FDI in Healthcare Sector in India by trr10672

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									           Foreign Investment in Hospitals in India:
                          Status and Implications




                                  Rupa Chanda

                                     Professor

                 Indian Institute of Management Bangalore

               Bannerghatta Road, Bangalore-560076, India

                          Email: rupa@iimb.ernet.in




In collaboration with WHO India Country Office, New Delhi and WTO Cell, Ministry of Health
                                                and Family Welfare, Government of India.
               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.
                                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 email 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.
                                         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 2009. 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 50-75 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 www.ibef.org
2
    See, Ernst and Young (2007) and CRISIL Research (Feb 2007).

                                                                                                       (i)
      (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)
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 super-
speciality 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)
    •   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)
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)
   •   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)
                                                          Table of Contents

1      Overview of the Indian Healthcare Sector ................................................................................... 5

2      Overview of the study ..................................................................................................................... 7
    2.1       Scope and objectives...................................................................................................................... 7
    2.2     Methodology for the study............................................................................................................. 8
       2.2.1    Details of the Quantitative Survey................................................................................... 9
       2.2.2    Qualitative survey ........................................................................................................... 10
    2.3       Limitations of the primary research............................................................................................. 11

3      Foreign Presence in Hospitals in India ....................................................................................... 12
    3.1     Foreign direct investment in hospitals.......................................................................................... 13
       3.1.1     Status of FDI in hospitals............................................................................................... 14
       3.1.2     Prospects for FDI in hospitals ....................................................................................... 17
    3.2       Other sources of foreign investment in hospitals ........................................................................... 19
    3.3       Pattern of financing in major corporate hospitals ......................................................................... 20

4      Constraints to foreign investment in hospitals in India ........................................................... 22
    4.1       External factors .......................................................................................................................... 23
    4.2     Domestic factors ......................................................................................................................... 23
       4.2.1   Initial establishment issues: land and set up issues ...................................................... 26
       4.2.2   Medical equipment and technology .............................................................................. 27
       4.2.3   Manpower availability and quality issues ..................................................................... 29
       4.2.4   Health Insurance............................................................................................................. 31
       4.2.5   Other regulatory issues and policy directions............................................................... 33

5      Impact of foreign investment in hospitals .................................................................................. 34
    5.1     Key findings from the survey....................................................................................................... 35
       5.1.1     Services and procedures ................................................................................................. 35
       5.1.2     Physical infrastructure and medical staff ...................................................................... 38
       5.1.3     Human resources: Remuneration and quality issues ................................................... 41
       5.1.4     Costs of services .............................................................................................................. 43
       5.1.5     Other features .................................................................................................................. 47
    5.2     Perceived impact of foreign investment in hospitals ...................................................................... 50
       5.2.1     Positive implications....................................................................................................... 50
       5.2.2     Areas of concern ............................................................................................................. 53
    5.3       Summarizing the implications and further inferences................................................................... 56

6      Implications for GATS commitments in hospital services ...................................................... 57
    6.1       India’s autonomous and multilateral liberalization in hospital services ........................................ 57
    6.2       Strategy for multilateral liberalization in hospital services............................................................ 59

7      Summary of findings...................................................................................................................... 60
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......................................................................55




                                                                                                                                                                         2
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
NABL    National Accreditation Board for Laboratories
NCR     National Capital Region
NRI     Non Resident Indian
OPD     Out Patients Department
OT      Operation Theatre
PE      Private Equity
PPP     Public Private Partnership
PSU     Public Sector Unit
RBI     Reserve Bank of India
Rs.     Rupees
SAARC   South Asian Association for Regional Cooperation
SEZ     Special Economic Zone
TPA     Third Party Administrators
UAE     United Arab Emirates
UK      United Kingdom
US      United States
VC      Venture Capital
WHO     World Health Organization
WTO     World Trade Organization




                                                           4
               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 2009. 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 2016.
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 2012. 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 50-75 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 www.ibef.org
2
    See, Ernst and Young (2007) and CRISIL Research (Feb 2007).
                                                                                                      5
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
100-200 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 government-
owned 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
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
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
stakeholders such as civil society organizations, industry associations, financiers, doctors, and
public sector practitioners, in the NCR, Bangalore, and Kolkata.

2.2.1 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
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.

2.2.2 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 email. 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
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 email. 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
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-2006.



                                                                                                   12
•     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 Delhi-
      based 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 non-
resident 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
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.

3.1.1 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 20006
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
Table-3.     Approved FDI Hospitals by DIPP (January 2000-June 2006)

Sl No.     Date            Indian Company                 Country of     Foreign equity (Mns)
                                                          foreign
                                                          investor
                                                                         Rs.        US $
1          April 2002      Fernandez Maternity            Australia      0.42       0.01
                           Hospital, Hyderabad
2          December        Sir Edward Dunlop              Canada         1,282.25   26.71
           2002            Hospitals, New Delhi
3          January 2004    Max Healthcare, New Delhi      Mauritius      316.21     6.63
4          January 2000    Dr. Ramayya’s Pramila          UK-NRI         15.00      0.35
                           Hospitals Ltd, Hyderabad.
5          January 2000    HN Hospital, Mumbai            USA- NRI       0.00       0.00
6          September       Kalinga Hospital,              NRI            54.09      0.11
           2003            Bhubaneshwar
7          August 2000     Thaqdees Hospitals Ltd,        Saudi Arabia   0.32       0.01
                           Thaikkatukkara, Kerala
8          January 1,      Duncan Gleneagles, Kolkata     Singapore      59.24      1.29
           2003
9          July 2004       Pacific Hospitals,             Singapore      5.82       0.13
                           Hyderabad
10         October 2001    Malabar Institute of Medical   UAE            133.61     2.97
                           Sciences Hospital Ltd.,
                           Calicut
11         July 2002       Peoples General Hospital       UAE            73.32      1.53
                           Ltd., Bhopal
12         August 2001     Thaqdees Hospitals Ltd,        UK             0.34       0.01
                           Ernakulam
13         July 2001       Trichur Heart Hospital,        UK             49.89      1.11
                           Thrissur
14         August 2002     Bhimavaram Hospital Ltd.,      USA            0.10       0.00
                           Bhimavaram
15         December        S&V Loga Hospital Pvt. Ltd,    USA            3.79       0.08
           2002            Peramanur, Salem
16         November        Vikram Hospital, Mysore        USA            29.65      0.64
           2003
17         February 2004   Basappa Memorial Hospital      USA            22.83      0.50
                           Pvt. Ltd., Mysore
18         April 2004      Parekh Hospital Pvt Ltd,       USA            0.50       0.01
                           Mumbai
19         July 2004       Columbia Asia Hospital Pvt.    USA            0.90       0.02
                           Ltd., Bangalore
20         August 2004     Add Life Medical Institute     USA            326.24     7.07
                           Ltd. Sterling Hospital
                           Building, Ahmedabad
21         January 2004    RA Multispeciality Hospital    British        0.06       0.00
                           Pvt. Ltd, Coimbatore           Virginia
Source: DIPP (2006)



