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Zooming in on Tier-II Cities

Hospital czars are now pouring in heavy investments into tier-II cities due to the skyrocketing growth there, reports Nayantara Som

Move over Delhi, Mumbai, and Chennai, give way to the new contestants in the race. Industries have realised that there is a life beyond the mega and metropolitan cities in India. Be it the automobile or the petrochemical industry or real estate giants, all have realised that tier-II cities are the latest investor's paradise.

The FICCI-Ernst and Young Indian Real Estate Report, 2007: Growth and New Destinations reveals that besides eight metros, cities such as Surat, Chandigarh, Nagpur, Vadodara, Visakhapatnam and Jaipur are experiencing the initial phase of rapid economic growth. The major industrial sectors will thus make huge investments in these cities, making them hotbeds for growth and development. Similarly, in the search for greener pastures, hospital giants have now diverted their focus from metropolitan cities to tier-II cities like NCR, Pune, Chandigarh, Indore, Ahmedabad, Kochi, Secunderabad, Jaipur, Rajkot, and Nagpur. Apart from hospital group projects, consider even the much-hyped medicities—Dr Naresh Trehan's project in Gurgaon and Dr KM Cherian's project on the outskirts of Chennai.

All this is testimony that tier-II cities are now playing an instrumental role in taking healthcare to the next level. And why not? These towns have a huge sea of opportunities in store for healthcare both from the demand and supply side. They are what experts term the "emerging metros of tomorrow". Analysts predict that with the boom in the Indian economy, tier-II cities have a major share in the growth pie. ASSOCHAM conducted a study on 'Trends of Job Openings' through its arm ASSOCHAM Eco Pulse (AEP) based on the analysis of sample vacancies posted by several companies on top job sites, daily newspapers, journals and magazines published during August-November 2007. "The growth momentum in smaller cities has begun to pick up. If adequate attention is provided to building infrastructure and nurturing the talent pool in these emerging cities, the contribution of these cities in employment generation would increase manifold," opines ASSOCHAM President Venugopal N Dhoot.

"The cost that a hospital incurs is very crucial to decide whether a project is a failure or a success" - Amod Karanjikar Analyst Edelweiss Securities

"We have invested Rs 400 crore for all our tier-II plans" - R Basil CEO and MD Manipal Health Systems

Rising Demand

Demand for adequate as well as quality healthcare facilities is a major stimulus for healthcare groups to explore these unexplored territories. "These cities are underserved as far as medical facilities are concerned. In many cases, people from tier-II cities come all the way to hospitals situated in metros for treatment, which is not always feasible, especially in emergencies," says Vishal Bali, CEO and MD, Wockhardt Hospital Group. R Basil, CEO and MD, Manipal Hospitals System (MHS) agrees, "The facilities here require significant upgradation, in terms of both infrastructure and clinical skills to meet the rising demand of the growing population of tier-II cities. The gradual migration of the IT industry to tier-II cities is also reflecting in the increased expectation in the quality of life, especially healthcare." That is when a hospital situated in these towns makes business sense. Hence hospitals are now strategising in tapping the needs of tier-II cities across the length and breath of the country.
There are some who prefer to remain concentrated in one region. In the northern region, groups like Fortis Healthcare and Max Healthcare are contemplating concentrating only on the National Capital Region (NCR) and the adjoining areas, rather than spreading out to other parts. Their contention is that there is a dire need for medical services in these areas, which are isolated and cut off from the main city. "Our primary goal is to make quality healthcare services accessible and reachable in tier-II cities which were otherwise cut off," says Dr Parvez Ahmed, Executive Director, Max Healthcare.

Rising Incomes

A key stimulus in the trend is the sudden upsurge of the Indian middle class, which has automatically led to a rise in disposable income. Hospital groups are now cashing in on this opportunity. A study by the McKinsey Global Institute (MGI) suggests that if India maintains its recent growth rate, then the average household income will triple in the next few decades, and India will become the world's fifth largest consumer economy by 2025. It further reports that there has been a rapid urbanisation, which has pushed up urban population to 318 million today, and this is likely to reach 523 million by 2025. According to Brigadier Joe Curian, Group President, Global Hospitals Group, "The growth curve is much steeper in tier-II cities with the middle class having high disposal income, and recently their spending in healthcare delivery has also increased."

Bangalore-based Columbia Asia has chosen to tap this segment of the population residing in tier-II cities. Says Tufan Ghosh, CEO, Columbia Asia, "The middle class has disposable income. At the same time, there is a huge gap in infrastructure and quality healthcare. Hence despite the income, people have to travel all the way to the larger metropolitan cities for treatment. We intend to reduce the gap." While remaining tight-lipped about the cities the group is expanding to, Ghosh reveals that Columbia Asia is definitely looking at setting up multi speciality hospitals rather than tertiary care hospitals. "That is the immediate need in these cities," he explains.

