MANAGEMENT BY CHOICE
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MANAGEMENT BY CHOICE

 
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MANAGEMENT BY CHOICE:

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.

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. Filling the Gap 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. (Can we get Pratap
Reddy, Apollo Hospitals to furnish details on how many were fully paid
for and how many were done at no cost to the patient!)Yet, the
hospital makes a tidy profit. The Narayana Hrudyalaya group had a
turnover of close to Rs. 3000,000,000 (300 Crore) in 2008-09, up from
Rs. 1500,000,000 (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 in Mexico.
“Next year our turnover should be Rs. 6000,000,000 (6000 Crore) and
after Phase 1 of the Health Cities plan is complete in 2010, we should
be closer to Rs. 1,000,000,000 (1000 Crore),” says Sreenath Reddy,
Chief Financial Officer.

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 low 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 the
internationally famous management guru, University of Michigan’s C.K.
Prahalad.

The hospital has been discussed extensively in Prahalad’s 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! (Can any one tell me how much does Apollo Flagship
Hospital at Chennai charge?) 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.

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.
200,000 - 300,000, 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.”

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. 400,000 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 pediatric
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.

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.
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