                                                                                                15
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 well-
known 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
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.
                                              7
3.1.2 Prospects for FDI in hospitals
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
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 600-800-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
http://www.expresshealthcaremgmt.com/200609/bangalorediscovered01.shtml

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 well-
known 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
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 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. 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 15-26 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 20-25 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
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 12-14 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
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
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
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 in-
depth 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
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
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
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 11-13 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.

4.2.1 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 45-50
percent of total project costs, if land is bought, followed by medical equipment, which constitute
between 30-35 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
equipment. 11 In terms of the value of land and buildings in the total stock of assets, one respondent
noted that land accounts for 10-15 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.

4.2.2 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
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
2006-2012 period. The market is expected to more than double from $2.2 billion in 2006 to close to
$5 billion in 2012.
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
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.”

4.2.3 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
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
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.

4.2.4 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.
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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 2004-2005. 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 non-
payment 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 2005-06 registered a growth of 35% over 2004-05,
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 2012.

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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 information-
limited 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 70-80 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.

4.2.5 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

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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

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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 hospitals 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.

5.1.1 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
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 non-
foreign 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
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.


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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.

5.1.2 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
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
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.




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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
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 10-20 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.




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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
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. 750. 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
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-foreign-
funded 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. 1.25 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 non-
foreign-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
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.100.


                                                                                                     46
However, when compared to small and medium size establishments, the general view is that most
medical procedures and services are likely to be 15-30 percent costlier in the larger corporate
hospitals, with some variability within this range depending on the procedure concerned and the
kind of equipment involved. Respondents also noted that foreign funded hospitals and generally
the large corporate hospitals could not be compared with the small and medium size players on
major procedures as they were different in terms of quality and standards, hygiene, and the use of
technology. The main differentiator is that smaller nursing homes reuse items, have different
sterilization procedures and thus can have 20 percent or so lower costs on most services.

5.1.5 Other features
Information was also sought on various other dimensions of operations, such as on rural outreach
programmes and corporate social responsibility schemes, telemedicine, medical value travel, and
foreign collaborations and tie ups, in order to assess whether there are any major differences
between foreign funded and non foreign funded hospitals. The idea was to understand how the two
groups of hospitals might differ in their impact on the larger society and on the larger economy
through technology transfer and foreign exchange earnings.
(i)     Rural outreach and extension activities
In the case of rural outreach programmes and extension activities, around one quarter of the
hospitals in both the groups indicated that they do have such schemes. However, 8 of the non-
foreign-funded hospitals explicitly mentioned that they cater to poor patients and have targeted
welfare programmes while only one foreign funded hospital replied to this question. This may
suggest that large corporate hospitals are less likely to look at programmes specifically targeted at
the poor compared to trust and charitable hospitals (which are included in the non foreign funded
category) although this does not mean that the former would not engage in any such activities as
part of their overall operations.
Discussions with various large corporate hospitals on their outreach and extension activities makes
it clear that they do see such activities as necessary but they also view such such services as falling
within a larger business model that must ultimately be viable. The outreach activities mostly
consist of OPDs, screening camps in rural areas, awareness talks, taking the best personnel to the
doorstep of rural consumers, and specialized programmes such as for maternity and child health.
Some hospitals discussed about particular CSR programmes that they are currently engaged in and
various models that are being adopted in this context. For example, Escorts does some 400 or so
camps in North India each year. These include cardiac consultations like ECG, Echocardiography,
and mobile vans for outreach services, and talks on prevention and early deterrence talks to help
reduce costs for consumers and delay or obviate the need for surgical treatments. EHIRC has
launched with CII and Hero Honda, the Jonawas Pilot Project worth 12 lakhs. This project targets
1,000 villages over a three-year period. It involves village participation, corporate sponsorship, and
the involvement of Escorts and is a major CSR initiative. Hub and spoke models are also followed
by private hospital, wherein, the preliminary treatment is done at a local hospital and additional
treatment is done by the larger private hospital. 14 Some of the big corporate hospitals indicated that
they have such initiatives with local hospitals in various parts of the country. Often telemedicine is




