Wharton health care management professor Lawton R. Burns has been analyzing physician-hospital integration for more than 25 years. He has just completed a new book, India’s Healthcare Industry: Innovation in Delivery, Financing and Manufacturing, and plans to follow it with a book focused on Chinese health care. Burns says the trends in China are remarkably similar to what has happened to the sector in India.

In this interview with Knowledge at Wharton, Burns, who is also director of the Wharton Center for Health Management & Economics, notes that India will face the same health care issues that the U.S has been struggling with over the past 20-30 years.

An edited transcript of the conversation follows.

On the three “p’s” of Indian health care:

This research is a book that we published this year through Cambridge University Press. It’s a guide to the entire health care system of India, designed for the people who provide health care, the people who make products that they sell to the health care providers of India, and the people who want to do business with any of the stakeholders in India’s health care industry. The book is organized around three topics, what we call the three “p’s” of health care: the providers of health care, the payers for health care and the producers of health care products. And we loosely tie all of that together as the health care value chain of India.

Let me drill down a little bit on the three p’s. With regard to the providers, there is a small but growing set of private hospital systems in India, mimicking what we have here in the U.S. The vast majority of their hospital industry, however, is public — government-owned hospitals. In terms of the medical profession, there is a group of allopathic- trained physicians like what you’d find here in the U.S. and other Western countries. But supplementing that is a group of traditional medicine practitioners and totally untrained practitioners, which even people over there call quacks. Then you have a private insurance industry, which is just getting off the ground. And you have some local and community health insurance schemes to try to supplement that.

Regarding manufacturing, India has become famous for its generic pharmaceutical manufacturers. It is trying to get a biotechnology industry and a medical device industry off the ground. The book goes through all of these things, largely centered on the private sector in India.

“The medical tourism business going from the West to the East is really a lot of hype.”

India and the U.S. have a number of parallels that are quite interesting. That makes it easier for people to understand India’s health care industry if they understand a system like their own, such as ours. So, for example, they have very similar structures for the financing and delivery of health care. They also have the same issues and concerns that we do. I can elaborate a little bit on this. In terms of financing, their financing in health care is fragmented across several different stakeholders. You have a weak central government, states that do a lot of provision of health care. In fact, it’s their constitutional responsibility to provide and finance health care. You have individuals, and now you have a growing number of private sector firms providing health coverage for their employees. So health care financing is fragmented across all of these just like in the U.S.

At the same time, you have both public and private sector health care providers. It used to be primarily public sector. But now we have the rise of private hospital chains, and you have this enormous number of private physicians. That’s really what the public prefers — the private sector over the public sector, which is very similar to the U.S.

So in terms of financing and the provision of health care, you have these two systems that are increasingly private sector: very fragmented in terms of financing, and also very fragmented in terms of the structure of the delivery systems. You have lots of small hospitals, lots of small doctors and small clinics scattered over an enormous geographic area with very little consolidation or concentration of activity. So there’s lots of room to grow and consolidate.

That’s on the structure and the financing side. India has the same set of concerns that we have. We call it here the iron triangle of health care. The three angles of that iron triangle are cost, quality and access. India sees a rising cost of health care as it moves from the public to the private sector and more technology begins to filter in. And, as you have more private sectors providing health care, you also have access problems, because there’s a low level of insurance coverage in that country. People have to pay an enormous amount of the health care bill out of pocket. Then quality is the frontier for India, because there’s basically no regulation of India’s health care system.

On the different types of health care providers in India:

One of the things that really surprised us was the composition of the medical profession in India. It’s fascinating. There are about 700,000 of what we call allopathic physicians in India, people with typical medical school training…. And a lot of the physicians who are allopathically-trained in India, trained at some point in the U.S. or the U.K. But complementing those 700,000 allopathic physicians are 700,000 traditional practitioners of medicine. In India, that’s called Ayush, which is an acronym for Ayurvedic, Yoga, Unani, Siddha and Homeopathy. They each have their own sets of medical colleges and training institutions. They’re called registered medical practitioners. On top of all that, you have anywhere from one million to two million totally untrained, unsupervised practitioners, largely found in rural areas. People normally refer to them as quacks. They’re basically the primary care delivery system for India, which is still a largely rural society.

