Is the hospital sector worth financing? What is the cost of building a hospital and how are the hospitals financed? What are the risks in this business? How to judge the performance of a running hospital?

Current state of Indian Healthcare:

One of the factors a country's economy depends on is human capital. If you don't provide adequate access to healthcare, you lose at least half of your potential. Statistics from the World Bank reveal awful state of affairs of the healthcare sector in India. While a nation like USA has a healthcare spending of 18% of its GDP, India invests a mere 4% on the health of its citizens. For every 10,000 human beings, the number of hospital beds in France is 64, China has 39, Mexico has 15, while India has only 9 beds per 10,000 people.  The fact that India has just 7 doctors per 10,000 people against the world median of 14 is a concerning issue.

However, from a visionary perspective, this also makes healthcare an undeniably lucrative territory, filled with the potential growth opportunities. Indian healthcare sector, worth about USD 80 bn in 2012 is expected to reach about USD 160 bn by 2017. 50% of this is contributed by hospitals segment alone. The income levels of average middleclass Indians are rising each year, thus giving a boost to the standard of living and spending capabilities. Change in lifestyle and increasing urbanization is resulting into higher prevalence of lifestyle diseases, which typically need expensive treatments of longer duration as compared to those for infectious diseases. Increasing life expectancy has resulted into rising proportion of senior citizens in the population. Further, health insurance market in the country is growing at 33%, thanks to increasing health awareness and various government sponsored schemes. Another factor which is driving the healthcare market is medical tourism. At the leading private hospitals in our metropolitan cities, world class treatment is available at a fraction of the cost of the Western countries. As a result, around 170,000 people visited India in 2012-13 for availing medical treatment, while the country has the potential to attract many more such medical tourists. 

Classification of Hospitals:

The hospitals can be classified in various ways. Based upon the complexity of the ailments treated, they are classified into primary, secondary and tertiary hospitals. Primary care units are basically outpatient units that offer first-point-of-contact medical and preventive healthcare services without any ICUs or operation theaters. Secondary hospitals have upto 300 beds, of which 10-15% are ICU beds. The hospital offers essential specialities such as internal medicine, general surgery, gynecology, pediatrics, ENT, ophthalmology, basic diagnostic specialities and may also treat ailments related to gastroenterology, cardiology, neurology, dermatology, urology and dentistry. Tertiary hospitals have 300 or more beds and offer all the medical specialities under one roof and also treat complex ailments such as cardiac surgeries, neuro-surgeries, multi-organ failure, high-risk and trauma cases.

The hospitals may also be classified into government and private hospitals. About 30% of hospitals in India are government while the rest 70% are private. Most of the government hospitals are small town day care centres, while the large hospital segment is mostly dominated by private players.

Performance Parameters:

The performance of the operational hospital can be judged based upon the following parameters:


No of IPD Vs. OPD patients: Generally, only around 10% of the patients are IPD. However, they contribute around 80% of the hospital revenue. OPD patients increase the footfalls and are potential IPD customers.


Occupancy level:A well running hospital has occupancy level of 80% and above.


Average Length of Stay (ALOS): Hospital earns major portion of its revenue from a patient in the first two days of his stay. Hence long ALOS is not desirable from business perspective. ALOS of around 4 days is considered optimum.


Average Revenue per Occupied Bed (ARPOB): For super-speciality hospitals in metro cities, ARPOB is often more than Rs. 20,000 per day.


Medical Vs. Surgical patients: Hospital desires to have maximum proportion of surgical patients, as revenue from surgical patient is higher than that from medical patient


Segment-wise break up: Cardiology, Neurology, Oncology, Orthopedics and Ophthalmology are lucrative segments. Hence, higher the percentage of patients from these segments, more is the profitability.

The hospital’s performance can also be determined from other parameters such as: no of corporate tie-ups, no of tie-ups with insurance companies, mortality rate for key procedures, list of high end medical equipment, landmark surgeries performed, percentage of foreign patients, incidents of major accidents/ fire/ labour strikes etc. The qualitative parameters such as reputation of doctors, customer satisfaction and brand image are also critical but difficult to measure. The hospitals with international and national accreditations such as Joint Commission International (JCI) and National Accreditation Board for Hospitals & Healthcare (NABH) have an edge over the others.


