Kerala's charitable trust hospitals: Seize the moment, omit mistakes

Strategies for Kerala's charitable trust hospitals – Part 2

In Part 1 of this article, I had described how this is the best time for charitable hospitals in Kerala to do extremely well due to the recessionary conditions in the State and the financial crisis of the State government leading to government-run hospitals not being able to service patients properly.

I had also shown how a charitable hospital needs to only make a profit before tax of Rs 30, compared to the Rs 100 needed for a comparable private for-profit hospital as shown in Figure 1 below.

Figure 1. Financial advantage of a charitable trust hospital

Item	Code	Private For-Profit Hospital	Charitable Trust Hospital
Profit Before Tax	A	100	30
Tax	B	20	0
Profit After Tax	C=A-B	80	30
Depreciation	D	20	20
Free Cash Flow	E=C+D	100	50
Renovation/ Replacement	F	50	50
Dividend	G=E-F	50	0

 

This gives a significant cost advantage to a charitable trust hospital allowing it to price much lower than comparable private for-profit hospitals.

Thus, charitable trust hospitals have a huge advantage over private for-profit hospitals in the current market.

Unfortunately, we see many charitable trust hospitals being forced to increase their prices to near those of private for-profit hospitals due to wrong decisions.

Wrong decisions

Let me examine one of the wrong decisions taken by charitable trust hospitals that force them to increase their prices.

What happens if the charitable trust hospital decides to increase its infrastructure in a significant way by buying a nearby hospital or constructing a new block and investing in expensive medical equipment like MRI, CT, LINAC Accelerator at the same time?

To fund this huge investment, the charitable trust hospital would be forced to take a huge loan – also most of the loan would be term loans, which would mean a payment of principal + interest, resulting in higher cash outflows.

If the charitable trust hospital shown in Figure 1 decided to do this and its principal + interest payments came to Rs 70, then it would be forced to make a Profit Before Tax of Rs 100 to compete with a comparable private for-profit hospital as show in Figure 2.

Figure 2. Losing the financial advantage of a charitable trust hospital

Item	Code	Private for-profit Hospital	Charitable Trust Hospital
Profit Before Tax	A	100	100
Tax	B	20	0
Profit After Tax	C=A-B	80	100
Depreciation	D	20	20
Free Cash Flow	E=C+D	100	120
Principal + Interest Payments	F	0	70
Free Cash Flow after Principal + Interest	G=E-F	100	50
Renovation/ Replacement	H	50	50
Dividend	I=G-H	50	0

 

This decision negates the significant cost advantage that the charitable trust hospital had forcing it to price on par with comparable private for-profit hospitals.

Unfortunately, we see many charitable trust hospitals following this path and being forced to increase their prices to near those of private for-profit hospitals.

This will cause serious problems for such charitable trust hospitals in the current market situation.

I will examine why such wrong decisions are taken by charitable trust hospitals in the articles that follow.

(To be continued) 

The author is the founder and CEO of Results Consulting Group. He is a recognized thought leader on helping entrepreneurs build and implement significant and lasting competitive edges in India and the GCC. The views expressed are personal. email: [email protected], website: www.we-deliver-results.com