The Indian healthcare industry, perceived to be insulated from the vagaries of the economy, is also facing the heat of recent global economic events. However, it isn't all bad news, as HNN discover the insight of the industry.
When 1,900 hundred employees of the Indian aviation industry across various cities were suddenly sacked, ground reality hit hard. Pink slips, job cuts, reducing salaries, cost-cutting, ever escalating inflation rates — the times are indeed tough for the average man faced with global economic meltdown. Cut to healthcare and the so-called 'recession- proof' or 'insulated' healthcare industry is also feeling the ripples.
Insulated from the Economy
Most analysts believe that the healthcare industry is relatively insulated from the current economic crisis. The industry should be able to weather the current economic storm because healthcare is a necessity and is therefore not likely to be sacrificed, unlike luxuries like certain consumer goods or services. Ill health always prompts people to seek medical care, irrespective of the state of the economy. As Suyash Borar, COO, BM Birla Heart and Research Centre, Kolkata, points out, "When someone needs cardiac care, they would not worry about recession or market conditions.
In fact, due to rise in stress levels, the need for immediate healthcare would escalate further." However, many experts are still in the wait and watch mode. "Healthcare is a recession-proof industry and hence the impact is limited in this segment. Having said that, one cannot overlook the fact that the nature of this slowdown is due to a financial crisis which can impact all sectors, including healthcare, at the corporate level," avers Dimple Sanghi, Executive Director, IndiVision India Partners— a private equity fund of Future Capital Holdings, which invested in Hyderabad-based Global Hospitals through convertibles.
Vishal Bali, CEO and MD, Wockhardt Hospitals Group, says, "We will have to wait for the future to see how and where the financial funding and banking process takes us."
However, the ‘insulated’ healthcare industry is also facing the heat. The impact is mainly noticed in a funds crunch in new projects or expansion plans. Reportedly, many hospital groups have either postponed or put their expansion plans on hold. "Except for ones which are 75 per cent complete, projects have definitely slowed down," observes an expert.
"The new hospital projects coming up will definitely be affected because of the liquidity crunch in the market, as debt funding has become more expensive," opines Anupam Verma, CEO, DM Healthcare, a healthcare-specific PE firm. The anticipated liquidity crunch is making banks cautious about lending to newer ventures. Thus, the impact of this on the hospital segment is a likely slowing down of the expansion projects that were being vigorously pursued in the last few years. Analysts say groups who are dependent on debt funding are already feeling the heat. Dr Vivek Desai, MD of HOSMAC India, a leading hospital consultancy firm concurs, "Those who were planning higher debt equity ratios to fund the project will perhaps delay the commencement date till interest rates soften."
Says Murali Nair, Partner, E&Y, "In the next six months, there will be a slowdown in new projects as the overall sentiments are irrationally pessimistic. However, considering that the GDP is expected to grow at 7 per cent, which is a good growth, and the fact that we have predominantly a sick care system, this is only a temporary aberration arising out of irrational paranoia and will correct itself in the next 12-18 months."
Reportedly, a corporate group focussing on cardiology has delayed its Kolkata projects and the recruited employees have been shifted to Delhi. The Manipal Group, too, has slowed down expansion of projects due to the liquidity crunch. Dr Ranjan Pai, CEO, Manipal Education and Medical Group, claims, "There has been no real impact other than fund availability for expansion. Hence expansion capital will be constrained."
Dr Lal Pathlabs, a leading diagnostic chain, has preferred to decelerate a little and deferred some of its new satellite clinic projects. Dr OP Manchanda, CEO, Dr Lal Pathlabs, reveals, "We have cut down on our tele-radiology or satellite projects. However, as far as our expansion plans go, we haven't really halted any project." It is a similar story at Care Group of Hospitals, which has planned a major pan-India expansion spree. "We are a little cautious. The valuation for acquiring a new business is decreasing, as the economy is slowing down," says Kasi Raju, COO, Care Group of Hospitals.
