The global healthcare sector is going through some tectonic shifts. As providers, payers and investors across the world strive to deliver effective, efficient and equitable care, it is resulting in an ecosystem that is unlocking new operating models. These are being fuelled at the macro level by ageing and growing populations, the proliferation of high-cost chronic diseases and consumers' increased focus on care quality and value. The evolving financial and quality regulations, informed and empowered consumers, innovative treatment methods and technologies, and a significant rise in real estate costs, especially in emerging economies like India, are shaping a new healthcare delivery segment. The $160 billion Indian healthcare sector is poised to grow to $372 billion by 2022. And the hospital sector, currently valued at $62 billion, is growing at a CAGR of 16-17 per cent and is poised to reach $133 billion by 2023.
Private equity and venture capital have driven the growth of the healthcare delivery sector in India. In the last decade, different players have raised more than $3.4 billion to invest in infrastructure, medical technology and state-of-the-art clinical delivery, giving Indian patients access to a globally benchmarked private healthcare delivery ecosystem. This first wave of capital gave rise to many multispeciality hospital networks which expanded across the country. It also led to the creation of large standalone hospitals. The average bed capacity ranged from 300-500 with an average requirement of 850-900 sq. ft/bed. The capex of a large-format hospital, on the back of high real estate cost, imported medical equipment and support infrastructure, could amount to `80 lakh-1.1 crore per bed. It is happening when prices of procedures and consumables are being capped, pushing the payback period to more than seven years. The inherent complexity of large-format and tertiary-care multispeciality hospitals is that they operate on an asset-heavy model. The increasing cost structures and consistent capex requirements with late teens EBITDA margins have also pushed back the RoCE of large hospital chains to less than 10 per cent. For any sector to grow, the companies that constitute it must continue to evolve their business models. But the current trajectory of upward costs is having a significant impact on the return ratios of the stakeholders in the sector. The demographic, financial, operational and regulatory considerations have given rise to a new era of single-speciality healthcare delivery.
The underlying principle behind the single-speciality healthcare delivery is that these networks are scalable, replicable, capex-light and can lead to RoCEs upwards of 20 per cent. Over the last decade, in a second wave, more than $625 million of PE/VC capital has funded single-speciality hospitals specialising in oncology, ophthalmology, gynaecology, paediatrics, orthopaedics and gastroenterology besides daycare clinics in IVF, nephrology and dentistry. The rising power of capital behind these companies has shown a significant increase in the number of single-speciality healthcare delivery networks in the country.
More than a third of the PE/VC investment deals in the sector involved single-speciality chains. Their asset-light structure and significantly higher volumes deliver EBITDA break-even in the first year. This structure also allows for higher economies of scale.
A case in point is Motherhood Women and Children's network of hospitals which has a pan-India presence. To drive a significant upside in the economies of scale, the chain is building multiple hospitals in a single city. It operates six facilities in Bengaluru, three of which have been added last year. Single-speciality hospitals also have the opportunity to provide deeper therapeutic focus and offer best-in-class clinical protocols due to the vast repository of knowledge and experience in their speciality. The American Oncology Institute, which has scaled to a network of seven cancer hospitals in South Asia, offers oncology treatment protocols developed at the University of Pittsburgh Medical Center, which is among the leading providers of cancer care in the US. In conclusion, single-speciality provider networks are able to demonstrate more value to their consumers while simultaneously delivering attractive returns to shareholders.