Setting up a tertiary hospital and running it involve the following risks:

Project Risk

  Selecting appropriate business model

  Procuring land at affordable cost

  Arranging finance at minimal cost

  Completing the project without significant time/cost overrun

Market Risk

  Achieving optimal occupancy levels

  Avoiding over-capacity in any specialization

Human Resources Risk

      Succession planning with respect to key management personnel

      Attracting reputed doctors,  qualified nurses and lab technicians

      Controlling the manpower costs

Technological Risk

      Procuring world class equipment at minimal cost

      Handling the issue of technological obsolescence

Operational Risk

      Delivering high quality service to the patients

      Minimizing human errors, accidents, strikes, fire

      Procuring and managing the inventory in efficient way

Regulatory Risk

      Obtaining the required approvals and their timely renewal

      Fulfilling applicable social and environmental obligations


From the perspective of lender/investor, it is important to identify these risks, assess their impact and design the mitigants so as to protect the downside.

Project Economics:

The cost of setting up a hospital depends on a variety of factors such as location, business model, financing structure and government incentives, and may vary widely from Rs. 2.5 mn to Rs. 6.0 mn per bed for a secondary hospital and from Rs. 8.0 mn to Rs. 12.0 mnper bed for a tertiary hospital. The cost of land and building comprises 30-50% of the total cost, thanks to skyrocketed real estate prices in the last ten years. Medical equipment constitute 30-40% of the costs, pre-operative expenses are 10-12%, while IDC and the other miscellaneous costs contribute the rest. Shown below is the project cost calculation for a sample project:

No of beds



Area per Bed


Sq. ft.

Total Area


Sq. ft.




Land Area



Assumed Unit Land Cost


Rs. Mn/Acre

Land Cost


Rs. Mn.

Assumed Unit Construction Cost


Rs/Sq. ft.

Construction Cost


Rs. Mn.

Equipment Cost


Rs. Mn.



Rs. Mn.

Miscellaneous Cost


Rs. Mn.

Total Project Cost


Rs. Mn.

The hospitals have a long gestation period and can easily take 4-5 years after COD to reach optimum occupancy levels. A well-run hospital in a metropolis can get ARPOB of more than Rs. 20,000 per day and clock EBITDA margins in excess of 25%.

Cost Reduction Strategies:

Today, viability of the hospital critically depends upon the cost structure. The market players are using the following strategies for cost reduction:


Project cost: Lease contract (to reduce the real estate component of the project cost) (e.g. Manipal Group), Management contract (the operator is paid fee for running the hospital) (e.g. Fortis Raheja Hospital), setting up hospital as a trust (so as to acquire land at subsidized rate and also avail range of other benefits) (e.g. Lilavati, Hinduja), public-private partnership (eg. Seven Hills Hospital). If the hospital is set up as a trust or on PPP basis, it has to reserve certain proportion of beds for economically weaker sections of the society and treat them at concessional rates.


Personnel cost: Restricting the number of doctors on payroll and instead hire them as consultants and share revenue with them, tie-up with medical colleges and recruiting their medical/ nursing students


Equipment cost: Taking equipment on lease basis, pay-per-use, domestic procurement of equipment


O&M cost: Effective inventory management, use of IT systems, telemedicine



Similar to infrastructure projects, the hospital projects can be highly leveraged and may have aggressive debt to equity ratio such as 70:30. From a lender’s perspective, the long gestation period of the hospital may pose a challenge and the project may require sufficiently long loan tenor with adequate moratorium and ballooning repayment schedule. Also, the security structure may be weak in case of leased land due to limited marketability in case of default.

The healthcare sector has been favorite among the private equity funds, mainly on account of its resilience to economic downturns. There have been 71 M&A/PE deals in healthcare sector in 2013 of cumulative amount of USD 1359 mn. Some of the hospitals which have attracted PE investment in the recent past are: Manipal Hospitals, Cygnus Hospitals, CARE Hospitals, Narayana Hrudayalaya, Vasan Healthcare, Medanta – The Medicity etc.


The rapidly growing healthcare sector, especially in a populous, growing, and evolving nation like ours, is one of the few recession-proof options available for intelligent investment. The sector also faces lower regulatory hurdles compared to the other sectors. Carefully evaluated and risk-assessed investment in healthcare sector can generate attractive returns for the investor. In addition, it also offers something much more difficult to achieve as an investor: the satisfaction of participating in healthier and stronger nation building.


Kapil V. Edke

Kapil V. Edke is Manager in Business Development at IL&FS Financial Services (IFIN), Mumbai.

Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

© Copyright 2015-16. All rights reserved.