Indian Healthcare – Successful Business ModelsDr. Rakesh Kapur

The Context - Indian Healthcare Industry Understanding Business Models in Healthcare Comparative Case Study

Contents

Indian Healthcare Market

14%

6%

35%

17%

1%

11%

1%3%1%

3% 1% 6%

14%

6%

36%15%

5%

9%

2%

3%1%

3% 1% 5%

Healthcare pie (2006)US$ 34.2 Billion

Healthcare pie (2012)US$ 78.6 Billion

Growth : 15% CAGRPrivate Hospital Revenues

2006 – US$ 15.5 Billion2012 – US$ 35.9 Billion

► Understanding the healthcare market with 3P Model► Prevalence:

► High prevalence, likely to be higher than reported► Change in disease profile likely to drive the prevalence

higher► Significant disparity between states & socio-economic

classes in prevalence► Propensity:

► 3% of population slips below poverty line every year due to healthcare costs

► Average cost of single hospitalization equal to > 6 months of average household income

► Only 10-12% of Indian population is insured though growing at more than 35%

► Provider:► Although India has 20% of global disease burden, we have

6% of beds, 8% of doctors, 8% of nurses & 1% of paramedics ► Of the 13 Lakh private providers, 37% are unregistered

providing little quality assurance

Market Characteristics

Prevalence

Propensity

Prov

ider

3P Model of healthcare market

Indian Healthcare Market Characteristics

Consumer Viewpoint

► Understanding consumers from the 3A model► Accessibility:

► Inadequate infrastructure► High prevalence, increasing further► Regional disparity in India► Shortage of manpower

► Assurance:► Unregulated and fragmented market► Lack of data or information systems

► Affordability:► Inability to afford quality healthcare► Inadequate insurance penetration► Emergence of new diseases

Consumer viewpoint

Acce

ssib

ility Assurance

Affordability

3A Model of consumer needs

Why are private providers not filling the gap ?

1

2

3

4

5

6

INR 5.45

INR 5.92

INR 3.32

INR 6.87

INR 9.10

INR 3.65

Revenue per Bed / year (INR Mn)

1

2

3

4

5

6

22%

24%

17%

22%

30%

21%

EBITDA (%)

► There is considerable variation In RPB / year and EBITDA for hospitals within tier-1 cities

► It is possible to achieve operating margins of 28%-30%, however, choice of business model will be an imperative for success

UNDERSTANDINGBUSINESS MODELS

Understanding Business Models in Healthcare

Functional Mix Specialty Mix Level of Care Services Mix Growth Model

• Preventive• Therapeutic• Rehabilitative• Education• Research• AYUSH / CAM

• Single Specialty• Single Disease• Multi-specialty• Select Specialty

• Primary• Secondary• Tertiary• Quaternary

• Pathology Laboratory • Radiological set-up• Dialysis Units• Radiotherapy Units• Laproscopy Units

• Greenfield• Acquisition• Lease• Joint Venture• Congregation

Business Elements

Target Consumer - Positioning

Business economicsCapex per bed

Revenue per bed EBIDTA

Geographic Mix

Hospital’s “Business Model”

Bed; 17.2%

OT Rent; 17.1%

Pharmacy; 16.5%

Con-sum-ables, 19.4%

Consul-tants Fee;

15.4%

Radiology; 4.2%

Pathology; 5.1%

OPD; 4.6%

OT rent constitutes 17% of revenues but

indirectly it is responsible for 50%

of hospitals revenues

Pharmacy & Consumables generate 36% of hospitals

revenues

OPD, though generates 5% of revenues, is responsible for

50% of IPD admissions

HOSPITAL: SOURCES OF REVENUE

HOSPITAL: COST STRUCTURE

EBITDA; 17.8%

Labour & Salaries; 22.8%

Marketing & PR; 1.5%

Maintenance; 7.2%Pharmacy; 13.1%

Consumables; 10.5%

Utilities; 6.1%

Administrative expenses; 5.8%

Consultants share; 15.1%

(Operating Margin)

* All figures are a percentage of gross revenues

Specialty Mix – Key to a profitable business model

0% 30% 40%20%10%

Specialty Margin

ARPP (IPD)

0

50 K

100 K

150 K

200 K

Cardiology

30%

~30%

Orthopedics

16%

OBG

Neurosciences

20%

Internal Medicine

12%

Pediatrics

General Surgery

22%

23%

ALOS (Average Length of Stay) of these specialties is an important determinant of profitability, therefore their operational management is key to driving efficiencies

