Healthshare insights • October 13, 2020

An investor’s guide on how to assess hospital feasibility studies in African countries

Issue 1 of 3: Understanding key market demand pitfalls

Assessing opportunities and viability in the healthcare market requires a specialised understanding of how a hospital or healthcare facility operates, and what factors influence healthcare service demand and the ability to provide such services within a specific population.

There are a fair amount of market research companies and healthcare consultants that offer feasibility services for potential hospital or related healthcare facility projects. Often such companies have a lot of experience and understanding of retail or related markets, and they apply the same principles to their assessment of healthcare project viability. However, assessing opportunities and viability in the healthcare market requires a specialised understanding of how a hospital or healthcare facility operates, and what factors influence healthcare service demand and the ability to provide such services within a specific population. Assessing the financial viability of a healthcare project is not only a matter of modelling service fees and patient volumes but also requires an understanding of the operational limitations. Time and again, when Healthshare has been asked to review market studies and financial models prepared by third parties, we find that the market has been grossly overstated and ill-defined. Likewise, we have also found that the limitation and capacity of hospital services are overstated, while expenses are poorly modelled. These common mistakes are primarily due to a limited understanding of how variable expenses and staff requirements should be applied to patient volumes and ramp-up. In this article series, we discuss the three essential criteria that a prospective investor should be wary of when assessing a market demand study or financial feasibility provided by a consultancy firm. These include:

Sufficiency of market demand calculations
The most common reason why reports tend to overstate the market for healthcare services is due to applying a theoretical rather than a practical understanding of healthcare service demand. While healthcare services are needed, the demand for such services is influenced by more than the population’s theoretical medical needs, a point this article further expands on.

Availability of healthcare service providers/clinicians
Even when there is a visible market demand for healthcare services in an under-served area, the challenges to obtaining the specialists and clinicians to provide these services are often not addressed in market demand assessments for healthcare projects in Africa. Such oversights have led to state-of-the-art hospitals being built, but never commissioned, standing tall as monuments to insufficient planning. Our next issue in this article series will focus more on the considerations relating to the availability of healthcare providers.

The practicality of financial viability assessment
The most common mistake that we have come across in hospital financial viability assessments is that capacities are grossly overstated, to the point of being impractical or impossible to attain. It provides an unrealistic revenue expectation that may often be the downfall of a project and result in the loss of millions in investor capital. Another essential issue is inadequate human resource complement provision and insufficient variable expense modelling. In the third and final issue of this series, we touch on the key considerations relating to practical financial modelling.

…the false assumption that the entire population who need healthcare services can afford them and secondly, the broad assumption that the healthcare-seeking behaviour in all populations adheres to WHO recommended parameters for healthcare service provision.

What you need to know when assessing the sufficiency of market demand calculations

Market research companies often use general assumptions when defining the target population. Such assumptions may pool together an entire population in a catchment area and then present the entire population as the market demanding the services for private hospital care. It is based on the premise that a need for healthcare services automatically translates into a market demand for private healthcare services. Often, political or personal viewpoints of promotors may push this point. But in reality, private healthcare is an expensive commodity that can only be afforded by a portion of the population. Another frequent shortcoming is that the bed ratio per 1,000 lives as recommended by the World Health Organisation (WHO) is used as the sole indicator of hospital bed and service demand in a specific population. This approach does not take into account the different healthcare-seeking behaviours in heterogeneous populations and often results in two central challenges in healthcare service demand studies. Firstly, the false assumption that the entire population who need healthcare services can afford them, and secondly, the broad assumption that the healthcare-seeking behaviour in all populations adheres to WHO recommended parameters for healthcare service provision.

Affordability vs population needs
The assumption that all persons within a population need healthcare services, and will therefore pay for private hospital care, is not a true reflection of the potential market for a private healthcare project. Private healthcare services, and specifically hospital services, are expensive due to the high cost of specialised labour, equipment and information systems. While the demand for healthcare services may consequently reflect a large population, the ability to afford private healthcare services usually reflects a much smaller market. It is important to ensure that the “private healthcare population” who can afford private healthcare services either out of pocket or through membership of health insurance is calculated according to reasonable and conservative assumptions.

International healthcare demand “benchmarks” vs population healthcare-seeking behaviour
As a general rule applying to hospital studies, a bed ratio per 1,000 lives is applied to a specific population to determine the number of hospital beds required by a particular population. In African countries, the WHO recommended bed ratio is frequently used because the bed ratios of these countries are usually far below the minimum recommendations. While the bed ratio per 1,000 lives provides a theoretical measure of demand, it does not tap into the true healthcare-seeking behaviour of a market. For this reason, it must be augmented by projections on service utilisation, also referred to as clinical occupancy in hospital studies. Doing so indicates how full the hospital can expect to be over different timelines and provides a much more detailed look at potential patient volumes. This method uses admission profiles and the average length of stay as applicable to specific populations. By using both the bed ratio per 1,000 lives and the expected clinical utilisation levels, a much more robust indication of market demand is determined. The bed ratio only indicates what an average, homogeneous population’s hospital bed requirements will be in general. The shortcoming of this method is that it does not take into account challenges related to different geographic areas or other population-specific parameters. For example, a rural population may have much lower admission profiles to a hospital because travel-related challenges become a barrier to seeking healthcare services. Utilisation levels may therefore be lower in rural areas, and the sole application of the hospital bed ratio per 1,000 lives may result in an overoptimistic indication of the demand for hospital services. One needs to identify or quantify and qualify the incidence of admission for specific services within a population since this will provide a much more practical indication of the expected performance of a healthcare project.

In conclusion, affordability and projected utilisation indicators are often not considered and quantified in hospital market demand studies. Accordingly, this presents potentially serious pitfalls for a healthcare project and can provide a false indication of the project’s actual viability within the target market. Investors should carefully adjudicate market studies for these and similar pitfalls.
In the next issue of this article series, we will consider the key considerations relating to the availability of healthcare providers when assessing the viability of a healthcare project, and we will identify and discuss the pitfalls associated with this parameter.

Madeleine Uys
Project Analyst & Project Coordinator

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