Buy the referral book, not the occupancy rate

Indian hospital acquisitions are usually described in the language of property. A deal is reported as a number of beds bought at a price per bed, with a multiple of EBITDA alongside, and the commentary turns to occupancy and average revenue per occupied bed. Those measures are not wrong. They describe what a hospital has been. They say much less about what a buyer will own on the morning after completion.

I have looked at hospital acquisitions from three sides: as a consultant writing commercial diligence for private-equity investors, as the person integrating laboratories bought by a pathology chain, and now as the strategy officer recommending to a listed company's board whether to buy. From each side I have reached the same view. The most valuable asset in a hospital acquisition is the one that does not transfer with the shares.

What actually changes hands

Consider what a buyer receives. The land and buildings, or the leases. The equipment, some of it near the end of its life. The registrations and approvals, which must be checked one by one: registration under the applicable state law, fire safety approval for every block, licences from the atomic energy regulator for imaging equipment and cath labs, registration under the PCPNDT Act for ultrasound, and authorisation for biomedical waste. The employed staff. The payer contracts and the empanelments with government schemes and insurers. And the brand, which in a smaller city is often the founder's name.

What the buyer does not automatically receive is the doctors. In most Indian private hospitals a large share of revenue is generated by senior consultants who are not employees at all. They work under fee-for-service or revenue-sharing arrangements, often with short notice periods, and they bring patients who were referred to them personally by general practitioners, smaller nursing homes and other specialists across the district. Restrictions on doctors practising elsewhere after leaving are generally unenforceable in India, and a consultant who leaves can usually take most of their referrals to a hospital across the road.

So the honest description of a hospital acquisition is this: the buyer pays for a building and an option on the continued loyalty of a few dozen doctors. The price should reflect how valuable that option is and how likely it is to be exercised.

Three tests before any price is discussed

At Kesarvan we now run three tests before a valuation reaches our investment committee.

The first is referral concentration. We rebuild the hospital's inpatient revenue by treating consultant, and its admissions by referring source. If a handful of consultants produce a large share of revenue, the business is more fragile than its occupancy suggests. In 2022 we examined Narmadakunj Hospital in Indore, a 340-bed hospital offered to us for ₹780 crore. Six senior consultants produced 41 per cent of its inpatient revenue, on arrangements either side could end at three months' notice, and two were related to the sellers.

The second is the quality of the occupancy. Reported occupancy can include day-care admissions, observation beds and patients counted on the day of discharge. At Indore, nine of the 78 percentage points of reported occupancy were day-care admissions recorded as inpatients. We now recompute occupancy on our own definitions from the hospital's admission records before we accept any revenue-per-bed comparison.

The third is payer quality. We age receivables by payer: individual patients, insurers and their administrators, corporate accounts and government schemes. A hospital with 130 days of receivables from schemes and corporate payers is lending its working capital to its customers, and the buyer inherits both the loan and the habits that created it.

Only after these three tests do we discuss what the hospital is worth. They do not make the decision. They decide what question the valuation is answering.

Paying for the people who might leave

If the main risk in a hospital deal is that key doctors leave, the price should move with that risk. At Indore I recommended an offer of ₹560 crore, of which ₹120 crore would be paid only if the six consultants were still practising at the hospital after two years. The sellers refused, a larger chain bought the hospital at close to the asking price, and our entry into the city slipped by at least two years. I do not count that as a victory. Our executive chairman argued that Indore would not be offered to us again and that a rival would gain a decade's start, and he may yet be proved right.

Our purchase of Taalnagar Hospital in Bhopal the following year followed a different order. Before we agreed a price we agreed employed contracts and a three-year retention plan with its sixteen senior consultants, and funded the cath-lab upgrade they had been asking the previous owners for. We paid ₹265 crore for 210 beds. Fourteen of the sixteen consultants are still with us, and the hospital's EBITDA margin has risen from 9 per cent in 2023–24 to 17 per cent in 2025–26.

Retention is not only a matter of contracts. In Bhopal the consultants' first questions were about theatre time, the cath lab and whether their nurses would keep working beside them. We kept the nursing teams intact for the first year and moved billing and purchasing to our systems before we touched any clinical routine. A buyer that changes how doctors work in the first month tells them, more clearly than any contract, that the hospital they chose no longer exists.

Three practices follow from this, and I would recommend them to any buyer. Talk to the key consultants before the price is fixed, with the sellers' permission, because their intentions are the largest unknown in the deal. Structure part of the consideration around retention, or replace fee-for-service arrangements with employment or long-term agreements before completion. And plan integration from the doctors outwards: the first hundred days should be about rosters, theatre time, referral relationships and the equipment the clinicians need, not about new signage.

Boards can test this without becoming experts in clinical practice. When an acquisition paper arrives, a director can ask what share of revenue the top ten consultants produce, on what notice, and whether any of them have been consulted. A management team that cannot answer has priced the building and guessed at the hospital.