4 minute read 15 Apr 2020
COVID-19 leaves the private healthcare sector in financial distress

Impact of COVID-19: Private healthcare sector calls for urgent financial stimulus

By Kaivaan Movdawalla

EY India Healthcare Performance Improvement Partner

A seasoned healthcare and life sciences consulting practitioner. Passionate about re-engineering the healthcare ecosystem through operational transformation.

4 minute read 15 Apr 2020
Related topics Life Sciences COVID-19 Health

Private healthcare sector is witnessing an unprecedented slowdown due to COVID-19 outbreak and lockdown announced by the government.

With the outbreak of COVID-19 in India and stipulated lockdown, the private healthcare sector is witnessing an unprecedented slowdown as per EY-FICCI study titled, “COVID-19 impact assessment for private healthcare sector and key financial measures recommendations for the sector.” The study is based on an assessment of private healthcare players in the country to assess the economic impact of the COVID-19 pandemic and provides recommendations on the fiscal stimulus measures it needs in the coming months.

The sector is expected to witness short term operating losses to the tune of Rs 14,000 to 24,000 Crore for a quarter. For the hospital sector, which is already constrained with liquidity, onset of such losses will cause cash balances to be completely depleted within a month. Given the capital-intensive nature of the sector, interest coverage ratio (which is already low at 2) will get further constrained to negative 6 to 9. The revenue for the sector in FY 21 is also expected to be lower by 20-35% (compared to FY 20) resulting in early single digit or negative EBITDA for the full year with annual ROCEs estimated at -5 to -15%.

Private healthcare providers and laboratories are currently facing a triple burden unlike other sectors, which makes it situation unique:

  1. The industry was already in a very fragile state in the pre-COVID state in terms of its financial robustness
    • Median return on capital employed of ~7% which is lower than cost of capital of 14%, early double-digit operating margins and median profit after tax (PAT) margin of 3%. The sector was also operating on cash balance of only 19 days to sustain expenses. Given the capital-intensive nature of the industry, the interest coverage ratio also stands at only 2.
  2. Extra-ordinary drop in demand impacting cash flow resulting in difficulties in managing payrolls and fixed costs
    • The private healthcare sector has witnessed an 80% fall in patient visits and test volumes and revenue drop of 50-70% in end March.
    • Occupancy levels have fallen to a mere 30-40% by late-March vis-à-vis pre-COVID occupancy levels of ~65-70%, which is expected to further exacerbate with the lockdown in April.
  3. No/very limited latitude to reduce fixed cost and perhaps accommodate increase in costs in context of infection control and need for Personal Protection Equipments (PPEs)
    • While bed utilization is low, private hospitals are expected to be pro-active and prepared to manage any eventuality emerging from this epidemic situation. Hence, opportunity to rationalize fixed costs is very limited unlike other industry sectors. Increase in costs owing to infection control and PPE also needs to be accommodated. 
While the private sector stands fully committed to partner with the government as a national duty, it truly finds itself in a compelling situation to beseech the government for ‘differential’ financial forbearance measures and to be supported well, in order to best utilize its capabilities and capacity to serve the nation in this hour of crisis.
Kaivaan Movdawalla
EY India Healthcare Performance Improvement Partner

During the time of this pandemic, hospitals and medical professionals from doctors to nurses to support staff, who are the brave frontline soldiers fighting the war against COVID, are facing difficult times. There is an urgent call for action to address the immediate need of the sector and consider the recommendations for financial stimulus for the private healthcare sector.

The study suggests below recommendations for providing urgent financial stimulus for the sector:

  • Liquidity infusion- Short term interest free/ concessional interest loans to address the operating losses expected for the quarter and immediate 100% release of dues locked with central and state government authorities. 
  • Indirect tax reliefs/ exemptions/ waivers like- recoup amount equivalent to ineligible GST credits paid on procurements for a stipulated period; Customs duty / GST exemption on essential medicines, consumables and devices for treatment of COVID patients; Waiver or reduction of health cess on medical devices, Extension of time under the EPCG scheme etc.
  • Income tax benefits and deferment of statutory liability payments without interest, penalty for a stipulated period (3-6 months)
  • Rebate on commercial rate of power for a stipulated period

Summary

With large reduction in patient footfall and increasing operating losses, the Indian private healthcare sector needs a financial stimulus.

About this article

By Kaivaan Movdawalla

EY India Healthcare Performance Improvement Partner

A seasoned healthcare and life sciences consulting practitioner. Passionate about re-engineering the healthcare ecosystem through operational transformation.

Related topics Life Sciences COVID-19 Health