14
   For example, Escorts has a tie up with Kalyani Hospital and Shanti Mukund hospital where the
preliminary treatment is done and additional treatment is done at Escorts. It also has initiatives in Punjab,
Bhopal, and Indore.
                                                                                                          47
used to facilitate the process of partnership with local nursing homes and hospitals, thus enabling
greater reach to areas beyond the metros. Although the numbers in the sample did not indicate any
major difference in the proclivity of foreign funded versus non foreign funded hospitals in
undertaking such programmes, given the nature of some of the larger sponsored programmes, it
would appear that only the larger and more reputed private hospitals would be in a position to
initiate such schemes. As one respondent noted, CSR makes long-term business sense for all major
players in this segment.
(ii)     Public private partnership
Another way in which the growth of the private hospitals could benefit society is through public-
private partnership. Seven of the hospitals, mainly the ones with foreign funding, covered in this
small sample noted that they have some form of PPP.
One form of PPP is the reserving of beds and procedures for below poverty line patients. One
major corporate hospital noted that it provides 15 percent of its beds and procedures free to the
state government for BPL patients. It also provides a 15 percent discount on the total bill for all
state government employees. However, as several hospitals pointed out, if such schemes are
imposed as conditions for getting land at subsidized rates, then they do not turn out to be effective.
For instance, it was suggested by several that cross subsidy mechanisms and discounted medical
care are possible, but free treatment is not. Hence, a possible model for partnership is that if there is
a Rs.8 crores piece of land, then Rs. 3 crores could be waived and for the remaining Rs. 5 crores,
one could impose an obligation of 18% in terms of the value of healthcare to be delivered. Thus
any subsidy for procuring land against the cost of healthcare delivery must ultimately make
business sense and must be transparent.
A second area of PPP is in medical education and training. A few of the major corporate hospitals
noted that they provide training to students of a state medical college in particular programmes
such as cardiology. But this is seen as an untapped area for collaboration. Several respondents
noted that there could be much more collaboration, including exchange of information, research
and development, and doctors between public and private sector hospitals and training institutions.
A third form of PPP was between private and state run hospitals, wherein the former is allowed to
operate a public hospital under contract and take care of poor people. This was seen as one of the
most promising areas for partnership as many state governments are interested in collaborating
with reputed private sector hospitals.




       BOX- 2   Stakeholder views on public private partnership arrangements in
         hospitals

Quotes from two respondents on this issue clearly illustrate that public private partnership in the
management of public sector hospitals and innovative schemes for overcoming constraints to private
players in acquiring land and creating physical assets need to be considered.
“Government has the land or hospitals. It is unable to upgrade or invest in the existing infrastructure.
So it is ideal that they build and then involve the private sector to manage these public hospitals and
run them on some basis. The best model is a management contract where the private party does not
need to own the land or facility. The free treatment part could be paid to the private sector by the
government at some agreed amount, which would have been spent anyway by the government in the
form of a subsidy and any surplus can be retained by the private player, while the overall quality of

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service would improve. The government hospitals are too focused on quantity with no regard to
quality and this is why even the poor do not go to these hospitals. The strengths of the public and
private sector need to be combined.”
“There are some very good public sector hospitals which remain underutilized. There is a lot of land
held by the government, which is not utilized. There is a reasonable amount of equipment, buildings,
and decent manpower and in some areas these hospitals face no competition. There is a lot of
infrastructure sitting with the government. Consumption needs to be created as due to the low
standards and quality of delivery, there is lack of confidence and thus low usage of government
hospitals. The government tends to project those that are overutilized but there are many hospitals
where there is little or no utilization. These could be handed over and this would improve access to
all. PPP is a viable model but this should not be seen as charity as charity means no accountability.
Private players must be given leeway in a PPP framework and no roadblocks should be put. They
should certainly be made accountable for their performance and results but they should also have
flexibility or else it will not work. If this contract only looks at CSR by the private sector it will not
work as the private layer is responsible to his shareholders.”
It was also suggested that existing hospitals under public sector entities such as the railways, postal,
telecom, could be handed over to private sector players and the huge amounts of land available to
these public sector institutions be leased out to corporate players to improve their performance and to
also ease existing constraints on land procurement.
Source: Based on stakeholder interviews

Some of the large hospitals covered in this study indicated that they have partnerships with state
governments. Wockhardt has, for example, signed a PPP agreement with a district hospital in
Gujarat. The government of Gujarat will provide a specified outlay. The hospital will be managed
and run by Wockhardt with its own administration and any excess costs will be borne by it. Such a
scheme incentivizes the player to keep costs under control. Escorts is experimenting with the PPP
model in Raipur. Escorts manages the hospital, the government owns the infrastructure and
resources, and the running costs are paid by the hospital. There is a subsidized rate for the
beneficiaries while private patients pay at their capacity, thus providing a mechanism for cross
subsidization. It was suggested that many public sector hospitals which are now virtually free could
get into alternative revenue sharing arrangements under such contracts, such as providing 30
percent of beds free, 30% with subsidy, and 40% at full cost for generating revenues and providing
resources for upgrading the hospital.
Thus, it was evident that many of the private hospitals are interested in entering into such
management contract based partnership arrangements with the public sector as this is seen as an
ideal way to address the infrastructure and other constraints they face, but provided the
government has the right approach to such partnerships. In terms of helping the poor, cross subsidy
mechanisms rather than quantitative targets were considered a better model for such partnerships,
as this is also compatible with the overall business model. Also, the general issue of linkages within
the healthcare system at various levels was flagged by several of those interviewed. They also noted
the need to encourage tie-ups between mid sized nursing homes and clinics as well as local
pharmacies of good standards and repute with larger hospitals to increase outreach and the quality
of healthcare for all.
(iii)   Medical Value Travel
Ten of the hospitals in the sample stated that they cater to foreign patients. These were mostly
hospitals in the foreign funded category, though there were several well-known hospitals in the
non-foreign funded group that said they receive foreign patients. The origin countries were limited

