Narayana Hrudayalaya: A Model for Accessible, Affordable Health Care?
Cardiac surgeon Dr. Devi Shetty is
on a mission to build 5,000-bed "health cities" across India,
encouraged by the success at his nine-year-old Narayana Hrudayalaya hospital in
Bangalore. He has contained costs by tweaking processes, driving hard bargains
and negotiating creative partnership deals, but faces challenges in replicating
that model on a bigger scale. Shetty wants to make quality health care
accessible and affordable using economies of scale, or the cost advantages
businesses obtain due to expansion. His hospital in Bangalore focuses on
cardiac medicine but he wants to extend the model to other specialties, in
addition to other locations.
Shetty believes his success could
lead to a new health care model not only for India but perhaps also for the
world. "The first heart surgery was done over a hundred years ago but even
today only 8% of the world's population can afford heart operations,"
Shetty notes. "In India, around 2.5 million people require heart surgeries
every year but all of [the country's doctors] put together perform only 80,000
to 90,000 surgeries a year.... We clearly need to relook and change the way
things are being done."
At his Narayana Hrudayalaya
Institute of Cardiac Sciences in Bangalore, the 56-year-old Shetty is doing
just that. Patients at his hospital get cardiac care at a cost lower than any
other hospital in the country and at a fraction of what it would cost elsewhere
in the world, a feat accomplished through what Shetty refers to as
"process innovation." Shetty, who has been in the medical profession
for close to 25 years and worked at Guy's Hospital in London, the Birla Heart
Research Foundation in Kolkata (formerly Calcutta) and the Manipal Heart
Foundation in Bangalore before branching out on his own, was
formerly personal physician to Mother Teresa. His interactions with her,
he notes, not only offered the opportunity to closely observe the famed
humanitarian's charitable work but also caused the doctor to begin thinking
about how quality health care could be made widely accessible and affordable.
That was how Shetty came to the
conclusion that the health care industry needs more process innovation than
product innovation. The industry "does not need a magic pill or the
fastest scanner or a new procedure," he states, but instead requires
improvements that lower the cost of medical attention and make it more widely
available. Shetty's premise of economies of scale is not radical; in fact, the
doctor describes his way as "the Walmart approach." What sets him
apart, however, is that he has successfully adapted the method to a field as
complex and costly as cardiac care. "There is no doubt that he has created
a very distinct model to take cardiac care to the masses," notes Vishal
Bali, chief executive officer of Fortis Hospitals, a prominent Indian
healthcare group.
Now Shetty is ready to aim higher.
India currently has around 0.7 hospital beds per thousand people; the key to
better aligning those numbers with the population, he states, is creating a
chain of large "health cities" across the country. To set the ball
rolling, Shetty spearheaded the creation of a 1,400-bed cancer and
multispecialty hospital -- the largest cancer hospital in the country -- at the
Bangalore campus. A women and children's hospital and another for nephrology
are also in the works. In addition, the Bangalore facility -- which is set to
expand to a total of 5,000 beds over the next three years -- includes a 500-bed
orthopedic hospital, an eye hospital, research facilities and room for about 50
training programs.
Over the next five years, Shetty
wants to build similar 5,000-bed health cities across the country. An expansion
at his Kolkata hospital is currently underway, and new hospitals in Hyderabad
and Jaipur are expected to open for business later this year. Construction is
starting on a 1,400-bed hospital in Ahmedabad; additional locations have also
been identified. "We want to have around 30,000 beds over the next five
years," Shetty says. "As our volumes increase, we will get further
economies of scale. In the next five years we want to be able to do a heart
operation for US$800 from point of admission to point of discharge. We believe
it is possible."
Shetty has reason to be confident.
Over the years, the Bangalore heart hospital he opened in 2001 grew to 1,000
beds; the facility has added advanced technology and doctors there perform some
30 surgeries a day -- the highest number of cardiac surgeries done by any
hospital in India. Other hospitals in India, including Escorts, Apollo,
Wockhardt and Fortis, perform about half that number. In addition, Shetty's
staff has the capability to do a large number of different cardiac procedures.
