An article I recently read in the Wall Street Journal titled, “The Ailing Health of a Growing Nation” describes how the public healthcare system in India is in an abysmal state. According to the article, a senior official in the Indian health ministry said that the country has too many competing social priorities (like education and infrastructure) which cause an extremely inadequate investment in public healthcare by the Indian Government (1 – 1.4 % of GDP). Upon reading the article and conducting some cursory research about the state of public healthcare in India, it was evident that the egregious healthcare problems/crises that India faces will simply not be tackled through Government programs and healthcare alone.
There are promising developments in the private healthcare sector in India where certain firms whose business models rely on innovation and ingenuity have looked to maximize the reach and quality of their services. The executives of these firms have been working to design profitable business models that dramatically cut down the cost of healthcare without compromising the quality of their services. These businesses obviously have immense societal value as the importance of effective and accessible healthcare from a moral and an economic standpoint should be obvious. I read an extremely interesting article in the Harvard Business Review published in November 2013 titled, “Delivering World – Class Health Care, Affordably: Innovative hospitals in India are pointing the way” that analyzes the business models of some transformative firms in the Indian healthcare sector that are making significant strides in addressing some serious healthcare challenges that India faces.
The article first establishes that healthcare costs in certain Indian firms are extremely low when compared to average costs in American firms.
Examples: According to the article, cancer treatment that costs 2,900 USD in the HCG Oncology Hospital in India, costs 22,000 USD on average in the United States. Similarly kidney dialysis that costs 12,000 USD in the Deccan Hospital in India, costs about 66,750 USD in the US.
A crucial idea that the article then discusses is that the quality of healthcare in American firms and select Indian firms is roughly the same despite the huge price differential.
Examples: According to the article the survival rates of breast cancer patients in HCG Oncology in India is 86.9 % and 89.2 % on average in the US. Similarly the survival rates of patients with renal disease in the Deccan Hospital in India is 50 % and 41 % on average in the US. The authors of the article cite various other examples to indicate that the quality of healthcare services offered by these Indian firms isn’t compromised by the extremely low costs.
So how do we explain this price differential?
The most obvious reason that first comes to mind is the huge difference in the cost of labor between the two countries. However there is still a huge price differential after controlling for the differences in cost of labor.
Lets talk numbers.
According to the article, an open heart surgery in Narayana Health (NH) costs 3,160 USD. Out of this amount, 1054 USD goes to salaries and 2106 USD to other costs. Salary costs are split evenly between the hospital staff and the doctors (527 USD each).
According to payscale.com:
A registered nurse in India earns an average salary of 1,46,891 INR or 2448 USD per annum.
A registered nurse in the US earns around 62,159 USD per annum.
So using these numbers to approximate the price differential for hospital staff cost of labor, we find that the price varies by a factor of 25.40 (ie the hospital staff in the US earn 25.4 times the amount that their Indian counterparts earn).
Assume that the price differential for doctors varies by a factor of 3 (ie doctors in the US earn three times as much as the Indian doctors in these select firms).
So the cost of labor for the NH operation at US labor costs would be (527 * 25.4) + (527 * 3)) = 14,966.8 USD.
Total cost of the operation with US labor costs = 14966.8 + 2106 = 17,072.8 USD
Actual cost of an open heart surgery in the US = 75,662 USD – 342,087 USD
So even with US labor costs, the operation still costs a small percentage of what it does in the US (between 22.56 % – 4.99 %). (Data taken from the HBR article and payscale.com).
The authors also note that the cost of physical capital (like land, specialized equipment) is significantly higher in India.
This analogy clearly indicates that the strongest factor that facilitates lowering healthcare costs is the efficiency of the business models of these Indian firms.
The authors observe that a hub and spoke configuration of assets is a significant driver of this efficiency. The primary investments in physical and human capital is in locations where there is the highest concentration of consumers (typically from higher income brackets). These “hubs” tend to be large cities where significant revenue generation is facilitated by the high demand and income brackets of the immediate consumers. Secondary investments in physical and human capital is in locations where there is a relatively lower concentration of consumers (typically from lower income brackets). These “spokes” tend to be smaller cities/towns/villages where the immediate consumers are largely from lower income brackets. The spokes offer medical services that DON’T require high investments in physical and human capital and function as gateways to the hubs when a consumer requires a service that needs high value physical and human capital. Such an allocation of assets cuts costs significantly due to lower capital expenditure and higher productivity. It also boosts revenue generation by modeling the business as an effective economy of scale (as healthcare services in India have a high demand and low supply).
Their efficiency is also achieved by maximizing the productivity of human and physical capital by (i) adapting effectively to the market conditions of each locality, (ii) dynamically adapting treatment protocols to minimize negative outcomes, (iii) ensuring effective specialization of labor, and (iv) effective incentivization of cost cutting/frugality.
From a global perspective, these effective healthcare business models will increasingly compete with ineffective ones around the globe due to the growing trend of healthcare tourism.
In India, the Government should prioritize the effective implementation of laws and incentivizing constructive innovation in the private sector. Ineffective implementation of laws results in fraud, cheating and exploitation in many private sector firms. This has to be eliminated so that the forces of free market capitalism are aligned to achieve positive individual and societal outcomes. The Government should also provide incentives for firms to cut costs and reach consumers from lower income brackets. Broken incentive systems are as problematic as ineffective law enforcement because they will distort markets and prevent the creation of real value in the Indian economy. (Read the third point of the article, An idiot’s Guide to Inequality written by Nicholas Kristof in the New York Times). Therefore if the Government can be an effective referee whilst setting the goal posts on the right end of the field in the private sector, the innovation and ingenuity that will fuel competing private sector healthcare firms will help significantly address the healthcare crises in India.
Read: Corruption ruins the doctor-patient relationship in India, British Medical Journal, 8th May, 2014. Print.