                                                                                                             49
mainly to the SAARC region and the Middle East with some patients from the West. The numbers
were very small, at less than 10 percent for even the largest hospitals in the sample. Discussions
revealed clearly that while India has potential in expanding medical tourism, this is not an area
that is likely to see significant growth in the near future and cannot emerge as a major business
model for any private hospital. As one manager noted, “ The supply chain needs to be sorted out
and the entire experience made more attractive, to create a positive image and to further develop
the infrastructure for medical tourism. Employment and foreign exchange can be generated from
medical value travel, which is of course beneficial to any country. But medical value travel will
never constitute a significant percentage of all customers in Indian hospitals.”
Greater foreign investor presence in hospitals, however much limited, is expected to help expand
medical value travel to India by enabling tieups with foreign health insurance providers to develop
customized insurance products for target groups overseas to undertake elective surgeries in India
and follow ups abroad, by facilitating tie ups with medical schools, and through greater investment
in telediagnostic and other telehealth facilities. When questioned about the likely impact on
availability of beds for domestic patients, most respondents noted that there is unlikely to be any
major squeezing out of lower paying segments as the number of medical value travelers is never
expected to be large, though some respondents did note that such an impact could arise. It was
argued that medical value travel could be used to generate resources for investments in the
healthcare system as hospitals today are charging medical value travelers at higher rates.
Moreover, medical value travel can be used to make healthcare affordable to other sections as the
higher fees can be used to cross subsidize domestic consumers. But much of the discussion on the
likely impact of greater foreign investment in hospitals on medical value travel and the subsequent
implications for the healthcare sector remained speculative given the currently limited scale of
medical value travel for all hospitals.
(iv)   Technology and knowledge transfer
 Only a few of the surveyed hospitals indicated that they have any collaboration with overseas
institutions. More foreign funded than non-foreign funded hospitals indicated such tie-ups. Foreign
collaboration consisted of tie-ups for research and development, technology sharing, professional
exchange, and continuing medical education. For example, Apollo Gleneagles has a relationship
with Johns Hopkins for research and training and for second opinions but there is no collaboration
in terms of investment in any facilities. Cases of tie-ups and professional exchange and
collaboration have been discussed earlier in the section on manpower availability and quality
constraints.
It does appear, however, from the primary and secondary sources that technology and knowledge
transfer has not yet occurred in any major way. This may in part be related to the relatively loose
arrangements that are currently in place, whereas a joint venture type of approach could potentially
yield more benefits (though there are problems in setting up joint ventures with overseas
institutions, as highlighted earlier).

5.2       Perceived impact of foreign investment in hospitals
In the course of the quantitative survey and the in-depth discussions by Nielsen and the researcher,
stakeholders were questioned about the perceived impact of foreign investment in hospitals. The
responses were largely positive though concerns were voiced in a few areas.

5.2.1 Positive implications
Some of the areas of positive impact that were highlighted are:

                                                                                                 50
     •   Infrastructure development
     •   Upgrading and investment in technology
     •   Increased availability of high end and niche procedures
     •   Improved systems and processes
     •   Integration of information technology in healthcare delivery
     •   Improved standards and focus on accreditation
     •   Improved work environment
     •   Increased employment opportunities at all levels
     •   Greater emphasis on medical research and training
     •   Greater opportunities for knowledge transfer due to tie ups with overseas hospitals and
         collaborative ventures
     •   Spillover in related areas such as diagnostics, labs, and medical equipment supply and
         manufacturing, outsourcing (clinical trials, billings, insurance processing), medical value
         travel
     •   Increased insurance penetration
Infrastructure, technology, and standards were the most commonly cited areas of impact. Several
respondents noted that foreign investment would augment resources available for investing in new
technologies and that foreign direct investment, joint ventures, and tieups in particular would bring
in new technologies. The availability of adequate technology would be assured with good cash
flows and reinvestment of profits and given the focus of such hospitals. One doctors at a small
nursing home noted that most people would like to work in corporate hospitals in order to have
exposure to new technology. One of the perceived implications of such investments and
improvement in standards is reversal of overseas talent, particularly in some specialties given the
higher end and niche focus of some of the foreign funded hospitals.
There was also a common perception that standards would be raised as such hospitals would try to
improve their bottomline and to get more business. The latter would include more effective and
new ways of management, better governance, increased accountability through audits of medical
practices, better methods of healthcare delivery, which would improve efficiency. More hospitals
would turn towards international accreditation. It was also noted that the process of accreditation
would reduce violations in medical ethics, such as reducing unnecessary tests and procedures, as
there would be greater accountability. 15 The offshoot of such improvements in standards and
practices would be shorter hospital stay, lower infection rates, benefiting both patients and doctors.
Many felt that there would also be a demonstration effect on other hospitals with many more
getting accredited and registering for NABH/NABL certification.