The hospital's mortality rate of around 2% and hospital-acquired infection rate
of 2.8 per 1000 ICU days are comparable to the best hospitals across the world,
Shetty asserts. In an article in Forbes India, the University of
Michigan's C. K. Prahalad said the mortality rate in Narayana Hrudayalaya is
"much lower than in New York State for similar kinds of heart
disease."
Serving the Poor
Cardiac surgeries in the United
States can cost up to US$50,000. In India, they typically cost around
US$5,000-US$7,000. Depending on the complexities of the procedure and the
length of the patient's stay at the hospital, the price tag increases. At
Narayana Hrudayalaya, however, surgeries cost less than US$3,000, irrespective
of the complexity of the procedure or the length of hospitalization. About 45%
of Shetty's patients pay even less. Of these, about 30% are covered under a
micro-insurance plan for health care called Yeshasvini that reimburses Narayana
Hrudayalaya at about US$1,200 a surgery. Conceptualized by Shetty and run by an
independent trust, Yeshasvini was launched in 2002 in association with the
Karnataka state government.
For those who are not part of the
insurance plan and can't afford the hospital's regular charges, Shetty offers
concessional rates. The discounts depend on patients' financial capacity and
are funded either by the hospital's charitable trust, individual donors or by
the hospital itself. Almost 15% of the hospital's patients benefit from these
concessions. In addition, Shetty and his team reach out to patients through a
network of rural clinics and via telemedicine facilities. Patients come to the
Bangalore facility from more than 50 countries. Shetty's instructions to his
team are clear: No one who comes to Narayana Hrudayalaya will be denied
treatment due to a lack of funds.
To ensure the viability of the
project, Shetty has devised a hybrid pricing model. Apart from the regular
package of US$3,000 a surgery, he also offers semiprivate and private rooms for
those who want and can afford better personal amenities. The medical facilities
are the same for every patient, however. The upgraded rooms, which comprise
around 20% of the total available at the hospital, are priced at
US$4,000-US$5,000 and "offset the losses incurred from treating the
poor," Shetty notes.
The managing team at Narayana
Hrudayalaya follows the unique accounting practice of studying the profit and
loss account on a daily basis. "By monitoring the average realization per
surgery and our profitability on a daily basis, we are able to assess how much
concession we can afford to give the following day without adversely impacting
our profitability," states Sreenath Reddy, the hospital's chief financial
officer. Reddy expects revenues of US$80 million for the year ending March 2010
and to generate US$200 million annually over the next two years. The hospital
has been profitable from the first year. JP Morgan and PineBridge Investments
(formerly known as AIG Investments) each hold a 12.5% stake in the company.
Kiran Mazumdar-Shaw, chairman and managing director of biotechnology firm
Biocon owns a 2.5% stake, and Shetty and his family own the remainder of the
company. Shishir Jain, executive director at JP Morgan believes Shetty has
shown that "it is possible to fulfill a great social need without compromising
on the profitability." Santosh Senapathy, managing director of PineBridge
Investments adds that "Narayana Hrudayalaya will change the way healthcare
is delivered across the world."
Innovations in Operations
Indeed, Shetty has already turned
some standard industry practices on their heads. One of his first innovations
when he set up Narayana Hrudayalaya in 2001 was in the way doctors are
compensated. Typically, cardiac surgeons are paid per surgery and their costs
constitute a significant proportion of a hospital's total expenses. Shetty
invited his staff physicians to work for fixed salaries; he did not pay them
less than what they would have normally taken home at the end of the month, but
he required doctors to perform more surgeries, bringing down the cost per
procedure. This approach continues to be one of the core savings areas at
Narayana Hrudayalaya.
In addition, Shetty's father-in-law
-- who was in the construction business -- built the first hospital for him,
keeping costs to the minimum. Shetty claims he passed on those savings to
patients, and maintains that, even today, construction costs at his hospitals
are less than half of that for others. "The way we design the hospitals
and our close monitoring of our projects help us to keep a very tight control
of our construction costs," notes Shetty's son Viren, an engineer and
director at the hospital. Shetty's two other sons are studying medicine.
