Foreign Investment in Hospitals in India: Status and Implications

Transcription

1 Foreign Investment in Hospitals in India: Status and Implications Rupa Chanda Professor Indian Institute of Management Bangalore Bannerghatta Road, Bangalore , India In collaboration with WHO India Country Office, New Delhi and WTO Cell, Ministry of Health and Family Welfare, Government of India.

2 Foreign Investment in Hospitals in India: Status and Implications * Rupa Chanda ** * This document is not a formal publication of the World Health Organization (WHO). The study was supported by WHO India Country Office and the WTO Cell, Ministry of Health and Family Welfare, Government of India. However, the views expressed are solely of the author and do not necessarily reflect the opinion or views of the WHO or the Ministry of Health and Family Welfare. The document may, however, be freely reviewed, abstracted, reproduced or translated, in part or whole, with due acknowledgement and citation, but is not for sale or for use in conjunction with commercial purposes. ** Professor, Economics & Social Sciences Area, Indian Institute of Management Bangalore.

3 Acknowledgements The author is grateful to the many practitioners and managers from various hospitals in Delhi, Bangalore, and Kolkata, as well as industry association experts who spared their valuable time for face-to-face interviews and shared their knowledge and insights for this study. Many of them also replied to repeated queries over and telephone to elaborate on various issues and helped to sharpen the author s understanding of the many complexities in the healthcare sector. This study would not have been possible without their help and guidance. I would also like to thank Krishanu Rakshit, doctoral student at IIM Bangalore and Sasidaran G., research associate at IIM Bangalore, for all their help in collecting background information and data on hospitals, in tabulation and data analysis, and in the preparation of the report. Without their timely assistance, it would not have been possible to collate all the information and prepare the report on time. I also express my sincere gratitude to Sunil Nandraj and Anagha Khot of the WHO Country Office, New Delhi and Ujjwal Kumar and Rajendra Mehrotra of the WTO Cell, Ministry of Health and Family Welfare, Government of India for their support and guidance throughout the study and for helping to organize a workshop in Delhi for the presentation of the draft report. I am also thankful to them for giving me an opportunity to work on this subject and to contribute in whatever small way towards informing public policy in this area.

4 Executive Summary Background and Objectives The Indian healthcare delivery market is estimated at US$ 18.7 billion and employs over four million people, making it one of the largest service sectors in the economy today. Total national healthcare spending reached 5.2% of GDP, or US $34.9 billion in 2004 and is expected to rise to 5.5% of GDP, or US $60.9 billion by The sector comprises of many segments, which include hospitals, medical infrastructure, medical devices, clinical trials, outsourcing, telemedicine, and health insurance, to name some. The industry has grown at about 13 per cent annually in recent years and is expected to grow at 15 per cent per year over the next four to five years. According to a recent study, the industry will account for 6.1 percent of GDP by 2012 and is projected to provide employment to around 9 million people. 1 A striking feature of India s healthcare system is the significant and growing role of the private sector in healthcare delivery and total healthcare expenditures. Public health expenditure accounts for less than 1 percent of GDP compared to 3 percent of GDP for developing countries and 5 percent for high income countries. The private healthcare sector in India accounts for over 75 percent of total healthcare expenditure in the country and is one of the largest in the world. India s healthcare sector, however, falls well below international benchmarks for physical infrastructure and manpower, and even falls below the standards existing in comparable developing countries. It is estimated that over a million beds have to be added to attain this 1.85 ratio, which translates into a total investment of $78 billion (Rs. 350,830 crores) in health infrastructure. An additional 800,000 physicians are required over the next 10 years, which translates into huge investments in training facilities and equipment. In order to reach even percent of the present levels of other developing countries, the sector will require an estimated investment of $20-30 billion. 2 Thus, India s healthcare sector needs to scale up considerably in terms of the availability and quality of its physical infrastructure as well as human resources. Given the growing demand, the emergence of reputed private players, and the huge investment needs in the healthcare sector, in recent years, there has been growing interest among foreign players and non resident Indians to enter the Indian healthcare market. There is also growing interest among domestic and international financial institutions, private equity funds, venture capitalists, and banks to explore investment opportunities across a wide range of segments. This study examines the status of foreign financing (foreign direct investment-fdi as well as other forms of foreign fund inflows) in one of the key segments of the healthcare sector, i.e., in hospitals. It also analyses the implications of such financing for the hospital segment and for the overall healthcare system. The specific objectives of the study include: 1 These statistics are taken from IBEF, available at 2 See, Ernst and Young (2007) and CRISIL Research (Feb 2007). (i)

5 (a) Understanding the nature of foreign funding in hospitals in India, as well as other forms of foreign involvement (not necessarily financing related) in the hospitals segment in India; (b) Understanding the institutional and other factors facilitating and impeding foreign funding in hospitals in India; and (c) Understanding the realized or likely impact of foreign investment in hospitals in India on various aspects of the healthcare sector and the wider economy (quality, affordability, infrastructure development, technology, accessibility, prices, etc.) In addition to the aforementioned objectives, this study aims to provide policy inputs that would facilitate such investments and enable the realization of the greatest possible benefit from such inflows. It also aims to inform policy makers with regard to India s commitments in health services for the mode of commercial presence (mode 3) under the General Agreement on Trade in Services (GATS) negotiations in the WTO. Methodology and scope The study is based on primary as well as secondary research. The primary research has been conducted in two parts. One part was outsourced AC Nielsen, which carried out its survey work in two phases. The first phase of the primary research consisted of administering a structured questionnaire to administrators and finance sections of 19 hospitals in 6 cities around the country. All the hospitals were of a minimum size of 100 beds, multi-specialty, and included a mix of for profit private hospitals with and without foreign financing and not for profit private hospitals categorized as charitable/trust hospitals. The second phase of the survey work by Nielsen consisted of 15 semi-structured interviews with various stakeholders (doctors, nurses, owners or managers of hospitals and nursing homes (large and mid size) health consultants, health insurance companies, diagnostics, and medical equipment suppliers and patients. The second part of the primary research was undertaken by the author. This consisted of 30 in-depth discussions with senior management in major corporate hospitals and with other stakeholders such as civil society organizations, industry associations, financiers, doctors, and public sector practitioners across three cities. Status and prospects for foreign investment in hospitals in India The study indicates that the foreign investment policy is very liberal for hospitals. Since January 2000, FDI is permitted up to 100 percent under the automatic route in hospitals in India. 3 Controlling stake is also permitted in hospitals for foreign investors. FIPB approval is only required for foreign investors with prior technical collaboration, but allowed upto 100 percent. Current regulations also permit other forms of capital mobilization, such as through ADRs and GDRs, upto 49 percent, which are treated as FDI. FII as well as private equity funding over a certain stake are also permitted under FDI route. In addition, FIIs and private equity funds can individually purchase upto 10 percent and collectively upto 24 percent of the paid-up share capital of the company, through open offers or private placement, or through the stock exchange. Proprietary funds, foreign individuals and foreign corporates can register as a sub-account and invest through the FII, subject to limits of 10 percent and 5 percent, respectively for these sub-accounts. Foreign venture capital investments (FVCIs) are also permitted, though subject to certain restrictions. No major regulatory 3 See, RBI note on Foreign Investments in India (April 1, 2007). (ii)

6 hurdles seem to exist with regard to the setting up of hospitals. Although various forms of financing may be classified as FDI, industry experts distinguish between these various modes as they have different implications for the absorption of costs, benefits to patients, expectations of returns, and improved capacity in healthcare delivery. An examination of the list of approved hospital projects obtained from the Department for Industrial Policy and Promotion and the primary survey indicates that despite the liberal regulatory environment, FDI presence in Indian hospitals is very limited at present. There are only three or hospitals which according to industry persons, qualify as FDI hospitals in India. The rest are FDI approved on paper, and may not have brought in capital. There are also players who have routed funds through other countries but do not see themselves as FDI hospitals as this routing is only for tax purposes and not really FDI type inflows. However, it is perceived that there will be increased inflow of foreign funds into India s hospital segment in the near future given major expansion plans by existing and prospective corporate players. These include huge Medicities with large superspeciality and multi-speciality hospitals and integrated healthcare services as well as scaling up of existing operations and setting up of new hospitals around the country. Much of the recent capital inflows have been through private equity funds and IPOs and this trend is expected to continue. However, the predominant mode of financing is domestic borrowing and foreign financing constitutes roughly 20 percent of funding in hospitals. Constraints to foreign investment in hospitals in India While there are clearly many drivers to foreign investment in hospitals in India, the study finds that there are external as well as domestic constraints, which explain the limited presence of foreign investment in India s hospital segment. These constraints include the fact that the number of such foreign players may be limited, there are competing investment destinations, there are difficulties for foreign players in entering independently and in maintaining joint ventures that the gestation period in hospital projects is long and that investors may not be willing to make such a long term commitment. More importantly, various domestic factors adversely affect the returns to investment in hospitals in India. These include high initial establishment costs and in particular the prohibitive cost of procuring land, low health insurance penetration in the country which reduces the consumer base for corporate hospitals, restrictions on medical education and training providers which create a supply bottleneck and adversely affects the quality of medical personnel at all levels, the high cost of importing medical devices and the limited domestic manufacturing capacity in this area, other regulatory deficiencies which result in lack of standardization, proper governance, and quality assurance in the healthcare sector, and lack of policy clarity and priority to the healthcare sector. Thus clearly, unless such constraints are addressed, a liberal investment Impact of foreign investment in hospitals in India Overall, if one were to take the survey results as reflecting the way in which foreign funded hospitals function compare to non foreign funded hospitals, and thus the kind of impact they are likely to have on the healthcare sector, then several insights emerge. Such hospitals are likely to focus on more advanced procedures and specialty areas. They are more likely to focus on curative and intervention oriented treatment than on preventive and long-term kind of treatment. (iii)

7 They are likely to employ a higher ratio of technology to personnel in their healthcare delivery and thus involve a substitution of human resources with technology and equipment. They are likely to invest much more in medical equipment and devices and also in specialized and experienced medical personnel, thus involving a focus on high-end human resources and high-end technology. Such hospitals tend to have better systems and processes and usage of IT, which creates a more efficient and professional work environment. Foreign funded hospitals pay higher rates to staff at all levels and particularly to senior medical personnel. They are more likely to attract overseas doctors and specialists than other hospitals They are more likely to be accredited domestically and/or internationally. Their costs are likely to be comparable to or slightly higher than those of non foreign funded large hospitals Their costs will tend to be higher than for small and medium size nursing homes and hospitals but this is mainly due to greater capital intensity and focus on quality systems and processes and focus on hygiene There could be positive externalities in other areas, some of which could further drive foreign investment in hospitals Foreign funded hospitals could draw away medical personnel at all levels from other hospitals (both large non-foreign-funded and medium and small size hospitals/nursing homes, and public sector hospitals) and could adversely impact the quality of medical manpower available to competing institutions There is likely to be closure of substandard institutions, some consolidation of the hospital segment, and new kinds of arrangements could emerge between larger and smaller players as the healthcare sector evolves There could be greater segmentation between the public and private sector with resource flows towards the latter, greater wage disparity, unless innovative arrangements emerge between the two segments and reforms are undertaken in the public sector hospitals While there are clearly concerns about the equity, affordability, and market segmentation implications of growing foreign investor presence in India s hospital segment, it is evident that the root cause lies in structural problems that are already present in the healthcare sector, such as lack of affordable health insurance schemes or inappropriate regulations on medical education providers. Foreign investment and greater corporate presence in hospitals could aggravate such structural problems. The insights obtained from the discussions with stakeholders suggest that the solution lies in strengthening the public healthcare system, in amending certain regulations that affect all players, and in introducing schemes, which provide affordable access to healthcare for all and not in restricting foreign investment. The benefits of foreign investment in hospitals are likely to outweigh these adverse effects. (iv)

8 Implications for GATS commitments in hospital services The study examined whether India should further liberalize its offer on hospital services to 100 percent with no prior approval requirement, i.e., bind in its existing FDI regulations in this area? The findings of this study suggest that India could bind in its existing FDI policy in hospitals and permit 100 percent on automatic route. The justifications for such a strategy relate to two facts. First, as investors see a lack of clarity and roadmap for the health sector, a binding commitment would signal that the liberal foreign investment policy for hospitals is there to stay and that the government is committed to facilitating investments in India s hospital segment. Second, to the extent that additional FDI does flow into hospitals, there are several likely benefits that could accrue while the negatives that could arise will not really be a direct result of foreign investment but of existing structural distortions and inadequacies in India s health care sector. The study also suggests possible conditions that could be inscribed in India s commitments to ensure that certain objectives are realized. The existing revised offer puts a technology transfer related condition. Another possible condition could pertain to corporate social responsibility measures, such as outreach and extension services and reinvestment of part of profits in medical research and education or in telemedicine to serve a wider population base if any subsidies or concessions have been granted in related areas. While other conditions could be inscribed, such as requiring tie ups with local players in terms of referral services, education and training of personnel, transfer of older equipment, and pooling of resources, it may not be advisable to impose too many conditions as these could adversely affect incentives for investors and their bottomlines. But the study notes that a liberal binding commitment on FDI in hospitals may not translate into greater foreign investment in India s hospitals unless the various constraints affecting hospital projects are addressed. Thus, a more reform oriented approach and a shift in attitude would be required in various areas, including in public sector institutions, in medical education, health insurance, the medical equipment and devices segment, and infrastructure facilitation, among others. Such supporting measures and reforms would help ensure the benefits while mitigating the possible negatives. Also, negotiators need to look at India s commitments and domestic policies in other sectors, such as in health insurance and higher education, at their commitments in other modes and sub sectors of health services, and keep in mind the impact of cross cutting regulations. Policy recommendations Overall, the study throws up several policy measures required by government and initiatives required by private players to make the hospital segment more attractive to both domestic and foreign investors if the ultimate aim is to expand capacity, improve standards, and make healthcare affordable and accessible to a wider segment. Some of these measures include: Facilitating land acquisition- some subsidization of initial project costs or PPP arrangements with possible cost discounting or cross subsidization arrangements built into the valuation of land; Consider other forms of obtaining land- through leasing arrangements, joint development with real estate developers and arrangements with public sector units owning land and hospital facilities and government facilitation of such arrangements; Freeing up medical education and encouraging private hospitals to enter into medical education and training to expand the supply of medical personnel at all levels (v)