15
  Much of course would depend on the credibility of the NABH certification scheme, which is a mix of
various accreditation systems. So far, only 6 hospitals have taken NABH certification and some 50 have
applied. Greater public and corporate demand for accreditation and the opening up of health insurance were
seen as essential to this process.
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A virtuous cycle is thus seen, whereby, such improvements would in turn attract better paying and
more customers, making it possible to invest further in new and better technologies, further
attracting overseas doctors, and raising standards. An important point made here was that as it
would be difficult for foreign players to come and establish themselves on their own given the
localized nature of the healthcare business and the difficulty in setting up one’s own customer base
as an overseas institution. However, given the need for tieups and collaborations, foreign
investment would certainly facilitate such arrangements and lead to technology and knowledge
transfer to local players.
Some points were also made about the likely evolution of the healthcare delivery system. Several
respondents noted that greater corporatization and inflow of FDI in the hospitals segment would
also enable more healthy competition among the big corporate players and could encourage
consolidation and economies of scale in the sector (and also the fact that many hospitals are in
other lines of business), which would benefit consumers potentially lowering costs and improving
the affordability of quality healthcare in the country. Expanded volumes would also enable the
corporate players to cross subsidize poor patients more effectively, to do more outreach and
extension services, and even establishes themselves in second tier cities and towns. It was also
pointed out that through such extension services and set ups outside major metros, corporate
hospitals would be able to make available their equipment (not obsolete but not the latest
necessarily) and thus expand accessibility of healthcare.
There were two kinds of views expressed about the implications for small and mid size players.
One view was that such nursing homes would face greater competition from the large corporate
hospitals and would have difficulty retaining staff and would become less attractive as they would
not be able to provide many services under one roof. Hence, many would have to close down. But
another point of view was that many of the better quality small and mid size players would tie up
with larger hospitals in terms of referral services and less specialized medical procedures, thus
improving outreach and quality of healthcare for all. The same was noted for pharmacies,
diagnostics and labs, where one view was that smaller players would be adversely affected by the
expansion of large foreign funded and more generally corporate hospitals while another view was
that the better quality smaller players would be able to coexist with the large hospitals and their
diagnostic facilities. The latter view was based on a perception that there is enough demand and
localized preference in the market to enable smaller players to continue, that the smaller players are
likely to be less expensive, and that there might be tie ups and franchising arrangements between
large hospitals and local pharmacies and diagnostic centers.
Some respondents also noted that there would be increased possibilities for partnership
arrangements between government medical institutions and private players through management
contracts. In their view, the growth of corporate hospitals and the benefits that would accrue from
foreign investment for such hospitals in terms of improved practices, better governance, and
accountability, would also get transferred to the public sector institutions through such public
private partnership arrangements. The latter was of course subject to government institutions
coming forward to enter into such PPP arrangements. Thus, there are perceived structural
implications arising from greater foreign investment and growth of corporate hospitals for both
private and public healthcare institutions. The view was that the paradigm of doing healthcare
would be positively affected across all kinds of players due to improved standards, greater quality
consciousness among healthcare players, and a greater awareness among consumers of what
quality and service mean.
Foreign funding in private hospitals was also seen as promoting opportunities in other areas of the
healthcare sector. One such area was clinical trials outsourcing which many respondents felt was a
growth area that had yet to be tapped. The emergence of major corporate hospitals with foreign
                                                                                                   52
funding was perceived to give a boost to this area as pharmaceutical companies would be more
comfortable with carrying out clinical tests in such hospitals given their superior patient record
(data privacy issues) and delivery systems. Positive implications are also perceived for research and
development and education, as corporate hospitals are expected to invest in these areas. The
example of Apollo, which is currently investing in medical, nursing and paramedical education
and training as well as in health administration, was cited. Foreign funded hospitals are expected
to invest more in continuing medical education through tie-ups with overseas institutions or short-
term transfer of personnel. The growth of such hospitals is also expected to spur local
manufacturing of medical devices and products, through tie-ups and licensing arrangements, which
would ultimately benefit the sector by lowering costs of such inputs.
Another spill over area that was cited was medical value travel. It was felt that foreign funding of
hospitals could lead to an increase medical value travel to India, expanding beyond the current
clientele from the SAARC countries, Africa, and South East Asia to patients from some of the
Western countries. The latter would be driven by the entry of multinational insurance companies,
which, according to respondents, would be more comfortable in dealing with foreign funded
corporate hospitals that were accredited and accountable. Thus, insurance penetration would both
drive foreign investment and be driven by greater foreign investment in hospitals. However, none
of the interviewees felt that medical value travel would take off in very large numbers even with
more foreign investment in hospitals. Related expansion of activities in other areas such as medical
transcriptions and back-office medical outsourcing was also noted, particularly in those corporate
hospitals with foreign patients and tie-ups with foreign insurance companies.
Telemedicine was noted as another area where foreign funded hospitals, given their investment in
IT, would be well placed (although some well known non foreign funded hospitals are also doing
significant amount of work with remote areas through telemedicine). Telemedicine was seen as an
ideal way of expanding healthcare delivery beyond the metros to rural and remote areas and
enabling tieups between local healthcare centers and large hospitals and specialists, with
implications for knowledge and technology transfer and upgrading of standards to third parties.

5.2.2 Areas of concern
Although the perception was largely positive, certain common issues were raised on the possible
negative fallout of greater foreign investment in hospitals and the growth of corporate hospitals.
Some of these concerns, such as affordability issues and implications for mid and small size
players, have already been touched upon in the preceding section
The main areas of negative impacted highlighted in the discussions include:
   •   Higher costs of medical care
   •   Unnecessary tests and procedures violating medical ethics
   •   Squeezing out of the poor from the market to low quality players
   •   Diversion of resources towards curative and high end technology and procedures and away
       from preventive and chronic ailments and needs of the local population
   •   Greater competition for manpower, higher manpower costs, attrition and poaching
   •   Pull on resources from smaller players in the private sector and from public sector hospitals
   •   Greater divide between the public and private sector in terms of availability and quality of
       healthcare and wages

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   •   Crowding out of local patients for high value foreign patients
   •   Tilting of healthcare delivery towards higher paying private segments
One of the main sources of concern relates to human resources and the internal brain drain that
could arise with the expansion of foreign investment in hospitals and the emergence of larger
corporate hospitals. As one practitioner in a public sector hospital noted, it would become harder
for the public sector to retain doctors as well as teachers in their affiliated medical colleges,
aggravating the already existing trend of doctors moving out of government hospitals and from
training towards private practice and the e-flux of paramedics and nurses. He also noted that the
increased focus on earning money would mean less focus on teaching and research especially on
issues relevant to local conditions. In turn, future specialists coming from the public sector would
be poorly qualified which would further affect the quality of training and service available in public
sector institutions. The shortage of medical educators in specific domains such as neurology, which
are high paying, was pointed out. Similarly, a practitioner in a small nursing home also stated that
such establishments expect to face similar pressures on their medical personnel from foreign
funded hospitals, exacerbating the problem of high and rapidly growing salaries.
Interestingly, a private sector respondent from one corporate hospital also noted the problem of
manpower in that the competition for talent would increase if more foreign investment comes into
Indian hospitals. He noted that this would affect the plans of private players to scale their
operations as all players would be competing for the limited pool of managers, educators, and the
front and back end staff. Foreign investment would put further pressure on wages and salaries of
medical personnel, which are already increasing rapidly at all levels. Thus, expansion of scale with
uniform quality would become difficult for large players, for both foreign funded and non-foreign-
funded hospitals.
If one looks objectively at the issue of manpower, both in terms of the resource pull effects on some
players and the increased costs and difficulty in getting quality manpower with greater foreign
investment in hospitals, it is clear that the root problem is not foreign investment but it is the
shortage of medical manpower and support personnel due to bottlenecks in the education system
and related regulatory issues (highlighted earlier). Likewise, the fact that foreign investment would
lead to internal brain drain from the public to the private sector is more to do with the fact that
public sector professionals are paid too little, that the working environment and infrastructure in
public sector hospitals is not good, and that there is little investment in continuing medical
education and latest technologies which could help retain staff in the public sector Thus, in both
cases, foreign investment would aggravate existing structural problems but the root cause lies
elsewhere and thus the solutions to such problems also lie elsewhere and not in foreign investment
regulations.
Some of the required policy measures would include letting the corporate hospitals set up medical
colleges and training institutes, permitting investment in health education by foreign universities to
ease the supply bottlenecks on medical manpower, encouraging public private partnership
arrangements to improve governance and management practices in public sector hospitals, and
creating a more attractive work environment (through opportunities for development of skills and
continuing medical education, improved wages) for staff in public sector hospitals, and other
policies highlighted earlier.
The second major area of concern is about reduced affordability and relevance of healthcare if
there is more foreign investment in hospitals and the adverse impact on the poor who might be
squeezed out of the system. Although there were differing views on the implications for costs, most
respondents expressed concern that foreign investment in hospitals and the focus on profits and