So that was one major set of findings that surprised us. The other set of findings that surprised us had to do with India’s hospitals, particularly in the private sector. It turns out that a lot of the private hospitals are mimicking the same strategies that U.S. hospitals and hospital systems have been following for the past 15 to 20 years … [such as] forming hospital chains, employing doctors, like we’re doing here in the U.S. and … diversification, where they’re getting into quasi- and unrelated businesses to try to grow their footprint. They’re doing that not just in India, but across Southeast Asia. So they’re doing all three things at the same time, and that’s very similar to what we see here in the U.S.

On why expectations about medical tourism are overblown:

One of the more practical things has to do with the medical tourism business. There has been an awful lot of speculation over the past 10 years that as India develops its private hospital systems, those systems will increasingly attract U.S. and other Western patients to fly over to India to these private hospitals for surgeries and perhaps also combine that with vacations. There are huge expectations that the private hospitals in India will flourish with this influx of Western and U.S. patients, which will not only boost their revenues, but also boost the India tourism business, and perhaps take away business from the medical providers here in the U.S. That’s been on the discussion table for about 10 years.

What we found out is that those expectations are overblown and that the medical tourism business going from the West to the East is really a lot of hype. We found instead that there are several barriers to U.S. patients going over to get treatment from Indian providers, not the least of which is the fact that most health insurance schemes here in the U.S. don’t cover medical tourism travel. The Medicare system, which pays for about 40% of all health care expenditures here in the U.S., will never cover treatment in India. The American medical profession has only embraced medical tourism in a lukewarm way, and basically advocates against it, saying there are no malpractice or liability safeguards for you if you go over there.

Labor unions aren’t crazy about their members going over to India. Employers aren’t crazy about trying to coerce or strongly encourage their employees to go over there. So there are a number of things impeding that flow of traffic. I think what we’re going to see instead is what we call domestic medical tourism, where patients in one part of the U.S. will go to another part of the U.S. for health care, rather than go to India.

The best illustration of this is the partnerships the Cleveland Clinic has formed with various big-box retailers for cardiac surgery. Those big-box retailer employees, when they need heart surgery or heart bypasses, are not going to fly to India; they’re going to fly to Cleveland.

On strategic opportunities for Western firms in India:

There are a number of strategic opportunities for Western firms in India. One of the more interesting things we found is that in contrast to the West and other countries in Europe, the bulk of spending on health care in India is on retail pharmaceuticals. It’s not on hospitals and doctors. So 50% to 60% of all health care spending over there is on retail drugs. When you go to India, you find that there is very little in the way of an organized retail pharmacy sector — maybe 10% of the pharmacies over there are in chains of any organized fashion. That means 90% are basically mom-and-pop operations.

“If you want to go [to India] and set up retail pharmacy operations, you have to keep in mind that the average consumer isn’t spending much money. But there is a lot of collective money to be gained.”

There is an opportunity to develop more advanced retail pharmacy operations over there. A number of my Wharton students who are Indian go back to India after they get their MBAs to set up these retail pharmacy chains city by city, because they recognize the opportunity.

The other thing they have to think about, however, is even though retail drugs in India constitute, let’s say, 50% of all health care spending, that’s in the aggregate. But at an individual level per person, the amount spent on drugs is pretty small. India still has 400 million people who are really poor, making maybe $1-$2 a day. So they don’t have a whole lot to spend on pharmaceuticals. If you want to go over there and set up retail pharmacy operations, you have to keep in mind that the average consumer isn’t spending much money. But there is a lot of collective money to be gained in terms of market share by developing these operations.

On the parallels between India and China:

After I taught the global modular course on India’s health care system, I developed a second global modular course on China’s health care system. The last two years, I’ve gone over to the Guanghua School of Management at Peking University to teach another four-day course, but this time on China’s health care system and its health care reforms. And the similarities between India and China are remarkable.

First, both are very large countries geographically. They have huge populations — over one billion in each country. They’re very spread out. You have lots of markets you have to serve. The infrastructure for getting to all these markets is challenging, to say the least. And you have very small private sectors in health care. Much of the health care is organized in India at the state level, in China at the province level. So you have these layers of government that you have to deal with.

