Close
Login to MyACC
ACC Members


Not a Member?

The Association of Corporate Counsel (ACC) is the world's largest organization serving the professional and business interests of attorneys who practice in the legal departments of corporations, associations, nonprofits and other private-sector organizations around the globe.

Join ACC

India's healthcare sector largely comprises of hospitals and diagnostics and is pegged to be worth almost USD 145 billion by 2021, clocking a healthy compound annual growth rate of 15%. Key growth drivers are both domestic demand for high-quality tertiary and quaternary care as well as a burgeoning medical tourism industry. Of late, the recent spate of bad loans has opened up new opportunities in an already attractive sector with a number of healthcare entities struggling under the burden of leverage and ripe for a distressed buy-out. We have set out below the top ten issues to look-out for whilst evaluating an investment in India's healthcare sector.

1. Obligations towards the Economically Weaker Sections (EWS)

Certain state-level legislations impose requirement for reservation of free beds for members of the economically weaker sections (EWS) for provision of free treatment/ treatment at highly-subsidized rates. These obligations are typically encountered in situations where there is a government grant of real estate to the hospital operating company with sometimes, the grant documents themselves imposing such requirements. Being a local law issue, the exact modalities vary across states. While generally enforcement is lacking, of late, enforcement appears to have been stepped up with demands for disgorgement of profits made in violation of these obligations. In view of this, it is important to understand the nature of EWS obligations and assess the state of compliance with the same.

2. Medical Negligence

Medical negligence is a necessary hazard in the healthcare sector and a strong consumer protection law provides easy redressal mechanism for families of patients seeking compensation for alleged medical negligence. Cases of professional negligence usually make the hospital operating entity along with the concerned medical professional as parties. As mitigants, the adequacy of professional negligence insurance obtained by individual doctors/ insurance cover procured by the hospital operating entity should be evaluated. Further, this could also lead to reputational issues for the hospital/ individual doctor and result in financial liabilities because of adverse outcomes and impact business, going forward.

3. Contracts/ Arrangements with Key Doctors

The strength of operations is as good as the doctors on the rolls. Often, the consultancy contracts entered into with the doctors do not fully capture the extent of contingent pay-outs and other assurances and promises made to these doctors, since these are often made orally. These aspects become critical to assess the impact operations and profitability of the hospital and determine the quantum of retention spend required to hold onto key doctors by aligning their incentives appropriately. The business teams must familiarize themselves with the contracts of the key doctors who are the main revenue-generators by way of detailed discussions with the existing management. Further, any out-of-contract findings should be reduced to writing to reduce disagreements later.

4. In-House Pharmacies

In-house pharmacies are common in Indian hospitals, as these not only provide medicines required by in-house but also cater to out-patients and walk-in clients. In terms of the Indian exchange control regulations, foreign investment is permitted up to 51% in multi-brand retail under the government approval route and is subject to several conditions. Accordingly, a majority investment by a foreign investor in a hospital entity operating an in-house pharmacy could create regulatory issues.

5. Real Estate-related Issues

A plethora of permits and consents including no-objection certificates from the concerned fire department and an occupation certificate from the local municipal authorities are required to be obtained and kept current in order for a building to be occupied and run as a hospital. Further, buildings must also comply with zoning regulations that impose requirements where the building is located in a coastal area. A breach of these permits/ regulations can severely impact operations going forward including sealing or shutting down of the hospital. Often, elapse of time itself is no guarantee that the violation has been condoned.

6. Stamp Duty/ Registration

All contracts are required to be stamped and certain types of contracts, especially those covering real estate, also require registration. Registration of documents involving real estate is required to be completed within four months of execution and, at a maximum, within another four months, upon the payment of certain penalties. Documents that have not been adequately stamped/ not registered are inadmissible in evidence, can affect the title to the underlying real estate and can also be impounded by the authorities. Where critical contracts are found to be inadequately stamped/ not registered, one approach could be to have such contracts executed afresh and ensure that proper stamp duty is paid and registration is effected.

7. Data Privacy Matters

The medical records of patient and other patient data are classified as sensitive and personal data and information (SPDI) in terms of India's data privacy regime. All corporations handling SPDI are, amongst other things, required to have a privacy policy that sets out what information is being collected and the purpose and duration of collection and ensure that there are adequate policies and processes in place to prevent breaches of data privacy. Consent from data subjects is also required before SPDI can be transferred to any person and there is no safe harbour for transfers within corporate groups. This can impact data sharing arrangements for research as well as routine backing up of data onto cloud-based servers.

8. Material Contracts for Medical Equipment

In a healthcare business, some of the key material contracts are those centered around leasing of expensive medical equipment. It is customary for these leasing arrangements to be tied with contracts under which the lessor obligates the lessee to off-take reagents to operate these machines and these contracts reflect minimum guaranteed off-take obligations and take or pay obligations which tend to be lessor-favourable and sometimes permit the lessor to terminate the arrangement and re-possess the medical equipment. It is not uncommon to find hospital operating companies in default under these reagent-supply contracts and the impact of such default under these contracts that are often central to business operations including alternate arrangements should be evaluated by the investor.

9. Understanding the Business Model

Traditional hospital businesses are asset-heavy and are capital intensive. As a result, the newer asset-light models are being deployed that have a thrust on leasing assets which free-up cash that is better utilized elsewhere. While this eases some of the concerns around the adequacy of owned real estate, the intricacies of the arrangements, particularly under the typical hospital management structure, which tend to be complex. Understanding the finer print of the management contracts including the movement of cash, responsibility of undertaking capital expenditure of upkeep of capital assets and tax implications become integral to the sustainability of the business model.

10. Regulatory Price Caps on Medical Devices

While the hospital itself may present an attractive proposition in terms of reputation and model of operation, even the most well-thought out plan can sometimes be derailed due to unforeseen regulatory changes. India's National Pharmaceutical Pricing Agency is the pricing watchdog that has the power to cap and regulate the prices of essential medicines and medical devices in public interest. Recently, it has taken steps to cap the prices of cardiac stents and knee-caps, which has impacted top-lines of several super-specialty hospitals. Thus, investors need to evaluate the percentage of revenues driven by medical devices whose prices are capped as those would have a direct impact on revenues in their overall assessment of the target.

With much of India's healthcare sector buckling under the pressure of mounting debt, many hospital operating companies present attractive acquisition targets at reasonable valuations. Consolidation is currently the flavour of the season not only as a means to expand to newer geographies as also to achieve better economies of scale and drive growth. With demand for medical services slated to increase steadily, India's healthcare sector remains a tantalising proposition for global investors. However, investors with an interest in India's healthcare sector must be cognizant of some of the issues and challenges that come with such an investment. Many of these issues can be mitigated with appropriate advice but the spectre of regulatory price caps is something that investors will have to digest, as part of their business risk.

Region: India
The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
ACC

This site uses cookies to store information on your computer. Some are essential to make our site work properly; others help us improve the user experience.

By using the site, you consent to the placement of these cookies. For more information, read our cookies policy and our privacy policy.

Accept