9 Incentivising domestic manufacturing of medical devices and technologies through increased investment in this sector and tie ups with foreign companies and efforts to standardize output Opening up the health insurance sector to enable greater scrutiny of processes and standards of hospitals, which would also help attract foreign funds, as well as introduction of a national or community based health insurance scheme to increase affordability of healthcare and mitigate potential adverse effects of corporatisation on equity; Improving the regulatory framework for health insurance by standardizing norms for payouts, coverage, reduce malpractice; Facilitating public private partnerships in hospitals, with private sector hospitals entering into limited period management contracts with public hospitals, under well-defined revenue sharing arrangement, along with CSR responsibilities through cross subsidization mechanisms Greater sharing of resources (equipment, knowledge, research facilities) between public and private hospitals and between larger private hospitals and smaller local players Establishing a regulatory framework and an independent regulator in the healthcare sector to address issues of standardization, classification, information disclosure, etc.; and Improved regulation and monitoring of mid and small size establishments to improve standards and quality, weed out substandard establishments, and enable consolidation in healthcare delivery. Perhaps the most important point illustrated by this study is that mere liberalization of the foreign investment regime without putting in place supporting institutional and regulatory frameworks and domestic reforms, will have limited effectiveness. Foreign investment can yield many benefits but if structural and regulatory deficiencies are not addressed, these benefits may not materialize and existing structural distortions may be aggravated. Hence, government needs to take a proactive role by initiating domestic reforms and creating an enabling environment so that the benefits of liberalization do ensue and any adverse effects are mitigated. (vi)

10 Table of Contents 1 Overview of the Indian Healthcare Sector Overview of the study Scope and objectives Methodology for the study Details of the Quantitative Survey Qualitative survey Limitations of the primary research Foreign Presence in Hospitals in India Foreign direct investment in hospitals Status of FDI in hospitals Prospects for FDI in hospitals Other sources of foreign investment in hospitals Pattern of financing in major corporate hospitals Constraints to foreign investment in hospitals in India External factors Domestic factors Initial establishment issues: land and set up issues Medical equipment and technology Manpower availability and quality issues Health Insurance Other regulatory issues and policy directions Impact of foreign investment in hospitals Key findings from the survey Services and procedures Physical infrastructure and medical staff Human resources: Remuneration and quality issues Costs of services Other features Perceived impact of foreign investment in hospitals Positive implications Areas of concern Summarizing the implications and further inferences Implications for GATS commitments in hospital services India s autonomous and multilateral liberalization in hospital services Strategy for multilateral liberalization in hospital services Summary of findings...60

11 List of Tables Table-1. Hospitals covered by the quantitative survey...10 Table-2. Target groups covered for the in-depth qualitative discussions...11 Table-3. Approved FDI Hospitals by DIPP (January 2000-June 2006)...15 Table-4. Summary of pros and cons of financing sources for hospitals...22 Table-5. Summary of key operating and other ratios of major corporate hospitals in India (March 2006 figures)...25 Table-6. Availability of Services in surveyed hospitals...36 Table-7. Availability of Medical Procedures in surveyed hospitals...36 Table-8. Availability of Infrastructure and Medical Facilities...39 Table-9. Availability of Medical Staff...39 Table-10. Average monthly remuneration for staff (Rs.)...41 Table-11. Status matrix for committed and offered liberalization in India s hospital services...58 List of Figures Figure- 1. Structure of Borrowings...21 Figure- 2. Domestic Medical Equipment Market...28 Figure- 3. Health Insurance Penetration in India...32 Figure- 4. Cost comparison for neurology procedures (Rs.)...43 Figure- 5. Cost comparison for Gastroenterology procedure (Rs.)...43 Figure- 6. Cost comparison for dialysis (Rs.)...44 Figure- 7. Cost comparison for Cardio-thoracic surgery (Rs.)...45 Figure- 8. Cost comparison for diagnostic service (ultrasound) (Rs.)...46 Figure- 9. Cost comparison for diagnostic service (ECG) (Rs.)...46 List of Boxes BOX- 1 Major Medical City Projects: Proposed and Newly Established...17 BOX- 2 Stakeholder views on public private partnership arrangements in hospitals...48 BOX- 3 Perceived implications for affordability of healthcare

12 Acronyms ADR American Depository Receipt CEO Chief Executive Officer CII Confederation of Indian Industries CMIE Centre for Monitoring Indian Economy CRISIL Credit Rating Information Services of India Limited CSR Corporate Social Responsibility CT Computerized Tomography DIPP Department of Industrial Policy and Promotion ECB External Commercial Borrowing ECG Electro Cardiogram EHIRCEscorts Heart Institute and Research Centre EMG Electromyography ER Emergency Room FDI Foreign Direct Investment FICCI Federation of Indian Chambers of Commerce and Industry FII Foreign Institutional Investment FIPB Foreign Investment Promotion Board FVCI Foreign Venture Capital Investment GATS General Agreement on Trade in Services GDR Global Depository Receipt HR Human Resources IBEF India Brand Equity Foundation IFC International Finance Corporation ICU Intensive Care Unit IPO Initial Public Offer ISO International Organization for Standardization IT Information Technology JCI Joint Commission International MRI Magnetic Resonance Imaging NABH National Accreditation Board for Hospitals 3

13 NABL NCR NRI OPD OT PE PPP PSU RBI Rs. SAARC SEZ TPA UAE UK US VC WHO WTO National Accreditation Board for Laboratories National Capital Region Non Resident Indian Out Patients Department Operation Theatre Private Equity Public Private Partnership Public Sector Unit Reserve Bank of India Rupees South Asian Association for Regional Cooperation Special Economic Zone Third Party Administrators United Arab Emirates United Kingdom United States Venture Capital World Health Organization World Trade Organization 4

14 Foreign Investment in Hospitals in India: Status and Implications 1 Overview of the Indian Healthcare Sector The Indian healthcare delivery market is estimated at US$ 18.7 billion and employs over four million people, making it one of the largest service sectors in the economy today. Total national healthcare spending reached 5.2% of GDP, or US $34.9 billion in 2004 and is expected to rise to 5.5% of GDP, or US $60.9 billion by The sector comprises of many segments, which include hospitals, medical infrastructure, medical devices, clinical trials, outsourcing, telemedicine, and health insurance, to name some. The industry has grown at about 13 per cent annually in recent years and is expected to grow at 15 per cent per year over the next four to five years. According to a recent study, the industry will account for 6.1 percent of GDP by 2012 and is projected to provide employment to around 9 million people. 1 Hence, by all estimates, this is a sector, which is growing rapidly and is seen to have considerable potential. This growth and potential is due to the growing demand for healthcare services in the Indian market, which is driven by rising incomes, a growing propensity to spend on healthcare, a shift to lifestyle related diseases, and demographics, among other factors. Notwithstanding the sector s rapid growth and potential, in many respects, India s healthcare sector falls well below international benchmarks for physical infrastructure and manpower, and even falls below the standards existing in comparable developing countries. The total number of doctors (all kinds included) per thousand persons stood at only 1.27 in 2006 and 0.5 physicians per thousand persons in India, compared to a world average of 1.5. The number of nurses per thousand persons stood at 0.9 in 2006 compared to a world average of 1.2. Added to this deficiency is the mal-distribution between rural and urban areas and shortages of specialized personnel. These ratios are projected to remain below the existing world averages even in The current ratio of beds per thousand persons is a mere 1.03 (well below the WHO norms) compared to an average ratio of 4.3 for developing countries like China, Korea, and Thailand, and in the best of circumstances is projected to reach 1.85 per thousand persons by It is estimated that over a million beds have to be added to attain this 1.85 ratio, which translates into a total investment of $78 billion (Rs. 350,830 crores) in health infrastructure. An additional 800,000 physicians are required over the next 10 years, which in turn translates into huge investments in training facilities and equipment. In order to reach even percent of the present levels of other developing countries, the sector will require an estimated investment of $20-30 billion. 2 Thus, India s healthcare sector needs to scale up considerably in terms of the availability and quality of its physical infrastructure as well as human resources so as to meet the growing demand and to compare favourably with international standards. 1 These statistics are taken from IBEF, available at 2 See, Ernst and Young (2007) and CRISIL Research (Feb 2007). 5

15 A striking feature of India s healthcare system is the significant and growing role of the private sector in healthcare delivery and total healthcare expenditures. Public health expenditure accounts for less than 1 percent of GDP compared to 3 percent of GDP for developing countries and 5 percent for high income countries. The private healthcare sector in India accounts for over 75 percent of total healthcare expenditure in the country and is one of the largest in the world. An estimated 60 percent of hospitals, 75 percent of dispensaries, and 80 percent of all qualified doctors are in the private sector. However, private healthcare delivery is highly fragmented with over 90 percent of private healthcare being serviced by the unorganised sector, according to a recent consulting firm report. 3 Some 2 to 3 percent of hospitals are 200-bed plus, some 6-7 percent are bed size hospitals, and the bulk 80 percent of private sector hospitals are very small, less than 30 beds. Studies by the Central Bureau of Health Intelligence have shown that a majority of Indians trust private healthcare despite a higher average cost of US$ 4.3 compared to US$ 2.7 in governmentowned healthcare agencies. Only 23.5 percent of urban residents and 30.6 percent of rural residents choose government facilities, reflecting the widespread lack of confidence in the public healthcare system. The private sector s role is expected to grow in the future. It is estimated that out of the 1 million beds to be added by 2012, the private sector will contribute 896,000 beds. Government spending on healthcare infrastructure (excluding land) is projected to rise only marginally, by 0.12 percent of GDP and is expected to meet only 12 percent of the huge investment required in the healthcare sector, with the private sector providing some 88 percent of investment requirements. 4 Hence, the private sector will be a key player in driving the future growth of India s healthcare sector, including in segments such as hospitals. Given the growing demand, the emergence of reputed private players, and the huge investment needs in the healthcare sector, in recent years, there has been growing interest among foreign players and non resident Indians to enter the Indian healthcare market. There is also growing interest among domestic and international financial institutions, private equity funds, venture capitalists, and banks to explore investment opportunities across a wide range of segments (drugs and pharmaceuticals, medical devices, hospitals, etc.) in the Indian healthcare sector. In the hospitals and medical devices segment alone, there are reportedly at least 20 international players competing to have a share on the Indian healthcare market. These players are entering mainly through joint ventures with Indian companies and also through technology and training collaborations. The growing presence of corporate players and foreign investors in India s healthcare sector, although highlighted and also documented in various reports by industry associations and consulting firms, is not yet well understood in terms of its current status as well as its implications for the healthcare system at large. For example, while the emergence of corporate hospitals or foreign funding and tie ups in the hospital segment can have many positive implications, such as helping to improve physical infrastructure, standards, quality of healthcare, technology, and delivery systems and processes along with spill over benefits in areas such as medical devices, pharmaceuticals, outsourcing, and research and development, it may also result in higher costs of healthcare and greater segmentation between the public and private health sectors. Thus, there is a need to examine the state of play so as to better understand the nature and extent of foreign 3 Technopak (February 2007). 4 Ernst and Young (2007) and IBEF. 6

16 presence in selected segments of India s healthcare sector and its realized as well as likely impact on the concerned segment and on the healthcare system at large. 2 Overview of the study 2.1 Scope and objectives This study examines the status of foreign financing (foreign direct investment-fdi as well as other forms of foreign fund inflows) in one of the key segments of the healthcare sector, i.e., in hospitals. It also analyses the implications of such financing for the hospital segment and for the overall healthcare system. The specific objectives of the study include: a) Understanding the nature of foreign funding in hospitals in India, as well as other forms of foreign involvement (not necessarily financing related) in the hospitals segment in India; b) Understanding the institutional and other factors facilitating and impeding foreign funding in hospitals in India; and c) Understanding the realized or likely impact of foreign investment in hospitals in India on various aspects of the healthcare sector and the wider economy (quality, affordability, infrastructure development, technology, accessibility, prices, etc.) In addition to the aforementioned objectives, this study has two broader goals. The first is to provide policy inputs that would facilitate such investments and enable the realization of the greatest possible benefit from such inflows. The second is to inform policy makers with regard to India s commitments in health services for the mode of commercial presence (mode 3) under the General Agreement on Trade in Services (GATS) negotiations in the WTO. A few points are worth noting at the outset regarding the scope of this study and the approach taken on specific issues in the course of the discussion. First, while the original scope of this study was to understand the status of FDI through automatic route and through FIPB route in hospitals in India, it was deemed appropriate to enlarge the scope to examine foreign financing more generally. This is because it became evident in the initial stages of the study that there are multiple modes of foreign funding in the hospitals segment in India and that these are more prevalent than FDI. Hence, if the study was to derive any useful insights and policy recommendations and understand how liberalization of the investment environment in hospitals is impacting the segment, it was necessary to go beyond FDI and to examine all kinds of foreign financing, explicit as well as forms that are not so directly visible. Thus this study looks at FDI, joint ventures, Foreign Institutional Investment, investments by private equity funds, Diaspora investment, and possible foreign investment in the context of placements in capital markets. Second, in several sections of this study, the discussion also touches on forms of foreign presence, which go beyond mere financing. These include tie-ups, technical collaborations, and research and development and education related arrangements. While these are not under the direct purview of this study, these are also considered, as they are prevalent in India s healthcare sector. These are both influenced by the investment environment and also influence the overall investment environment. Third, although the study started with a focus on foreign investment, in the course of the study it became evident that a more generalized approach to investment was appropriate. This is because many of the factors driving or impeding foreign investment in hospitals are also pertinent to 7

