn’t think an oncology chain could scale up,” explains Ajaikumar, chairman and CEO, HealthCare Global. “Our investment banker almost gave up, saying we should do an IPO.” Eventually, IDFC (which has since exited), Premji Invest, Milestone Religare and Evolvence brought Rs.170 crore into the company. Ajaikumar says revenue is likely to be closer to Rs.500 crore with an EBITDA of around Rs.100 crore in FY13. “Scalability is all about standardisation,” he says. “If you have non-standardised procedures, you can’t achieve efficiency.”
But standardisation is not always easy. KM Cherian, chairman and CEO of the Frontier Lifeline Hospitals, which is into cardiac care and where Rajasthan Venture Capital Fund picked up an 11% stake in May 2012, certainly thinks so. “Even as you standardise your process, you have to customise according to individual patients; and that makes healthcare much more complex,” he says. For instance, patients in cardiac care often come with multiple complications such as high blood pressure or diabetes, which can lead to kidney failure; the treatment pattern needs to be customised keeping all these conditions in mind. “In healthcare, you cannot standardise like you can at McDonalds,” he concludes.
Stitching it up
Still, most healthcare players and industry observers believe these new formats could well be the answer to India’s healthcare woes, Before they get there, though, there are several challenges to be overcome. For one, availability of real estate is a huge bugbear for single specialty chains, as it is for multi-specialty hospitals, forcing them to go slow on their expansion. “Location will play a critical factor in our success because people don’t want to travel for a long time to get to their dentist,” says White’s Venkatesh. “The challenge will be to keep costs low while we acquire a national footprint.”
Execution is another critical element. “The opportunity is huge but execution is going to be critical because it’s a location-based business,” says Ben Mathias, executive director, NEA India, a VC firm. “You have to manage multiple locations and scale across the country while ensuring uniform quality. So, back-end technology and processes have to be extremely strong.” Finally, you need to drive down healthcare costs. “Bringing in the latest technology and charging high prices will not work in this country,” says GSK Velu, co-founder and chairman, Medfort Hospitals, which owns the Maxivision Eye Hospital brand.
Instead, what may work is branded healthcare. “The younger generation of today looks for big brands, whether it is a Louis Vuitton bag or a Saravana Bhavan dosa, so brands will get built in the healthcare space as well,” proclaims Velu confidently. Stronger brands also mean reduced dependence on doctors, leading to a steadier source of revenue for healthcare chains. “Single specialty hospitals depend less on doctors and more on processes,” observes Vijay Kaushik, vice-president, Veda Corporate Advisors. “The brand has become more important than the doctor. A good 60-65% of revenue flows in even if you don’t have any superstar doctors on your payroll.” And that would make these chains more sustainable over the long term.
PE/VC investors are definitely betting on that, with more than 45% of the total investments ($422 million) in the new formats coming in 2012 alone. “Investors need to generate returns. The returns from single specialty hospitals are much better than multi-specialty because they are less capital-intensive,” points out Srinivas Baratam, managing partner of Mumbai-based Milestone Religare Investment Advisors. So there is little doubt that investors will continue to court these asset-light models. They are willing to pay a significant premium for a bite of the action. On an average, healthcare deals are valued at around 10-15 times the revenue and about 14-25 times EBITDA.
But not all of them will make it in the final diagnosis. “A lot of the capital invested will not generate returns,” remarks Y Rama Rao, MD and CEO, Spark Capital, the i-bank that has with Vasan Healthcare and Vaatsalya. “Still, if the present pace of investments continue, the patient-customer will gain — he will have easier access to better healthcare at extremely affordable costs.”
Sriram Reddy definitely agrees. He decided to give NephroPlus a try on his friend’s recommendation. Now, he walks his father over to NephroPlus’ East Marredpally centre, which is not only 10 minutes away from their home, he also pays 30% less for the treatment. And that’s not a bad deal after all.