Up and To the Right: Learning from the Healthcare IT Market in India
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4 percent. The Indian market for hospital IT is projected to grow at over 25 percent per year. Taking inflation into account, this is about twice the growth rate of the US market.
So everything looks up and to the right. Doctors are becoming entrepreneurs, local hospital IT firms have strapped themselves to a rocket, and those who made early bets—like Apollo Hospitals’ founder Dr. Prathap Reddy—are now quite wealthy. But like all fast moving markets, this is one where you can still get burned: In the largest Indian IPO cancellation in history, Wockhard Hospitals shelved their $150 million public offering in January 2008 after subscriptions sputtered at 20 percent. They have just agreed to sell their 10 highest grossing hospitals to another chain, Fortis, in order to meet debt obligations and keep their pharma business afloat.
Follow the Money
To better understand how the industry works, we follow the money. Patient choice drives the Indian healthcare market. The biggest driver of hospital selection is proximity during a medical emergency. The second biggest is patient preference—not insurance tie ups or price. Because insurance and price are not determining factors, the growing middle class is opting for private hospitals which they believe provide a better standard of care. But because of low doctor, nurse, and bed ratios per patient, private hospitals find themselves supply constrained.
And despite the significant growth in the sector to meet demand, hospitals remain largely unregulated. There is no single governing body that requires registration and accreditation of hospitals in India. The National Accreditation Board for Hospitals & Healthcare Providers (NABH) comes closest but is still voluntary. To date only 34 of India’s 50,000 hospitals have received NABH accreditation. The payor side is highly regulated, however. There is a strict review process that each new insurance product must undergo before it is sold on the market.
This regulatory imbalance results a power dynamic that is radically different than that in the U.S. In America, insurers are able to exact huge discounts from providers (on the order of 40 percent) in return for steering patients to them. In India, where the hospitals are already at capacity, there is little incentive to give discounts. On average, hospitals offer insurers discounts of 3 to 5 percent. This leaves payors with essentially zero leverage.
When you are highly regulated, your counterparty is not, and you have no financial leverage, you lose money. A lot of money. Health insurers in India have a net claims ratio of 1.2—in other words they are paying out 120 percent of what they are taking in. This is due to both … Next Page »