Note: • Bubble size - % revenue of that specialty• % inside the bubble – specialty’s EBITDA as seen in tertiary care facilities in metro cities in India

Service Mix

Pharmacy OT Doctors Radiology Pathology Consumables Room Misc0%

10%

20%

30%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

12.8%

6.4%

19.1%

4.1%

9.4%

17.1%

23.7%

7.4%9.3%

11.6%

23.3%

3.0%4.7%

19.0%19.8%

9.3%

19%

35%

10%

40%

35%

25%

5%

Orthopedics Neuro-surgery EBITDA

Significant variance in service mix impacts profitability through;’• Capital Expenditure• Revenue realization• Cost of delivery

Overview of Growth Models

Greenfield Acquisition Lease / Joint Venture Agglomerates

►Max►Manipal►Sterling►Columbia - Asia

► Fortis►Wockhardt ►Reliance ADAG

► Apollo Hospitals► Wockhardt Hospitals► Parkway Group► Narayan Hrudayalaya

► I-Ven Medicare (ICICI)► Asian Health Alliance► DM Healthcare

► Long gestation period,

delayed returns► High initial capital

requirement ► Land availability, especially in

metros is a challenge

► Fast ramp-up► High initial capital

requirement► Revenues accumulate from

day 1 ► Acquiring skilled manpower

along with asset limits

teething issues► Constrained by availability

► Low initial capital

requirements► Assured revenue base from

day 1► Profit / revenue sharing limits

risk► Focus on core competencies /

specialties

► Strategic stake (minor /

majority) in small to medium

hospitals across the country► Generates economies of scale

through bulk purchasing,

preferred services etc► Managing multiple partners

requires a capable

management team

► Capex: High

► Revenues: High

► EBITDA: Delayed, High

► Pay-back Period: 5-7 Years

► Capex: High

► Revenues: High

► EBITDA: High

► Pay-back Period: 5-7 Years

► Capex: Low

► Revenues: Low

► EBITDA: Medium

► Pay-back Period: 2-3 Years

► Capex: High

► Revenues: Medium

► EBITDA: High

► Pay-back Period: 3-5 Years

Target Consumer - Positioning

Lean Differentiators Differentiator

Cost LeadersValu

e

Cost / Pricing Level

Niche: Super-specialty

Niche: Nursing Homes

Indian healthcare delivery market has seen adoption of various business models in response to the local needs and changing customer behavior

A strong brand

Low cost provider

Revenue optimization

Stress on continuous improvement / innovation

Lean Differentiator

Seamless service delivery

1

2

3

4

5

Evaluating Business Models

9.009.009.00Integrated medical institutes9.009.008.00Academic medical institute9.009.007.00Medical Colleges7.009.007.00Indian Medicities 2.004.007.00Medical Mall: (Products & Services)5.009.006.00Super specialty hospital (Single/Multi)3.008.006.00Critical care set-ups4.008.005.00Nursing homes, Gr. Specialty hospital3.007.005.00Integrated Rehab Institute4.007.005.00Specialty hospitals (Single & Multi)5.008.004.00Diagnostic centres/ network clinics2.007.004.00Day care set-up2.006.004.00Multi-specialty Rehab Institute2.008.003.00Life-style & disease management centers2.007.003.00Wellness & rejunuvation centers5.005.003.00CAM Academic Institutes5.005.002.00CAM Hospitals

4.002.002.00Preventive checks & OPD; Vaccination centres

2.007.001.00Integrated Clinics4.004.001.00CAM Clinics1.004.001.00Specialty Clinics1.004.001.00Poly clinics6.004.001.00Partnering Public-funded programs1.002.001.00Clinic/network clinics

Operational Complexity

ProfitabilityInvestmentBUSINESS-MODEL

Higher investment and complexity of business, leads to better

profitability, if managed well

Scale: 1 to 3 4 to 6 7 to 9

LOW MEDIUM HIGH

Healthcare providerCentre

Insurance company

BPL Population APL Population

Viability gap1 funding in form of an annuity for setting up facilities in select non Tier 1