17 domestic investment in hospitals. Hence, the discussion on drivers and impediments often considers investment more generally, i.e., both foreign and domestic investment, and refers to corporate or private hospitals without necessarily distinguishing between them in terms of sources of funding. 2.2 Methodology for the study The study is based on primary as well as secondary research. The secondary sources consist of existing reports on the health sector by national and international agencies, consulting firms, industry associations, academics, and popular media. The latter sources have been used to gather information on the general state of India s health sector, on the hospitals segment, including the profiles and financials of major hospitals in India, on related areas such as medical devices and technologies, health insurance, and manpower, and on the investment scenario in India s hospital segment, including the institutional and procedural aspects of such investments. In addition, primary research has also been conducted for this study in two parts. One part was outsourced AC Nielsen. The latter in turn carried out its survey work in two phases. The first phase of the primary research consisted of administering a structured questionnaire to administrators and finance sections of a small sample of hospitals around the country. This questionnaire was designed on the basis of pilots conducted in Bangalore. This questionnaire was designed as a self-completion questionnaire as some sections had to be left behind with the respondent for completion, although an attempt was made to obtain as much of the information as possible through a face-to-face interview. The target cities/regions for this survey were the National Capital Region, Bangalore, Kolkata, Hyderabad, Mumbai and Chennai. No quotas were assigned to individual cities and the sample was drawn up depending on the response from the field. The criteria for selecting hospitals for the quantitative survey included size, i.e., all hospitals were of a minimum size of 100 beds, they were all multi-specialty hospitals, and they included a mix of for profit private hospitals with and without foreign financing and not for profit private hospitals categorized as charitable/trust hospitals. An initial list of institutions that have been approved for foreign direct investment was obtained from the Department of Industrial Policy and Promotion. This list was used for the initial selection of hospitals. The survey aimed at collecting information on the key features of hospitals, including their infrastructure, human resources, range of healthcare facilities, prices, technology and equipment, and financials and to compare across the different categories of hospitals, in particular between foreign funded and non funded hospitals for these various dimensions. The second phase of the survey work by Nielsen consisted of semi-structured interviews with various stakeholders who could provide views on the role and implications of foreign financing in hospitals. A total of 15 in-depth discussions were carried out in this phase. The respondents included doctors, nurses, owners or managers of hospitals and nursing homes (large and mid size) health consultants, health insurance companies, diagnostics, and medical equipment suppliers and patients. Customized in-depth discussion guides were used for this purpose. These qualitative discussions were aimed at supplementing the information obtained from the survey and getting varied perspectives on how liberalization of investments in hospitals would affect different stakeholders in the healthcare sector. The second part of the primary research was undertaken by the researcher. This consisted of a total of 30 in-depth discussions with senior management in major corporate hospitals and with other 8

18 stakeholders such as civil society organizations, industry associations, financiers, doctors, and public sector practitioners, in the NCR, Bangalore, and Kolkata Details of the Quantitative Survey Quantitative data was collected for 19 hospitals around the country through the survey questionnaire administered by Nielsen. It is important to note that it proved very difficult to carry out the quantitative part of the primary survey. Many large hospitals were not willing to participate in the survey and provide background information, despite assurances of confidentiality of information. 5 Hence, for hospitals, which were considered necessary for inclusion in the list of surveyed hospitals and for which qualitative discussions could be used to corroborate findings, secondary sources were used to gather background information. The latter consisted of 6 major hospitals around the country. These secondary sources included consulting firm and research reports and annual reports of hospitals. The status report for the data collection is provided in the table below. 5 In some cases, hospitals were not willing to participate in the survey due to legal reasons, such as going for an IPO. In some cases, they were not willing to participate due to internal administrative reasons. In one case, senior management did not grant approval. 9

19 Table-1. Hospitals covered by the quantitative survey Sl No. Hospital City 1 Indraprastha Apollo New Delhi 2 Max Healthcare New Delhi 3 Fortis a/ New Delhi 4 Escorts Healthcare a/ New Delhi 5 Woodlands Kolkata 6 Anandlok Hospital Kolkata 7 Jitendra Narayan Ray Sishu Seva Bhavan and General Hospital Kolkata 8 Apollo Gleneagles a/ Kolkata 9 Sarvodaya Hospital Bangalore 10 Suguna Ramaiah Hospital Pvt Ltd Bangalore 11 Chinmaya Mission Hospital Bangalore 12 Columbia Asia Hospital Pvt. Ltd Bangalore 13 Wockhardt Hospitals a/ Bangalore 14 Manipal Hospitals a/ Bangalore 15 Narayana Hrudayalaya Bangalore 16 CSI Kalyani General Hospital Chennai 17 KHM Hospitals Chennai 18 Kumaran Hospitals (p) Ltd Chennai 19 Apollo Hospitals a/ Chennai 20 P.D.Hinduja National Hospital and Medical Research Centre Mumbai 21 Joy Hospital Mumbai 22 Sir H.N. Hospital and Research Centre Mumbai 23 Sowmya Hospital Hyderabad 24 Pacific Medical Centre Hyderabad 25 St. Theresa s Hospital Hyderabad Note: a/ Based primarily on secondary sources Qualitative survey A total of 45 qualitative interviews were conducted between the researcher and the survey agency. These interviews were largely done face-to-face, although a few were done over the telephone and via . The attempt was to target as wide a group of stakeholders as possible, although it proved difficult to get inputs to the extent desired from certain stakeholders, such as foreign investors and equity funds. The status matrix for these interviews conducted by the researcher and the survey agency is provided below. 10

20 Table-2. Target groups covered for the in-depth qualitative discussions Institution/stakeholder No. of interviews Affiliation Indraprastha Apollo 1 Senior management Max Healthcare 4 Senior management and practitioners Fortis 3 Senior management Escorts 2 Senior management Columbia Asia 1 Senior management Narayana Hrudayalaya 2 Senior management Wockhardt 1 Senior management Woodlands 2 Senior management Medica Synergie 3 Senior management AMRI 1 Senior management Apollo Gleneagles 2 Senior management Institute of Laparoscopic Surgery 1 Practitioner and owner Manipal Hospital 1 Senior management NIMHANS 1 Practitioner St. John s Medical College 1 Professor and practitioner Vydehi Medical College 1 Professor and practitioner Mid size nursing home 1 Owner and practitioner Vydehi Hospital 1 Nurse Mid size nursing home 1 Practitioner Mid size nursing home 1 Practitioner Small nursing home 1 Owner and practitioner Health insurance company 1 Management Medical equipment 1 Supplier Diagnostics 1 Practitioner Health consultant 1 Financial advisor Health consultant 1 Advisor on global affairs Industry associations 3 Health sector specialists Customer 2 Patients Foreign medico-legal expert 1 Professional Private equity fund 1 Person dealing with the health sector Liberty Foundation-NGO 1 Civil society organization working on health sector and regulatory issues One group that was targeted but which ultimately could not be interviewed in these in-depths was that of prospective foreign and domestic investors in India s hospital segment. This is because despite attempts to communicate with such investors, the latter were not willing to share their views or to send replies via . Thus, this point of view had to be obtained through secondary sources and third party discussions. 2.3 Limitations of the primary research It needs to be pointed out that several difficulties were encountered in conducting the primary survey. As noted already, many hospitals that were deemed crucial for this study, did not agree to participate, although they did agree to qualitative discussions. This did affect the final composition of the sample of hospitals. Also, even when firms did participate in the survey, they were often not forthcoming on the data concerning their financials, in particular, on their sources of financing (domestic and foreign), their revenues and profits, and their costs for different procedures. They 11

21 were more forthcoming on issues of physical infrastructure and healthcare facilities. Thus, some of the comparative analysis that had been intended could not be done and at times had to be based on secondary sources of information which were not always uniformly available across all the hospitals covered in the study. The primary research is also limited by the fact that the number of hospitals covered is small (due to funding constraints), although attempts were made to obtain as representative a group of hospitals across the various categories as possible. However, the usual problems of small sample surveys do affect this study. And finally, given that the query method was used to elicit views on the impact of liberalizing foreign investment in hospitals, there are potentially biases in the responses, although all efforts were made to get the views of a diverse group of stakeholders through the qualitative discussions so as to counterbalance such biases as much as possible. 3 Foreign Presence in Hospitals in India In recent years, there is growing interest among foreign players to enter India s healthcare sector through capital investments, technology tie-ups, and collaborative ventures across various segments, including diagnostics, medical equipment, hospitals, and education and training. For example: Singapore's Pacific Healthcare has made its first foray into the Indian market, opening an international medical centre, which is a joint venture with India's Vitae Healthcare, in the Indian city of Hyderabad. The Singapore based Parkway Group Healthcare PTE Ltd penetrated into the Indian health care market in 2003 through a joint venture with the Apollo group to build the Apollo Gleneagles hospital, a 325-bed multi-speciality hospital at a cost of US$ 29 million. Columbia Asia Group, a Seattle-based hospital services company, a worldwide developer and operator of community hospitals, has started its first American- style medical centre in Hebbal, Bangalore. Columbia Asia is the first hospital to enter the Indian healthcare market through the Foreign Direct Investment route. Wockhardt, the international arm of the Harvard Medical School, which also has a strategic association with Harvard Medical International, has set up a new hospital (a tertiary service provider) in Bangalore at a cost of around Rs. 200 crores. The Parkway group has also entered into a joint venture with a Mumbai-based Asian Heart institute and research centre to set up specialised centres of medical excellence in Mumbai. Max Healthcare and Singapore General Hospital (SGH) have entered into collaboration for medical practice, research, training and education in healthcare services. Steris, a US$ 1.1 billion healthcare equipment company, plans to set up a wholly owned arm in India to sell its devices and products in the country s booming medical device market. Steris plans to make an initial investment of US$ 1,00,000 to set up the wholly owned subsidiary. Apollo Hospitals Enterprise Ltd has entered into a joint venture with Amcare Labs, an affiliate of Johns Hopkins International of the US, to set up a diagnostic laboratory in Hyderabad. An initial amount of US$ 2.2 million is to be invested and the laboratory is likely to be operational by mid

22 India s first geriatric hospital, the Heritage Hospital of Hyderabad has formed a joint venture with US-based United Church Homes to recruit, train and provide placement to registered Indian nurses in USA. The US-based healthcare products major, Proton Health Care has made an entry into India with its range of digital health monitoring devices and has a strategic tie-up with the Delhibased S M Logistics for distributing its products in the Indian market. The American Association of Physicians of Indian Origin (AAPI), a Non-Resident Indian group will be launching two pilot projects in Bihar and Andhra Pradesh in July 2006 to help improve India s healthcare in rural areas. The AAPI has committed itself to the improvement of primary healthcare under a memorandum of understanding during the Pravasi Bharatiya Divas, the annual conclave of the Indian diaspora, with the government. The following section discusses the nature and extent of foreign involvement in the hospitals segment in India. It focuses primarily on the role of foreign financing in Indian hospitals through FDI and other forms of financing (including FIIs, private equity funds, venture capitalists, and other modes) in the total financing structure of private sector hospitals in India and the regulatory environment affecting these inflows. The discussion is based on both secondary and primary sources of information. 3.1 Foreign direct investment in hospitals Since January 2000, FDI is permitted up to 100 percent under the automatic route in hospitals in India. Thus no government approval is required as long as the Indian company files with the regional office of the RBI within 30 days of receipt of inward remittances and file the required documents along with form FC-GPR with that Office within 30 days of issue of shares to the nonresident investors. 6 Controlling stake is also permitted in hospitals for foreign investors. FIPB approval is currently only required for foreign investors with prior technical collaboration, but is allowed up to 100 percent. Prior to January 2000, FDI in hospitals was permitted under the FIPB route, which meant that the FIPB would consider the investment proposals and take a decision and the Indian company with the RBI would make thereafter filings. Current regulations also permit other forms of capital mobilization, which are treated as FDI. For instance, Indian companies can raise foreign currency resources abroad through ADRs and GDRs under the automatic route, upto 49 percent subject to specified conditions and such investments are also treated as FDI. The lax investment environment for hospitals is also evident from the discussions. No major regulatory hurdles were cited by any of the respondents with regard to the setting up of hospitals. One respondent noted that there are some 20 odd licenses to procure, including environmental and various safety clearances, but the process is generally perceived to be quite streamlined. There is some concern about corruption and lack of transparency in some parts of the application process, and long processing time (around 6 months in some cases) and lack of response from authorities for particular licenses. But the hurdles are felt mostly at the operational level rather than in the regulatory framework per se. The following discussion highlights the available evidence on hospitals that have received FDI in recent years and views on the extent to which FDI is likely to come into the hospital business in India. It needs to be pointed out that a distinction is made between FDI in the traditional sense of 6 See, RBI note on Foreign Investments in India (April 1, 2007). 13

