Is This the Right Time for Indians to Invest in US Healthcare?

In India, full capital account convertibility of the rupee is still a distant dream. Putting aside positive and negative macro-economic arguments, it has been difficult for domestic investors to take advantage of global lowering of interest rates, especially with Indian stock markets and industries showing early signs of overinvestment. Moreover, with the recent slowdown of economic productivity within the country, there are certain investment avenues that domestic investors could take advantage of in other developed countries, where growth is recovering, and interest rates are relatively lower. Debt funds are priced better in a low inflation expecting economy and would be highly priced compared to a high inflation economy, especially bonds with fixed interest rates.

Diversification of portfolios, particularly in businesses offering fundamental services would be an ideal shield in the short run especially in down turning economic cycles. One such avenue is the healthcare industry of the United States, more specifically, the nursing care industry. Is the fundamental value of a nursing home business model based on the value of the underlying property? Or is it based on revenue streams that come along with the business? Let’s find out…

Indian Land Markets Vs. US Commercial Property Markets

Indian land markets suffer from extreme handicaps such as lack of regulation, single window clearances, and lack of proper methodology for title clearance processes. Therefore, investment in land, although profitable, suffers from uncertainty and a lack of safety nets. Combine that with sporadic investments from the government and we see land values that are extremely volatile and susceptible to a sudden rise or fall in value.

On the other hand, US commercial property markets are relatively stable and much more regulated, which in turn, paves the way for intermediaries such as REITS, which act as deleveraging agencies. One might be concerned with the volatility of the land prices after the mortgage bubble; however, commercial properties have maintained their value even in times of crisis.

Commercial Properties Vs. Residential Properties

Source: Commercial Property Price Index (Green Street Advisor)

An interesting trend to note in property values over the last 20 years, is that the 2008 crisis did not lead to a dip in the value of commercial properties on par with residential ones. Also, commercial property prices recovered slowly and steadily post the shock of 2008 - the main reason being slow and stringent leveraging on commercial properties with efficient intermediaries such as REITs often lending a helping hand, thereby, shifting liabilities from property owners to investors.

Tight policies regarding leverage, capital adequacy, and ancillary services were put into effect post the 2008 crisis. With a goal to regulate the markets, legislation to curtail inflationary pressures and credit misallocation in land assets were rolled out as well.

Stability

The striking aspect of healthcare and nursing spends is that it has either remained stable or has shown an increase and has not seen a considerable downward movement even during the crisis. Thus, it ensures stability in terms of cash flows and makes the business of nursing care very predictable and stable.

Source: Centers for Medicare & Medicaid Services (Historical Data)

Source: Centers for Medicare & Medicaid Services (Historical Data)

Lower Risk

An important find for the nursing industry, was that the composition of expenses remained constant and out-of-pocket expenses reduced on a linear trend. This shows that consumers have very little to put forward towards nursing care expenses and thus, revenue streams remain neutral towards general underlying economic trends.

Source: Centers for Medicare & Medicaid Services (Historical Data)

Medicaid and Medicare or even healthcare spending is less sensitive to economic trends and as a result it becomes an ideal place for balancing portfolios against structural risk of the economy. However, the resilience of healthcare spending as seen in the data demonstrates an underlying pattern - healthcare spending appears to be counter cyclical during times of recession and appears to be stable during high growth.

Since majority of expenses of healthcare comes from government spending, such fundamental service expenditures usually are higher during good times but do not reduce during bad times because they are often populist expenses.

All investments have risk, so we should note our thoughts on potential headwinds in the sector. Fundamentally we believe government-funded Medicaid and Medicare are here to stay. President Trump has been the most disruptive political figure in decades, and even he has stayed away from discussions about abolishing the programs. That, however, does not mean that the programs do not experience regular modification. Last year's managed care conversions have largely been absorbed by the system, with the inevitable fallout of weak or underperforming operastors and assets that occurs in a capitalist system. Going forward, we believe larger and more sophisticated operators will benefit from an economy of scale at the expense of smaller operators.

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