ibnlive » Business

Jul 07, 2009 at 02:54pm IST

Dr Devi Shetty's mission of cheap healthcare

Twenty-day-old Samuel Idoko’s parents were worried sick. The boy’s heart condition needed urgent surgery but back home in Nigeria, there were no hospitals dealing with such cases. They didn’t even have the time to celebrate his birth as they rushed him to Bangalore. Their destination: Narayana Hrudyalaya Institute of Cardiac Sciences.

Established in 2001, this 1,000-bed hospital and its sister concern, Rabindranath Tagore Institute of Cardiac Sciences in Kolkata, together do 15 percent of all heart surgeries in India. At the rate of 30 cardiac surgeries a day, the Bangalore facility handles the highest number of heart surgeries in the world.

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It’s not for nothing that patients come here in droves. It has an impossible-sounding success rate of 95 percent and charges a fraction of what other heart hospitals do. The charismatic Dr Devi Shetty, the hospital’s founder, has been relentlessly pursuing a mission: To make world-class healthcare affordable to the masses. “Hundred years after the first heart surgery was done, only 8 percent of the world’s population can afford it,” he says, quickly pointing out that this is a five-year-old statistic and today we might be worse off. “What happens to the rest?” asks Shetty.

CLEAN DEAL: Dr Shetty's hospital in Bangalore makes the cost of treatment clear to patients.

Filling the Gap

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Shetty’s hospital has managed to dissociate healthcare from affluence. The patient is told beforehand what he will pay. This is fixed irrespective of any future complications or the duration of stay.

A heart surgery here costs Rs. 110,000, much less than what it costs elsewhere. Even so, you pay the full price only if you can afford it. Many don’t pay at all. In 2008, out of 6,088 heart surgeries at the Bangalore centre, only 1,232 were fully paid for. Yet, the hospital makes a tidy profit. The Narayana Hrudyalaya group had a turnover of close to Rs. 300 crore in 2008-09, up from Rs. 150 crore in the previous year.

Narayana Hrudayalaya is now moving to have the largest number of beds in the country, beating Apollo Hospitals which has 6,000. It is creating multi-specialty “Health Cities”. The Bangalore facility will be ramped up to 5,000 beds. In addition to the 1,000-bed heart hospital, it has new cancer, orthopedic and eye hospitals. In the next two years, it will add two more, one for women and children and another for tropical diseases. The Kolkata facility will also be expanded to 5,000 beds. The idea is to have a health city in every state of India and have a presence in every emerging economy of the world. Already work is on to set up facilities in Malaysia and Mexico. “Next year our turnover should be Rs. 600 crore and after Phase 1 of the Health Cities plan is complete in 2010, we should be closer to Rs. 1,000 crore,” says Sreenath Reddy, chief financial officer.

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All this will be done without increasing the costs of the business. Before Devi Shetty, it was considered impossible to drive down costs to such levels; even now, no one has been able to replicate this. Top-flight management researchers want to understand how Shetty does it. “The mortality rate in Narayana Hrudyalaya is much lower than in New York State for similar kinds of heart disease,” says University of Michigan’s C.K. Prahalad. The hospital has been discussed extensively in his 2004 bestseller, The Fortune at the Bottom of the Pyramid. It has also become a case study at Harvard Business School. Adds Kokila P. Doshi, professor of Economics at University of San Diego’s business school, “Till now the trend was that government serves the poor. Shetty has shown that private enterprise can serve the poor profitably.”

Leveraging Scale

But how does Shetty do it? The answer lies in what he likes to call his “Wal-Mart approach to healthcare”. Wal-Mart proved that with size, the cost of inputs could be challenged. “They had the size which let them dictate terms to anyone starting from a giant like Procter & Gamble to potato growers,” he says.

Shetty relentlessly pursues Wal-Mart’s dictum of “everyday low prices”. Only that potato growers have been replaced by pharmaceutical companies and medical equipment manufacturers, who account for almost 40 percent of a hospital’s revenue outflow.

Here’s how it works: Most catheters sold in India by multinationals, for instance, are not manufactured by them. But the original equipment makers don’t sell directly to hospitals unless they get sufficient volumes. Narayana Hrudyalaya has the volumes: It handles 30 heart surgeries and at least 1,000 walk-in patients a day. It was able to convince them to supply at a low cost.