23 ownership of physical assets on one hand and private equity and FII funding of hospitals through holdings of shares by individuals or a group of foreign investors on the other. If one goes by the current definition of FDI in India, private equity stake of over 10% by any individual investor also counts for FDI and Foreign Institutional Investors (FIIs) are permitted to invest under the FDI route in addition to the FII route. But for the purposes of this discussion, the aforementioned distinction has been made, as there are different implications in terms of return expectations, financial control, and time horizons Status of FDI in hospitals In order to understand the extent and nature of foreign direct investment in hospitals, a list of all FDI approved projects in hospitals and diagnostic centres during the January 2000 to July period was obtained from the Department for Industrial Policy and Promotion. This list consisted of 90 projects, for a total approved FDI amount of $53 million, and covering a wide range of countries, such as Australia, Canada, UK, US, the UAE, Malaysia, and Singapore, among others. However, if one examines the list of approved projects and separates hospitals from diagnostic centres, then one finds that the majority of these approved projects are diagnostic centres. Only 21 of the approved projects are in the hospitals segment. The following table shows the approved projects for FDI in hospitals as received from the DIPP, along with the source countries, and the Rupee and US dollar values of FDI approved. 14

24 Table-3. Approved FDI Hospitals by DIPP (January 2000-June 2006) Sl No. Date Indian Company Country of foreign investor Foreign equity (Mns) Rs. US $ 1 April 2002 Fernandez Maternity Australia Hospital, Hyderabad 2 December Sir Edward Dunlop Canada 1, Hospitals, New Delhi 3 January 2004 Max Healthcare, New Delhi Mauritius January 2000 Dr. Ramayya s Pramila UK-NRI Hospitals Ltd, Hyderabad. 5 January 2000 HN Hospital, Mumbai USA- NRI September Kalinga Hospital, NRI Bhubaneshwar 7 August 2000 Thaqdees Hospitals Ltd, Saudi Arabia Thaikkatukkara, Kerala 8 January 1, Duncan Gleneagles, Kolkata Singapore July 2004 Pacific Hospitals, Singapore Hyderabad 10 October 2001 Malabar Institute of Medical UAE Sciences Hospital Ltd., Calicut 11 July 2002 Peoples General Hospital UAE Ltd., Bhopal 12 August 2001 Thaqdees Hospitals Ltd, UK Ernakulam 13 July 2001 Trichur Heart Hospital, UK Thrissur 14 August 2002 Bhimavaram Hospital Ltd., USA Bhimavaram 15 December S&V Loga Hospital Pvt. Ltd, USA Peramanur, Salem 16 November Vikram Hospital, Mysore USA February 2004 Basappa Memorial Hospital USA Pvt. Ltd., Mysore 18 April 2004 Parekh Hospital Pvt Ltd, USA Mumbai 19 July 2004 Columbia Asia Hospital Pvt. USA Ltd., Bangalore 20 August 2004 Add Life Medical Institute USA Ltd. Sterling Hospital Building, Ahmedabad 21 January 2004 RA Multispeciality Hospital Pvt. Ltd, Coimbatore British Virginia Source: DIPP (2006) 15

25 The above list indicates that a few countries account for the bulk of FDI in hospitals in India. These are mainly the US, UAE, Singapore, and the UK, although some other countries such as Mauritius, Australia, and Canada also feature among the source countries for investment, some most likely for tax reasons. Non-resident Indians are an important source of investment (some projects are explicitly listed as NRI based while for several others, the particulars of the investor indicate clearly that there is NRI investment though this is not explicitly classified as such). Interestingly, by and large, this list of approved FDI projects in hospitals does not include the wellknown corporate hospitals in the country, excepting Columbia Asia, Max Healthcare, and Pacific Hospitals. In the latter cases, the funding source is an investment group, such as Pacific Healthcare Holdings, S&G Investment, or the Gleneagles group. A large number of the approved projects are small individual investor type hospitals, with NRI participation and in smaller cities, indicating the importance of diaspora contacts and location specific professional and other linkages that can affect foreign investment in hospitals. The amount of investment in most cases is quite small, with several having less than US $1million in FDI and the bulk falling in the $1 to $2 million range, indicating that several of these hospitals are small or mid size and not the major corporate hospital type. There is some discrepancy between what the above list shows and what is indicated by industry experts regarding the presence of FDI in Indian hospitals. According to several senior management persons who were interviewed for this study, there are really only three or hospitals which would qualify as FDI hospitals in India. These are Columbia Asia, Apollo Gleneagles, and Max Healthcare. The rest, according to them, are FDI approved on paper, and may not have brought in capital through the FDI route but rather through other sources of foreign financing available under existing regulations, following approval of their projects. While one possible reason for the discrepancy between what is given in the DIPP list and what is perceived by players may be a result of the low visibility of several of the smaller hospitals given in the approved list, there appear to be other reasons as well. Several experts who were interviewed noted that although many investors seek and obtain approvals, they do not necessarily enter the country to set up operations subsequently as their primary motive may not be setting up the hospital. In some cases, they stated that the sanction for the project might be used as a means to mobilize funds for reasons other than setting up the hospital. This was in part corroborated by the fact that when the survey agency did an initial check on the hospitals given in the DIPP approval list for drawing up their sample frame, it was found that several of them did not exist on the ground even though they had received approval several years ago. It was also pointed out that even the well-known joint ventures are more collaborative and equipment-centric in nature than investments in a financial sense. In the course of the survey, it also became apparent that there are some corporate hospitals which do receive FDI but which do not consider themselves as FDI hospitals. This is because the foreign funds that they receive are only for routing purposes. For example, in the case of one hospital, the respondent noted that the promoter company is based out of Mauritius for tax benefits and thus is technically classified as FDI. The private investor has also routed investment through Mauritius and this would also count as FDI. But the management at the hospital did not see themselves as an FDI establishment. Hence, there is clearly a distinction between what is technically classified as FDI as per legislation and what practitioners in corporate hospitals see as FDI in terms of its intent and implications for the functioning of the hospitals. Overall, FDI presence in Indian hospitals seems to be limited at present, notwithstanding the very liberal investment policy on FDI in hospitals. According to one estimate, foreign investors have tapped only 10 percent of the Indian healthcare market and thus the scope for FDI remains large. (The possible reasons for limited FDI presence are discussed at length later in this paper). There appear to be some post-approval, transparency and follow up related issues, as there is lack of 16

26 clarity about whether what is approved really materializes on the ground and motives of investors. There is also clearly a perceived difference between FDI which brings with it technology and creation of assets and FDI which is for tax benefit purposes and driven more by short-term expectations Prospects for FDI in hospitals 7 The discussions revealed that there are several prospective players in the Indian hospital market. One of these is Gleneagles, which had earlier come in through a joint venture with Apollo and was now interested in entering on its own, given its local experience. Other examples of prospective FDI players cited are the EMAAR group from Dubai, which has plans to set up some 100 hospitals all over the country, and Pacific Holdings from Singapore, which has started operations in a small way in Hyderabad. According to one industry expert, there are some 10 projects at present with overseas funding, including Medicity and Artemis. Many of the well-known domestic players are also mobilizing funds, including overseas funds through FIIs and equities to finance major expansion plans in other cities. There may also be increased foreign capital inflows into hospitals with some major corporate houses planning to enter the hospital business. 8 The IFC based in Washington, DC, has been approached for funding. Although there are perceived possibilities for joint ventures, with the foreign partner arranging for funds and the local partner helping to manage the business, generally it was felt that joint ventures are difficult to establish and maintain in the hospital business due to problems in aligning expectations of the partners. The main source countries for foreign investment are seen to be the US, UK, Australia, and Singapore. However, the prevailing view is that one would not see a huge amount of FDI in India s hospital segment in the near future, despite the health sector s huge growth potential and the liberal regulatory environment. As one respondent noted, investments to the tune of US $100 million and above can only happen through investments in corporate hospitals (chains), but very few are likely to venture into India. One of the main reasons cited was the localized nature of this business and the need for in-depth knowledge of local market conditions and available resources, which would make it difficult to have control over the business and returns and would thus make foreign investors reluctant to take a long term position. It is also perceived that India would take some time before it can replicate the developed country model of very large corporate chain hospitals given the average size of hospitals in those countries is several times that of some of the largest hospitals in India (e.g., 10,000 versus 2,000) A leading article in the Business Standard on the growing corporate medical sector, illustrates the growing scope for foreign funding and other collaborative opportunities in India s hospital segment. The examples of some major medical city projects in India are given in the box below. BOX- 1 Major Medical City Projects: Proposed and Newly Established Medicity, Gurgaon Dr. Naresh Trehan s Medicity, a Rs. 1,200 crores project in Gurgaon, spread over 93 acres will consist of a 1,600 bed hospital. The project is modelled along the lines of the Mayo Clinic. It will 7 This section is largely based on discussions with management and practitioners in various hospitals and industry associations. 8 Some examples include Max, which is planning to set up in Gurgaon, Fortis in Gurgaon, Wockhardt in Jaipur and Delhi, and Narayana Hrudalaya in Jaipur and Kolkata. 17

27 have R&D facilities, complete biotechnology backup, and major undergraduate and postgraduate institutions for cardiology, oncology, neurosciences, bone and joint, and regenerative medicine and trauma care. Apollo Health City, Hyderabad This project was opened in mid 2007, at an investment of Rs. 1,000 crores. With 33 acres, it is currently the largest health city in the country. The project is modelled on an integrated concept of healthcare. It will impart undergraduate medical education. It includes a postgraduate college for doctors, a nursing school, a college of physiotherapy, institute of hospital administration, institute of medical informatics, institute for emergency medicine, and an institute for paramedics. It contains a 500-bed hospital. Another 200 beds will be added over the next six months. Fortis Medicity, Gurgaon This project is worth an investment of over Rs. 1,200 crores. It will have two campuses. The hospital campus will contain a high-end, multi and super-speciality hospital and research centre. The college campus will contain a medical college for undergraduate and postgraduate education, a dental college, nursing college and facility for primary and applied research in medicine. It will also have a bed hospital. Fortis Medicity, Lucknow This project is worth an investment of between Rs. 500 crores to Rs. 800 crores and is spread over 52 acres. It will include an 800-bed hospital, a medical college offering undergraduate, postgraduate, and postdoctoral courses, a dental college, nursing college, a college of physical medicine and rehabilitation, and a college of allied medical science. Health City, Bangalore This 5,000-bed health city will be spread over 35 acres with a project cost of Rs. 2,000 crores. It will consist of 10 hospitals, which will come up over several phases. The 500 bed cardiac centre, Narayana Hrudayalaya is already functional and is spread over 12 acres. The second phase will have 1000 beds, 30 operating rooms, and a teaching institute to train cardiologists, cardiac surgeons, cardiac anaesthetists, nurses, various technicians, and healthcare specialists. The Health City will also have hospitals for specialities like orthopaedic, cancer, neurosurgery, ophthalmology, women and children. There will also be a thrust on telemedicine. Source: Business Standard, Weekend Section, July 28/29, 2007, p. I. and By and large, industry experts feet that foreign players are more likely to come in through tie-ups and collaborations in areas such as research and training and technology ventures than through FDI as the former are less risky ventures and are easier to control. Foreign technical collaborations are permitted under the automatic route in hospitals. Some examples of existing collaborative ventures include tie-ups between major corporate hospitals and the international divisions of wellknown overseas hospitals, such as Cleveland, Mayo, Johns Hopkins, and Texas Heart. In addition, the general view is that existing domestic players who are planning to expand their operations and new players who are entering the hospital business are more likely to obtain funding through sources other than FDI. From the scale of the above investment projects and their integration of various aspects of healthcare, apart from healthcare delivery through hospitals, it is evident that there will be some degree of foreign funding and foreign involvement in some of these projects apart from investment by the domestic corporate sector. Foreign involvement is likely to be in the form of technical 18

