Divya Raman, 35, goes to her friendly, neighbourhood family physician in Koramangala, suburban Bangalore, whenever her family members fall ill. But this is not an average neighbourhood clinic. The walls are a warm magenta and yellow, there is enough space to sit and, most importantly, it is clean. “It is better than regular clinics, as it is clean and you do not get put off by a crowd,” says Raman.
Manipal Hospital would be happy to hear Raman’s response. For the last two months, the Rs. 500-crore hospital chain has been trying to perfect a formula to succeed in tier II towns.
The hospital’s management decided to shift the business focus of Manipal Cure and Care, its wellness chain, from preventive care, wellness and beauty to playing the role of a family physician.
Although 11 of the chain’s 15 hospitals are in tier II towns, it is only recently that it is trying to further carve segments in this market.
Fortis and Apollo too are working on targeting different segments in tier II markets. Fortis Healthcare, that has 20 of its 53 hospitals in tier II towns, launched its specialty clinics, Fortis C-DOC (Center for Diabetes, Obesity, and Cholesterol Disorders) targeted at tier II towns in December 2010.
Apollo announced in January that they were going to invest Rs. 10,000 crore in building 250 Apollo Reach Hospitals — smaller hospitals than the 51 they have in big cities — in tier II towns such as Karimnagar in Andhra Pradesh.
Why are these big hospital chain so interested in small towns?
According to consultancy firm KPMG, data from 2009 shows that India has 0.7 beds for every 1,000 people, the lowest among BRIC nations. To increase this bed capacity by one for every 1,000 people in tier II cities, at least 500,000 beds are required, says Technopak, a management consultant firm. India needs between 3,333 and 7,142 hospitals in tier II cities alone.
The three largest hospital chains — Manipal, Apollo and Fortis — have about 33 hospitals in tier II towns such as Kangra, Raigad, Moradabad, Salem and Visakhapatnam.
Of the $33 billion that Indians spend on healthcare, just 20 percent is spent in smaller towns. “For major surgeries and treatment of serious ailments, patients still travel from small towns to one of the seven large cities — Delhi, Mumbai, Chennai, Hyderabad, Bangalore, Kolkata and Ahmedabad,” says Dr. Rana Mehta, senior vice president, healthcare, Technopak.
Getting the Right Formula
As the health industry gets more competitive in metros, large chains are doing their variation on the ‘bottom of the pyramid’ because of the profit margins that small towns can offer. “For example, you can buy land for Rs. 3 crore in a tier II town. The same land would cost three times more (Rs. 10 crore to Rs. 12 crore) in a tier I city. This has an impact on both the break-even stage of a hospital as well as profit margins,” says Mushahid Ali Khan, analyst, Technopak.
Traditionally, tier II towns are the strongholds of individual doctors with polyclinics that can have margins as high as 35 to 40 percent but are incapable of scaling up. “In the traditional model, you go for the latest and the best [equipment],” says Dr. Ashwin Naik, CEO and co-founder, Vaatsalya Healthcare, a hospital chain focussed on tier II cities, such as Hassan and Shimoga in Karnataka, since 2005. “But the consumer does not care. They want access to healthcare at a good price.”
He says it is about getting the right mix of investment and maximum usage of equipment. For example, a hospital may get a less expensive ultrasound machine — for Rs. 30 lakh and not Rs. 50 lakh. This will not compromise on quality, but will boost profit margins.
Naik says a Vaatsalya Healthcare hospital breaks even between one and three years now. This is a year or two less that what it would take for a hospital to break even in a tier I city.
Sources in the industry, who do not wish to be named, say a hospital in a tier I city can have a margin of 6 percent, whereas one in a tier II city can have margins of 12 to 15 percent. Depending on the mix of services and medical equipment, this can go up to as high as 19 to 20 percent.Sameer Pawar