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This article first appeared in The Edge Malaysia Weekly on April 29, 2019 - May 5, 2019

WHILE the healthcare sector is generally resilient against a slowing economy — being neither the first to fall nor the last to rise regardless of the external environment — KPJ Healthcare Bhd president and managing director Datuk Amiruddin Abdul Satar takes cognisance of the potential consequences of a downturn.

“When you have a recession or slow growth in the national economy, people cut down on certain spending, such as on entertainment or travel. Whatever money they have they will save for healthcare. But if the slowdown is longer than expected, their money might run out, to the point that they might not have enough for their healthcare needs. At least in Malaysia, we are fortunate to have free public healthcare,” he says.

However, an economic slowdown can have a trickle-down effect on corporate healthcare spending. He has observed that the group’s medical insurance penetration has slowed slightly.

“In hard economic times, medical benefits are the last to go. But if companies shed staff, then we lose customers as they will no longer be on the medical insurance,” he says, though so far the numbers have not been as worrying as several years ago, when the corporate sector saw major cuts in the oil and gas industry.

As a private hospital, KPJ serves about 20% of the population with close to 80% of its patients being insurance holders. Amiruddin says the portion of those paying cash for medical care is shrinking, and that those who do are typically doing so by choice because they can afford it.

Amiruddin acknowledges that rising medical costs is a growing concern, but shrugged off the suggestion that it would adversely affect the private hospital business. Although he observes the migration of patients from private to public hospitals as a result, this is more to do with slowing economic growth rather than rising medical costs.

“Yes, it’s true but I don’t think it has reached the level that we see a significant drop in our occupancy. Generally speaking, hospitals do well with an occupancy level above 60%. We are trying our best to get to 80% occupancy all the time, but there are many factors that contribute to that — not necessarily rising costs. It could be due to declining income or earning capacity reduction,” he says.

KPJ is now less bullish than it was previously in terms of performance, but the group is confident of maintaining earnings momentum.

“As far as the sector is concerned, the outlook is still positive. We are a little more bearish but we will still be in the black, we will still see some growth in revenue. About 4% to 5% top-line growth,” Amiruddin says.

For the financial year ended Dec 31, 2018 (FY2018), net profit rose 11% year on year to RM179.44 million while revenue rose 4% to a record RM3.31 billion on increased patient visits, number of beds and surgeries.

Assessing the year ahead, Amiruddin says he is confident there will still be growth. “We are not in recession, although everybody is bracing for a slowdown. We will proceed with our planned openings but we will play safe in scaling our service offerings to suit what we think the demand will be so we do not incur unnecessary costs.”

The group is spending about RM1 billion on its hospital expansion plan over the next several years. For FY2019, it will invest about RM200 million to RM300 million on new hospital openings. It plans to add a couple more hospitals this year with several more planned for the next three years. This is part of the group’s long-term strategy before settling down to focus on service delivery.

The expansion is important for the group as it aims to increase its presence nationwide. It recently opened its 26th hospital, KPJ Bandar Dato’ Onn, in Johor Baru and expects to open KPJ Miri, KPJ Kuching and KPJ Batu Pahat hospitals in the second half of the year. By 2023, it aims to have 35 hospitals nationwide.

Gearing-wise, Amiruddin says so long as the group continues to build, it cannot expect the gearing level to reduce as much. “Our main source of cash is borrowings. Perhaps after three years it will get better. A comfortable level would be about 0.5 times, though now it is higher at about 0.9 times.”

The group’s reserves remain healthy. As at Dec 31, it had a cash and cash equivalent balance of RM404.2 million, an increase of more than 100% from FY2017.

Amiruddin says despite its expansion mode, KPJ remains committed to maintaining its practice of quarterly dividend payouts of up to 50% of full-year net profit. Last year, it declared dividends of 2 sen per ordinary share, up 12% from 1.8 sen in FY2017, for a total of RM84.7 million in dividend payments.

While most of the group’s patients are Malaysians, the expansion of new hospitals is also aimed at catering for medical tourism. Amiruddin says tourists make up less than 5% of total KPJ patients and they go to selected hospitals around the Klang Valley and states with direct flight access. Nevertheless, he sees the portion of the pie growing as the group builds more hospitals.

“It is a lucrative segment and we already have traction. Some countries already trust Malaysia as their medical destination. We have gained the trust of patients in Indonesia, Bangladesh, Myanmar, Vietnam, and some Middle Eastern and African countries too,” he says.

In addition to new hospital openings, Amirrudin says KPJ will also be building ambulatory care centres (ACC) to diversify its offerings as well as to ease the burden of high medical costs. The group plans to add two to three ACCs in the Klang Valley.

“The concept of an ACC for us is to increase our presence and to be backed up by existing hospitals. It allows us to offer a lower cost structure to patients and more affordable fees. This will not cost much, perhaps each centre will cost on average less than RM10 million,” he says.

 

Still keen to pursue public-private tie-up

The mismatch between the availability of public healthcare services and demand is an ongoing issue faced by the government. The private sector, on the other hand, has plenty of capacity to lend.

Both parties know this, though the ball is in the government’s court on whether to pursue a public-private partnership, says KPJ Healthcare Bhd president and managing director Datuk Amiruddin Abdul Satar.

Last November, KPJ proposed a public-private partnership with the Health Ministry to allow government hospitals to use some of the facilities at private hospitals to help cut down waiting time.

Amiruddin says there are many facilities in the private sector that have the capacity to accommodate more patients, especially imaging services such as MRI and CT scans.

“In government hospitals, there are long queues and many services required by the public take a long time to be delivered,” he notes. For example, it can take months before patients are able to see a specialist and get MRI and CT scans done. In contrast, it will just take a few days in private hospitals.

“If the government can come up with a certain budget, we don’t mind selling this service to them,” Amiruddin says.

How would it work? “Instead of asking for a budget to buy an MRI (machine), public hospitals ask for a budget from the Finance Ministry to buy the service. Government patients will then go to private hospitals, but their bill is subsidised by the government,” Amiruddin explains.

A special rate will have to be worked out, he says. “This will help us to utilise the MRI more. We have made an overture to the government but we have not reached a stage of negotiation. In fact, the initial proposal came from our association many years ago. We continue to make this proposal to the government.”

 

 

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