                                                                                                   54
returns for shareholders would lead to increased costs of healthcare. The common view was that
the costs would be higher than in smaller nursing homes and hospitals and that given the lack of
health insurance coverage for lower income groups, the growth of foreign funded and corporate
hospitals would only aggravate the existing income and geographic divide in healthcare delivery.
    BOX- 3      Perceived implications for affordability of healthcare

Quotes from several respondents illustrate this common concern about increased costs of
healthcare with foreign investment and the growth of corporate hospitals.
A doctor at a small nursing home noted, “Lower middle class people cannot afford corporate
hospitals. Middle class people who have insurance go to corporate hospitals, but the other
people go to government hospitals or small nursing homes…”
Another practitioner stated, “Affordability depends on the socio-economic strata of patients.
Low strata people will have to go to government hospitals and have to take the service they
get. If it’s something serious, they have to sell their land and get money for treatment. The
priorities of middle-income people are changing and some are taking medical insurance.
Then basic healthcare can be improved. If some eventuality comes in their lives, they can at
least fall back on this insurance. Private hospitals are not affordable for middle class people
unless the company pays for it.”
Likewise, the management of a major corporate hospital with foreign funding stated
regarding costs following increased foreign investment in hospitals in India, “It will go up
because the return expectation is also huge. They expect a minimum return and to give that
return you have to relook at your tariffs, you have to relook at your efficiency, and so tariffs
will go up.
Source: Based on stakeholder interviews

Thus, the concern over higher costs is closely related to the affordability and availability of health
insurance schemes for a wider section of society. Foreign funded hospitals are perceived to be
skewed towards rich people as they would never be in reach of the common man and this is seen to
be made worse by the lack of affordable health packages. It must be noted, however, that a few
respondents did point out that there would not be any major escalation in costs as hospitals would
need to keep prices within a reasonable range and that ultimately pricing would be determined by
what the market could afford to pay. In this view, economies of scale and scope, which would be
facilitated by the expansion of foreign funded hospitals, would help keep costs within reasonable
and affordable levels.
Overall, the common perception is that the entry of foreign players would tilt the balance towards
higher paying private segments of the population and towards the higher end and niche services
which may not be relevant to the poor. But as with manpower issues, foreign investment would
possibly aggravate the already existing divide between those who can and those who cannot afford
healthcare. The root problem is the lack of affordable health insurance schemes, which makes the
poorer segments more vulnerable to higher costs of healthcare. Thus the solution does not lie with
regulations pertaining to foreign investment per se but with the introduction of innovative and
affordable health insurance packages, which could include micro insurance and community based
insurance packages which are perhaps managed by community health insurance trusts with
government support. Part of the solution may also lie in incentivizing and enabling corporate
players to do go beyond metros and to do outreach and extension activities serving a wider section
of society. It was also suggested by many that expanded scale and presence of higher paying

                                                                                                   55
segments in corporate and foreign funded hospitals could be used to cross-subsidize poorer
segments and thus expand the accessibility of healthcare delivery to all.
Apart from these two issues, the only other major concern was that the growing presence of foreign
investor hospitals and of corporate hospitals would force small and mid size hospitals and nursing
homes to close down or would lead to their acquisition by larger players. There was another view,
however, that smaller players would continue to coexist as “Everybody needs smaller clinics too;
we have a huge population and there is no dearth of patients.” This view was also based on a
common perception that large corporate and foreign funded hospitals are likely to be impersonal
and would not provide the personalized care available at smaller establishments. Overall, while
there were differing views on the likely implications for the structure of healthcare delivery and on
the possible arrangements that could emerge between the smaller and the larger players, the
prevailing view was that poor quality and substandard players are likely to be weeded out with
greater foreign investment in hospitals.

5.3        Summarizing the implications and further inferences
Overall, if one were to take the survey results as reflecting the way in which foreign funded
hospitals function compared 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.
•   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 of the healthcare sector and some of these
    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
                                                                                                    56
    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, the root cause lies in
structural problems that are already present in the healthcare sector. 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 and policies can be taken to mitigate these costs.

6 Implications for GATS commitments in hospital services
One of the objectives of this study was to determine what India’s stand should be in its
commitment on health services, particularly with regard to mode 3 or commercial presence in one
part of the sector, i.e., hospitals. The main issue under consideration was whether India should
make a liberal commitment in this area, and how the commitment could be shaped with additional
limitations or conditions, if so required, to make this liberalization offer as beneficial to the
country’s healthcare objectives as possible. The following discussion outlines the evolution of
India’s approach to the health services sector and requests made to India in this sector under the
GATS. Then based on the findings regarding the prospects for foreign investment in hospitals and
the likely implications of such investment, this study suggests what shape any binding
commitments in this area should take.

