Demand for private healthcare on the rise as population ages fast, incomes rise: Fitch

• Rising incidence of non-communicable deceases with rising urbanisation to drive future demand 
• Fitch estimates one in every seven Sri Lankan to be above 65 by 2030
• EBITDA margin of listed hospitals to improve modestly in medium term as patient volumes increase

Fitch Ratings said yesterday private healthcare providers in Sri Lanka will experience rising demand amid the fast-ageing population and rising incidence of non-communicable deceases (NCDs) with more people moving into cities.  

Growth in urban living, instant yet often unhealthy diets, rising mental and physical stress levels with ever increasing complicated life styles are a few of the by-products when incomes of a population increase.  

“We expect geriatric care to become a strong growth area as per capita incomes increase, while the incidence of NCDs are rising in Sri Lanka, particularly in urban areas,” Fitch Ratings said in a special report on Sri Lanka’s listed hospitals. 

Fitch estimates one in every seven Sri Lankans will be above the age of 65 by 2030, making the country one of the fastest aging populations in the world. 
Meanwhile, the rising incomes will also make private healthcare within reach of many and so is the rising incidence of NCDs which requires long hospital stays.  Fitch is of the opinion that the State hospitals aren’t equipped to handle this growing demand. 

According to data, the proportion of Sri Lankan households with someone suffering from a chronic illness has risen to 17 percent at end-2016 from 14.4 percent in 2006. The frequency is higher in urban areas at 18.6 percent of households, with the highest concentration in the Western Province, which accounts for 28 percent of the country’s population and 38 percent of its household income. 

According to the Demographic and Health Survey Report – 2016, 8.2 percent of the country’s population suffered from high blood pressure, 5.7 percent from diabetes and 5.4 percent from high blood cholesterol.

Further the increase in penetration in medical insurance and persistent under capacity in public sector healthcare are also identified as drivers for private medical care in the medium to long term in Sri Lanka. 

To cater to the growing demand for private healthcare, Asiri group and Nawaloka hospitals led the capacity expansion during 2014-2017 period followed by more moderate investments by Ceylon Hospitals PLC (Durdans) and Lanka Hospital Corporation PLC. 

Mostly debt funded capacity expansions however increased the leverage of these hospitals. Fitch measured average net leverage of the sector rose to 2.6x by end 2017 from 1.7x at end 2013 with a peak of 2.8x at the height of the capex cycle. 

Average net leverage is defined as net adjusted debt to earnings before interest tax depreciation and amortisation (EBITDA) and the ratio does not include Singhe Hospitals PLC, which is yet to breakeven. 

However Fitch expects the balance sheets of these hospitals to improve in the medium term with the moderating capex and improving operating performance. 
The rating agency expects the sector’s capex intensity to reduce to 12-15 percent of revenue in the next few years boding well for the sector leverage. 

Further, Fitch expects the EBITDA margin of the listed hospitals to improve modestly in the medium term as patient volumes increase. 

Over the past five years the combined EBITDA margin of listed hospitals has averaged around 23 percent, with each operator’s margin ranging from high teens to low 30s. 

“Higher occupancy at hospitals and larger revenue contributions from high- margin value-added businesses, such as diagnostics and laboratory services, should help to more than cover the high fixed costs of the sector and widen margins. 

We also believe hospitals should be able to pass on cost increases from staff-related costs or currency depreciation to end-customers amid strong demand for private healthcare,” Fitch said. 

However, these margins are capped by the government’s price controls and shortages in qualified physicians and nursing staff.  

While hospitals will pass on most of the cost increases including pressure from rupee depreciation and high salaries to staff to protect the margins, pass through of costs has been curtailed by government price controls on certain services, such as physician consultations, surgical procedures and lab tests.