Spurred by rising real estate costs and investor interest, two key national hospital chains are considering adding more beds in urban areas through what is known as a management contract model. This ‘asset-light' strategy — embraced with much success by hotel brands such as the Taj Group — has made Fortis and Apollo look at using the infrastructure provided by smaller hospitals in cities, trusts or by real estate owners — thereby saving them the hassle of setting up a new hospital from scratch and also shortening the payback period.
“In urban areas, numerous existing hospital properties are available which have hidden value as they are undermanaged. (There are also) many hospital trusts (which) are keen to professionalise but find it difficult to raise resources to modernise. It is thus beneficial to all stakeholders that these properties come under professional management,” explains Dr Lloyd Nazareth, President and Chief Operating Officer, Fortis Hospitals.
Mr Akhileshwaran Krishnan, Chief Financial Officer of Apollo Hospital Enterprises, also confirms this trend. “In a proposed hospital at Mumbai, we have entered into a long-term contract wherein the current owners will develop the infrastructure and we will operate and manage the hospital under a revenue-share mechanism with a minimum committed lease rental. Beds, medical equipment and people are under our ownership completely. The movables are ours.”
Fortis' Dr Nazareth says many investors see healthcare as a stable industry with good long-term prospects. They wish to offer property (which they own) on long-term lease to groups that will put up good infrastructure and run the show. The investor also gets long-term guaranteed cash flows.
The returns in this ‘asset-light' model can be quite attractive, Apollo's Mr Krishnan explains. “The return on capital for a hospital can be very high if you strip out land and building costs. The payback period can be shortened in the operate-and-lease route…. it can be enhanced by 3-4 years.” Mr Krishnan says prospective investors in such models could be real estate players, trusts or hospital operators with a long-term lease.
He also points out that efficiently managed hospitals can easily generate returns of 18-20 per cent on capital, while real estate investors usually aim for only 10-12 per cent.
How it works
The way hospitals like Fortis and Apollo plan to implement this strategy is simple. They may enter into a plain ‘operations and management' contract with a smaller standalone hospital and operate it. In this case, all capital investment plus profits or losses are borne by the original owner of the property, while the hospital chain receives a management fee. Alternatively, the chain identifies the property, refurbishes it and then manages it as a hospital. In this case, profits or losses flow to the chain, while the property owner gets a fixed lease rent. In both cases, the chain gets a foothold in a new location without scouting around for land or putting up a new building.
For instance, the Apollo group has a hospital in Madurai under operating lease and is exploring the asset-light route for its third facility in South Chennai.
Ownership/Management
Asked if separation of ownership and management wouldn't compromise quality, Dr Nazareth cautions that this isn't a ‘franchisee' model. Though the ownership may not lie with hospitals such as Fortis, 100 per cent of the management of every hospital under their banner lies with it. That ensures standard quality of service and infrastructure at all the hospitals.
For instance, early this year, Fortis Malar, a subsidiary of Fortis Healthcare, signed an agreement with the Puducherry-based East Coast Hospital to operate and manage it. As part of the agreement, East Coast Hospital retains ownership of the hospital.