According to a joint report by LoEstro Advisors, an investment banking and consulting firm, and Medium Healthcare, a healthcare consulting firm, the small and medium enterprise (SME) hospitals segment in India is set to achieve a market size of Rs. 5 trillion (US$ 60.08 billion) by the financial year 2026-27. This growth is primarily driven by localized demand, niche specialization, and various government initiatives supporting the healthcare sector. Despite catering to around 60% of healthcare needs and managing 90% of the total hospital beds in India, SME hospitals face significant operational challenges that hinder their profitability and competitiveness.

Mr. Rakesh Gupta, the Managing Partner at LoEstro Advisors, emphasized the crucial role that SME hospitals play in providing healthcare services, particularly in Tier-II and Tier-III cities. These hospitals, however, are encountering substantial operational challenges, which include lower average revenue per occupied bed (ARPOB), which is 40% less than that of larger hospital chains. SME hospitals are also dealing with longer patient stays and higher operational costs, which further contribute to their lower profitability. These factors make it difficult for them to compete with larger hospital chains, which have been rapidly expanding their reach in smaller cities and regions.

The report sheds light on several critical factors affecting the performance of SME hospitals:

1. Lower Revenue Per Occupied Bed: SME hospitals are facing approximately 40% less revenue per occupied bed compared to larger hospital chains. This is largely due to fewer high-value medical procedures and charges being conducted in these facilities.

2. Extended Average Length of Stay (ALOS): The average length of stay in SME hospitals is 33% higher than that in larger private hospital chains. This is partly attributed to the high focus on obstetrics and gynecology, which often involves extended care, adding to the operational burden of these institutions.

3. Customer Migration: Patients are increasingly migrating towards larger hospital chains that offer a wider range of services and advanced medical technologies. Additionally, the rise of specialized local clinics that focus on specific medical fields, such as cardiology and orthopedics, is further intensifying competition, especially for middle-income groups seeking more affordable options.

4. Operational Costs and Lower Profit Margins: SME hospitals often operate in a costlier environment with high operational costs, including staffing and equipment maintenance, resulting in lower profitability compared to larger chains. The competition from large hospital networks, which have added around 400 more centers outside Tier-I cities in the past five years, has made it even more difficult for SMEs to maintain their market share.

While SME hospitals have a significant presence and continue to serve a large portion of India’s population, the emerging competition from both large hospital chains and specialized clinics presents a formidable challenge. Large hospital chains have been actively expanding, especially in smaller towns and cities, by opening brownfield expansions—established facilities refurbished and rebranded under their banner. This strategy has allowed them to tap into new markets, attracting patients away from SME hospitals.

Despite these challenges, the report suggests that localized demand and specialization in niche services present an opportunity for SME hospitals to thrive in specific regions. By addressing operational inefficiencies and embracing cost-effective innovations, SME hospitals can potentially capture more market share in the growing healthcare segment, particularly in under-served areas where the larger chains have yet to establish a stronghold.

As SME hospitals continue to evolve, the focus on improving patient care quality, operational efficiency, and specialized services will be pivotal in maintaining their competitive edge against both larger hospital chains and specialized clinics in India’s ever-expanding healthcare market.

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