28 collaborations and collaborative research and development and training activities. Foreign funding is also likely to come in various forms, many of which are discussed in the following section. 3.2 Other sources of foreign investment in hospitals 9 There are various other forms of foreign funding, which are being used by hospitals in India to either expand their operations or to set up new operations. The regulatory environment concerning foreign financing in hospitals is quite liberal. As mentioned earlier, FII as well as private equity funding over a certain stake are also permitted under FDI route. In addition, FIIs and private equity funds can individually purchase upto 10 percent and collectively upto 24 percent of the paidup share capital of the company, through open offers or private placement, or through the stock exchange. Proprietary funds, foreign individuals and foreign corporates can register as a subaccount and invest through the FII, subject to limits of 10 percent and 5 percent, respectively for these sub-accounts. Foreign venture capital investments (FVCIs) are also permitted, though subject to certain restrictions. Respondents made it clear that while these other forms of financing also classify as FDI, there is a distinction to be made between permanent and temporary FDI as these have different implications for the absorption of costs, benefits to patients, expectations of returns, and improved capacity in healthcare delivery. The discussions indicate that non-debt based foreign funding has come into Indian hospitals through investment banks, through private equity funds which have taken limited exposure positions of between percent on various players, and through others such as FIIs, development agencies, and investment arms of foreign governments. Among these different sources, the most prevalent is private equity funding and now increasingly public offers. Several established corporate hospitals, including Max, Fortis, and Wockhardt are going for IPOs, where there is purchase of shares but without financial control and both foreign and domestic investors are subscribing to these shares. More and more hospitals are expected to raise money through IPOs in the near future, as this compares quite favourably with short term borrowing from banks, which involves a higher cost. However, the IPO option is open only to the reputed and well-established players and is not for new entrants. Despite repeated queries on the extent of foreign subscriptions in IPOs and in private equity funding, it was not possible to get an idea of the break-up between domestic and foreign investors under these modes. But it was noted by several respondents that the role of private equity funds, though significant, is less than that of individual investors through the IPO route. An estimated percent of the financing is provided by private equity funds and venture capitalists in some of the corporates, according to one respondent and that independently listed healthcare companies prefer going directly to investors. The institutional investors that were commonly cited include Warburg Pincus, which has taken a 26 percent stake in Max India and later in Max Healthcare, and the International Finance Corporation (IFC) based in Washington. It was also pointed out that there is some amount of NRI investment in healthcare. Two classes of NRI investors were identified. First are NRI doctors who wish to return to India or contribute to India, are financially comfortable, and therefore wish to invest in a venture. They may team up with local doctors. The second group consists of individual NRI investors who have finances and contacts and see the health sector as a growth opportunity and feel they can get high returns. Both NRI doctors and non-doctors are funding hospitals mainly through purchase of shares, although as highlighted earlier, there is also NRI investment through the direct FDI route. Apollo is one hospital that has worked through a network of investors (domestic and foreign) who tend to be in 9 Based on discussions and secondary sources. 19

29 the medical fraternity. However, it was also noted that due to the difficulty in controlling processes, even NRI investments may not be that forthcoming, except in some larger hospitals. A few other forms of foreign financing emerged from the discussions, but their role was rather limited. One example was that of Hinduja hospital, which has a tie up with Dubai World, the investment arm of the UAE government. The latter has an equity stake of 49 percent in the hospital. Venture capital funding and FII funding also appear to be quite limited and discussions revealed that these are not expected to be significant sources of financing in the near future. In the case of VC funding, one new hospital cited that it had accessed funds from a group of venture capitalists that had sourced the funds from small investors, but that it had encountered difficulties in the absence of a guarantor or facilitator. Similarly, respondents noted that FII funding was not likely to flow in large amounts into hospitals, as either such funds would need to have deep knowledge of the healthcare sector and its economics, which was unlikely, and that FIIs would not venture into the hospital business if they were only looking at short term returns. In terms of debt based financing, external commercial borrowing (ECB) did not emerge as an important source of funding for hospitals, although several respondents noted that this would be the ideal source given it was cheaper than domestic borrowing and equity financing. One respondent cited the fact that although rules on ECB had been relaxed, permissions for the real estate and healthcare sector had not been given by the RBI, possibly due to capital market exposure related restrictions. Other respondents noted that ECBs were permitted and had been obtained by some players, but that their use remained limited mainly because of the foreign currency exposure risk as hedging costs could be quite high. One hospital had had to preclose its external loan as it had incurred huge costs due to currency fluctuations. But there was a consensus that such credit would still be cheaper than domestic borrowing at around 6 percent excluding the currency exposure risk, and at around 8 or 9 percent including this risk, compared to percent rates for 8-10 year loans provided by PSUs and domestic private banks. Overall, external debt and more generally, debt based financing was seen as preferable to equity financing because of the additional issues of control, returns, and expectations in the case of private equity investors. Across all the sources of funding, however, it was apparent that large amounts of foreign funding are only flowing into major corporate hospitals Reputation and brand value are key to accessing funds through private equity, FIIs, or external commercial borrowing. Hence, new hospital projects would primarily have to rely on domestic debt and would not see much foreign capital inflows except through individual NRI investor or through groups of small investors. It is also felt that foreign investment is not likely to come to trust hospitals as investors are looking for returns and trust hospitals have delivery models and objectives that are not necessarily focused on the bottomline. Thus, any discussion of foreign investment in hospitals has mainly to do with the large private sector players who can access funds through various sources. 3.3 Pattern of financing in major corporate hospitals The preceding discussion has highlighted the possibilities for FDI, foreign equity funding, and foreign debt based funding in hospitals. It is clear that there is scope for expansion in FDI as well as private equity funding, especially in larger hospitals. However, if one looks at the current pattern of financing, both domestic and foreign, for some of the major corporate hospitals in India, one finds that these constitute a relatively small share. It is domestic financing that predominates, in particular domestic long-term bank borrowings. The following figure shows the composition of overall financing (domestic and foreign) by 6 major corporate hospitals in India. 20

30 Figure- 1. Structure of Borrowings Source: Company balance sheets accessed from the CMIE Prowess database (2006 figures) Over half of the finances are obtained through long-term bank loans. From the other categories of financing the share of foreign sources is not readily apparent, but roughly less than 20 percent could be funded through external sources. This corroborates the earlier discussion that although the sector has a lot of potential, to date, the role of foreign investment remains limited. The following table highlights the main pros and cons of the different sources of financing for hospitals in India, drawing upon the preceding discussion. 21

31 Table-4. Summary of pros and cons of financing sources for hospitals Source: Based on discussions and secondary sources What might be the possible explanations for this untapped potential in terms of foreign financing, when growth opportunities in the sector are good, when there is a clear demand-supply mismatch which foreign investment can help address, and when there is a liberal investment environment? One possible explanation given by a respondent is that since over 80 percent of hospitals are not listed in the country, the scope for foreign investment in them automatically gets limited. But this does not address the issue of why there is limited foreign funding as a whole and why FDI, which according to industry experts would be the most desirable form of financing, is not forthcoming in larger numbers? What might explain the fact that the recent spurt in funds into hospitals has been more through the equity route and public placements compared to the FDI route, which would suggest that investors are hesitant to make a long-term commitment to the sector? One needs to examine the factors beyond the direct regulatory environment for foreign investment and see if there are sector-specific factors, which deter foreign direct investment in hospitals or if there are regulations in other areas that affect the hospital segment and its attractiveness to foreign investors. The following section looks at the constraints to foreign investment in hospitals, as noted by industry experts and based on a reading of secondary sources. 4 Constraints to foreign investment in hospitals in India There are certainly many factors that could drive foreign funding into hospitals in India. The most important driving factor is the demand-supply mismatch and the huge amount of private sector investment that is required in this sector to raise its infrastructure even marginally to meet 22

32 international metrics. With the growing economy, rising incomes, increased willingness among Indian consumers to pay for quality healthcare and to go to institutional providers, the comparably lower costs of establishment in India, and the healthcare packages offered by companies which are increasing affordability of healthcare for consumers, this is a potentially attractive sector for both foreign and domestic investors. Also, with the prospects for setting up hospitals in Special Economic Zones and large-scale Medicities, there are opportunities for foreign investors to finance such projects. The growing presence of private healthcare in some developed countries also creates opportunities for foreign investment in the healthcare sector of developing countries such as India. However, there are external and domestic factors, which constrain foreign investment, especially foreign direct investment in India s hospital segment. 4.1 External factors One of the external factors, which was noted is that notwithstanding trends towards privatisation in healthcare in major developed countries, this is a sector that is undergoing reform and internal problems in those economies. In many countries, the number of private players who can establish hospitals overseas is limited. Hence, the potential number of overseas institutions that can invest in emerging markets may be rather limited. A second factor that was commonly noted was that the hospital business requires localized and indepth knowledge of the host country s market and thus entry as an independent overseas institution is very difficult. Joint ventures may be a better way of entering a foreign market when setting up hospitals. But there are problems in maintaining partnerships, as there are issues of financial control and differences in expectations and management styles. A third fact is that foreign investors would consider many competing destinations and would tend to go to markets which they are more familiar with and where there is clarity about policies not only regarding FDI but also regarding the healthcare sector overall. As several respondents pointed out, the Indian government does not have a clear roadmap for the healthcare sector, has not considered it as a core sector, and is perceived to be non transparent in terms of its regulatory environment and corrupt and inefficient in its procedures for establishing business, all of which do deter foreign investors. A quote from one foreign health sector expert sums up the perception of India as an investment destination. Investors can have two roles. There are those who want to invest in physical infrastructure and others who see this as a profitable development opportunity and thus want certainty of returns. Thus minimization of risk and a regulatory environment that permits that is important. The regulatory environment must permit certainty of revenue flows to repay debt. The obvious and immediate attractiveness of India is its population, its GDP growth, its expanding market The main factors that make India unattractive is the uncertainty of its regulatory environment, issues of income flow, license and red tape, difficulties in developing business, and corruption. Investing in service industries is different from that in production industries There are two reasons why investors are waiting and watching. One is the lack of infrastructure and the second is the bureaucracy for setting up. 4.2 Domestic factors The discussions suggested, however, that it is primarily domestic factors that are specific to the hospital business that have limited the extent of FDI in India s hospitals. These include initial establishment related factors as well as post-establishment related operational issues, which affect the returns to investment. 23

33 The single most important constraint is the high cost involved in setting up hospitals, the long gestation period of such investment, and the relatively low returns on investment. Several senior persons at leading corporate hospitals stated that hospitals are a very expensive business involving huge upfront very capital-intensive investments and very high running costs. According to many, it takes some 4 to 5 years to break even and some 7 8 years to make reasonable profits, although depending on the model adopted and efficiencies, it may be possible to break even and make profits in a shorter period. One senior doctor noted that an estimated Rs. 50 lakhs is required per bed, which works out to Rs. 100 crores for a 200-bed hospital. If this cost could be reduced to even Rs. 40 lakhs per bed, then the break-even period could be quicker. In addition, rising operating costs (due to shortages and high procurement costs of certain inputs as discussed later) further squeeze margins. Thus, investment in hospitals is characterized by low returns, high capital intensity, and long-term commitment. This is not the most attractive combination for foreign investors when also coupled with the various external factors discussed earlier. Several hospitals noted that profit rates are around 13 percent, lower than that in other high growth sectors such as IT, finance, or retail. The following table shows the financials for six selected hospitals, some of which have foreign funding, mainly through FII and equity sources. The figures summarize the key features of investment and returns in the hospital business and highlight some of the main factors, albeit interrelated, which affect this segment. 24

34 Table-5. Summary of key operating and other ratios of major corporate hospitals in India (March 2006 figures) Source: CMIE Prowess database and CRISINFAC (2007). Several things are evident from these financials regarding the nature of investment that is required in hospitals. First is the high capital intensity of hospitals, which is reflected by the low ratio of operating income to gross fixed assets. This ratio is less than 1 for five of the six hospitals, while the desirable benchmark ratio according to industry experts is around 2. Even as a share of net fixed assets, the asset turnover ratio is below this benchmark. Operating income to total assets is less than 1 for all the hospitals, again indicating the asset-intensive nature of the hospital business. 10 Second, the profit after tax to operating income ratio is negative or only slightly positive for all the above hospitals. This substantiates the earlier point made about low returns to investment in hospitals, notwithstanding some of these being well-established players. There is a lot of variability in these numbers, reflecting the fact that the hospital business is a localized one and returns are context and model specific. Third, is the depreciation of assets, and especially of medical equipment (discussed at length later in this section), which often become obsolete. While the average depreciation rates shown above are not very high, at around 5% per year, the depreciation rate varies across classes of assets and for different kinds of medical equipment, thus requiring efficient working of the assets and high utilization rates. The latter in turn has implications for the required scale of operations and profitability of such establishments. Fourth, one sees the significance of land and buildings in total assets. For most of the hospitals in the given table, this asset constitutes over 20 percent of total assets. If one takes stock of the fact that several of these hospitals have been established for time now (as also reflected by the high cumulative depreciation rates for some of them), then it is evident that land and buildings can constitute a significant share of total set up costs (as discussed later in this section). 10 It needs to be noted that it is not clear what is included under operating income and there may be differences across the hospitals in terms of their classification of operating income and also assets. One major source of difference in what constitutes operating income is the income generated from the pharmacy business, which is often a major chunk of a patient s bill in hospitals. This may not be included by some of the hospitals in their operating income and could thus reduce the asset turnover ratio that is reported. 25

