Private healthcare thriving

MALAYSIAN private hospital operators are poised for another year of growth, even as the ageing nation grapples with a 15% medical inflation that exceeds global average.

Overcrowding at government-funded hospitals, booming medical tourism and the rise in elective surgeries are raising the demand for private hospitals, despite complaints of the hefty bills.

Interestingly, the two largest private hospital chains in Malaysia by bed count – IHH Healthcare Bhd and KPJ Healthcare Bhd – are government-linked.

IHH, which owns brands like Gleneagles, Pantai and Prince Court, is 37% owned by Khazanah Nasional Bhd and the Employees Provident Fund, combined.

Meanwhile, the Johor government’s Johor Corp is the single-largest shareholder of KPJ with a 45% stake.

With the number of hospital beds in the country hovering below the ideal level, the national healthcare system is highly reliant on private hospitals increasing their bed count, including in intensive care units.

This is despite the Health Ministry’s (MoH) focus on building new hospitals and upgrading facilities.

Based on World Bank data, Malaysia had two hospital beds per 1,000 population in 2020.

This is much lower than the average for upper-middle income nations at 3.7 beds, while the average for high-income countries was even higher at 5.4 beds.

If private hospitals are taken out of the equation, the country could lose nearly 30% of its hospital beds.

Expanding capacity

In 2022, private hospitals contributed 17,780 licensed beds, while the majority 45,167 beds were in the public hospitals.

By 2028, Maybank Investment Bank Research (Maybank IB) forecasts private hospitals to add almost 4,000 beds, raising the total to 21,770 beds.

As for the public sector, hospital beds are also expected to increase albeit at a smaller quantum of nearly 2,800 beds to 47,946 beds.

Major listed private hospital operators such as IHH and KPJ have previously announced their plans to add more beds domestically, including by acquiring hospitals, like in the case of IHH buying the 600-bed Island Hospital in Penang for RM3.9bil.

IHH is also looking to add about 300 beds over the next three to five years through ongoing asset enhancement initiatives across its hospitals.

Overall, IHH has set a bed expansion target of 4,000 beds by 2028, with nearly half of them in India. Beds in Malaysia will increase by 1,300.

As for KPJ, it plans to raise its bed count to 5,000 by 2028.

The planned expansion of their operations is necessary as some of the hospitals under IHH and KPJ are reaching high occupancy rates.

It also signals the huge growth opportunities for private hospital operators, who have typically enjoyed health profit margins.

For example, IHH and KPJ enjoyed a net profit margin of 11% and 9% respectively in the financial year ended Dec 31, 2024.

Pre-tax profit margins are even higher at 15.4% for IHH and 13.5% for KPJ.

Meanwhile, Cengild Medical Bhd and TMC Life Sciences Bhd reported a net profit margin of 16.6% (pre-tax margin: 23.7%) and 11.7% (pre-tax margin: 15.2%) respectively in the financial year ended June 30, 2024.

Cengild runs a hospital in Bangsar South treating gastrointestinal and liver disease.

TMC Life Sciences Bhd operates the Thomson Hospital in Kota Damansara, among others.

Resilient growth

With the rise in elective surgeries, which typically offer higher margins, private hospitals’ bottomlines are well supported despite market challenges.

An elective surgery is a planned, non-emergency surgical procedure. It may be either medically required such as cataract surgery, or optional such as breast augmentation or implant surgery.

In addition, private hospitals’ bottomline are also lifted by the increase in affluent and wealthy medical tourists into the country,

Typically, foreign patients register about 20% higher revenue intensity due to greater concentration in complex cases.

Some private hospitals in Malaysia will benefit more from medical tourism, such as IHH’s Island Hospital.

About 60% of its patients are medical tourists, mainly from Indonesia, attracted by the oncology services.

In a note, BIMB Research says medical tourism presents an opportunity for Malaysia to capitalise on its well-established healthcare system to generate significant foreign revenue.

The research house has an overweight rating on the Malaysian healthcare sector, partly driven by the rising demand by an ageing population.

Beyond medical tourists from abroad, more Malaysians are also expected to use private healthcare facilities, leading to a growing patient inflow into the private healthcare system.

In particular, IHH and KPJ are the clear winners of the increasing patient inflow.

According to Maybank IB, IHH and KPJ make up 18% and 27% of total market share of private inpatient admissions in 2023, respectively.

“On top of a rising trend in inpatient admissions, we also see a rise in revenue intensity as proxied by average revenue per inpatient admission, largely characterised by growth in demand for increasingly complex and cross-specialty cases, as well as medical tourism,” it adds.

Despite the positives of the private hospitals sector, a key challenge will be the change of payment system for hospital care.

New scheme

The MoH looks to implement the diagnosis-related group (DRG) payment system in order to deal with the rising medical bills and the resulting huge spike in medical insurance premiums.

The DRG payment system is a method where hospitals are paid a fixed amount for each patient case based on diagnosis and procedures, no matter the actual treatment cost.

Recently, Health Minister Datuk Seri Dr Dzulkefly Ahmad announced that the first phase of the national DRG system, focusing on minor illnesses in hospitals, is expected to be implemented by the end of 2025.

Speaking with StarBiz 7, a healthcare analyst says that private hospital operators’ profits are expected to remain intact in the near-term as the actual implementation of DRG will only take place beyond 2025.

“We are likely to see a gradual rollout of DRG covering more than just minor illnesses.

“So the impact on private hospital operators’ earnings should be minimal,” adds the analyst.

Beyond DRG, healthcare providers are also facing rising operational costs, although these will not be a major drag on earnings in the coming quarters.

Regardless of the challenges, the non-cyclical private hospital business remains a defensive and profitable space to be in.

With the expected initial public offerings of Sunway Healthcare and Columbia Asia Healthcare, investors will enjoy more options of listed hospital players on Bursa Malaysia.

This may also lead to a re-rating of valuations of existing listed healthcare companies like IHH and KPJ.