No Prescription
As the economic meltdown is claiming more jobs, those with no health insurance are increasingly likely to stop filling their regular prescriptions, reduce their visits to the physicians or even stop seeking tests as preventive measures. Jumana Barnagarwala, Head, Healthcare Consulting, Datamonitor, illustrates, "This was evidenced when Pfizer blamed a 13 per cent decline in the sales of its best-selling drug Lipitor in the US on financially-affected patients not filling their prescriptions."
Will Charity Stop?
The most profound effect of the economic slowdown in healthcare has been the drying up of charity funding for some hospitals. Dr Aravind Srinivasan, Administrator, Aravind Eye Care Systems, Madurai, admits, "Our CSR activities have also been affected. While earlier there was a lot of free disposable investment available in terms of charity, the emotional investment is drying out, for survival itself is now doubtful."
However, Col Manesh Masand, CEO, Jaslok Hospital, a trust hospital in Mumbai, differs, "Why should charity decline? It will not and there is no need to worry about sustaining the current model." Dr George Chandy, Director, CMC, Vellore also insists that there has been no impact whatsoever of the global economic meltdown on charity work.
Tighten your Belts
Though the Indian healthcare industry has not seen job cuts so far, HR procurement has slowed down and in some cases organisations have put a freeze on recruitment except for positions which are absolutely critical or in line with strategy. Apollo Hospitals Group is a case in point. It has already taken certain steps to soften the blow of global meltdown by restructuring its internal cost framework and bringing in operational efficiency. The Group has restricted its recruitment.
Says Dr K Prabakar, VP, HR, Apollo Hospitals Group, "Unit heads have to justify requirements for replacements and all new recruitments will have to go through clear sanctions for the next six months." The Group is banking upon multi tasking of human resource at the second level like managers and supervisors. It has cut down on travel expenditure unless very essential. "We are doing most of our management review meetings through video conferencing rather than travelling," shares Dr Prabakar.
Beckman Coulter, leading manufacturer of clinical diagnostics equipment, has gone for a recruitment freeze, at least for the next year. The company has also cut down on overseas travel, and internal travel is very controlled. Dr SP Chandrashekar, Managing Director, Beckman Coulter India, elaborates, "As a multinational, for some of our internal marketing activities we had proposed to get foreign brand ambassadors to speak. This did not happen as we have cut down on foreign travel in India-specific activities."
Becton Dickinson & Co has also tightened its cost-intensive measures. Says Ram Sharma, Managing Director, Becton Dickinson & Co, "Typically, we are being 'smart' in how we spend. In the current situation when the investment in less, we maintain our capex and look at areas of waste-reduction. It is not really cost-cautiousness. It has just made us focused. During boom-time, if we want to do 10 things we may end up doing all 10, but now, maybe we will do only three. We focus on functioning efficiently. When it comes to travel, we ensure that we book our flights early so that we are able to get the best rates." At its plants, BD is regularly mapping its productivity and thus discovering areas of waste-reduction to enhance its productivity. It is also trying to delay unnecessary expenses without affecting customer services.
While some say it's a correction phase, others feel that it's a consolidation phase. Nevertheless, the fact is that healthcare companies have started 'trimming the fat.' Cost-cutting is a regular and consistent occurrence, except now they are sensitive to the market conditions. Dr Pai avers, "There have been no salary cuts and no job cuts in Manipal. However, we have asked our people to travel less and only if absolutely necessary."
IT has a Problem
Another segment which is in for some tough times, according to reports, is Healthcare IT (HIT) since these companies are dependent on VC funding which is drying up. This is likely to lead to greater consolidation among the smaller players. Those HIT companies that are targeting physician practice are likely to be wiped out because physicians will not consider buying IT solutions when there are no patients to manage.
Seema Gupta, Managing Director, ARYA Hospital Management Solutions, muses, "For every new equipment or IT implementation, hospitals are asking for RoI. We have to prove our RoI for even the smallest thing." Larger HIT companies with existing big clients will have to be satisfied with service and maintenance earnings on products already sold.