35 Fifth, the figures indicate that debt financing is important. There is variability in interest expenses as a share of total borrowings, with the average rate at around 8 percent. It does appear that domestic debt is more expensive than external commercial borrowing, as highlighted earlier. This suggests that the interest rate environment (how high or low interest rates are when debt is contracted) and the availability of other forms of financing (share of debt to equity) is important for hospitals and thus could significantly impact the finances of hospitals. It is interesting to note the item, sundry debtors to operating income, which comes to ratios of 15 percent or more in most cases, which is higher than the percent rates for cost of capital noted by many respondents. It is not clear what this item refers to, but it may pertain to bad or miscellaneous debts of the hospitals, which are clearly contracted at a higher cost. The financial information presented in Table 5 above indicates that there are clearly issues of establishment, operating costs, nature of assets and their depreciation, and costs of financing, which are likely to affect the viability of hospital projects and thus the extent to which this segment attracts foreign direct investment. The following discussion examines four issues. These are: (1) set up costs and in particular costs of procuring land; (2) required investments in and depreciation of medical equipment and devices; (3) medical manpower constraints; and (4) regulations in related areas and the overall regulatory environment and policy direction affecting investment in hospitals Initial establishment issues: land and set up issues The most commonly cited problem was the difficulty in getting land in big cities and its prohibitive cost. As pointed out by experts, land costs can play a critical role in the long-term sustainability of hospital projects, directly influencing pricing strategy and margins. Broadly, project costs, land and construction of buildings should constitute around 40 to 50 percent of total project costs (with around 40 percent of costs being accounted for by medical equipments and the rest 10 to 20 percent for operational expenses and human resources). Land costs should be within 5 percent of the total investment according ton one strategy planner. If a hospital spends a higher share of the investment cost on procuring land, this is bound to affect the pricing of services, which along with other operational and maintenance, and technology upgradation costs put further pressures on margins and affect the costing of services and thus affordability of healthcare. A quote from one respondent well illustrates this point. The cost of land is slowing the process. Land prices are too high and so the hospital business is unviable from day one. Availability of land has become the main challenge. What compounds this problem is that although real estate costs are rising and available land in metros is scarce, it is not possible to easily raise bed prices, thus affecting margins. Institutional land is not available at a discount for non trust or non society modes of operation. Several persons who were interviewed stated that land and buildings constitute around percent of total project costs, if land is bought, followed by medical equipment, which constitute between percent of total project costs. If the land is leased or there is a joint venture arrangement whereby one party invests in the real estate, or if there is a public-private partnership arrangement whereby part of the procurement cost is subsidized by government, then the initial costs can be significantly lowered and the main investment area then becomes medical 26

36 equipment. 11 In terms of the value of land and buildings in the total stock of assets, one respondent noted that land accounts for percent of a hospital s existing fixed assets, and buildings, IT, and engineering services account for a sizeable 30 percent or so of fixed assets. Thus land and buildings together remain an important part of the hospital s total stock of assets and clearly for its initial establishment costs. Respondents also noted that given the hard infrastructure requirements and long repayment periods, scale is essential to make hospital projects viable. For example, if there is infrastructure of around 5,000 beds, then costs can be lowered significantly, and margins can be improved. Such investments are only possible with inflows from international agencies, private equity funds, and other development agencies. However, the cost of land is a major deterrent to setting up such large-scale establishments and the viability of hospital projects, thus adversely affecting investor interest. However, it was also pointed out, that other arrangements need to be considered such that private players need not procure the land but can either get it on lease or manage and build on existing assets of public sector institutions (see later discussion on public private partnership). The problems faced by major players in getting land were evident from the suggestions put forward by the respondents on this issue. Many noted that there needs to be land allocated within SEZs for hospitals as this would lower the cost of establishment and enable the setting up of large hospitals. Further, land could be earmarked in cities in specified areas, not necessarily in the centre of the city but in the outskirts in designated areas, for setting up hospitals. Many also pointed out that if land is subsidized, then this should not come with conditions to serve below poverty line patients as such conditions are not enforceable and create perennial obligations on hospitals rather than making the procurement of land a one-time transaction. For many, the government needs to see subsidies on land procurement as assistance to the sector at large to help it expand its capacity for all, rather than assistance given to any particular player. This, it was argued, would also permit hospitals to enter into second and third tier cities and towns and thus expand the reach of healthcare to all. In addition to the procurement of land, there are also issues concerning the supporting infrastructure (such as getting water supply and electricity) and the process of obtaining clearances for buildings (getting legal documents, environmental and fire clearances) which are not always transparent, may involve corruption, varying levels of efficiency and interest on the part of state governments, and vested interests, which may delay establishment and drive up initial costs. Although none of the respondents had any major issues on administrative procedures and bureaucracy, some did note that the entire process of setting up a Greenfield investment might take as long as 3 to 5 years Medical equipment and technology The other major investment area that affects initial and operating costs of hospitals is that of medical equipment and technology. Equipment constitutes around 30 percent of all fixed assets; depending on the kind of technology acquired and some 40 percent of revenues are spent on drugs and supplies. However, 70 percent or more of medical devices are imported, often at high cost notwithstanding recent reductions in import duties. It is felt that these duties could be rationalized further and flat uniform rates introduced for a wide range of medical devices, without conditions 11 Examples were given of hospitals that have opted for a joint venture type arrangement where a real estate developer invests in the land, building, and development of surrounding areas and of hospitals that have entered into PPP arrangements. But several problems were noted with subsidy-based arrangements. 27

37 on their end use or any performance requirements. One respondent noted that as long as these imports are used to meet domestic demand, there should not be any conditions for availing of lower rates. The root problem here is the limited domestic manufacturing capacity for medical equipment in India. Apart from a few companies, there is no domestic production. One respondent stated, We are facing a crisis because most of the international equipment manufacturers have hiked the prices of equipments and although customs duties have come down significantly, the overall cost of service is still very high. There is often no alternative supply of equipment, and some of these manufacturers are hiking prices at will. Therefore technology transfer in this area would be key in the coming years, if we want to deliver international quality service at affordable prices. According to industry experts, unless companies establish Indian subsidiaries or enter into tie-ups with local companies, hospitals will need to continue importing and these input costs will not come down. The following graph shows the growth expected in the medical equipment market in India over the period. The market is expected to more than double from $2.2 billion in 2006 to close to $5 billion in Figure- 2. Domestic Medical Equipment Market Source: Ernst and Young Analysis and FICCI (2007), Opportunities in Healthcare: Destination India, Executive Summary, p.2. Hence, this is clearly a high growth segment in the healthcare sector, where one could foresee increased FDI and collaborative arrangements to expand domestic manufacturing capacity. Thus, local manufacturing of medical equipment needs to be incentivised, which would also have spin-off benefits in other areas such as medical value travel. However, the government would also need to enforce guidelines for standardization and quality certification. The structure of the medical equipment industry also poses problems. Organized equipment manufacturers often engage in opportunistic pricing and make big margins when selling to hospitals. The prices paid generally exceed their true manufacturing cost. A catheter may be 28

38 procured at ten times its actual manufacturing cost. Partnerships between hospitals and medical equipment manufacturers to develop indigenous technologies and greater involvement of medical faculty in research and product development at such companies could help lower input costs for hospitals. It was also pointed out that if there were larger hospitals, then economies of scale would enable the hospitals to bring down the share of medical equipment costs from the current level of 40 percent to around 20 percent. 12 Yet another problem in this context is the fact that rapid technological changes often render obsolete some high cost equipment and devices that hospitals invest in, thus requiring fresh investments in certain equipment within a few years. The depreciation rate for high-end equipment as per books can be 14 years; in real terms it is around 7 to 10 years. Hospitals often place the equipment at 7 years and stretch it up to 10 years if it remains relevant technologically (CT machines, X Ray machines) although some equipment can be stretched as long as 15 years (OT tables). There are also breakdowns and repair costs. One respondent noted that investment in MRIs and CT machines may be to the tune of 3.5 to 4 crores, but within 2 to 3 years, a new model may arrive. The hospital may need to invest in the new equipment so as to maintain the latest technology and ensure the best quality of service. Hence, corporate hospitals have to sweat their equipment in the initial three years so as to be able to invest in newer technologies within a few years. Utilization ratios of 60 to 65 percent are required by the end of the second or third years to work the asset effectively and enable such fresh investments within a short time. For an investment of Rs. 4 crores in medical equipment, noted one expert, a revenue of Rs. 18 to 20 lakhs per month may be required to break even in three years time. While it is difficult to draw generalized conclusions as utilization rates and breakeven loads depend on the kind of equipment, the arrangement under which the equipment has been purchased, and the accounting practices and purchase policies differ across institutions, the views expressed clearly indicate that the capital expenditure costs incurred for medical equipment are a major constraint on operations and returns. To quote on practitioner, The question is where hospitals should stop investing in the latest technologies. How can technical advances be financed? The higher the level of technology used, the more that needs to be paid for such doctors if they are trained in the use of that technology. It is also difficult to anticipate further advancements. The high cost of procuring equipment and the cost of manpower trained in its use further escalate costs in this business Manpower availability and quality issues Another major operating challenge affecting all private players, especially as they embark on expansion plans, is human resources at all levels- doctors, nurses, paramedics, front and back end support staff, managers, and administrators. This gap is both in terms of quantity and quality. As a result, the cost of talent is rising by some 20 percent per year and is even higher at around 50 to 60 percent at the junior and middle levels. Poaching and attrition problems are rampant. There is a dearth of qualified and trained technicians who can operate sophisticated healthcare equipments. 12 One leading doctor noted that there is a need to build large chains of hospitals, which alone can bring down input costs through economies of scale. If there can be some 8-10 hospitals with 5 to 10,000 beds, then one can bring down costs of devices. The input cost share has to be lowered from the current rate of some 40 percent to around 20 percent. 29

39 As one practitioner put it, One reason, why FDI in healthcare may not be happening is because of the dearth of qualified manpower in the country, both for doctors and paramedics. The problem of manpower is mainly attributed to existing regulations on medical education, which create a bottleneck on the supply of doctors and nurses. The Medical Council of India has arcane guidelines on the setting up of medical schools. Only government or trust hospitals can set up such education facilities. There are also inappropriate guidelines for setting up medical colleges and training schools, such as on the amount of land required, the number of classrooms, and on their size. For instance, there is a restriction of a 500-bed care unit on hospitals for getting permission to set up training colleges. The healthcare education facility is required at a minimum have a 10-acre campus. The acreage requirements for grant medical colleges are also applied to education facilities set up by private hospitals. The entire approach is infrastructure and volume based rather than value based and does not focus on quality and functional excellence. As one respondent pointed out, The restriction on land size does not make sense. Well-known medical schools abroad are only 5 acres in size. The Nursing Council of India requires 50 beds minimum and large size campus but trains only 50 nurses while much smaller buildings with 10,000 square feet for example in Singapore are training 500 nurses a year. It is also possible to use simulations for training. Ironically, as experts commented, while the Medical Council has not permitted corporate hospitals to set up training facilities, which would benefit them and the healthcare sector at large, it has permitted a plethora of substandard private medical colleges, which have political patronage and make money through huge capitation fees. Many of these private institutes lack basic faculty, equipment, and infrastructure and are unable to provide relevant and quality training. Likewise, the Nursing Council of India s regulations are also seen to be arcane. The Nursing Council does not allow private players to enter into nursing education unless they form trusts. Hospitals need to tie up with another organization in order to grant a PG diploma in hospital administration. Again, there are requirements on land and infrastructure, such as requiring a 500 seater auditorium, 25 acres of contiguous land, conditions which are difficult to fulfil in first tier cities. It was pointed out that if corporate hospitals are allowed to start nursing colleges, then they could provide continuous medical education and skill upgrading that is required in this sector, and also generates employment by recruiting the nursing graduates from these colleges. As one CEO put it, We need private institutions to be partners in the education process. Between 1990 and 2007, there has been a marked deterioration in the nursing and paramedical sciences and the quality of medical and nursing students has fallen. Such an outcome is seen to be the result of restrictions placed on good private hospitals from entering medical training and education. Thus, medical education needs to be decontrolled to increase the supply of manpower at all levels and to improve quality. Several suggestions were put forward by the respondents, which clearly highlighted the problems they face in this area. Most noted that private hospitals need to be encouraged to be part of the training process. One suggestion was to link the incentives given to these hospitals when setting up with their fulfilment of obligations on creating manpower, as this would link the needs of the hospitals with the larger societal need for quality manpower in this sector. It was also suggested that the constraints on the supply of trainers and faculty could be alleviated if more flexibility were provided to professionals in this sector. For example, more flexibility could be given to practitioners in the private sector to teach and transfer their knowledge and experience to educational institutions in the public and private sector. Likewise, faculty in public sector institutions could be permitted to teach and practice in the private sector institutions to bring their experience, enhance their skills and exposure to state of the art equipment and also their income possibilities. One respondent commented on the inflexibilities in the medical education system regarding the use of human resources, Often senior medical professionals are keen to impart 30

40 education in various government-run medical colleges. However, they are rarely offered a position befitting their stature. Some of these senior professionals are even willing to teach these courses without any honorarium, but wish that the colleges offer them a position as professor or senior professor, which takes due cognisance of their expertise and experience. However, frequently, due to red-tapism, these professors are not allowed to teach specialized courses. Therefore, a mindset change is required in medical education, which can improve medical education in this country. Overall, existing training is inadequate, in short supply, often not relevant, sometimes not available in certain areas (health administration), and of highly variable quality. There needs to be more pooling and exchange of human and physical resources, use of both practical and research based experience in teaching, and incentivisation of the established private players in medical education, if the larger healthcare system is to be benefited. It was also noted that opening up the higher education sector to FDI would alleviate the manpower constraint in the healthcare sector as much of the resulting investment is expected to flow into medical education. Overseas universities from the UK and US are interested in entering India s medical education sector, in nursing, paramedics, and general medical education. The fallout of the manpower shortage is higher costs for hospitals. With manpower (and materials costs - consumables and medicines) rising rapidly, the profitability of hospitals is getting adversely affected. Hospitals are coping with the manpower constraint in different ways. Some share resources across different centres, or call in additional manpower from other locations for critical treatments and emergencies, and some plan for 20-30% overcapacity to ensure consistent service quality delivery, thus incurring additional costs. Many invest significantly in training their staff at all levels, which also raises manpower costs. Some institutions are talking to management institutes to train their staff in various soft skills, such as leadership development and in various functions such as HR and finance in a manner that is attuned to the healthcare sector, as this is currently not available from the training institutions. Hospitals are also encouraging existing technicians to upgrade through training. Since manpower development is important, often the start-up period consists of extensive training programmes, which can be quite expensive and a major deterrent for many entrepreneurs. Some private hospitals are tying up with overseas institutions like medical schools in the UAE for training their staff. Narayana Hrudalaya has a tie up with Hyatt College of Technology and with Queen Mary s Medical School for training. It has also tied up with the University of Ohio to train nurses and with University of Minnesota for temporary registration of its doctors to train there. Max has tied up with the Indian Institute of Labour Management for training of health administrators. All the major corporate hospitals are investing in continuing medical education and tie-ups to overcome the inadequacies in medical training in India Health Insurance Several practitioners and managers who were interviewed indicated that FDI in hospitals in India would remain constrained unless the health insurance market is liberalized further and market penetration increases. Current policy permits only 26 percent FDI participation in the insurance sector and through joint ventures and there are minimum capital requirements imposed on players entering the market. There are several ways in which liberalization of health insurance and the entry of foreign as well as domestic health insurance companies could help. First is by increasing accountability, transparency, and efficiency in healthcare delivery and incentivising many more hospitals to go for accreditation. This would give more confidence to foreign investors interested in entering the hospital segment. 31