Very small portions of the provider industry are Western trained, and they have very similar medical school structures. And one thing that’s really remarkable when you go into these two countries is the fact that the vast majority of the physicians have maybe three to five years of training after high school. And so they have issues with the quality of health care, access to health care. China right now is engaged in rolling out health insurance to almost the entire population. And what China is going to experience is the rising cost of health care, paid for by the government through the expansion of this health insurance scheme. They are going to be worried about the same iron triangle issue that India is worried about, and that we’ve been struggling with here in the U.S. for the last 20 or 30 years.

On the challenges of integrated health care:

What’s really interesting is what’s happening to some of the private hospital systems over in India. When I was over there last in the fall of 2012, I gave my Indian School of Business (ISB) students a final exam where they had to read the annual report of Fortis Healthcare, which is the second largest for-profit hospital chain over there. If you read through Fortis annual report for 2011-2012, it talks about how they are into the integration of health care, which is a very Western idea.

“What we have done is describe the totality of India’s health care system: The payers, the providers, the producers, what we call the value chain of health care, and put that all together systemically with the research evidence that exists.”

Fortis was building its horizontal hospital chain. It was getting into physician employment, attracting star physician business and building up the value chain of health care — the people who were referred to the Fortis hospitals, diagnostic clinics and things like that. They were also diversifying both geographically across Southeast Asia, as well as into different product markets in health care — for example, acquiring dental clinics in other countries.

I asked my students to critique those strategies, because those are the same strategies that U.S. hospitals have been following for the past 15 to 20 years, with mixed, if any, success. I was asking them to figure out: Are you going to have the same outcomes as we’re having, or are you going to have different outcomes?

What’s happened in the past two years since I was there — and this is what’s been in the news — is that Fortis Healthcare has been de-diversifying and de-integrating, basically realizing that all those businesses and geographies they were occupying weren’t helping them. They went into massive debt to acquire these things. And now they’re getting back to focusing on their core hospital market and their core geographic market of India. So that’s an illustration of hospitals in India mimicking what hospitals here in the U.S. have done, coming up with the same results and then having basically to go back to their roots.

That’s one of the things we discovered when we developed this chapter on India’s hospital systems.

One how the study dispels misperceptions:

I can think of at least two. One we’ve already mentioned, and that’s global medical tourism. [Second,] people thought that as Indian entrepreneurs built health cities in Bangalore and other major metropolitan areas in India, more and more Western patients would go over there to get health care through these cities. That hasn’t happened.

What’s even more interesting is that one of the entrepreneurs who developed the first health city in India, the well-known Dr. Devi Shetty, instead of trying to attract U.S. patients over there, is now building a health city in the Cayman Islands. You will no longer have to fly to India for health care with Dr. Devi Shetty in his health city. You can just go down to the Cayman Islands and have it done there. So that was some of the hype that we thought needed to be dispelled.

I think the other thing has to do with whether or not those health cities can be replicated by other players around the world, and particularly here in the U.S. Devi Shetty’s model has gotten a lot of attention here. What we found, though, is that there are a number of advantages that Dr. Shetty had in developing his health cities back in India, which other people won’t enjoy. For example, a lot of the financing came from within his family, from his father-in-law. A lot of the land was donated or given at low cost by the government. Those are advantages that allow you to run a low-cost operation and deliver care and subsidize it for the poor and the nonpaying patients in India.

But other hospital systems that don’t have those advantages won’t have that low-cost structure and won’t be able to duplicate what Devi Shetty has done.

On what makes the research unique:

There are a lot of books on India’s health care system. And I do not pretend to be the expert on everything going on in health care systems in India, particularly with regard to rural health care delivery, traditional medicine and things like that. What we have done, though, is describe the totality of India’s health care system: The payers, the providers, the producers, what we call the value chain of health care, and put that all together systemically with the research evidence that exists.

On what’s next:

Based on the global modular course that I taught in Beijing, I’m now writing a companion volume on China’s health care and reform, pretty much based on the course I taught over there, using the input of the guest speakers who came to that course, and my teaching assistants, who are Chinese, and who were in my MBA program.