Compassion vs. Cost: How Franchising could improve India's Healthcare

"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.

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