HEALTHCARE FINANCING

Posted on 02-April-2020 at 02:23 PM

Economic growth is commonly used as an indicator of a nation’s economic performance, and the level of GDP per capita is a key component of the Human Development Index of the United Nations Development Programme, a popular indicator of national well-being. The role of health in influencing economic outcomes has been well understood at the micro level. Healthier workers are likely to be able to work longer, be generally more productive than their relatively less healthy counterparts.


India is at the crossroads of an exciting and challenging period in its history. Making healthcare affordable and accessible for all its citizens is one of the key focus areas of the country today. The challenge is immense, as nearly 73% of the country’s population lives in rural areas and 26.1% is below poverty level. While on one hand, India lacks strong healthcare infrastructure, on the other hand, the country has several inherent weaknesses in its healthcare system.


However most of the organized private healthcare establishments are confined to the state capitals or Tier I cities. Very few have made inroads in Tier II and Tier III cities. This presents the country with both a challenge and opportunity to not only increase the penetration of quality health services but also be the growth driver in these regions.


The central government has given priority to healthcare and is making significant investments to improve the infrastructure and delivery mechanism jointly with the state governments. The National Health Policy 2017 emphasizes on the infrastructural building of PHCs & CHCs.

In order to strengthen the healthcare model the government under the national health policy 2017 have decided to increase the expenditure from the government side:


a)  Increase health expenditure by Government as a percentage of GDP from the existing   1.15% to 2.5 % by 2025.

b)  Increase State sector health spending to > 8% of their budget by 2020

c) Decrease in proportion of households facing catastrophic health expenditure from the current levels by 25%, by 2025.


However, the government alone cannot meet the infrastructure, capacity and delivery shortages existing in the current healthcare system. There has to be increased participation of private sector in the PPP schemes for infrastructure, capacity development and delivery.

In order to complement the skills, expertise and resources of each other as well as alleviate the financing burden for the growth and development of the healthcare sector, the private and public sectors are now working together at a varied pace and working model across the states in India. Some of the successful Public Private Partnerships (PPP) involves laboratory services (pathology, radiology, CT scan, MRI etc.), mobile medical units, PHC management, telemedicine services and hospital maintenance. The models that have been experimented with by the states are: contracting out, contracting in, lease, service agreements (outsourcing), buying of a product/ service, joint venture company, social marketing and franchising.


The present inefficiencies and inequities in the public healthcare system in India have pushed forward the need for creative thinking and innovative solutions. New avenues for financing needs to be looked upon and the last few years have seen a boon in the healthcare financing field. Private equity, venture capital, external commercial borrowings, etc brought in new funding options besides long-term debt which was used as the primary mechanism to finance hospitals in India. Given the flurry of activity in the health care sector which includes the setting up green field projects, expanding existing hospitals and acquiring brown field facilities, there is a dire need for innovative funding mechanisms. Considering the huge need gap, rapid rate of growth and capital-intensive nature of hospitals, many players are looking for funding mechanisms beyond the conventional borrowing route.

 

Avenues for healthcare funding in India


Private sources of healthcare financing

Debt financing


Debt financing from banks and financial institutions is the preferred route for raising capital for smaller health care providers. However large private players also routinely access funds through this route. With the growth in services sector and health care in particular, the role of banks and other lending institutions acquires a special significance.


Foreign direct investment


The growing Indian health care market and lucrative opportunities in the sector are attracting foreign investors. The foreign players are seeking to enter the Indian healthcare delivery market through various channels including capital investment, technology tie ups or some form of collaborative ventures with Indian counterparts in the area of medical technology, diagnostics, health care education and training.


Private equity


Private Equity (PE) is now emerging as one of the most preferred form of funding. PE funds invest in the companies with a proven track record of profitability and sustainable growth. The fund brings in not only the capital but also the adequate strategic planning and management skill sets for growth.


Currently the Indian healthcare market, particularly on the provider side, offers the following opportunities to PE funds:

• High need gap.

• Limited presence of network hospital system.

• Skewed bed: population ratio.

• Mostly privatized healthcare delivery leading to higher spend in the private sector;

• Recession-proof sector.

• Viable formats (secondary and tertiary care).

• Mix of Brownfield and Greenfield projects.

• Good operating margins.

• Good rate of return as compared to other industries.


Individual Investors


Recent time has seen a surge in number of number of individual investors in Healthcare field with the emergence of various healthcare startups ranging from public health, old age care, technological interventions etc. These individual investors are mostly doctors or people with healthcare background who want to invest in these startups due to the high potential which they see in this growing healthcare market.

Venture capital funds


These are companies that specialize in financing new ventures like bringing a new product to the market when the venture may need to attract financial funding. There are several categories of financing avenues. While smaller ventures sometimes rely on family funding, loans from friends or personal bank loans, more ambitious projects that need more substantial funding may turn to private investors who use their own capital to finance a venture’s need.


Challenges of healthcare PPPs


In spite of the initiatives and innovations happening in Healthcare PPPs, both from the State Governments as well as the Private Sector, there are some challenges that need to be addressed for success and sustainability of these projects on an on-going basis. These challenges are outlined below:


• Lack of direction from the State Governments in identifying areas where partnership is possible as well as coming up with area specific partnering models (in terms of sharing of risks, resources and costs);

• No policy to include to private sector participation in the PPP governing body, which is negatively impacting the equitable representation of both private and public sector interests;

• Insignificant involvement of the people at the grass root level in the decision-making process with shortage of patient-centric approach;

• Lack of public sector initiative to structure the PPP through equity participation or debt infusion at subsidized cost of borrowing and to make provision for an extended tax holiday;

• Unavailability of qualitative and quantitative benchmarks as well as key success factors for performance evaluation and monitoring of PPP projects, post-implementation, on a continued basis; and

• No specific plan to utilise the Unspent Budget of the Ministry of Health in the subsequent year to facilitate any large scale capital investment.

 

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