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India M&A Transaction Services – Healthcare Assessing financial impact and managing cash flows in the wake of COVID-19 May 2020
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India M&A Transaction Services – HealthcareAssessing financial impact and managing cash flows in the wake of COVID-19
May 2020
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India M&A Transaction Services – Healthcare
Key challenges and their impact
Newly set-up centres or hospitals have not yet achieved cash break-even
Hospitals are in the midst of reinventing the pharmacy/consumable supply chain to achieve cost efficiencies
Inherent in the hospital operating model are high lease costs
Reduction in medical tourism from international patients
Until hospital reaches EBITDA maturity, doctors may be engaged on a fixed-cost model
Commitments/expectations for bonuses/incentives and increments with understanding that such measures may be calibrated
Decrease in outpatient footfall and its resultant impact on outpatient to inpatient conversion ratio. Also, per the recommendation of the Government of India, elective surgeries are being postponed leading to lower inpatient counts
Hospital models are leveraged on a few doctors
Recently raised debt to finance capex/expansion
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India M&A Transaction Services – Healthcare
• Cash generating units will need to subsidise newer units
• Uncertainty on when the crisis will subside makes financial planning more difficult
• With worldwide travel restrictions and lockdown measures, medical tourism is likely to be effected resulting in a lower footfall from international patients
• Outpatient-to-inpatient conversion ratio may be severely effected
• With electives being postponed, IP volumes are also reducing. Cost of maintaining the hospital, which is largely fixed in nature, does not reduce significantly
• Doctor‘s cost in such cases may be very high. Impact will be muted if such doctors are engaged on variable models
• Doctor retention can be a concern in case of renegotiation of terms
• Overall doctor cost may be impacted as these doctors have to be remunerated irrespective of the revenue generated
• Relationships with existing vendors may be impacted due to the switch to new vendors for realising price reduction/other efficiencies
• Impact of changes in resultant credit terms may not be favourable
• Availability of pharmacy items, supply chain, and the credit period may be impacted
Reduction in medical tourism from international patients
Hospital is in the midst of reinventing the pharmacy/consumable supply-chain to achieve cost efficiencies
Until the hospital reaches EBITDA maturity, doctors may be engaged in the fixed-cost model
A few doctors contributing a major portion of the revenue, especially in matured hospitals
Decrease in outpatient and inpatient footfall on account of postponed elective surgeries, etc.
Newly set up centres or hospitals have not yet achieved cash break-even1
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India M&A Transaction Services – Healthcare
• As footfalls reduce, burden of rent on the centre operating costs, which are fixed in nature, increases disproportionately
• Increases stress on working capital requirements
• With reducing revenue, higher staff costs, which are fixed in nature, may impact cash EBITDA
• Impacts employee retention in case if the competitor is able to pay more
• Reduced revenue without proportionate reductions in cost (fixed or variable) reduces available cash for debt repayment
• RBI has offered a moratorium for repayments (without waiver of instalment/interest levy during such period)
Commitment/expectation for bonuses/incentives and increments with understanding that such measures may be calibrated
Recently raised debt to finance capex/expansion
High lease costs may be inherent in the hospital operating model7
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Inherent and irrepressible factorsSome factors may be inherent in the business and therefore, not controllable. These factors negatively impact gross margins and working capital
• May be difficult to reduce volumes especially when disposable surplus in the hands of the consumer is low
• Rates are lower than the cash tariff and higher credit period. Resulting in higher working capital requirement and lower gross margins
• Not containable as there are a few specialties that require higher than normal consumables to be used for procedures
• Gross margin on such specialties may be lower
• Inevitable participation in government schemes
• Managing collections when rates are already low is an existing challenge
• Certain types of invasive procedures, IVF, implants etc., may be deferred on account of fear of transmission of COVID-19 amongst patients
• This can affect revenue projection for FY21 (the length of the uncertainty is unpredictable)
Business largely dependent
on Third Party Administrator
(TPA)
Business with government
Clinical specialties resulting in
higher pharmacy/consumption
ratios
Elective procedures may
be deferred
Key notable trends Commentary
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India M&A Transaction Services – Healthcare
Potential cost-reduction measuresPotential cash flow management initiatives
Area Potential reduction measures EBITDA Working capital Cash
Consumables and pharmacy
• Negotiate prices linked to volume, albeit lower payable days, if there is a possibility of additional debt, to meet working capital requirement.
NA
• Reduce consumption costs through various means such as optimising the use of consumables per patient and use of generic drugs.
NA
• Evaluate the possibility of outsourcing the consumption function—who can also help reduce inventory holding while being able to pass pricing efficiencies. Efforts of the procurement team can be considered for other cross-function support.
NA
Doctor costs • Move doctors to variable pay.
• Renegotiate “expensive” arrangements to include deferred models, which can also help doctor retention.
Employee costs
• If necessary, revisit increments/bonuses. Depending on the philosophy of the organisation, such measures can be articulated as deferrals.
NA
• Evaluate staff efficiency by realigning staffing cadres & hierarchies; consolidation of roles/rightsizing of teams; cross training and optimising headcount.
NA
• Increase the use of shared services to eliminate duplication cost at centres.
NA
• Implement pay cuts depending on the level/grade.
NA
Rent • Subject to force majeure terms in the agreement, defer or make part rent payments in consultation with lawyers during the lockdown.
• Renegotiate rent where applicable.