Barnagarwala believes that internet-based and consumer-facing HIT companies that provide healthcare solutions may do well because they are essentially dependent on advertising revenues for their sustenance (for example a medical portal like WebMD's advertising revenue for Q3-2008 was reported to have risen substantially compared to last year). "In the US, software outsourcing services will come down temporarily similar to any other outsourcing services —but will definitely improve in the long term given the cost benefits," assures Chandrasekar Kandasamy, Managing Director, ePlanet Ventures, a global VC firm that has announced an investment of $5.5 million in Trivitron.
Not Life or Death
Experts say there will be a negative impact on consumer spending but only related to discretionary part of healthcare services like cosmetic and allied surgeries rather than the necessary part which includes cardiac or neurological disease treatment. Opines Daljit Singh, President, Operations and Strategy, Fortis Healthcare, "The only area of care delivery which may slow down somewhat is the arena of 'elective non-life threatening surgeries' which could be deferred to better times."
Dollar Tours
Experts view the global meltdown as a considerable threat to the booming medical tourism industry in India. Verma, who is also the Vice President of the Medical Tourism Council of Maharashtra, feels that as a consequence of recession many people in the West will no longer be able to afford insurance, and thus medical tourism will also take a beating as people will try and prioritise their healthcare needs and wait for economic conditions to get better. However, Dr Hari Prasad, CEO, Apollo Hospitals, Hyderabad feels that medical tourism will not have any negative impact on Indian healthcare. "We believe that there will be no impact in the Indian environment and on the global platform, the impact will be positive. With the dollar strengthening against the rupee we see more patients coming into the country for advanced healthcare," he predicts.
Overseas Effects
The New York Times in its report 'Hospitals see drop in Paying Patients' points out that healthcare is no longer recession-proof, and any medical care that can be delayed will be delayed. The article goes on to say, "some patients without insurance seem to be deferring treatments like knee replacement, hernia repair and weight-loss surgeries— the kind of procedures that are among the most lucrative to hospitals. Just as consumers are hesitant to make any sort of big financial decision right now, some patients may feel too financially insecure to take time off work or spend what could be thousands of dollars in out-of-pocket expenses for elective treatments."
In fact, Florida-based non-profit organisation, Shands HealthCare, cited poor economy and lower patient demand while announcing that it would shut down one of its eight hospitals and move patients and staff to its nearby facilities. According to news reports, the 367-bed Gainesville hospital that is closing lost $12 million last year.
In the US, in 62 per cent of hospitals admissions are almost flat to down by two to three per cent. The patients lost are the lucrative paying customers. At the same time, with many job losses the number of uninsured is rising, resulting in huge losses.
The Good News
Realistic real estate: The current slump in real estate prices due to the battered market is good news for healthcare. Srinivasan of Arvind Eye posits, "As real estate prices have corrected, now we can probably think about newer projects. We can negotiate better. Now land is available at a more reasonable rate." Raju of Care Group echoes, "Real estate prices had shot up abnormally and now they have reached a reasonable value."
No Greener Pastures: On the positive side, the economic slowdown has resulted in reduced attrition. This is because the paying capacity of other verticals has reduced, and, healthcare has emerged as a 'safer' option. Says Ankush Gupta, Manager, HR, PD Hinduja Hospital, Mumbai, "Uncertainty leads to dilemmas, leading in turn to difficulty and delay in decision making for job seekers. Job hoppers who generally show great confidence in changing jobs are also very cautious, and they are also looking for information like years of existence in the business, reserves and surpluses, and the long-term and short-term strategies of the organisation."
Singh too feels that a positive effect will be reduction in attrition. "The impact will be better for the 'non medical' cadre as compared to the medical cadre," he says. However, Dr Prabakar of Apollo begs to differ. "We track the attrition rate on a month-to-month basis and have identified no drastic change in the attrition of nursing staff and junior doctors who still prefer exploring markets like the Middle East."
