“How can health care and innovation in India be translated into measurable outcomes?” Pervez Ahmed, CEO and managing director of Max Healthcare, a leading hospital chain based in New Delhi, asked a lecture hall filled with medical executives one recent afternoon in Hyderabad. India’s US$40 billion-a-year health care industry has grown rapidly and is now the second-largest service-sector employer in the country (after education), providing jobs for about 4.5 million people directly or indirectly. Highly qualified doctors and scientists, state-of-the-art technology and low costs have helped India become an attractive global hub for medical tourism, clinical studies, and research and development programs. Now, however, Ahmed — like many others in the sector — says health care in India is at a critical turning point, putting its innovative acumen to the test.

Ahmed and a host of other health care executives spoke during a recent three-day course titled, “Health Care Innovation in India,” taught by Wharton health care management professor Lawton R. Burns and jointly offered by Wharton and the Indian School of Business (ISB) in Hyderabad. As Ahmed and the other presenters noted, despite its stakeholders’ sky-high growth expectations, health care in India is plagued by deep-rooted inefficiencies which could derail progress. Sustaining India’s competitive advantage in health care, they agreed, hinges on the ability of hospitals, drug manufacturers, biotech firms and non-governmental organizations (NGOs) to continuously find new and efficient ways to build their businesses while addressing the needs of the millions of Indians without adequate access to medical services.

Managing What Is Measured

This is where razor-sharp performance tools and metrics come in, the presenters noted. Consider Max’s chain of hospitals, which has grown rapidly since it was founded in 1985 and now has 800 beds and more than 1,500 physicians in eight hospitals in New Delhi. To manage its growth, Ahmed said, Max has deployed an arsenal of management techniques, notably Six Sigma and “lean theory.” Aimed at improving the quality and efficiency of the services it provides, the combination of Six Sigma and lean operations — more widely used in sectors such as auto manufacturing than in health care — has provided Ahmed with plenty of proof of the extent to which the sector can benefit from a focus on metrics. For example, these techniques, according to Ahmed, have helped Max to greatly reduce the incidence of infections in their hospitals.

“Lean theory means doing the right thing at the right place at the right time — and doing it right the first time,” said Ahmed. What’s more, the benefits aren’t confined to laboratories or operating theaters. “Applying lean theory and Six Sigma increases margins, cash flow [and] customer satisfaction. It also reduces inventory and thereby waste.”

Another hospital chain honing its use of metrics is New Delhi-based Fortis. One of the largest hospital chains in the country, it exemplifies the growth of health care in India. Starting with the opening of its first hospital in Mohali nearly ten years ago, it has been expanding nationwide, primarily through a fast-paced acquisition strategy. As Shivinder Mohan Singh, the company’s managing director and another course presenter, recounted, the first major step came in 2005, when Fortis bought Escorts Heart Institute & Research Centre, tripling its size. In December, it closed a deal to acquire 10 hospitals from Wockhardt Hospitals, bringing the number of hospitals under the Fortis brand to 39 and increasing the number of beds to 5,180 from 3,278. More growth is on the way, Singh added. “By 2012, we will have 7,000 beds.”

As with Max Healthcare, Fortis has been focused on efficiency and is reaping the rewards. Its first facility took three years to break even; now break-even is achieved in less than half that time. “We try to make systems more efficient, use our machines better,” Singh noted. “Our infrastructure [cost] per bed is US$150,000; in the U.S., it is US$1 million or so.”

The core indicator that Fortis uses to measure its performance is average revenue per occupied bed (ARPOB) over a year — similar to ARPU (average revenue per user) in telecoms and ARR (average revenue per room) in hotels, according to Singh. “You don’t make more money for me by staying longer. If I can get you healthier faster, then I can get you out in seven days instead of nine days. Money happens in the first 48 hours, [during] surgery and in diagnostics.”

One benefit of the company’s growth strategy is that it is helping it achieve greater economies of scale and reach. As Singh noted, patients in India tend to seek care from specific doctors, which isn’t always cost-efficient for hospitals. By virtue of its size and geographic spread, Fortis hopes to change this.

The strategy also chips away at the overall inefficiency of India’s hospitals. Currently, 70% of beds in the country are in government hospitals, but 80% of the population seeks private health care. Unlike in developed countries, more than 70% of health care expenditure in India is out-of-pocket. Patients are served by a fragmented hospital system, with more than 80% of hospitals having fewer than 30 beds and only 1% managing more than 100 beds. Chains like Fortis want to change this by using M&A to consolidate the sector.