Scale helped Shetty shave off costs of medical tests too. Take blood gas analysis. At Rs. 350-400 per test, it forms the bulk of the cost for an ICU patient in India. At Narayana Hrudyalaya it costs merely Rs. 8.50 per test!

How? “Most hospitals do just 20, 30 tests in a day. We do about 2,000,” says Shetty. He used that to persuade manufacturers to merely “park” their machines in the hospital and instead make money from selling chemical reagents for the tests. It’s a win-win: Narayana Hrudyalaya saves on the cost of these machines (Rs. 12-15 lakh each) and the manufacturer does Rs 50,000 worth of business selling reagents every month.

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Unlike other hospitals that make most of their money through in-patient care (procedures and operations), Narayana Hrudyalaya makes the bulk of its profits in the out-patient department (OPD) — just through registrations and investigations such as ultrasounds and X-rays.

The logic is simple. “At the OPD level, every person can afford to pay Rs 200-300. When he needs treatment that will cost Rs. 2-3 lakh, that is when he expects help,” says Reddy. “Today the revenue point for every hospital is in-patient services, which give a margin of hardly 8-10 percent while our margin in the out-patient is 80 percent,” adds Shetty. “So you try to get huge numbers of out-patients.”

THE BEST: Devi Shetty's team accounts for 15 pc of all heart surgeries in India.

But to get so many people to the OPD, you need a sound value proposition. “Patients will come to you provided your in-patient cost is affordable — if you are doing a heart operation for Rs. 60,000-70,000, or a brain operation for, say, Rs. 10,000. So you reduce your in-patient cost,” says Shetty.

Each evening, Shetty and his team of senior doctors examine a profit and loss account for the day. If they go below their average realisation benchmark of Rs, 95,000 the next day they prefer patients who can pay more. Also, Shetty searches for ways to save — he got his microbiology department to make hand-wash and disinfectants in-house, bringing down the monthly cost from Rs. 4 lakh to Rs. 50,000.

Practicing Quality

‘Specialisation’ is his mantra to ensure quality even as costs are driven down. “We train technically skilled people for a particular job,” says Shetty. So each surgeon specialises in doing only bypass surgeries or valve replacements or paediatric surgeries. That gives them phenomenal experience.

Shetty does something else to cut costs. Every ICU patient has dedicated nurses watching over him, 24 hours a day. They work eight-hour shifts, standing in front of the patient. Shetty doesn’t provide chairs: “The moment you provide a chair, the efficiency of the nurse goes down by at least 30 percent.” He encourages attrition among them: “As they grow older, they don’t contribute as much to patient care, but their salary keeps going up.”

To keep salary costs low, he hires people with basic college education and trains them for jobs like reading radiology charts.

Going forward, the biggest challenge for Shetty is how to make sure all this doesn’t remain a one man show, and get the same quality. “That means enormous commitment to training and recruitment,” says Prahalad.

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Shetty is clear that the new facilities will be run by people who have perfected their skills at Narayana Hrudyalaya so that there’s no cultural mismatch. It is already running 49 training programmes and the plan is to turn it into an academic institution. “When you have an academic institution as a hospital, the succession plan is already in place,” he says.

The Wal-Mart Effect

Dr Devi Shetty’s Narayana Hrudyalaya in Bangalore uses economies of scale to keep the cost of treatment low

Rs 8.50 for a blood gas analysis

This normally costs Rs. 350-400 per test and forms the bulk of the cost for an ICU patient. Where others do 30 tests a day, Narayana Hrudyalaya does 2,000. It used these numbers to persuade manufacturers to install machines — which cost Rs. 12-15 lakh each — for free and make money instead by charging only for chemical reagents for the test.

Rs 110,000 cost of a heart surgery; 6,088 heart surgeries (in 2008), 1,232 fully paid for; Rs. 300 crore turnover (2008-09)

Unlike other hospitals, the bulk of its profits come from the out- patients ward, where the cost to the patient is low but the margins are as high as 80 percent. The number of walk-in patients remains high because they know the cost of surgery will be subsidised should they need it.

30 heart surgeries, 1,000 walk-in patients a day

Medicines and equipment account for 40 percent of revenue outflows, but original equipment makers for instance, don’t usually supply directly to hospitals. Narayana Hrudyalaya used these numbers to convince them to supply directly, at a low cost.

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