Devi Shetty, MD
Cost is now the most pressing challenge in American health care. Despite attempts to rein in medical spending, cost reduction remains elusive. Health care spending in this country is undermining business competitiveness and results in wage stagnation. More and more working families can no longer afford insurance premiums and out-of-pocket costs, often going without care as a result.
If American ingenuity and leadership are not up to the task of cost reduction, then who has a solution? According to Vijay Govindarajan at Dartmouth’s Tuck School of Business and Ravi Ramamurti, a business professor at Northeastern, the answer lies with medical entrepreneurs in India who have cracked the code on delivering world-class care at low cost.
Reverse Innovation in Health Care: How To Make Value-Based Delivery Work
Their 2018 book, Reverse Innovation in Health Care: How To Make Value-Based Delivery Work, suggests that Western health care systems—and particularly that of the United States—could learn a lot from leading Indian hospitals about how to practice value-based care. It will come as a shock to most Americans that a number of Indian facilities deliver the same quality of care as the best facilities in the United States but at a stunningly small fraction of the cost. For example: cataract surgeries for $100, radiosurgery using CyberKnife for $3,000, vaginal deliveries for $120, home-based dialysis for $8,000 a year, and a $1 voice prosthesis device for patients with stage 4 throat cancer whose voice box has been removed.
Govindarajan and Ramamurti point to a number of U.S. innovators achieving some remarkable results, including efforts by Ascension Health to expand access to care and the University of Mississippi Medical Center’s rural health outreach efforts. But the thrust of the book highlights exemplary Indian entrepreneurs who have demonstrated how to deliver true value-based care. Health care knowledge and expertise have tended to flow from developed to lesser-developed countries. Now the tables have turned, and it is U.S. hospitals and providers that could learn from poorer countries and benefit from importing their low-resource, high-quality know-how.
The most intriguing case study is Narayana Health, a 6,000-bed hospital system in Bangalore that opened in 2001. Devi Shetty, MD, founded the system with the goal of treating all patients regardless of their ability to pay. That vision required developing ultra-low-cost care through ruthless efficiency and a culture of frugality. In 2014, Shetty brought his model to the Western Hemisphere and established Health City Cayman Islands (HCCI), a 105-bed hospital that is a joint venture between Narayana Health and Ascension Health.
This facility has demonstrated remarkable results. Costs are astonishingly low by American standards, and medical outcomes are equivalent to those of the best hospitals in the United States. Prices are 60% to 70% less than American hospitals, drugs are 90% less expensive, and equipment costs 50% less. The cost per hospital bed is $700,000, compared with $2 million per bed in the United States. There are no copayments or deductibles, and patients’ travel costs are paid by HCCI.
How can this be?
What medical entrepreneurs and breakthrough facilities such as HCCI have in common is a business model that is radically different from that of their American counterparts. It is characterized by five core principles:
To provide high-quality care at a price that ordinary Indians could afford, procedures had to be priced at less than 5% of what most Americans pay. In other words, an ultra-low-cost model needed to cut out 95% of the cost that is routinely designed into the American health care system.
A fundamental difference between the business models of leading Indian hospitals and American facilities is what determines price. Exemplary Indian hospitals offer services at a price that average patients can pay by themselves without the need for cumbersome insurance policies and layers of bureaucracy. Every aspect of the delivery system is designed accordingly to reduce unnecessary cost.
In contrast, American health care providers price services so that revenues cover operating costs in order to maintain a margin. There is little regard to what average working families can afford to pay. While third-party payment has insulated Americans from the cost of care, that insulation is wearing thin as costs are shifted to patients and with the astronomical rise in pharmaceutical costs. The two business models incorporate radically different value propositions in terms of ideology and customer focus.
What Reverse Innovation In Health Care shows is that high-quality care (outcomes) can be affordable if it is designed to be affordable (efficiency). In contrast, American health care is not designed to be affordable, but rather to maximize revenues and margins—and that is the crux of the problem. This book points out that some American innovators are on the right track, but most hospitals are mired in a business model that resists innovation and efficiency.
While affordability is widely cited as a mission of U.S. delivery systems, this book concludes that organizational culture must be committed to frugality and rigorous cost consciousness as a prerequisite to sustainability. Nibbling at the margins of cost reduction will not do.
Medical innovators in India have a lot to teach health care leaders and hospital boards about how to design and deliver value-based care. The U.S. can learn from less developed countries that have already cracked the code on how to design and deliver affordable care and be profitable at the same time.