Cost Matters

Market analysts offer a different perspective altogether. Says Amod Karanjikar, Analyst, Edelweiss Securities, "The cost that a hospital incurs is very crucial to decide whether a project is a failure or a success." Attributes like real estate prices are a potent yardstick to decide the profitability of a project. "In tier-II cities, the real estate prices are very low in comparison to the skyrocketing prices in the larger metropolitan cities. Hence hospital groups are considering this as a feasible option," he adds.

This coupled with a decent demand makes these cities the hotbeds of investment for groups, which are now on an expansion spree. "There is a decent demand for healthcare services in these cities. Hence hospitals coming up with bed strength between 200-250 can expect a decent bed occupancy," adds Karanjikar. Most of the groups in fact are coming up with set-ups with bed strength anywhere in the range of 150-250 beds. "At this stage, hospitals should adopt a medium size bed strength to counter the demand in the region," adds Dr Ahmed.

From the business point of view, the main purpose behind these projects as asserted by most groups is mainly to establish a pan India presence. Apart from the goal of a pan India presence, another common interest across almost all groups is the hub and spoke model which they intend to follow, as they believe it makes strategic sense. "Hospitals set up primary care centres in tier-II cities and for further reference refer patients to the main hospitals situated in the metros," adds Karanjikar.

Green & Brown

According to a 2007 study on opportunities in healthcare by Ernst and Young and FICCI, India needs an investment of about Rs 3.5-4 lakh crore in healthcare by 2012, in order to meet the expected demand in the sector.

A number of private sector companies are trying to bridge this gap by creating the infrastructure required for providing healthcare on a large scale in an organised fashion. As a result, the combined out-patient and in-patient market in terms of private spend on healthcare is expected to clock about Rs 16,200 crore by the year 2012, according to a 2001 CII-McKinsey study.

A slew of projects are in the pipeline. Healthcare bigwigs like Apollo Hospitals, Wockhardt Hospitals Group, Fortis Healthcare, Max Healthcare, Manipal Health System and Global Hospitals Group have announced plans to filter down to these cities. These encompass both green field as well as brown field projects.

Hurdles to Leap

Along with the manifold advantages, every investment comes with its package of shortcomings. Experts, though optimistic, are cautious and wary, with the problems of infrastructure and skilled manpower topping the list. As Fortis Healthcare Group President, Strategy and Organisational Development, Daljit Singh sums up, "I would not call them shortcomings, but rather challenges which can be overcome." Challenges for hospitals range from manpower to acceptability and pricing strategies. "Unlike the big metropolitan cities, manpower skill is limited in these cities. Especially in the case of nurses and paramedics where you have to recruit and then train them according to quality standards," opines Ghosh. In such a situation, groups usually take in manpower from the larger metropolitan cities to these smaller towns. Here arises another predicament. "Even in such situations, the challenge lies in convincing people to come and work in smaller towns," Singh adds.

Another area of concern is the ability of the masses residing in these towns to shell out the extra penny for the high cost treatments offered. "The ability of these towns to pay is a major area of concern. People here are more used to facilities provided by Government hospitals offering subsidised rates," says Singh. "Corporate hospitals will target patients who are covered by medical insurance or who can afford to pay," adds Karanjikar. It is doubtful whether people are ready to go that extra mile and get quality services at the same time. Ideally in such a situation it is but expected that hospitals should subsidise their rates to suit the needs of the masses. However, hospitals have a different view to offer. "There are a host of factors to be considered when the pricing has to be changed, including the type of investments made like the investment per head, in technology, diagnostics and the level of doctors taken in. So, while changing our pricing structure we have to take all this into consideration. Coupled with this, market forces also play a role," Singh explains.

Opinions also differ on whether the tertiary care model or a multi speciality model will work. A chunk of investors opine that setting up a multi speciality works in the long run. "A multi speciality hospital makes more sense because if a single speciality hospital is set up, then a hospital should be sure as to whether the diseases related to that speciality are prevalent in the town," Karanjikar feels.

A vocal minority of analysts opine that due to heavy investments, the real estate prices in tier-II cities are gradually rising. "Now the only shortcoming for Apollo is that the land prices are rising everyday even in tier-II cities," says K Ravichandran, Senior General Manager, Apollo Global Projects.

Despite the obstacles and possible delays in the public-private partnership (PPP) models, perhaps it is these private players who can bridge the chasm between the demand and supply in healthcare delivery. With the advent of medical tourism and health insurance in the industry, the future promises to be bright for these players.

healthcare@expressindia.com