Limitations in public healthcare, among other reasons, has seen a rise in demand for private healthcare services, but a shortage of professionals, rise in healthcare costs and intense competition could impact on profitability, while further increases in room capacity could result in oversupply over the longer term and price competition, an industry report released yesterday (21) showed.

As a multitude of factors point towards increasing demand for private healthcare, the shortage of skilled professionals in the industry may act as a constraining factor in exploiting such demand. The number of medical professionals in Sri Lanka, although progressively higher over the past several decades, is still relatively lower than the number in regional countries and those with equivalent levels of income, RAM Ratings Lanka said in a special report.

"The shortage of medical personnel is more pronounced in private hospitals which are dependent on visiting specialists to attract patients, given the doctor-centric nature of the Sri Lankan healthcare industry. An average of 900 doctors graduate from local medical faculties annually, of which around 70% are absorbed by the government sector, although these doctors are allowed to practise in the private sector subsequent to completing the required number of hours at public hospitals. Empirical evidence indicates that only around 12% of medical graduates are absorbed into the private sector on a full-time basis. Meanwhile, the migration of medical professionals remains high; the IPS estimates that nearly 50% of doctors completing compulsory training in developed countries opt to permanently reside there. This is mainly attributed to the relatively lower salaries paid to public sector medical officers in Sri Lanka. The private sector is also faced with a lack of training opportunities. Nurses and medical officers have significantly fewer opportunities to specialise and pursue postgraduate education, in contrast with government sector personnel."

"The limitations of public healthcare, particularly inadequate capacity, limited availability of specialty treatment and disparities in service quality, have provided an impetus for the growth of the private healthcare sector. Sri Lanka boasts a wide public healthcare network with primary and tertiary care units; most residents live within about 3 kilometers of a public healthcare facility. That said, the lack of a formal referral system coupled with disparities in service quality between rural and urban hospitals has compelled rural patients to seek treatment in base and provincial hospitals. As a result, the out-patient departments of base and provincial government hospitals frequently see long queues and waiting times, exacerbated by unnecessary patient arrivals and inadequate facilities to support the demand. The in-patient divisions of the main government hospitals also record high bed-occupancy and bed-turnover rates, whilst floor patients are a common occurence. The lack of specialty treatment in rural areas has also led to patients opting for private healthcare. Although public hospitals in urban areas remain the main alternative, they lack capacity and have extended waiting periods (particularly for surgeries)," RAM Ratings noted.

Increasing  competitiveness...

"Whilst demand for private healthcare is expected to be robust over the short to medium term, intensifying competitive pressures may hamper the profitability of players. This is particularly true for the capital Colombo, in which most private healthcare sector operators have consistently expanded room capacity in recent years. Our estimates indicate that the 4 listed operators increased their collective room capacity by around 55% over the last 5 years. Meanwhile, although industry-wide statistics on hospital occupancy levels are not available, RAM Ratings Lanka estimates rates to still be good at around 80%. However, further increases in room capacity could result in oversupply over the longer term, and price competition among players as a consequence. Given increasing healthcare costs, this could put pressure on profitability margins over the medium to long term."

Business risk...

"The private healthcare industry is relatively favourable to existing players, owing to growth potential, relatively resilient demand, high entry barriers and flexibility of pricing. However, stiffer competition and the need to provide quality care to preserve brand name, coupled with the capital intensive nature of the business may increase the level of risk in the industry over the longer term.

"The competitiveness of a private hospital operator depends on a range of factors including size, diversification, revenue volatility, cost structures and growth strategies. In terms of portfolio size, we note that most private healthcare providers operate from a single facility, with capital intensity and funding constraints preventing smaller players from expanding capacity. On the other hand, larger more established players have in recent times sought to strengthen their geographical presence by venturing outside the capital. Operators have also attempted to diversify their revenue sources by providing additional services such as laboratory and pharmaceutical services. We note that in Colombo, where around 85% of all private sector laboratory tests are performed, 2 private hospitals dominate with an estimated market share of around 45%, which can act as an entry barrier to potential players.

"With regard to revenue trends, the 4 listed private hospitals have continued to record healthy top-line growth over the last five years. Given the faster expansion of its hospital portfolio, Asiri Hospitals recorded a relatively strong compound annual revenue growth of around 25% in the period from 2007 to 2012, whilst that of other players was around 13%-16%. The revenue trends are reflective of increasing patient volumes against a backdrop of rising demand for private healthcare."

Financial risk...

"Financial risk assessment includes the evaluation of the healthcare providers’ capital structure, leverage, cash flow adequacy and financial flexibility. Despite the capital intensive nature of the business, the majority of players assessed have moderate gearing levels, with gearing ratios generally below 0.50 times. Healthy profitability coupled with relatively good profit retention has enabled these hospitals to generate capital internally. The debt protection metrics of industry players are also strong, reflective of healthy cash flow generation. The funds from operations debt coverage levels of players have remained healthy over the years, generally ranging from around 0.40 to 0.60 times. Based on indicators of hospitals assessed, the cash protection metrics of private healthcare providers are relatively stronger than that of most other industries, given their strong cash flow generation. In terms of financial flexibility, whilst debt financing through banks is a viable option for larger, more established players, the lack of funding avenues continues to be a constraining factor for smaller hospital operators," RAM Lanka said

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