6.1        India’s autonomous and multilateral liberalization in hospital
           services
Health related social services, is one sector where India has not received many requests. India has
nevertheless unilaterally and multilaterally liberalized the hospital services subsector to a great
extent in mode 3. India was among the few countries, which scheduled this sector in the Uruguay
Round. As shown in the following table, India improved significantly upon its Uruguay Round
commitment in its initial conditional offer, replacing its unbound commitment in modes 1 and 2
with an offer for a full commitment in these modes, and increasing the FDI ceiling in hospitals
from 51 percent in its Uruguay Round commitment to 74 percent in its initial and revised offers,
though this offer is subject to a local incorporation requirement, FIPB approval, and inflow of
latest technology. The latter is of course more restrictive than the existing FDI policy for hospitals
as the revised offer permits 74 percent and is subject to FIPB approval while existing FDI
regulations allow 100 percent on automatic route and also permit other kinds of foreign capital
inflows (FII and equity funds) to be classified under FDI subject to some limitations, as outlined
earlier.


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Table-11.   Status matrix for committed and offered liberalization in India’s hospital services

Sector / Sub          Uruguay Round         Conditional            Revised Offer          Domestic
sector                Commitments on        Initial Offer (Dec     (Aug 2005)             Reforms
                      market access         2003)                                         Between 1994-
                      (1994)                                                              2006
Hospital services     1) “Unbound”          1) “None”,             1) No change           100 per cent FDI
                                            provided                                      subject to FIPB
                                            transaction is                                approval.
                                            between two
                                            established                                   100 percent FDI
                                            medical                                       permitted on
                                            institutions,                                 automatic route
                                            covering areas of                             since 2000.
                                            second opinion for
                                            diagnostics or
                                            research
                                                                                          FII, private equity
                      2) “Unbound”          2) “None”              2) No change           funds allowed to
                                                                                          register as FDI
                      3) Foreign equity     3) Foreign equity      3) No change           subject to
                      ceiling is 51%,       limit increased to                            limitations on
                      only through local    74%. FIPB                                     equity share.
                      incorporation         approval required
                                            for foreign                                   The health
                                            investors with                                insurance market
                                            prior                                         was opened to
                                            collaboration.                                private
                                            Only through                                  competition in
                                            local                                         2000, which
                                            incorporation.                                permitted both
                                            Subject to inflow                             general and life
                                            of latest                                     insurance
                                            technology for                                companies to offer
                                            treatment.                                    health insurance.
                                            Different
                                            conditions for
                                            publicly funded
                                            services
                      4) “Unbound”          4) No change          4) No change
                      except as given in                          except restrictions
                      the horizontal                              removed for
                      commitments                                 charitable
                                                                  purposes
Source: Based on India’s schedule of commitments, initial conditional and revised offers, and various policy
documents on the health services sector.

The liberalization of India’s multilateral offer on hospital services reflects the autonomous
liberalization that India has undertaken in health services since 2000, with the opening up the
hospital segment to 100 percent FDI participation and the entry of domestic corporate hospitals
and MNCs in India’s health care industry. While the table indicates that the level of domestic
liberalization still exceeds that placed in the offers, the shift in the multilateral stance from the
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Uruguay Round to the stage of revised offers is large. It indicates the Indian government’s
recognition of the changing scenario in the health sector and the potential gains to be realized from
the infusion of capital and technology in this sector, particularly from the emergence of hospitals of
international standards and the spin off benefits in other areas. The nature of the offers also
indicates that India has tried to retain policy space to address considerations such as technology
transfer, consumer protection, quality and reliability of health care providers, and social concerns
by inscribing certain conditions on the technology brought in and the kinds of players involved.

6.2        Strategy for multilateral liberalization in hospital services
Should India 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 concern in policy circles is
that such a binding would lead to entry by foreign players and increased FDI in this segment, with
possible negative effects on equity and on the public sector. A binding commitment would be
irreversible and thus caution may be required in taking such a step towards further multilateral
liberalization. The findings of this study, however, 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.
As investors would adopt different investment models (hub and spoke, local franchises, medicity,
etc.), depending on their profile,, the location of the investment, and the pattern of financing,
among other factors, attaching too many conditions on the commitment may reduce the flexibility
of investors to enter into what is a very location specific business.
But as is clearly highlighted by the study, a liberal binding commitment on FDI in hospitals is not
going to translate into a surge in foreign investment in India’s hospitals unless the various
constraints affecting hospital projects that are discussed in this study 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.
There is also a need to look at India’s commitments and domestic policies in other sectors, such as
in health insurance (which would come under the financial services schedule) and in higher
education (which would come under the education services schedule). Commitments in the

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insurance and higher education services sectors need to be considered in conjunction with
commitments in hospital services as liberalized entry for foreign insurance companies and for
foreign higher education providers may help in deriving benefits from further liberalization of
mode 3 in hospitals. Likewise, supporting policies in the manufacturing sector to increase local
production capacity in medical devices and to standardize such production would also be required.
Within health services, the implications of commitments need to be considered across modes. For
instance, a full commitment in mode 1 would be relevant if one of the objectives is to encourage tie
ups and collaboration in medical education and training, to encourage telemedicine links with
overseas institutions, or to promote opportunities for clinical trials outsourcing. Thus, when
finalizing India’s commitment in health services, a broad view needs to be taken across modes
within the health services sector, across related service sectors, and outside the service sector. The
impact of cross cutting regulations needs to be kept in mind.