Though the end goals (growth and efficiency) are the same, other hospital companies are taking a different tack. For example, in contrast to Fortis, Apollo Hospitals — India’s largest chain — has been growing organically, according to Preetha Reddy, Apollo’s managing director. The company currently has more than 10,000 beds in 43 hospitals.

Beyond hospitals, Apollo has also expanded into other parts of the health care system, from a chain of retail pharmacies to back-office medical services and international consulting. Two big growth areas, Reddy said, are telemedicine — providing health care to patients in remote areas over the phone and Internet — and education. Apollo currently runs 11 nursing colleges, with about 3,000 graduates every year. So acute is the medical manpower shortage in the country that even if it hired all the nurses graduating from its schools, it would still face a shortfall, she noted. So, the company is starting 10 more colleges with similar training programs for physiotherapists, clinical assistants and other technical specialties.

Regardless of which part of the health care sector it is in, Apollo focuses heavily on the price advantage India has over the U.S. and other developed countries. For instance, a hip replacement in India is 13 times cheaper than in the U.S., and gall-bladder surgery eight times cheaper.

Quality, too, is a factor fuelling Apollo’s growth. It was one of the first hospitals in Southeast Asia to be accredited by the Joint Commission International (JCI), which sets global quality standards for medical services. Six out of the 15 Indian hospitals that have JCI accreditation belong to Apollo. “What’s more, our biggest advantage has been in processes and in tying up with the best in the world on research,” said Reddy. “For cardiology, we work with the Cleveland Clinic; for cancer, we collaborate with Stanford Medical; for epidemiology studies, with Johns Hopkins.”

Reddy also described the “dashboard” of performance metrics, which she and Apollo hospital chiefs monitor every day. Clinical indicators include outcomes, length of stay and infections in ICU, while asset utilization indicators include the use of operating theaters (which should be at least 18 hours a day or be closed) and material costs (which should be around 30% of revenues). Human resource indicators include cost per employee, retention, hours of training and a satisfaction survey. Another HR component is what Reddy called “the clinician engagement” model. “We treat our doctors as customers. We give them the environment they want. Management is a separate support system. It looks at improving processes, to best give the doctor the time to concentrate on patients.”

A Global Hub

The growing role that India could play in the global health care arena was highlighted by Hasit Joshipura, vice president of south Asia and managing director in India for U.K.-based GlaxoSmithKline (GSK). “Until recently,” Joshipura said, “one-third of the planet accounted for 84% of the pharma market, but that is changing. India and China are the new growth markets.” What’s more, the costs of developing new drugs are increasing, while the revenues a pharma company can generate from the time that a drug is launched to its peak is decreasing. The key to survival, he said, was for pharma companies to be searching continuously for new markets and ways to cut costs.

That point isn’t lost on India’s biotech companies. Collectively, they earned US$2.5 billion in 2009, 18% more than the previous year. Vaccines accounted for more than half of the revenue pie, with six of the top 12 biotech companies — led by Serum Institute of India — specializing in vaccines.

But whatever the specialization, all biotech firms face the same challenge: Their main performance metric is based on how many new drugs they have in the pipeline, which require not only enormous R&D budgets but also many years before their clinical trials are completed and they begin generating revenue.

According to Varaprasad Reddy, founder and CEO of Hyderabad-based Shantha Biotechnics, “the real innovation for new products has still not started. So far, what companies have done is meet immediate needs within the WTO guidelines [for intellectual property right protection].” The reason? A scarcity of investment funds is holding back biotech innovation. “For new molecules, we need lots of money. Even if our research costs are about 20% of what they would be in the U.S., no bank in India will give money for R&D,” he stated. But India’s low costs are certainly attractive to Western biotech companies, which have begun taking stakes in and partnering with Indian counterparts.

One way Indian biotech firms can gain investor awareness is to forge an international presence, as Shantha’s experience shows. Of the roughly US$54 million of revenue the 16-year-old company generated in the last fiscal year, India only accounted for less than 5%. It is most known in the industry today for its Hepatitis-B vaccine — the first recombinant-DNA vaccine to be made in India, supplying more than 50% of global vaccine demand via an agreement with UNICEF. Another big milestone was its launch last year of an oral cholera vaccine, which initially had no buyers, but then the Bill & Melinda Gates Foundation stepped in and ordered 50 million doses.

These projects caught the attention of French pharma major Sanofi-Aventis, which acquired a majority stake in Shantha for 550 million euros (US$758 million) in July last year. As Varaprasad Reddy explained, “Sanofi-Aventis wants to develop Shantha Biotech into a global hub for R&D,” while using the brand in other developing countries.

