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LibraryimgBlogimgIndia’s Healthcare Sector: Opportunities and the Need for Alternative Financing

India’s Healthcare Sector: Opportunities and the Need for Alternative Financing

  • April 28, 2023
  • By Vivriti Asset Management

The public and private spending on healthcare delivery around the world have been rising rapidly keeping pace with the growth in economies. The working pattern of the global population has turned more sedentary especially after the pandemic. This is giving rise to the incidence of more lifestyle-led chronic diseases causing an accelerated growth in demand for healthcare services.

In India, healthcare is one of the largest sectors when it comes to contribution to the nation’s employment and revenues. As of 2021, it employed roughly 50 lakh people. The size of the healthcare market is expected to have surpassed from merely ~US$70 billion in 2012 to ~$US370 billion by 2022, suggesting a CAGR of ~16% (Statista).

The domestic healthcare delivery market can be divided into four broader segments, as shown below:–

The hospital industry expects to grow at a CAGR of 15-20% to over $130 billion by 2023. Diagnostics on the other hand, which is valued at ~$4bn (the share of the organised sector is just around a quarter of the total value) in the healthcare sector, is expected to witness secular growth at a CAGR of over 20% to $30-40 billion in the same time frame.


India’s demographic factors present huge opportunities in the healthcare sector. Firstly, the life expectancy of India’s population has been increasing. As per United Nations estimates, life expectancy in the country has increased from 35.21 years in 1950 to 70.4 years in 2023. It is projected to increase to ~82 years by 2100. Secondly, the rise in aging population. The share of senior citizens in India’s population is expected to double to 16% over 2011-2041 (PwC India, 2020) while the total number of senior citizens is estimated to be 30 crores by 2050 (Invest India).

Thirdly, the rising income expect to result in a shift of 7 crores+ households into the middle-class section of society by 2031 leading to growing awareness for preventive healthcare. It is estimated that 8% of Indians will earn more than US$ 12,000 per annum by 2026 (Invest India, KPMG, and FICCI, 2021).

These apart, accessibility to services due to growing penetration of health insurance, higher incidence of lifestyle diseases caused by factors including obesity, poor diet, high blood pressure, and cholesterol, etc. in urban areas, and accelerated adoption of digital technologies, including telemedicine, in the post-Covid world are expected to boost the demand for healthcare.

The demand for healthcare facilities has been rising at a faster rate in Tier 2 and Tier 3 cities due to the rapid increase in per-capita income in these regions. This led many private hospital operators to foray into areas in Tier 2 and Tier 3 locations that are farther away from metropolitan cities. As per Invest India, investment opportunities in India’s country’s hospital/medical infrastructure sub-sector are pegged at over US$32 billion. Production-linked Incentive (PLI) schemes announced by the govt and a flurry of investment avenues in contract manufacturing, over-the-counter drugs, and vaccines also boosted opportunities in the domestic manufacturing of pharmaceuticals.

The centre has allowed up to 100% Foreign Direct Investment (FDI) under the automatic route (which means the non-resident investor or Indian company can invest without prior approval from the govt or RBI) in the hospital sector and in the manufacture of medical devices.

Beds and doctors’ availability

India still faces systematic issues in terms of infrastructure and resources. Significant gaps exist between the number of beds available and the beds required. The country’s hospital bed density is much lower than the global average as depicted below while there is a shortage of skilled professionals in the sector, including doctors, nurses, paramedics, etc.

Structural Issues for private hospital operators

The credit profile of private hospital operators in India is expected to remain strong going ahead given the potential for higher revenue growth, better operational efficiency, and other factors like capacity additions. The operators are solving the structural issues as discussed below.

Occupancy rate

The bed occupancy rate (BOR) is the ratio of the number of inpatient bed days added annually to the number of functional beds. A high BOR is crucial to optimize revenue for the hospital operator. On the other end, a high OR reflects an operator’s quality of patient care, infrastructure, and level of staff training, hence, it is used to assess the performance of hospitals.

As per the 2012 guidelines of Indian Public Health Standards (IPHS), the BOR should ideally be at least 80% while a BOR of below 42% is considered very low and a BOR of 100% is not desirable as spare bed capacity should be there to accommodate variations in demand. The lack of beds causes delays in emergency departments and puts patients in clinically inappropriate wards which increases the chance of hospital-acquired infections. As per a 2021 study by NITI Aayog of district hospitals, the national average of BOR is 66% and most large hospitals are operating in the BOR range of 65-70%.

Out-of-pocket expenditures

Most of the private hospital operators in India are generating the majority portions of their revenue from out-of-pocket (OOP) payments by patients. In India, the share of OOP expenditure in total healthcare expenses stands at above 60%, which is one of the highest in the world and much higher than the global average of ~20%.