41 The second is by increasing the paying consumer base and thus making healthcare affordable to a larger percentage of the population. This in turn would help hospitals expand the scale of their operations, bring down costs through economies of scale, and thus improve their profitability. It was felt that without a critical mass of insured patients, at around 10-20% of the population, foreign players would not enter the Indian hospital market in a big way. The following figure shows the low level of health insurance penetration in the country, despite rapid growth in recent years. 13 Figure- 3. Health Insurance Penetration in India Source: IFC Health Conference (2007) As shown above, less than 10% of India s population today has a health insurance cover; either voluntary or as part of the Employees State Insurance, Central Government Health Scheme or Community Insurance. The estimated market potential is Rs. 15,000 crores, of which only 10% had been tapped as of The low share of insured patients is seen as one of the main reasons that healthcare services have not grown as much as they could in India. There is also an allied problem of low awareness about medical/ health insurance. Thus, there is considerable scope for increased market penetration. The third way in which liberalization of health insurance would help is in terms of improved cost recovery for hospitals, again benefiting their bottomlines. As stated by one respondent, Healthcare is expensive and needs to be made more affordable. Whether or not running a hospital is profitable or non profitable, the player must be able to operate on non-regular cash flow basis. Government hospitals have deeper pockets and must still have payer sources. Health insurance can provide a reliable payer source. The root problem is that currently, many hospitals are affected by the nonpayment of bills, especially in emergency and trauma cases. They have no guarantee that these bills would be paid up in future or of any government intervention or assistance in such matters. 13 The number of lives covered under health plans has improved from 4-5 million about six years ago to over 12 million today. Health insurance premium collected in registered a growth of 35% over , with private players registering a growth of 77% over and public players a growth of 25%. Ernst & Young expects the total medical insurance premium income in India to grow to $3.8 billion by

42 Increased insurance coverage would enable hospitals to handle such cases more easily (although as also noted, in some cases insurance companies do not pay up the money). By enabling greater transparency and clarity on insurance policies, the entry of foreign insurance companies is also expected to help address certain regulatory and procedural problems that currently plague the existing insurance mechanisms. It was noted that the Third Party Administrators (TPA) system introduced by the government in order to facilitate the healthcare disbursal system, has rendered itself to misuse by patients (through falsification of informationlimited disclosure of chronic illnesses), by hospitals (in connivance with patients to inflate bills), and by the TPA (due to rejection of genuine claims for no reasons, bill deletions, etc.). There has been lack of due diligence of TPAs. Many TPAs do not pay the hospital on time and try to hold on to the money that the insurance companies have realized. Average payout cycles under TPAs may be as much as days, whereas the normal payout cycle is about 30 days. Another problem is that there is no government regulation to ensure uniformity across the policies of different insurance companies, resulting in non recovery and confusion among hospitals, patients, and insurance companies on cost limits, acceptable prices, coverage of procedures, etc. As one respondent noted, low insurance penetration and adverse payout ratios for insurance companies (Rs. 120 for every Rs. 100 collected in premiums) will lead to a steep rise in the cost of medical insurance premiums.. This will only further hurt the growth of private medical insurance and have adverse equity implications. Thus, opening up of health insurance is warranted on efficiency and transparency grounds. Increased insurance penetration is required to lower the cost of claims and help lower premiums. One noted practitioner pointed out, as the quantum of those covered by insurance increases, hospitals would become more willing to open even in rural areas as premium would be available at more affordable rates for the rural population. Collaboration with overseas hospitals and universities is also expected to help raise the acceptability of hospitals in India to foreign insurance companies. Most respondents also argued that liberalization of health insurance and entry of foreign health insurance companies would have positive implications for medical value travel, the pharmaceutical and clinical trials business. There is clearly a two way relationship between health insurance and the growth of private sector corporate hospitals, with or without foreign funding, as liberalization of health insurance will help such players while the increased presence of the latter will also help drive health insurance. But the FDI policy needs to be liberalized to make this happen. In addition, as all respondents pointed out, a proactive framework is needed in health insurance, as has been the case in life insurance to improve governance and address the aforementioned problems. It was, however, acknowledged that there will need to be micro insurance programs and state and community based affordable health insurance schemes to improve insurance cover for the poorer sections as opening up of health insurance and entry of foreign insurance companies would not cater to certain sections only Other regulatory issues and policy directions A few other regulatory issues are also seen as affecting the functioning of private hospitals and thus indirectly the attractiveness of the sector to foreign investors. One of these is standards and accreditation and registration guidelines for setting up of healthcare delivery centres. It was noted that the government does not have a proper framework to guide the setting up of new hospitals and nursing homes. The government does not set benchmarks for service delivery, does not demand players to comply with basic norms, and also does not do any kind of local or zone based marked needs assessment before allowing new facilities to register. A related issue that was raised was disclosure policy. It was noted that without a uniform disclosure policy and sharing of 33

43 information by hospitals, a mature healthcare delivery system cannot materialize. Government needs to insist on getting proper information from all establishments in order to ensure adherence to norms it lays down. Independent regulatory bodies are required to ensure standards are maintained through frequent audits and disclosure of information. The lack of a regulatory framework for setting up establishments and monitoring their standards adversely affects quality, creates unwarranted competition for manpower, and also results in excess supply of medical facilities in some zones, making some players unviable. Many of the respondents noted that it is necessary to have some planning about the number of hospitals required in an area and some process for certifying the need for setting up a hospital in a zone. Such an approach would enable greater consolidation in healthcare delivery and economies of scale, potentially helping to lower costs while also improving returns for establishments. The recent initiatives to introduce NABH certification, which looks at issues like patient safety and processes and draws upon the best practices of other systems, was welcomed by all those interviewed, with several insisting that it should be made mandatory along with greater regulation of clinics and nursing home. Effective regulatory frameworks and better enforcement of standards would also improve the image of India s healthcare delivery system, thus raising overall standards making it a more credible investment destination for overseas investors. Today, the fragmentation of the sector and variability in quality of healthcare delivery is a deterrent to foreign investment. Another issue that emerged was the general lack of clarity and priority in the government s approach to the healthcare sector. To quote one respondent noted, Health has never been seen as a core sector so far. The government has given little emphasis on organized health care. It has not been seen as a priority from the privatisation perspective and so its influence remains peripheral. Government s core interest is lacking which leads to hesitation from FIIs to invest in this sector. The roadmap at the domestic and the global level is unclear. Huge reforms are required but clarity in approach is lacking. Hence, despite the fact that the FDI policy in hospitals is very liberal and no major regulatory hurdles are faced in setting up hospitals, according to industry experts, what would be required for foreign investors to show more interest is a roadmap of where the government sees healthcare from a domestic and international perspective, clarity on the government s position on urban, rural, and semi-urban health care, what is desired from foreign participation, and how the government will support the sector. Greater transparency and predictability in the policy environment is required if the existing liberal FDI regulations are to elicit greater foreign participation in this sector. 5 Impact of foreign investment in hospitals This study also examined the realized as well as pe4rceived impact of foreign investment in hospitals in India. As highlighted earlier, one of the main ways in which foreign investment can help is through creation of physical infrastructure. Some 800,000 beds are required over the next five years to raise our infrastructure status in healthcare to an acceptable level and for this Greenfield investments are essential. The latter is not possible with domestic resources alone. There is an estimated gap of $10-15 billion which foreign investment can provide to double existing infrastructure. Investments are also needed beyond the metros to expand access to healthcare. There are many positive implications of foreign investment in hospitals. In addition to helping increase physical capacity in the health care sector, such as increasing the number of hospital beds, diagnostic facilities, and increasing the supply of speciality and super-speciality centres, foreign investment can also help in raising the standards and quality of healthcare, in upgrading technology, and in creating employment opportunities, with potential benefits to the health sector and the economy at large. For instance, the international groups have promised to usher in 34

44 standards, quality assurance, a high level of customer care, and a disciplined approach towards work, along with accountability into the Indian healthcare industry. An exposure to international quality standards could result in more Indian-owned operations benchmarking their services against the international groups. One good example is the trend of leading Indian medical care facilities increasingly complying with stringent quality standards and queuing up for international accreditations such as JCI. The presence of foreign investors in the healthcare sector could also provide a boost to medical tourism and help India in achieving its goal of establishing itself as a medical tourism hub in the region. There are also spill over benefits in other areas, such as the growth of the health insurance sector, clinical trials and other health services outsourcing, and the pharmaceutical market. However, there are also potential adverse effects with the entry of foreign investment in hospitals and more generally with the corporatisation of hospitals. There could be increased segmentation with the growth of a well-funded private segment on one side and a resource-constrained public segment on the other. The latter could also result in internal brain drain from the public to private sector and a skewing of health provision towards the needs of the urban affluent class. There could also be adverse implications in terms of increased cost and affordability of health care services for the poor. There could be negative fallout for small and mid size players. The following section highlights the findings from the quantitative survey to indicate the realized impact of foreign investment in hospitals on some of the aforementioned aspects. On the basis of these findings, the discussion draws inferences on the likely implications of foreign investment in hospitals. The discussion is supplemented with the insights derived from the in-depth discussions on the likely areas and nature of impact of such investment. 5.1 Key findings from the survey Of the 25 h ospitals covered in the quantitative survey (through primary and secondary sources), 12 had foreign financing. None of the hospitals had any concerns about the existing regulations concerning foreign investment, corroborating the earlier discussion on the liberal regulatory environment. The source country for funds was typically the source country where the investment group was based or where the centre or overseas hospital was based. Hence, Pacific Medical Centre in Hyderabad has most of its foreign funds coming in from Singapore, as it is originally based in Singapore. Several interesting insights emerged from the survey about how foreign funded hospitals and hospitals without foreign funding might compare, in terms of the kinds of services and procedures they offer, the kind of technology and equipment they invest in, their utilization rates for hard and soft infrastructure, their focus areas, their costs, and their remuneration of medical personnel, among other areas for comparison. This comparative data is seen as indicative of the realized impact of foreign investment in hospitals Services and procedures As the sample of hospitals was selected on the basis of size (100 beds and above) and all those chosen were multi-specialty institutions, on these dimensions there was no basic difference between the foreign funded and non-foreign funded hospitals. The data indicate that all the hospitals provide general medical services and most provide specialized and advanced specialty services. The following table shows the results for the availability of services, for all the foreign funded institutions in this sample, all the non foreign funded institutions in this sample, and all the non foreign funded institutions excepting one major large trust hospital in the second, third, and 35

45 fourth columns, respectively. The percentage shares refer to the share of hospitals in that category affirming the availability of the concerned service. Table-6. Availability of Services in surveyed hospitals Source: Based on survey data. The tabulated results above show that there is little difference between the foreign funded and nonforeign funded hospitals in terms of the availability of services. While this may be partly due to the relatively small sample size and the pre-selection criteria (all relatively large and multi-speciality hospitals), it does reflect the fact that the large, well-established, non-foreign-funded private hospitals are quite comparable in terms of the range of healthcare delivery they provide. But if one examines the results more closely, it is interesting to note that the share of foreign funded hospitals tends to be slightly higher and in some cases significantly higher as one moves into higher category of services. While the difference between the two groups of institutions is very slight for category I services (excepting dermatology), for certain category II and III services, there is a significant difference. This is evident in the case of pulmonology, endocrinology, haematology, metabolic disorders for instance where the share is much higher for foreign funded institutions. This may suggest that foreign funded institutions tend to focus on more advanced and speciality services compared to non-foreign funded institutions. This inference is substantiated by the results on availability of surgical procedures as shown in the following table. Again, the percentages refer to the share of hospitals in that category affirming that they provide the concerned surgical procedure. Table-7. Availability of Medical Procedures in surveyed hospitals 36