7 Summary of findings
This study has attempted to understand the extent to which there is FDI presence in the hospitals
segment of India’s healthcare sector and how this presence is affecting the sector at large. One of
the main findings of this study is that despite the opening up of hospitals to 100 percent FDI
participation under automatic route and despite quite a few approved FDI hospitals, there are very
few such hospitals in reality. While it is difficult to give exact numbers on the ground, according to
some experts there are at most three or four such hospitals. However, if one takes a expanded view
of foreign financing to include other modes of funding (partly in keeping with regulatory treatment
of these other modes under FDI), which include FII, private equity, IPOs, multilateral
development agency funding, external commercial borrowing, and venture capital, then one finds
that these alternate modes, and in particular private equity funding is more prevalent than FDI
funding (although domestic debt remains an important source of financing for most hospitals). This
preference suggests that there are issues affecting the hospital segment, which make it less attractive
for long term FDI kind of investment as opposed to other forms of foreign financing.
The study also finds that the long gestation period of investment in hospitals, the relatively low
rates of return compared to that in many other high growth sectors impede FDI in this area. While
external factors influence foreign investors in their decision to invest in this segment, the main
factors that influence overall profitability of hospitals pertain to domestic factors, in particular:
•   High upfront costs due to physical infrastructure (land) constraints;
•   High input costs for medical devices and technology resulting from reliance on imports, the
    structure of this industry, and lack of local manufacturing capacity;
•   Manpower constraints in terms of quantity and quality arising from inappropriate regulations
    on medical education suppliers and inadequacies in medical education;
•   The low level of insurance penetration resulting from limited opening up of the insurance
    sector and lack of a universal health insurance scheme to make healthcare affordable to a larger
    number of people;
•   Other regulatory inadequacies affecting standards and practices in healthcare establishment,
    and
•   Lack of policy clarity and thrust on healthcare as a priority area.



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In terms of the impact of foreign investment, the usual positive implications such as infrastructure
development, increased capacity, improved standards and available technology, and various
spillover benefits emerge from the discussions. In terms of negative implications, the usual concern
areas such as higher costs and greater segmentation between the public and private players and
greater geographic segmentation are highlighted.
The survey results, albeit limited by the small number of hospitals covered, no major difference is
apparent on the cost front while differences emerge in terms of the nature of treatment and
orientation of the for profit corporate hospitals, in terms of being more technology and intervention
oriented, more dependent on high end and specialized equipment and personnel, and utilizing their
working capital more intensively. The survey results also reveal that such hospitals are likely to
create higher paying jobs and thus are likely to attract good quality persons from existing
institutions, especially in the public sector and the smaller and mid size establishments. Thus some
inferences can be drawn about the likely positive impact of greater foreign investor presence in
terms of technology investments, greater availability of high end and specialized procedures, and
improved quality of persons, with possible negative impact in terms of resource diversion and
greater competition for smaller and public sector establishments.
But on the negative side, it is evident that such hospitals do not address the geographic divide that
exists in healthcare delivery in India, i.e., the divide between rural and urban areas and between
regions across the country, notwithstanding some efforts at corporate social responsibility and
telemedicine. This is because all players want to locate where supporting infrastructure already
exists and there is a paying population. It also emerges that such hospitals tend to provide less
personalized care and substitute such care with technology. Such hospitals also lead to further
competition for quality manpower, which is already in short supply, and thus are likely to drive up
wages and possibly costs of services.
The analysis suggests that India should make a full commitment on mode 3 in hospitals, the main
reason being that such a commitment would give predictability to the policy environment, which is
currently lacking. Moreover, additional investment with perhaps some conditions in terms of
technology transfer and corporate social responsibility or outreach activities is likely to be
beneficial overall. Policy space can be reserved through such additional conditions and by
continuing to exclude publicly funded institutions from the ambit of the commitments. However,
the study also highlights the fact that making a binding commitment would not automatically lead
to huge additional investment given the many constraints plaguing this sector.
The study also 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



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•   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 corporatization 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.
It needs to be pointed out that there have been repeated demands to grant infrastructure status to
the healthcare sector so as to facilitate access to viability gap financing and improve cash flows for
private players; the study finds that there are practical difficulties in implementing this proposal.
The main problem is that the sector lacks a supra-regulatory body, unlike sectors such as transport,
ports, and telecom. In order to get infrastructure status, the existence of such a regulatory body is
required. The feasibility of setting up such a body may be questioned given there are incumbents
such as the Medical Council of India and there are likely to be conflicts of interest with regard to
regulatory jurisdiction. The real issue as highlighted by this study is not whether the industry gets
infrastructure status but the availability of cheaper domestic financing and tax benefits in view of
the long gestation of hospital projects, both of which are possible on a case-to-case basis, even
without infrastructure status.
The study also reveals that the maturity of the healthcare market is an important determinant of
how successful a country is in attracting foreign investment into hospitals. Corporate hospitals
need to be seen as delivering to not only surgical and critical care but also for chronic and
preventive care in the consumer mindset. As put by one expert, “Healthcare business is still doctor
driven in many parts and has not achieved the brand status the other services have. This could be a
major impediment for companies to come in and do business.” Thus, the very model of healthcare
delivery as perceived by consumers needs to change and this can in part be facilitated by increased
insurance penetration and greater affordability of healthcare.
To conclude, it is hoped that the findings of this study and its conclusions will help the government
to formulate its strategy under the GATS and also provide the requisite enabling environment to
take advantage of liberalization in the healthcare sector. The study shows clearly that without a
proactive role by government in terms of initiating domestic reforms in the healthcare sector and
creating an enabling environment, the benefits of liberalization may not materialize.



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References
a. Business Standard, Weekend Section, July 28/29, 2007, p. I.
b. CMIE, Prowess database.
c. CRISIL Research, Annual Review: Hospitals, Industry Information Service, Mumbai,
   February 2007.
d. Ernst and Young and FICCI, Opportunities in Healthcare: Destination India, New Delhi,
   2007.
e. Ernst and Young and India Brand Equity Foundation, Report on Healthcare, 2004 and 2005.
f.   Express Healthcare, Opportunities Galore, 2004.
g. Government of India, Report of the National Commission on Macroeconomics and Health,
   Ministry of Health and Family Welfare, New Delhi, 2005.
h. http://www.expresshealthcaremgmt.com/200609/bangalorediscovered01.shtml (accessed on
   September 1, 2009).
i.   IBEF, www.ibef.org.
j.   International Finance Corporation, conference presentation, New Delhi, 2007.
k. Technopak, “Healthcare Outlook”, quarterly report, Vol. 1, February 2007.




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