Listed Sri Lanka hospitals have strong growth prospects: Fitch
ECONOMYNEXT – Sri Lanka’s listed hospitals will continue to grow strongly given growing demand for private health care, although regulatory price controls will constrain profitability, Fitch Ratings said in a new report.
Long-term demand drivers are intact for private hospital operators, the report on the sector said.
“Increasing demand for private healthcare is driven by Sri Lanka’s aging population and rising incidence of non-communicable diseases (NCDs), which state hospitals are not well-equipped to handle,” it said.
Growth is also supported by the rise in medical insurance penetration.
“Demand for private healthcare in Sri Lanka is likely to improve in the medium to long term with wider acceptance of medical insurance, helped by government-led insurance schemes and increasing personal income.”
However, Fitch Ratings said the shortage of trained professionals could be a growth constraint.
“We expect further expansion of private hospitals to be hobbled by the shortage in qualified physicians and nursing staff. We do not expect the shortage to resolve in the medium term.”
Rising personal incomes also mean private healthcare is within reach of more and more people.
“Also, consumers seek convenience and better service standards that are not met by the public sector due to under capacity,” the report said.
Sri Lanka’s urban population, which forms 15% of total population, earns income that is 25%-30% higher that of the rest of the country, and most private operators have located hospitals close to them.
Income levels in rural areas have increased at a faster pace than urban areas in recent years, and decline in the use of outpatient and inpatient care at state hospitals by the rural population in recent years also indicates a shift to private healthcare, Fitch said.
“These create opportunities for private operators to expand outside of the main cities.”
However, there are limits on such growth as qualified and popular consultants are mostly concentrated in urban areas.
“Most of the qualified and established consultants are with the government sector now, and they are concentrated in the Western Province,” Fitch Ratings said.
“Private operators have had to establish their hospitals close to these skilled professionals to obtain their services.”
About 55% of state-sector consultants are attached to hospitals in the Western Province and in the Galle and Kandy districts.
“Any private hospital seeking to expand outside of the Western Province runs the risk of not attracting popular physicians, which may hamper the long-term success of the hospital.”
Hospital operators will continue to face pressures from the depreciation of the Sri Lankan rupee, which increases their cost of sales, and the shortage of trained staff, which compels hospitals to pay a premium to recruit them.
The operators are able to pass on most of these costs to customers and protect margins in the medium term because of the specialised service they provide and the undersupply of providers.
“However, the pass through of costs has been curtailed by government price controls on certain services, such as physician consultations, surgical procedures and lab tests,” Fitch Ratings said.
The government has imposed price caps on certain essential drugs, blood tests, channelling services and medical devices such as lenses used in cataract surgeries and stents used on heart patients to reduce costs for patients.
“The changes reduce the prices of medical devices dramatically, ranging from around 50% for stents and 35% to 75% for lenses, which has reduced the profitability of private hospitals carrying out such procedures,” Fitch said.
“We believe continued intervention by the government via taxes and price controls add volatility to sector profitability, which was previously generally stable.”
(COLOMBO, May 25, 2018)