46 Source: Based on survey data and CRISIL (2007). The tabulated results in the above table clearly show that foreign funded institutions are more inclined towards advanced and speciality areas for surgical intervention. If one compares the share of institutions in each category for general surgical procedures, the difference is very small across the various categories. In contrast, for specialized surgical procedures such as neurosurgery, oncology, or cardio-thoracic surgery, the share is significantly higher for foreign funded hospitals. This confirms the fact that the latter, while providing a wide range of services, tend to focus on niche areas, on surgical interventions as opposed to general preventive care. It is also worth noting that the removal of one major Trust hospital from the non-foreign-funded institutions category makes a significant difference to the results. Apart from reasons of small sample size, this may also indicate the fact that there exist major non-foreign-funded private sector players that operate in highly advanced and niche areas, and thus that such advanced healthcare delivery is not necessarily dominated by the foreign funded hospitals and for-profit private hospitals alone. What might explain the greater focus on advanced surgical procedures and niche areas for the foreign funded hospitals, as illustrated by the preceding table? One possible explanation, as provided by one industry expert, is that corporate hospitals tend to concentrate on high revenue generating procedures, which include cardiology, oncology, and neurology. The comparatively higher shares for the advanced procedures may thus be reflecting this focus on higher revenue stream areas, which in turn is partly related to their huge investment in high-end technology and the need to work such capital efficiently to manage their revenue streams and to recover their investments. This was corroborated by the in-depth discussions where respondents of some of the major corporate hospitals indicated that they invest significantly in upgrading medical devices and technologies and that they use a large portion of foreign funds for developing infrastructure and importing new technology. 37

47 Thus, foreign funded hospitals appear to focus more on advanced technology and equipment compared to other hospitals. One might also infer from these results that there is a difference in approach to medical care. Foreign funded hospitals and more generally, large corporate hospitals it appears tend to take a more curative and intervention based approach to healthcare (admission to intensive and emergency care). The latter in turn also suggests that the utilization mix of different classes of assets may be different between the large corporate hospitals versus trust, charitable, and non-foreign funded hospitals Physical infrastructure and medical staff The following two tables clearly show this difference in approach in terms of asset utilization mix, i.e., greater use of technology as opposed to medical personnel, and greater sweating of the physical capital (beds, operation theatres, ICUs, ambulances, etc.) in the case of foreign funded as opposed to the non foreign funded hospitals. 38

48 Table-8. Availability of Infrastructure and Medical Facilities Source: Based on primary survey data. Table-9. Availability of Medical Staff Source: Based on primary survey data. 39

49 If one compares the availability of infrastructure and medical facilities, the most striking difference is in the average number of medical facilities, such as for intensive care units. It indicates the much larger investment in operative and ICU set-up than in the case of non-foreign-funded and other categories of hospitals. Compared to 6.5 ICUs on average for the other hospitals, the foreign funded hospitals report an average number of 24. The investment in physical infrastructure is also significantly larger. For example, the average size for the foreign funded hospitals is around 240 compared to 216 for the non foreign funded category and 159 when the one large trust hospital that is comparable on many scores with the foreign funded institutions, is removed. There is also a large difference for the average number of rooms, at 133 for foreign funded as opposed to 101 for the non-foreign-funded and only 57 when the one large trust hospital is removed in the latter category. The average number of ambulances for emergency services is also much higher for foreign funded institutions, at 3.4 compared to 2.1 for the non-foreign funded and even lower at 1.8 when the large trust hospital in the non foreign funded category is excluded (though most hospitals have round the clock ambulance services). Thus, the foreign funded corporate hospitals have invested more in scale, in terms of beds, rooms, ambulances, and ICU infrastructure. In terms of service infrastructure, foreign funded institutions also report a higher share in the case of ambulance services and a slightly higher share in the case of post-operative care facilities. This may again reflect their greater focus on operative and critical care services. The average number of operations conducted per day is 22.4 compared to 15.5 in the case of non-foreign-funded institutions. The utilization ratio for operation theatres is similarly much higher for the foreign funded institutions at over 3 compared to 2.3 for the non-foreign-funded hospitals. Thus, as noted earlier, not only is the focus of medical care in the foreign funded and large corporate hospitals is mainly on critical care and surgical interventions, requiring state of the art technology and good critical care facilities, reflecting the greater utilization of assets in such care. These inferences are also partly corroborated by the table on availability of medical staff. The data show clearly that there is greater availability of medical staff for critical care in the foreign funded hospitals at an average of 11.6 doctors for emergency room services compared to 4.9 for non foreign funded institutions and an average of 30.5 nurses for emergency room services compared to 8.5 for non foreign funded institutions. However, the number of patients per doctor or per nurse is much higher in the case of foreign funded institutions, indicating that general medical care does not tend to be the focus area for the large corporate hospitals and that there is a substitution of human capital with technology, except in critical care and surgical/speciality procedures where they are much better equipped. Thus, there is a niche orientation in terms of the care provided, in terms of the technology invested, and in terms of the use of human capital in the foreign funded institutions. It is important to note that these numbers also reflect consumer demand patterns. The higher numbers for emergency, ambulance, post-operative, and medical care services also suggest that the demand for medical care at large corporate hospitals is mainly in the critical, emergency, and intensive care areas rather than in general out patient and chronic medical care. Hence, it appears that consumers distinguish between classes of hospitals/competing establishments such as nursing homes and clinics in terms of the medical care and facilities that they seek. One is not necessarily seeing a one-stop shop approach to medical care as yet even though large corporate hospitals may provide all facilities under one roof. This may in turn suggest considerations of affordability and personalized medical care, issues that are not directly corroborated by the survey results but were clearly thrown up by the in-depth discussions. 40

50 5.1.3 Human resources: Remuneration and quality issues The survey collected information on the average remuneration given to staff, including doctors, nurses, paramedical, administrative, and other lower level staff. The aim was to understand whether there is a significant differential in remuneration between foreign funded and non foreign funded hospitals and therefore whether there may be a resource flow towards the former, with implications for the functioning of non-corporate and small and mid size players in the hospital business. The following table shows the average monthly remuneration for staff for different categories of medical personnel. These categories are based on industry norms and a common subset of categories that were listed by the surveyed institutions. Table-10. Average monthly remuneration for staff (Rs.) Source: Based on primary survey data (2007). The results above show that foreign funded hospitals pay higher remuneration to their doctors, nurses, paramedical, administrative, and even lower level staff compared to non-foreign-funded institutions. The differential is greatest for senior consultants, around 3 to 7.5 times higher for foreign funded institutions. For nurses, the factor of difference is around 2 times. For administrative staff, foreign funded institutions pay around two to two and a half times more and for the lower level support staff, the factor of difference is around one and a half to three times. These differences in remuneration have positive and negative implications. On the positive side, they indicate that the emergence of large corporate hospitals and foreign funding will improve employment and income opportunities for medical personnel and support staff. They will provide scope for augmenting income and living standards at all levels. However, from the perspective of other players, including larger non-foreign funded hospitals and in particular mid size nursing homes and smaller hospitals, such differences in remuneration would suggest greater competition for human resources at all levels. The small and mid size hospitals and non corporate hospitals are likely to have greater difficulty in attracting and retaining medical staff and support persons. The very large differential in the case of senior consultant doctors also suggests that very specialized and experienced doctors are paid significantly higher rates in the foreign funded hospitals. Thus, there is also likely to be an adverse impact in terms of the quality of doctors, especially specialists, for the non-corporate players. 41

51 The survey results therefore clearly indicate resource pull effects from the non-foreign-funded to the foreign funded segment. If one were to take this analysis further and also consider public sector hospitals (which are not a part of this survey), then one can make the argument that internal brain drain is likely from the public sector to the private sector in general, and especially towards the foreign funded and large corporate hospitals, given the much lower wages and poor working conditions in the public sector. Again, there are likely to be quality implications for the public sector. These inferences are corroborated by the findings from the in-depth discussions. The data on remuneration also indicates that there is a wide variability in payments to medical staff, especially in the case of senior consultant doctors, and that this range is much greater when it comes to foreign funded hospitals. This suggests that there are different kinds of fee structures that are operating in such hospitals. Discussions also revealed variability in payment arrangements for consulting doctors and for very experienced and senior personnel. As one respondent noted, consultants may charge different rates and are paid their fees for services delivered, net of service charges ranging between percent that are levied by the hospital. The fee for service is based on the procedures and surgeries done and there is a gradation of different kinds of surgeries, depending on the degree of difficulty, the duration, the use of equipment, etc. There is revenue sharing between the hospital and the consultant and the share for the hospital increases when there is more overhead cost for the hospital in terms of the equipment and support staff used. There may also be variability in fees depending on whether the consultant has shared in the capital cost of the hospital. Thus, the arrangements do reward experience, services that are more specialized and difficult to render, and also take account of joint ownership or investment in assets. This certainly would distinguish such hospitals from public sector and non-corporate players and thus make them more conducive to incentivising and retaining staff. A majority of the surveyed hospitals also reported that they permit their doctors to keep private practice elsewhere, although trust hospitals were more likely to indicate that they do not permit this. Overall it appears that foreign funded hospitals may be better placed at retaining and attracting good quality medical personnel. Discussions also made it clear that the these hospitals also rely on their investments in state of the art equipment and the good work environment and infrastructure as an important means of attracting and retaining good personnel. Several of the respondents from such hospitals noted that they have efficient computerized systems for maintaining patients records, for pay rolls, billings, and inventory management, which make the work environment much more professional and streamlined. A much larger number of the foreign funded institutions noted that they had obtained either ISO 9001: 2000 certification or JCI certification and a few of them had also voluntarily registered for the NABH/NABL certification. An attempt was also made to assess the extent to which foreign funded hospitals and generally the growth of corporate hospitals in India is helping to attract doctors from overseas. As several hospitals did not provide this information, this proved difficult to compare. However, discussions with management of several foreign funded hospitals indicated that between 5-10 percent of their doctors have overseas work experience and that there is growing interest among overseas Indian doctors to return. Some of these doctors have super-specializations. Nurses and paramedical staff generally were not reported as having overseas work experience, though several respondents did mention that they were facing an e-flux of such personnel to other countries and were generally facing problems of getting good quality nurses and paramedics. 42

52 5.1.4 Costs of services The survey also tried to elicit information on the cost of various procedures and services in foreign funded and non-foreign-funded hospitals. However, most hospitals did not provide the information or even if they responded, they did not answer for all the services and procedures listed in the questionnaire. It was also difficult at times to compare a service or procedure across hospitals as the terminology used differed and was often very specific. Notwithstanding these limitations, the cost data was examined for a small subset of commonly known procedures and services and separated for foreign funded and non-foreign-funded hospitals. These results are shown in the following figures. The hospital numbers indicate the hospital in the sample, which responded to the concerned cost category (this number has been maintained for each of the hospitals across all the tabulated results and figures in this study). Figure- 4. Cost comparison for neurology procedures (Rs.) Source: Based on survey data Figure- 5. Cost comparison for Gastroenterology procedure (Rs.) 43

53 Source: Based on survey data. Figure- 6. Cost comparison for dialysis (Rs.) Source: Based on survey data If one takes the costs for specific and commonly required neurology and gastroenterology procedures and dialysis shown in the preceding graphs, then it appears that the foreign funded hospitals tend to be more expensive than the non-foreign-funded hospitals, although there is quite a bit of variability within each group. While the cost for EMG in foreign funded hospitals is around Rs. 1,500, for non-foreign-funded hospitals the cost is half this amount at around Rs In the case of endoscopy, the cost in foreign funded hospitals varies from Rs. 4,000 to over Rs. 9,000 while that in non foreign funded institutions it ranges from less than Rs. 1,000 in several of the responding hospitals to as much as Rs. 7,000 and Rs. 9,000 in others. If one removes the very low cost hospitals (one of which is a public sector hospital and some are charitable and trust hospitals), then the average cost in the non foreign funded category is around Rs. 5,000, still lower than that 44

54 in foreign funded hospitals at around Rs.7,000. For dialysis, the cost in foreign funded hospitals is around Rs. 2,500 compared to an average cost of around Rs. 1,000 for the reporting non-foreignfunded hospitals. The picture is different, however, if one examines costs for cardio-thoracic surgery. Here, foreign funded hospitals reported a cost of around Rs. 1.1 lakh to Rs lakhs compared to a range of Rs. 1.2 lakhs to over Rs. 1.6 lakhs in the case of non-foreign funded hospitals. Though the set of hospitals responding is very small, the data do suggest that foreign funded hospitals need not always be more expensive. There may be issues of scale and specialization for this particular surgical procedure that may be affecting the nature of costs for the few hospitals that have responded to this question. Figure- 7. Cost comparison for Cardio-thoracic surgery (Rs.) Source: Based on survey data The cost comparisons for various diagnostic services on the other hand show that foreign and nonforeign-funded hospitals may be quite comparable for various high demand services. In the case of ultrasound services, the reporting foreign funded hospitals gave a cost of less than Rs. 1,000 while the reporting non-foreign-funded hospitals gave a cost of more than Rs. 1,000. In the case of ECG services, the two groups were broadly comparable, though there was considerably variation in cost for one non-foreign-funded institution. 45

55 Figure- 8. Cost comparison for diagnostic service (ultrasound) (Rs.) Source: Based on survey data Figure- 9. Cost comparison for diagnostic service (ECG) (Rs.) Source: Based on survey data Thus, taking stock of all the cost comparisons shown above, it appears that foreign funded hospitals tend to be slightly costlier for most procedures but not uniformly so and for some procedures are in a similar cost range. The qualitative discussions indicated that there is no significant difference in basic consultation fees between foreign funded and non-foreign-funded hospital. The average consultation fee for a patient visiting the hospital for the first time was around Rs.175 and the average fee for a repeat consultation was around Rs