NA
• Introduce a COVID-19 lockdown waiver. NA
• Let off spaces that are in excess of requirement (based on technical assessment).
NA
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India M&A Transaction Services – Healthcare
Area Potential reduction measures EBITDA Working capital
Cash
Contract labour
• Consolidate vendors for services including house keeping and security services and negotiate rates with select vendors due to resultant economies of scale.
NA
• Evaluate the need for temporary contract labour staff and terminate contracts where necessary.
NA
Annual Maintenance Charges (AMC)
• Make monthly payouts as opposed to upfront payments.
• Explore in-house maintenance of machines by hiring maintenance engineers at significantly lower costs.
NA
• Introduce a COVID-19 lockdown waiver. NA
• Defer costs and renegotiate rates. NA
Service outsourcing
• Outsource voluminous transactions for fixed cost savings. Increase focus on shared services.
NA
Revenue • Test deficiency of operating controls to prevent revenue leakages arising from systemic/operational issues e.g., missing packages, unbilled items, poor consumption bookings.
NA
• Increase use of telemedicine and teleconsultations for increased outpatient revenue and increased outpatient to inpatient conversion ratio.
NA
Loan repayment moratorium
• Assess the cash flow (both current and future needs) before opting in/out of the deferment of loan repayment deferment per the Reserve Bank of India (RBI) circular dated 27 March 2020.
NA NA
Decrease in interest rate in case of delay in deduction and deposit of TDS
• Rate of interest, in case of delay in deduction and deposit of TDS, is reduced from 1 to 0.75 percent per month.
• In case of delay in only deposit of TDS, rate of interest is reduced from 1.5 to 1.125 percent per month.
NA NA
Tighter cash flow monitoring
• Discussed subsequently.NA NA
NAPositive Impact to be assessed Not applicable
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India M&A Transaction Services – Healthcare
Assessing credit requirements
How much money do we need? For how long?
How do we slot this new money into our existing capital structure?
Reforecast trading and cash flows. Revised assumptions, forecasts, and cash flows will be required, along with some downside scenarios depending on the prolonged lockdown, given the current number of unknowns, to help your prospective funders understand actual/potential financing needs. This also needs to be monitored frequently given the current scenario.
Take rapid action around working capital. Prospective funders will expect you to have already done what you can to improve cash flow by optimising working capital and identifying“quick win” self-help measures to deliver rapid, tangible cash-flow benefits.
Consider cost-out measures. Similarly, prospective funders will expect you to identify and implement urgent actions to preserve cash in the short and medium term. Some of these have been elucidated previously.
Review existing facility/inter creditor documentation. Analyse borrowing capacity within existing baskets, etc.
Identify potential sources of collateral for additional borrowing—property, inventory, receivables, other unencumbered assets, and unrestricted subsidiaries.
Explore value transfer. Find ways of carving out collateral to support new financing.
Seek consents ASAP, if needed. If your current financing arrangements prohibit super-senior financing, the offering of collateral, or second liens on pledged assets, you may need to prepare a consent request.
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Even for companies that have not yet been adversely affected, management teams with concerns about COVID-19 should pre-emptively seek new committed facilities (even if not drawn) as a fall-back plan, in case the disruption period prolongs.
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Who could we borrow from? What terms can we expect?
Incumbent lenders. For most companies, incumbent lenders will be the best starting point. A request for support from existing stakeholders should be quickly formulated.
Special situations funds. Special situations funds can deploy capital flexibly, creatively, and at short notice. This includes banks, private credit funds, family offices, and institutional lenders that can produce credit-solution term sheets with appropriate terms, conditions, and costs to support rapid capital raising.
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Monitoring cash flow, revenue, and other KPIsDaily/weekly monitoring of cash flow
Weekly/fortnightly monitoring of revenue and other KPIs
Daily monitoring of
cash flow
Daily monitoring of revenue and
other KPIs
Prepare daily/weekly cash flow estimate [use revised forecast as mentioned above].
Prepare weekly/fortnightly MIS including department revenue and other KPIs including Average Revenue Per Operating Bed (ARPOB), Average Length of Stay (ALOS), and occupancy percentage.
Base payments for services and purchases on priority. Top priority vendors may be paid 70–80 percent of the due amount, while other regular vendors may be paid 30–50 percent and the balance may be deferred.
Strictly monitor monthly budgets versus the actual with explanations for variance of over 5 percent from the budget.
Aggregate daily/weekly cash flow for monthly/quarterly cash flow.
Aggregate daily/weekly Monthly Income Statements (MIS) for monthly MIS and other KPIs including Average Revenue Per Operating Bed (ARPOB), Average Length of Stay (ALOS), and occupancy percentage.
Control spends such as closure of ancillary centres with negative EBITDA through dynamic and agile decision making.
Save costs based on the MIS.
Proactively renegotiate future repayment and moratorium terms for existing loans from lenders including banks and financial institutions.
Assess the cash flow (both current and future needs) before opting in/out of loan repayment deferment as per the RBI circular dated 27 March 2020. Deferment of repayment will have higher cash outflow implications in the future.
Presentation above is illustrative for multispecialty hospital. KPIs for single specialty/diagnostic etc., may be different.
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Contacts
Acknowledgement
Bimal ModiPartner and Leader M&A Transaction Services Financial Advisory [email protected]
Dr. Utkarsh [email protected]
Arun Laxminarayanan Partner [email protected]
Sowmya [email protected]
Niranjan Ramanan Partner [email protected]
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