The Shift In Healthcare Diagnostic Industry
By Dr.Lisha Ruparel
From standalone centres to corporate national chains, the diagnostic industry has completely reinvented itself. Dr.Lisha Ruparel explores its evolution and dynamics..
Twenty years ago, for any blood test, we would visit our neighborhood diagnostic clinic. These stand-alone centres would cater to the entire vicinity and the practice would usually pass down from father to son. For advanced tests like microbiology and histopathology, the samples would be sent to an advanced diagnostic centre. From a majority of unorganized and scattered diagnostic clinics which were mainly family-owned to corporate national chains, the diagnostic industry has consolidated and continues to evolve.
The Indian healthcare industry has been stirred by a number of factors like the expanding middle class population, increase in spend on healthcare and the favourable demographics of the country over the past decade.The impetus provided by Government Insurance Schemes has fuelled the recent pace and speed of growth of healthcare. Other contributing factors are improved quality of services, increase in expenditure by public as well as private players and a growing awareness for preventive healthcare.
Amid this growth, the diagnostics section has emerged as a prominent game changer in healthcare. In an industry where there are no certain governing laws, standards or accreditation to check quality, the private players have taken the task in their hand. They are introducing standardisation in their practice and following protocols set by international medical bodies to ensure consistent and world-class service to their consumers. Currently only one percent of the laboratories are accredited. We have also noticed innovation in this space from the use of Artificial Intelligence and advanced testing methods of genetic profiles to predict future diseases. However, lack of entry barriers and absence of strong regulation in the business has also led to an increase in number of unorganised, standalone players, which form a substantial part of this fragmented market.
Overview of India’s Diagnostic Market
From the financial year 2015 to the financial year 2018, the Indian diagnostic industry grew at a CAGR of approximately 16.5% to approximately ₹ 596 billion (USD 9.1 billion) in the financial year 2018. For the next two years, it is expected to grow at a CAGR of approximately 16% to reach approximately ₹ 802 billion (USD 12.3 billion) in the financial year 2020. (Source: Draft Red Herring Prospectus of Metropolis)
Within diagnostics, pathology segment is estimated to contribute approximately 58% of total market, by revenue, while the remaining 42% is estimated to be contributed by the radiology segment.
Pathology testing is often the preferred first line of diagnosis for a majority of diseases and thus contributes to a major portion of the diagnostic industry. The pathology business is highly scalable as blood samples can be shipped to a remote, centralized location to achieve economies of scale. In contrast, imaging business operators have to install diagnostic equipment close to the patient. Imaging services cannot be centralized and, as a result, are difficult to scale up.
Major Contributor of Revenue in the Diagnostic Industry
The urban population of India (approximately 28% of India’s total population) contributes up to 65% of the total revenues of the diagnostics industry. Urban areas typically have better healthcare infrastructure in form of hospitals, clinics and diagnostic centers, along with greater penetration of the private sector in the healthcare space. Furthermore, higher disposable incomes have made tests more affordable along with increasing literacy rates making these services being availed more frequently.
Standalone centers dominate the diagnostic space with a 47% share, while hospital-based laboratories have a 37% market share. Diagnostic chains have a 16% market share and are further split into pan-India chains and regional chains. There are very few pan-India chains, which together have a share of approximately 35 to 40% of the organized diagnostic market. Regional chains constitute the rest of the market. (Source: Draft Red Herring Prospectus of Metropolis)
Diagnostic chains have grown rapidly with the emergence of pan-India players. They have been able to maintain rapid growth by opening more collection centers, which has helped them improve their asset utilization. Moreover, large chains have higher bargaining power that allows them to keep their input costs (bulk purchase of reagents) lower than standalone centers. Standalone centers also tend to lose out on some business on account of the unavailability of complex tests and the perception that the quality of services may not match with that provided by branded chains. In last few years there have been quite a few acquisitions in this space with larger players buying smaller players in order to gain market share. All these factors will lead to diagnostic chains continuing to acquire market share of standalone centers.