Still bullish: Despite the poor sentiment, PE firms seem keener on healthcare now than ever before. What makes PE funds bullish about this sector is that healthcare is not dependent upon the market sensex. Dr Alok Aggarwal, Chairman, Evalueserve Inc, explains, "PE funds are bullish on healthcare or biotech sector, because per se it is definitely less risky and with the rising incidence of chronic diseases, it will indeed mean that healthcare would be in demand." "PEs are looking at healthcare investments in a serious way as the industry has good potential to grow and gives steady returns," Dr Desai of HOSMAC shares.
Better Bargain: Across the spectrum, bargains will be harder. "If you charge it at a higher rate you need to prove its valuation. If you don't, people won't pay you a premium. In fact, this is a great time to increase focus on the customer. We would also look for acquiring new businesses where somebody has vacated that area so that we can keep those customers forever," Sharma of Bector Dickinson reveals.
Giffen Good Situation for Health Insurance?
One of the sectors which is perceived to feel the maximum brunt is insurance. As Barnagarwala explains, "Health insurance companies are affected adversely by this crisis because of their inability to raise prices in a declining market even as the costs of drugs and healthcare services continue to rise, further compounded by the reduction in the usage of healthcare services by those insured or those losing health insurance benefits due to increasing lay-offs."
Many corporates, predominantly top-notch IT companies and BPOs, are reducing the health insurance coverage for their employees, following a sharp increase in premium rates. Some corporates have also removed parents of employees from their group insurance scheme, restricting the benefit only to the staff. IT companies, which have conventionally offered substantial health covers for their staff as a human resource incentive, are now choosing to cut costs by initiating a co-payment structure (where an employee has to partly bear the cost) or by doing away with the cover altogether. Says an expert, "People will not take insurance, or will pay smaller premiums. Less pay in insurance would obviously mean a setback to an industry which is growing by almost 40 per cent per year."
However, some experts argue that this industry would not be affected as much because insurance penetration in this country is low. Another reason for the impact not to be felt is that most contracts are annual and hence if the recession continues until the next fiscal year, then contracts would probably be terminated. B Madhavan, CEO, MediAssist, a TPA, believes, "While other insurance is directly dependent on the economic conditions, that is not the case with healthcare. While it is indirect, the effect would mean cutting down of corporate spending on healthcare. The tendency to spend on healthcare would probably be less. Also, instead of 100 per cent reimbursement as earlier, corporates may reduce it to 80-90 per cent with 10-20 per cent payment by the employee."
"The impact of recession is yet to be felt in healthcare insurance. It is expected to be felt if the recession continues for a longer period, around a year. While IT companies have already started cutting employee welfare benefits, insurance healthcare is one of the least affected ones as it is primarily need-based," Madhavan reasons.
Deepak Mendiratta, MD, Health and Insurance Integrated, has a different view about how the healthcare insurance sector will score in the midst of global meltdown. He believes that the concept of Giffen goods will make the healthcare insurance more attractive now. This is a concept in economics in which people consume more as price rises, violating the law of demand. "In the Giffen good situation, cheaper close substitutes are not available. Because of the lack of substitutes, the income effect dominates, leading people to buy more of the good, even as its price rises. Similarly, in the matured economy the price of health insurance will also rise because the price of the healthcare is rising. The rise in healthcare prices means that insurance companies have to shell out more money. As a result, the pool available to them is less profitable. In addition, as the healthcare cost rises, the individual realises that it is riskier not to be covered by health insurance any longer," Mendiratta explains.
The Impact on Medical Equipment
The lack of liquidity may affect the market for medical devices (particularly those that are very expensive) because hospitals may not wish to commit large funds which could be better utilised in creating patient-pull. However, the effect hasn't percolated yet as most medical equipment companies deny feeling any recession blues.