Bang for the Buck

According to Wharton’s Burns, no discussion about innovation in health care in India would be complete without examining its impact on millions of Indians who have little or no access to adequate medical services. In global comparisons of health care spending, India is among the lowest ranked, with government health-related spending less than 5% of GDP. Rural Indians spend nearly 27% of their income on health care, and 35% of hospitalized Indians fall below the poverty line.

A big problem is that public health services in India are overcrowded and groaning under the strain of crumbling infrastructure. The system is also dogged by corruption, with providers levying informal fees for services that should be provided free of charge. Meanwhile, private health care is prohibitively expensive, substandard and often unregulated.

But can India’s health care players address these problems while still pursuing their ambitious plans for efficient growth and innovation? It’s a challenge that many NGO executives operating in Indian health care are grappling with, including Ashok Alexander, head of Avahan, an HIV/AIDS prevention program run by the Bill & Melinda Gates Foundation.

According to Alexander, the key is focus and scale — that is, saturating large geographic areas with a particular health care service to gain traction and become a catalyst for other services. Since its launch in 2003, Avahan homed in on 650 towns in six states in India — Andhra Pradesh, Tamil Nadu, Maharashtra, Karnataka, Manipur and Nagaland — and expanded rapidly to reach out to more than 300,000 female sex workers, high-risk men who have sex with men and transgenders, and drug users. To do that, the foundation is investing US$350 million, 70% of which is being spent on prevention and the remainder on advocacy, best practices transfer and communication.

But how does the foundation know whether Avahan is achieving its mission? Along with scale and focus, Alexander noted that Avahan uses an arsenal of tools to prioritize spending and monitor its performance — from surveys conducted by independent research agencies and program data that is analyzed monthly to qualitative information gathered at clinics. In other words, performance metrics play just as large a role at NGOs such as Avahan as they do at health care’s revenue-generating, profit-focused players.

That’s been a critical component of the Acumen Fund’s approach to measuring social returns on its investments, said Varun Sahni, country director of the New York-based organization which invests donations from philanthropists in projects in the same way that a venture capitalist would in a revenue-generating business. In addition to a rigid due diligence process, Acumen Fund applies an internally developed framework to its investments. By comparing each investment with a real or hypothetical charitable “option,” Acumen says it can quantify how its social impact compares with that of other philanthropic options. At the same time, “we have clear social return criteria that comes before financial return,” said Sahni.

With more than half of the US$18 million that Acumen has invested in India going towards health care, one of its most successful investments is its joint venture with private-sector Hindustan Latex to develop the LifeSpring Hospitals network. Providing high-quality, bare-bones maternity and child health care to low-income Indians, LifeSpring has cared for more than 70,000 patients and has delivered 4,500 babies. By 2012, LifeSpring expects to have set up 30 hospitals across the country and it plans to use a franchising model to greatly expand the number and geographic coverage of its hospitals.

Relentless cost control has, and will continue to be, key. LifeSpring only spends between US$150,000 and US$200,000 to set up each of its nine hospitals, rents its facilities instead of owning them, and has standardized processes. But perhaps more critical to keeping a lid on costs, said Sahni, is avoiding the temptation to branch out into other areas of health care and staying focused on what it does best: providing maternal care.

Having the Vision

One of the recurring themes throughout the three-day course was the importance of the “soft” — that is, non-financial, people-oriented — metrics used to measure and monitor health care innovation. As Deepa Krishnan of Aravind Eye Care System, the largest eye-care provider in the world, asked: “How does an organization innovate with compassion?” With five hospitals and three managed eye hospitals, the nonprofit screens more than two million patients and performs about 300,000 surgeries a year. Sixty percent of its patients are treated free of charge. What’s most striking about Aravind, however, is not only its productivity, but also its high quality (half the complications compared to the U.K.) and affordable care (at less than 1% of eye care costs under the U.K.’s National Health Service).

Like Avahan, scale has been important at Aravind. In its early days in the 1970s, it set up “eye camps” to reach the underserved rural poor. “But we found that we were only reaching 7% of those in need,” said Krishnan. “So we moved heavily into telemedicine and set up 33 primary care centers. These centers enable rural users to interact with doctors and diagnose their problems on the spot. It also means we use our scarce resources, our doctors, more effectively.”

Finding innovative ways to reduce costs while catering to the poor also led Aravind to manufacture intra-ocular lenses, which are used to replace an eye’s natural lens after a cataract operation. This reduced the cost of the lens from US$100 per pair to US$2. The key to meeting the health care needs of the poor, however, said Krishnan, is beyond process improvements and standardization. “It lies in the softer stuff — it comes from compassion and from owning the problem.”