Narayana Hrudayalaya: A Model for Accessible, Affordable Health Care?Published: July 01, 2010 in India Knowledge@Wharton
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."