K Mohanlal, Managing Director, Esaote India, a leading manufacturer of ultrasound imaging, insists, "We have not seen the impact yet. But if this recession period continues then there will be some impact in this industry." However, the company does admit to strategically changing its growth plans wherein it will now focus on cost-sensitive products instead of high-end products. "As we have been growing by almost 30 per cent per year, probably there will be a drop of 10 per cent. However, this is not merely because of recession, but because of Indian consumer needs. Nevertheless, subconsciously it has made us more focused about targeting lower premium products," he adds.
Maquet also denies any dramatic change, but does admit delays in sales of its new projects. Says Ashim Purohit, CEO, Maquet, "Though there is no immediate setback on our sales at the moment, we definitely foresee delays in some projects. However, it is likely to be a passing phase. Knowing the grit and determination of the Indian industry, it's not hard to visualise an even stronger rebound. But for sure, it's going to be a different marketplace from now on." For being seemingly unaffected by the current tide, Michael Rieder, Getinge Medical Systems, Vice President, Sales and Marketing, reasons, "Maquet is interacting with acute care hospitals on a global scale with more than 30 subsidiaries and over 200 distributors. We do see a high potential for growth for medical device companies, especially in emerging markets, such as India. In addition, we have established ourselves in new market segments. By honouring our origins in surgical infrastructure, we develop Maquet systematically into a therapeutic medical company."
According to Dr SP Chandrashekar, Managing Director, Beckman Coulter India, there has been a negative impact as some hospitals are postponing their decisions to buy capital equipment. Experts feel that healthcare companies that are not likely to be affected greatly are those that deal in inexpensive devices and supplies that are used in hospitals. "For example, high profit gains for the last quarter were reported by Becton Dickinson & Co and Baxter International Inc, and they even increased their full-year earnings estimates. That is because Baxter sells drugs for treatment of blood and immune disorders, while Becton Dickinson specialises in syringes and surgical tools which are considered essentials in a hospital," says Barnagarwala.
The medical technology market was billed to be worth about $2.7 billion in 2006 and is likely to cross $10 billion by 2012 with a growth rate of over 20 per cent. It is estimated that over 85 per cent of medical devices and equipment are imported and the market is primarily dominated by MNCs. Most MNCs currently source their products from China through OEM arrangements, joint ventures or own manufacturing facilities. With the Indian software and hardware strengths, and the overall increase in prices in China, India could become a potential alternate sourcing centre for such MNCs.
"We continue to be bullish on the healthcare industry - especially the medical technology space. With the costs of imports going up, we believe that a number of domestic companies would evolve, as Indian consumers would look for low-cost devices / equipment. We also believe that there could be consolidation of smaller players through acquisition by larger players who have a strong sales, distribution and support network. Foreign companies would also look to acquire smaller niche companies for product diversification and lower pricing advantages," believes Kandasamy of ePlanet Ventures.
Given the rise in the value of the dollar, the cost of purchases is expected to increase, which may increase the capital expenditure or the margins of companies engaged in healthcare. "The opportunities for the Indian healthcare manufacturing industry will increase, as more companies like Trivitron would get into local manufacturing of devices or equipment," Kandasamy argues.
Rays of Light
According to Kandasamy, "With reference to the domestic market, healthcare expenditure will continue to grow— though the estimates of US$67.5 billion by 2012 may decrease nominally. CROs and CMOs will continue to grow in the long term, though they may have a temporary setback, due to general recession in the economy." He adds, "While the growth will definitely be there, there will be a decline in growth percentages due to general recession. However, as in the Indian telecom industry, where a number of domestic players evolved due to cost advantages, we believe this could happen in the healthcare space."
Nair believes that this is an excellent opportunity for Indian healthcare industry players to come together and exploit the opportunity of drawing overseas patients-where there is true recession-through targeted marketing initiatives. Like the NASSCOM for IT, healthcare needs to adopt a collaborative approach to win the overseas market, he says.
So while the dark clouds of meltdown might be obscuring the sunrise industry right now, rays of light are peeping through around the edges.
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