areas

Insurance premium2

State

75%

25%

100%Funds operating

and capital expenditure

Provides treatment

Reimburses private provider based on agreed upon tariffs

Indi

cate

s sh

are

of fu

ndin

g be

twee

n Ce

ntre

and

Sta

te

Cess/ Surcharge/ Health tax

Electronic health cards distributed by government

Out of pocket premium – 70%

Out of pocket premium – 0%PUBLIC

SECTORPRIVATE SECTOR CONSUMER

Stakeholders involved

Monitoring Agency

Ensures governance and quality of care

Financial

monitoring Quality monitoring

National Healthcare Model

COMPARATIVE CASE STUDY

Comparative Case Study – 2 Healthcare Chains

FY 06 FY 07 FY 08 FY 09 FY 10

0

2

4

6

8

10

12

14

16

18

0

500

1000

1500

2000

2500

3000

3500

2

6

10

14

16

670

1204

1427

2137

3170Hospitals Beds

FY04 FY05 FY06 FY07 FY08 FY09 FY10

0

5

10

15

20

25

30

35

0

1000

2000

3000

4000

5000

6000

4 5

7

11

17

23

31

219287

570

10351654

3331

4793Hospitals Beds

Example – Chain 1

Example – Chain 2

Chain 1 – Feeding on the brand (Empty Calories !)

2005-06 2006-07 2007-080

5

10

15

20

25

30

30.326.8

23.8

-12%

Series1

-30

-20

-10

0

10

20

30

40

50

60

30.3 34.3

49.3

-9.5-16-5.7

Existing Hospitals Expansion 1 Expansion 2

-12%

Existing hospitals have been optimized to the fullest

Expansions have witnessed de-growth in performance

EBITDA of the group has declined… …Expansions have not yielded fruit

EBITDA Rs cr EBITDA Rs cr

Chain 1 – Some key learning's from its strategy & operating model

Business Model► Multi-specialty tertiary care offering the entire functional mix► Growth through JV / Lease► Mid-value, mid-price differentiator positioning

Doctor engagement

► Belief in Brand > Doctor► Fee for service without flexibility► Poor star retention with significant loss in revenue due to attrition► No cross- leveraging of clinical staff across locations

Brand ► Strong regional brand perceived to be expensive not portable in other geographies

Growth

► Selection of city based on “me-too” strategy► No detailed market assessment► No clear line of sight on doctors► Operating model in Tier 2 not aligned to location dynamics► Purchase centralized for less than 20% of value

Patient experience

► Lack of common measures or frequency of measurement across locations► Soft Skill Training is a localized function with no impact measurement► Lack of standardized processes for feedback collection, evaluation or action► Look & feel - a function of acquired infrastructure rather than brand identity

Chain 2 – Every new expansion has fed the brand

2003-04 2004-05 2005-06 2006-07 2007-08 (9 m)

0

10

20

30

40

50

60

11.7

21.728.2

39.2

54.1

4 1 1 2 7

Existing hospitals

Expansions

EBITDA of the group has steadily increased despite manifold expansions…

Most of the expansions have yielded positive EBITDA either in Year 1 or 2

Example: Expansions done in 06

Series1-2

0

2

4

6

8

10

12

14

16

Hospital 1 Hospital 2

2006-07 2007-08

EBITDA Rs cr EBITDA Rs cr

Chain 2 – Some key learnings

Positioning

► Super-specialty with focus on specific specialties and creation of Centres of Excellence

► High-value, high-price differentiator positioning, though was dynamically altered in difficult markets

Doctor engagement

► Created and nurtured star doctors – differential payment model► Strong referral network► Invest in building a second line who initially feed off the brand► Designated HOD’s who had equity stake and nurtured new centers

Brand

► Created strong brand in metros initially and then expanded to nearby geographies thereby leveraging brand awareness

► Actively invested in creating international networks► Leveraged International association to attract domestic patients

Patient Experience

► A common MIS with central reporting► Segregated clinical management from process management to minimize conflict► Started a post-discharge management program► Instituted SOP’s though with limited success► Lack of standardization of look & feel, constrained due its lease / JV growth model

Chain 2 – Some key learnings from their strategy & operating model

► Aim to be first mover in corporate healthcare in most Tier 2 locations► Extensive market assessment (demand and supply) before entry► Clear line of sight on doctors► Asset light model – high number of brownfields with lease rentals linked to revenue► Followed differential strategies as per maturity of facilities► Revenue enhancement through surgical & case mix optimization in its mature

facilities► Enhanced utilization in newer facilities through referral network, outreach

programs & raising marketing spend to > 10%► Purchase standardized & centralized for more than 50% of value► Most Tier 2 hospitals are EBITDA +ve within first 2 years of operations.

