Profitability of domestic hospital sector to improve in FY20, FY21: Crisil

Profitability of domestic hospital sector would continue to improve in the current as well as next financial year driven by enhanced coverage under Ayushman Bharat as well as deeper expansion in smaller towns, says Crisil Ratings.

The improvement in demand will also be driven by alterations made to healthcare delivery models by hospital chains to align with regulatory changes as well as factors like increasing lifestyle diseases and medical tourism.

"With insurance coverage of Rs 5 lakh under the Ayushman Bharat scheme (up from Rs 1-3 lakh under various government schemes), preference for private hospitals is rising," Crisil Ratings said.

The Crisil study covering 41 leading domestic hospital firms revealed that the bed additions in tier II cities will be higher in future, resulting in better materialisation of latent demand and adoption of Ayushman Bharat schemes.

"Crisil expects 60-70 per cent of bed additions to come up in tier II locations in the next 2-3 fiscals," Crisil Ratings Senior Director Anuj Sethi said.

Currently, healthcare facilities are clustered around tier I cities such as Chennai, New Delhi, Bengaluru, Kolkata, and Mumbai, he added.

Even as revenue growth is set to increase to 14-15 per cent over fiscals 2020 and 2021, operating profitability of hospital firms is also expected to improve to 16 per cent over this period, Crisil said.

"This will be supported by a rise in bed occupancy rates to 75 per cent from 60-65 per cent, automation and optimisation of clinical procedures, efficient sourcing, and continuing recalibration of pricing of services," it added.

A series of regulatory events in financial years 2017 and 2018 had impacted revenue growth and profitability of private hospitals.

While demonetisation and ban on large cash transactions impacted occupancy, implementation of GST, price cap on medical implants, and increase in minimum wages for nurses and staff moderated profitability, Crisil noted.

With occupancy and cash generation improving, hospital firms (41 entities) are expected to expand capacities by investing around Rs 4,800 crore in fiscals 2020 and 2021, it added.