Published on : July 31, 2012
Funding Hospital and Healthcare Projects in a Difficult Market
The costs of healthcare are rising, so how do hospitals, businesses and medical tourism groups fund healthcare projects in a tough market environment? Planners need to have an understanding of the global market, its growth drivers and trends and the methodology for best practices in order to create sustainable and successful projects.
It is estimated that global healthcare costs about $7 trillion a year and consumes an ever increasing portion of income in both developed and developing countries.
Examining emerging innovations in the delivery of healthcare, especially in developing countries, sheds some light on how companies are minimizing the rising costs while providing quality healthcare.
Don Lloyd Williams, CEO of the global consulting and advisory firm Princeton Healthcare Inc., lays out the essential information companies must understand before embarking on a healthcare project.
Impact of World Financial Crisis
As the economy continues its recovery after a major world financial crisis, the effects of the crash are still being seen. There are now tighter controls on the funding of new ventures – each idea is more highly scrutinized and examined for feasibility and sustainability. Companies have also added new requirements for ideas and are being more selective. There is also longer due diligence to evaluate risk.
In addition, global competition is expanding in both the developed and developing worlds. Some markets are actually improving, for example, capital investments are starting to pour in to Brazil, China and more recently Russia.
Common Market Drivers
There has been strong economic growth in key emerging markets over the last few years. A higher incident of lifestyle diseases, including cardiovascular disorders, cancer and diabetes, and higher public awareness and literacy have led to increased development of hospitals. The middle class segments are growing, and many governments, such as India, Saudi Arabia, China and Vietnam, are recognizing healthcare as a priority.
Economic drivers for growth include increasing accessibility and affordability of healthcare, global interest in lower-cost healthcare and in some cases, furthered interest in medical tourism. Most governments and companies are interested in value-added, high quality healthcare that utilizes high-tech clinical procedures and state-of-the-art medical equipment.
Hospital Trends in Emerging Markets
There are two major trends in hospital development. First, the economic downturn caused Western governments to cut public expenditures, including healthcare. Second, the demand for private hospitals has increased in key markets like India, China and Southeast Asia. These hospitals are to provide quicker access to quality care, the latest medical technology and expert healthcare practitioners.
Best Practices for a Healthcare Project
Developing the Initial Concept
The company needs to create a comprehensive concept from the start. Using a corporate model, it should develop a business plan, historical profile and forecasted financial models with an experienced team. The next step is to identify investors and lenders who complement the company’s strategic objectives. The key is to perform at the highest level and to understand the rules of engagement with the company’s counterparts.
Establishing the Tie to Market Demand
The next main step is to enter the market early with a strong brand that clients will recognize. And of course, the provided services must be top notch: high quality clinical services, state-of-the-art equipment and professional management team and trained clinical staff. There also needs to be high standards for the management of the hospital and performance metrics.
Creating a Realistic Business and Financial Model
Reach out to and work with lenders and investors who understand the hospital market. Utilize the rules of engagement and anticipate and prepare for deficits in the first two years of operation, and always perform at the highest level.
Companies tend to underestimate working capital requirements, so be aware of this tendency. Other common financial problems to watch out for are overleveraging, lower profit margins and slower ramp-up periods that lead to less revenue.
Let’s examine a few cases and see how they embarked on their projects.
Case 1 – A new hospital system in Chennai, India
There was a growing demand for a new hospital system, and so planners joined forces and first created a leadership and management team. They developed a comprehensive business plan to overcome their challenges of being new to the market and undercapitalized. It was profitable in the early stages with its earnings before interest, taxes, depreciation and amortization (EBITDA). It raised $10 million in debt in Phase I of the plan and then secured a joint venture in Phase II.
Case 2 – 50-year hospital system in Sao Paulo
This case is a bit different from the previous one because its hospital system was already well-established but had to face increasing demand and retiring leadership and management team members. It created a new business plan and had subsequently good operating performance in the early stages. It was profitable in its EBITDA and raised $55 million in equity.
Case 3 – Expansion of an insurance company in Santiago, Chile
A stable insurance company was expanding to acquire hospital and laboratory complexes to fit a growing demand in Peru and Colombia. Its main challenge was timing. It created a new business plan, had profitable EBITDA and accumulated $100 million in debt-securities backed funding.
To have a successful healthcare project in a poor economy, companies must enter the market early and develop all opportunities presented to them. They must create a competitive profile and asses the market risk. Next, they need to develop partnerships with global advisory and support teams and then find suitable investors and lenders. Finally, they should secure investments and perform at the highest level possible.
About the Authors
Renée-Marie Stephano is the President of the Medical Tourism Association™. Ms. Stephano is also the Editor-in-Chief of the Medical Tourism Magazine, Health Tourism Magazine and Healthcare Development Magazine. Having a background in international marketing and relations, health law and litigation, she provides a valuable service to the Medical Tourism Association™ in these fields. She may be reached at Renee@MedicalTourismAssociation.com.