Growth

Annexures

Healthcare Business Models (Annexure – A 1)

I. Preventive & Diagnostic focused models

BUSINESS MODEL/ DELIVERY FORMATS

EXAMPLE

HEALTHCARE FUNCTIONS TYPES OF RESOURCES

PreventiveDiagnostic

Therapeutic

Rehabilitative

Education

Research

Clinical

Care

Lab/Radiology

Allied

Non-clinical

Support

Conventional

Allopath

CAM

Med.

Intervention

Surg.

Partnering Public-funded programs

AIDS Campaign, Polio Vaccination                                

Disease Prevention Centres

Preventive checks & OPD; Vaccination centres

                               

Wellness & rejuvenation clinics

Ananda, Gold-spring                                

Life-style & disease management clinic

Medi-spa                                

                                   

Diagnostic centres/ network clinics

Dr. Lal's , SRL Ranbaxy, Stand alone set-ups

                               

Healthcare Business Models (Annexure – A2)

II. Therapeutic focused models

Global Healthcare MedicityMedicities

EHIRC, GangaRamSuper specialty hospital (Single/Multi)

Fatima Hospital, Holy FamilySpecialty hospitals (Single & Multi)

South point nursing hospitalNursing homes, Gr. Specialty hospital

Trauma Care CentresCritical care centres

Laparoscopy Units, Dialysis

units (NEPHRON, USA), Endoscopy centres.

Day care centres

Manipal Care & Cure ClinicsIntegrated Clinics

Cray Diabetes Management Clinic, Kaya SkinSpecialty Clinics

Apollo Clinics, Max-ClinicsPoly clinics

Single Consultant ChambersClinic

Surg.

Intervention

Med.

CAM

Allopath

Conventiona

l

Support

Non-clinical

Allied

Lab/Radiology

Care

Clinical

Research

Education

Rehabilitative

TherapeuticDiagnostic

Preventive

TYPES OF RESOURCESHEALTHCARE FUNCTIONS

EXAMPLEBUSINESS MODEL/ DELIVERY FORMATS

Healthcare Business Models (Annexure – A3)

III. Multiple, Rehab, CAM & Retail focused models

_Medical Mall: (Products & Services)

Vaidhyarathnam Moss, Holy Angels College of Alternative MedicinesCAM Academic Institutes

Caritas Ayurvedic HospitalCAM Hospitals

Dr. Batra Clinic, Ayurvedic clinics, Reilki Centres, AOL CentresCAM Clinics

Mayo Clinic, Rochester, Minn.Integrated Rehab Insti.

Rehabilitation Institute of ChicagoMulti-specialty Rehab Insti.

KGMCMedical Colleges

AIIMS, PGIAcademic medical institute

Medical City Dallas hospital (Over 95 specialties, attract patients across 75

diff. countries)

Integrated medical institutes

Surg.

Intervention

Med.

CAM

Allopath

Conventional

Support

Non-clinical

Allied

Lab/Radiology

Care

Clinical

Research

Education

Rehabilitative

Therapeutic

Diagnostic

Preventive

TYPES OF RESOURCESHEALTHCARE FUNCTIONS

EXAMPLEBUSINESS MODEL/ DELIVERY FORMATS

Emerging Opportunities (Annexure – B)

Medical InfrastructureAn estimated US$ 69.7 Billion is likely to be invested in medical infrastructure by 2012

Health Services OutsourcingCurrently a US$3.7 Billion industry, it is likely to double in the next 6 years and provide employment to more than 300,000 personnel

Health InsuranceWith premium collected of more than US$ 700 Million in 2006, yet only 2.4% of Indian population is insured. Premiums are likely to touch $ 3.8 Billion by 2012 with an insured base of around 10%

Training & EducationWith predicted shortage of 450,000 doctors and 1.2 Million nurses by 2012, medical & paramedical training could be a $2.2 Billion industry by 2012.

Medical DevicesCurrently a $ 2.1 Billion industry, it is likely to grow into a $ 4.9 Billion industry. With significant government backing, domestic contribution could increase to as much as 50%

Pathology LabsWith revenues of more than $850 Million in 2006, fuelled by technological advancements in data transfer, it could grow into a $ 2.6 Billion industry by 2012

Telemedicine73% of Indian population residing in rural areas provide a significant opportunity, since 80% of healthcare facilities are concentrated in urban India

Clinical TrialsClinical trials offer a huge scope for maximizing revenues for established players with a potential to grow at 25% annually into $ 900 Million by 2012