On call

Hospital companies prepare to meet surging demand for health care in Asia

A HUMID breeze wafts through the wards of Siloam General Hospital in Tangerang, near Jakarta. There is no air-conditioning, one of many ways the hospital contains its costs. Each room has dozens of beds arranged in neat aisles, privacy ostensibly offered by beige curtains. The open plan means that fewer nurses can tend to more patients. Families wait in long hallways, open to the car park.

Both are owned by Siloam Hospitals, an Indonesian firm. The difference is that in the General Hospital, the government pays Siloam a capped price per patient for a given condition; in Lippo Village most patients pay for themselves.

Siloam is part of a booming private business for hospital care in Asia. A bidding battle is under way for Healthscope, an Australian hospital firm which runs pathology services in Malaysia, Singapore and Vietnam. HCA of America, the world's biggest hospital firm, is reportedly prepared to pay $5 billion to outdo Fosun, a giant Chinese conglomerate. Last month a consortium agreed to pay $461m for Chindex, which owns a chain of hospitals in China. The group comprises Fosun, TPG Capital and Chindex's chief executive, who is married to a journalist on this newspaper.

The companies have every reason to smell an opportunity. Although Asia's emerging economies are slowing, the rise of their middle classes is continuing. In Indonesia the number of middle- and upper-income consumers is expected to swell from 74m in 2013 to 141m by 2020, predicts the Boston Consulting Group. Rising incomes mean rising demand for health care. The average Chinese city-dweller's health spending more than doubled between 2002 and 2010, estimates PwC, a firm of consultants.

Governments are trying to meet this demand. Malaysia and Thailand already have broad public health-care systems. China, which boasts that it has extended basic medical coverage to 97% of its people, continues to make reforms. The Philippines is in the midst of a rapid expansion of insurance. Indonesia is in the first year of a plan to bring health coverage to the entire population by 2019.

However, in many countries hospital beds are in short supply. Indonesia has only nine for every 10,000 people and the Philippines ten. America and Britain each have 29. And the quality of public hospitals varies greatly. Governments throughout the region say they will open more hospitals. But private operators think there will be a continuing shortfall for them to fill.

Some companies, such as Chindex and Siloam, are concentrating on only one country. In China Phoenix Healthcare Group, which made its stockmarket debut in November, tripled the number of hospital beds it manages between 2010 and June last year. Deutsche Bank expects that Phoenix's revenue will grow by 20% a year between now and 2016. Siloam, which also went public in 2013, has 16 hospitals in Indonesia. By 2017 it intends to have 40.

Others, such as Healthscope and IHH Healthcare, a Malaysian company, have international strategies. In 2010 IHH, then owned by Malaysia's sovereign-wealth fund, bought Parkway, a Singaporean chain of high-end hospitals. In 2012 it snapped up 60% of Acibadem, a Turkish hospital firm. It went public the same year. IHH is now the largest hospital company in Asia and the second-largest in the world by market value. Its business stretches from Abu Dhabi to Vietnam. At Parkway's newest hospital in Singapore, the muted wall colours evoke a hotel; a special scent is piped in to mask antiseptic odours. “Universal coverage is no-frills coverage,” explains Tan See Leng, IHH's chief executive. “We offer the frills.”

However, at least three obstacles lie in the path of Asia's ambitious private hospital companies. The first is simply that doctors and nurses are scarce. Companies in China have trouble attracting doctors from public hospitals, which offer good pay and pensions. Indonesia's rules for foreign doctors all but prohibit hospitals from recruiting them.

Second, regulations can be treacherous. Gershu Paul, a former boss of Siloam, says that the time needed to obtain licences, permits and so on constrains growth. The rules sometimes stop companies investing at all. In 2012 Hong Kong's government requested bids to build two new hospitals. IHH and its local partners, which agreed to stipulations covering everything from the number of obstetric beds to the share of local patients, last year won the right to build one site. For the other site there was only one bid—which was rejected because it did not meet the government's requirements.

The third obstacle is uncertainty. Selling to the swelling middle class is no doddle: in such a new market, firms are finding it hard to gauge what people will pay for, say, a hip operation, or whether they will pay more for their aged parents' care or for their children's. Siloam's private hospitals have six price tiers, an attempt to serve the many segments of Indonesia's dynamic market, yet last year only 51% of their beds were filled. So far, the rich are the most dependable moneymakers. When IHH considers entering a market, it notes a country's Gini coefficient, a measure of inequality: higher inequality implies wealthier patients willing to pay for treatment.

Eventually some firms may prove adept at offering good, cheap treatment. Narayana Health, an Indian company, has tried to industrialise hospital operations to make care less pricey. But it remains to be seen how many private hospitals will count public-health services among their customers. In China, Phoenix has tested schemes in which the government pays it to run public hospitals. The government has said that public insurance may be used for private care, but implementation has been patchy. Of the 40 hospitals in Siloam's plan for 2017, only the General in Tangerang will take fees from the government. Hospital companies will surely be part of Asia's emerging health-care systems. How big a part is much less certain.