Growth of private healthcare in Singapore 0 comments

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Given the renewed focus on the services sector in Singapore, it is no surprise that education and healthcare --- the prime concerns of the individual at the early and late stages of his life --- have been given strong focus in the drive to restructure the domestic economy.

A lot of press space have been devoted to the drive to make medical tourism a growth sector of the economy in the coming years, drawing on patients from the burgeoning Asian economies. I have often wondered where the term medical tourism derives from, until recently I realised that hospitals operate on quite a similar basis as hotels: they also have occupancy rates (bed occupancy), length of stay, and of course bed rates: quite similar to how hotels analyse their operational performance, although of course services offered are different. There is a government target of serving 1 million foreign patients by 2012, which would raise the healthcare sector's contribution to GDP to 3% by then from 0.2% in 2004.

There are underlying trends that support such optimistic projections. Firstly, the emerging economies of Asia are among the fastest growing economies in the world, and the second phase of the economic expansion, hitherto driven by exports and investments, is likely to be consumption-propelled. Secondly, Singapore has competitive advantages in the area of healthcare, having been the medical hub for Southeast-Asia which competes not on cost but on quality and complexity of medical treatment. Upstream, the biomedical sector will be a recurring source of new R&D projects and innovative medical treatments, while downstream, the integrity and professionalism hallmarks of the Singapore brand serve it well particularly in this segment. Thirdly, cross-border travel are now increasingly facilitated by improved travel links --- the likes of budget airlines, as well as relaxed travel restrictions (China, for example).

The healthcare market, of course, may be broadly split into the public and private sectors, where the former is subsidised by the government using public funds while the latter operates on a for-profit basis. Although we often hear about healthcare stocks being the classic defensive stocks on the premise that we still need medical care when sick regardless of whether the economy is doing fine or not, the fact is that this might apply more to public hospitals which typically cater to the masses (due to their affordability) and less to the private healthcare groups which are known more for specialist services, elective surgery and a general higher level of service, care and prestige. Thus the private hospitals exhibit a higher degree of cyclicality that one might expect --- one might even link them directly to consumer discretionary expenditure trends.

The MOH website has quite a good collection of articles discussing healthcare trends. To get a feel of the higher value-add services that private hospitals typically provide, consider: in 2002, private hospitals accounted for 16% of inpatient workload (counted by number of discharges) but 37% of inpatient revenue,; a similar trend was exhibited in day surgery where private healthcare workload amounted to 17% but recorded 37% by total market revenue share. These suggest much higher average charges for private healthcare (and obviously higher margins). To get a feel for whom medical tourism would benefit most, one can look at the foreign patient admission trends: the private sector have served 80% of foreign patients over the last decade (obviously, since public healthcare won't be subsidised for foreigners), with most foreigners being Indonesian and Malaysian. To get a feel of the cyclicality of the private healthcare industry, consider the effect of the 1997 Asian financial crisis on patient load: private market share (in inpatient and day surgery) had been gaining at the expense of public hospitals from 1993-96, with revenue share in particular close to converging at 50% each; but then the trend swung the other way from 1997 to 2002: with public healthcare workload remaining largely stable while private healthcare workload dropping steadily due to poor economic sentiment, the latter lost 6-7% market share by workload and ~10% by revenue share to the former over the next five years (of course, in large part due to the acute loss of foreign patients).

With the global economy now on a steady growth footing and Asian consumerism rising,
the trend must therefore benefit private healthcare groups more than public hospitals. A wildcard lies in the form of government regulations which have in recent years exhibited the trend of favouring decreased public subsidies for those who can afford it: in particular means testing must shift the preference towards private hospitals for more affluent individuals whose public healthcare subsidies might be cut. The private healthcare groups have been highly priced all these years, such as the two main groups Raffles Medical and Parkway Holdings which are priced at ~20X PE. But more intensive searches for other undervalued medical and healthcare stocks on the SGX may still yield some reward: those that satisfy niches in private healthcare, for example.

References:
(1) MOH article Jan 2004: Singapore Healthcare Market-Share Analysis
(2) MOH article Nov 2003: Trends in Foreign Patient Admission in Singapore

(3) CIMB-GK Goh analyst report 22 Nov 2005: Healthcare sector