Key Players by Geographic Regions in India’s Diagnostic Industry
In India, there are four major chains of diagnostic players with a pan-India presence. They are Dr. Lal PathLabs Limited, Thyrocare Technologies Limited, SRL Diagnostics and Metropolis. There are a few regional players who have a strong footprint in a particular region such as Quest Diagnostics (North India), Suraksha Diagnostic (East India), Suburban Diagnostics (West India) and Medall Healthcare (South India), Apollo Diagnostics, Max Diagnostics among others. Aster DM healthcare plans to enter the diagnostic services segment in India and plans to have two operational labs by the second quarter of the current fiscal in the first phase. The company plans to start Aster Labs in Karnataka and Kerala in the first phase and then extend to other states by FY21.
Models used by Diagnostic Chains
Processing Laboratory Network
National reference laboratory is located centrally and typically serve as the corporate headquarters of diagnostic chain companies. Pathology samples are brought to the national reference laboratory for processing and then the reports generated by the national reference laboratory are sent to the patients through collection centers or satellite laboratories or can be viewed online.
Regional reference laboratories are situated in large metropolitan cities and act as regional hubs, which accumulate samples from satellite laboratories and collection centers across the region.
Satellite laboratories offer a limited range of services. They mainly act as feeders for regional and national reference laboratories.
Collection centers: do not carry out any testing and are involved only in the collection and forwarding of patient samples to a satellite, regional or reference laboratory. Collection centers can be located in hospitals, nursing homes, pathology labs, doctors’ clinics and prime commercial properties among other places. Collection centers maybe company-owned or franchised.
Customer Reach-Out Network
Diagnostic chains reach their customers through a network of centres which comprise the following:
Owned Centres: These are the centres which are directly owned by the company by investing in land or rent.
Franchisees: These are the centres where franchisee rights are given to an operating partner who takes care of operations and in turn has to share revenue with the diagnostic chain. Diagnostic chains have extensively used the franchisee route for rapid expansion of their business as this requires minimal capital cost investment for them.
Managed Laboratories: These are the laboratories which are owned by individuals or hospitals whose operations are outsourced to a third party – mostly a larger diagnostic player, who manages the day-to-day operations of the laboratory with the agreement to share revenue. This segment is lucrative for diagnostic chains and they are entering into agreements with various smaller laboratories and hospitals for managing their laboratories.
Diagnostic chains due to their wide network benefit from economies of scale and hence are in better position to operate these managed laboratories.
Home collection: is the mode of customer service where a phlebotomist collects the sample and transports it in specially designed transportation box (cold box) to the designated processing centre. This mode is used by all the above diagnostic centres to reach out to more customers.
Hub and Spoke Model
In the hub and spoke model, there is one main laboratory at the central location (hub) around which small collection points (spokes) are located. At the end of the day, these collection points take all the testing samples to the main laboratory, where the actual testing is done. Followed by the leading players in the industry, this model has helped in the rapid expansion of private players, wherein the expansion is largely through the franchise model.
Key Diagnostic Chains In India
Source: Draft Red Herring Prospectus of Metropolis
Source: Annual reports of the companies
Source: Draft Red Herring Prospectus of Metropolis
Future trends in Diagnostics
The industry will further witness mergers and acquisitions resulting in the industry being dominated by the major chains with very few stand-alone centres. The major players are getting into sophisticated high end testing, oncology testing, reproductive genetics and other specialised fields, while maintaining basic testing as a revenue safety net. With advancements and increasing focus on research and development, new tests are getting added frequently.
Molecular pathology and DNA/RNA typing are the major areas where the diagnostic chains are adding more and more tests to gain a competitive advantage over other players. Emerging technologies in the diagnostic market, such as liquid biopsy, next-generation sequencing, microfluidics, and multiplex molecular diagnosis are also expanding the test menu.
All the major diagnostic players are investing in brand building initiatives and creating various online and offline marketing campaigns to differentiate their offerings, quality and test accuracy from their competitors. Healthcare IT and evolving technology has also benefited the industry greatly. Health tracking mobile applications and online services such as booking appointments online for preventive healthcare check-ups, booking a path/lab test, obtaining reports online are further shaping this segment.