In the initial days of Narayana
Hrudayalaya, patients came because of Shetty's skill and his reputation. The
cost savings he offered started attracting customers in greater numbers. Apart
from the surgeries, the Bangalore campus treats about 2,500 people daily in its
out-patient department. The increasing volumes in turn have helped lower costs
in many ways, staff says. Instead of buying surgical gloves in India, for
example, Narayana Hrudayalaya saves about 40% by importing them in container
loads from Malaysia. The hospital has moved to digital X-ray technology, saving
on the recurring cost of film. Most hospitals use their CT scanners, MRI
(magnetic resonance imaging) and other machines for only eight hours a day, but
Narayana Hrudayalaya uses them for 14 hours and offers these tests to the
patients at lower rates in the late evenings. As volumes increase, per unit
costs naturally come down.
For procedures like blood gas
analysis, Shetty's team convinced the equipment vendor that, instead of selling
the machine to the hospital, he could simply park it there and make his money
by selling the chemical reagents required for the test. The hospital saves on
the cost of the machines while the vendor also profits. For the past six
months, another vendor has parked his catheterization laboratory equipment at
the hospital free of charge. The deal came together because the vendor wants to
use Narayana Hrudayalaya as a referral, Shetty notes, with the idea that if he
can show that his equipment can cope with the patient volumes at Narayana
Hrudayalaya, it can work anywhere, he adds.
The high patient volumes help Shetty
drive a hard bargain with vendors when negotiating prices for everything from
basic supplies to sophisticated medical equipment. The new cancer hospital, for
example, purchased two linear accelerators (for producing X-rays) that
typically cost US$6.4 million each for the price of one machine. The cost of
the machines was spread out, interest-free, over seven years. "Given [the
hospital's] volumes and Shetty's own credibility, every negotiation is as tough
as it can be. He certainly gets his pound of flesh," notes V. Raja,
president and CEO of GE Healthcare South Asia, who has been associated with
Narayana Hrudayalaya from the beginning. With Shetty now on an expansion drive,
Raja is in discussions with him to see how they can structure deals that enable
Shetty to achieve economies of scale while bringing more business for GE
Healthcare.
Testing an Untested Model
Shetty's model of 5,000-bed health
cities has its share of risks and challenges. It remains to be seen if the
doctor can replicate his success in volume-based cardiac care across
specialties and cities. He is also considering setting up health care
facilities in the Cayman Islands and Malaysia. Observers say to succeed, Shetty
needs to build organizational and management bandwidth; create teams of medical
professionals that share his vision and are willing to work hard; put in place
robust processes, and raise the required funding. "The scalability of any
model is based on the creation of an organizational structure," says Bali,
of Fortis. "One does not see this at Narayana Hrudayalaya. It has been
around for many years and by now the structure should have emerged. One will
have to wait and watch if Shetty can indeed scale [his model] beyond one or two
institutions."
Amit Varma, president, healthcare,
at Religare Enterprises, a financial services group and director of critical
care medicine at the Fortis Escorts group of hospitals, raises another concern.
Varma was part of Shetty's team at Manipal Hospital and at Narayana
Hrudayalaya. "The intention is absolutely right but there is a base cost
to any procedure and you can bring that down only to a certain level," he
notes. "There is a tipping point beyond which the volume that you do will
have an adverse impact on the quality. What that tipping point is remains to be
seen."
But Girdhar Gyani, CEO of the
National Accreditation Board for Hospital and Healthcare Providers believes a
commitment to delivering quality service is part of the culture of strong
teams. "Shetty's team in Bangalore is top-of-the-line in terms of quality
and I am confident that the rest of the facilities that he builds will be the
same too. Shetty is a transformational leader who can bring about a sea change
in this industry."
Mazumdar-Shaw of Biocon, who owns a
stake in Shetty's company, says the doctor brings a missionary work ethic to
his efforts and has attracted a talented and committed team of doctors, nurses,
paramedics and professionals. She credits Narayana Hrudayalaya with
consistently focusing on training and developing specialized skills. "I
have no doubt that Narayana Hrudayalaya is scalable in India and Shetty's
concept of 5,000-bed health cities is the way to go. India's medical talent
pool is vast and can certainly sustain this growth." Raja of GE
Healthcare also adds his vote of confidence: "This is a pretty much
untested model across the world but Dr. Shetty is fully committed to it and, if
anyone can, he can."
http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4493
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