The main reasons for higher OOP in India are limited govt expenditures on healthcare and lower penetration of health insurance. It is also evident from the structure of payment modes witnessed in the Indian healthcare system as depicted below:–

It has been estimated that over 60% of the population in India pays for healthcare services in OOP mode. The ratio is less than 20% for major economies like the US, and the UK, and up to 35% for emerging economies like Brazil and China. This is because 60-70% of the Indian population is out of insurance coverage, both private and govt schemes.

As per the annual report of a private hospital operator, the bill amount sent to private and public insurance companies for inpatient services vary based on the kind of services and negotiations with each company. The amount charged to public sector companies generally comes at a discount compared to the amount paid by OOP patients.


These are two key monitorable to measure the operational efficiency of hospital operators. ALOS refers to the average no. of days a patient stays in a hospital and ARPOB indicates the daily revenue that can be generated by an occupied bed for a hospital. A highly efficient operator’s target is to reduce ALOS, which helps in increasing its ARPOB to ensure that more patients get treatment at the same time.

In the above chart, average ALOS is seen improving from Q2FY22 after rising during Covid with hospitals focusing on faster turnaround and higher utilisations.

The above chart shows ARPOB on an increasing trajectory on a sequential basis. This is expected to sustain as price hikes taken by hospitals to take effect in near term.

Inpatient and Outpatient mix

Hospital operators generate ~70% of their revenue from inpatient departments and the rest 30% from outpatient departments in terms of value. However, the ratio varies across operators depending on the type of healthcare services they provide, and the ailments being treated. However, in terms of volume, outpatient departments account for ~75% of the total. Hence, a balanced inpatient and outpatient mix is essential for higher revenue and profitability of the operator.

The financing gap and the need for alternate financing

The public spending on healthcare has only been ~2% of India’s Gross Domestic Product (GDP) even three years after the outbreak of Covid-19 while the aim is to raise the share up to 2.5% of GDP by 2025. In the last Union Budget, the healthcare budget has been marginally raised from the FY23 estimate of ~INR 86,000 crores to ~INR 89,000 crores for FY24. It is also to be noted that about only 10% of hospitals in the country are public and the rest are private. (KPMG, Oct 2021)

While the healthcare expenditure ratio in terms of GDP is one of the lowest globally, the gap left by limited public financing is somewhat filled by the private sector, which makes up ~65% of the healthcare expenditure in the country. However, given the marked under-penetration in healthcare services, the sector needs a significant ramp-up in private financing not only due to the overall funding needs but also due to the underlying asymmetries in financing caused by a fragmented market.

Market fragmentation occurs because large hospital chains comprise 10-15% of the industry while the rest is controlled by small and medium doctor-run hospitals. Despite accounting for the lion’s share in the industry, the hospital operators in the mid-market space lack the right access to funding. There is no appetite from banks for funding these mid-market operators located beyond Tier 1 metros and in the districts of Tier 2/3 regions due to poor accessibility and lack of knowledge about their business models and financials.

As per S Ganesh Prasad, Founder, MD & CEO of Bengaluru-based GenWorks Health, a provider of digital solutions in the hospital and health care space, Covid has significantly improved the balance sheet and has left liquidity for healthcare providers. There is a guarded optimism and a compelling need to invest in healthcare delivery. Innovative debt / Structured funding options will play a significant role in fast tracking growth investments. Public private partnerships that cover for viability gap funding can help private players to contribute significantly to set up treatment infrastructure, said Mr. Prasad.

Large hospital chains operating in Tier 2 and 3 locations are adding capacity at a significant rate. In the last four years, major hospital chains added ~70% of their incremental supply in such locations. Government assistance in the form of 40% viability gap funding under Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PMJAY) also aided expansion to these regions. Apart from PMJAY, there are three main government schemes that hospitals cover – The Central Government Health Scheme (CGHS), Ex-Serviceman Contributory Health Scheme (ECHS), and the Employee State Insurance (ESI).

Despite the presence of Govt schemes, the delay in receivables from such schemes increases the need for working capital financing, mainly for mid-market players. Notably, the average delay in payments from Govt schemes is 4 to 6 months, with the trend has worsened in the last 3-4 years. Operations of large hospitals in tier 2 and 3 cities account for 10-20% of their balance sheet, hence, they do not get impacted. However, mid-market operators face a credit crunch to scale up their business as banks do not finance them (for issues like the inability to get invoices less than six months old). Hence, they need alternate sources of financing in the form of debt or equity.



The views provided in this blog are of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.