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Hospitals are capital intensive organizations. What can healthcare CXOs do to achieve sustainability and profitability in the competitive healthcare market? Healthcare Executive finds out.

One of the signs of a healthy tech company is a strong balance sheet. The same could be said about a hospital; whatever be the size of the chain, it’s not a sound business model, unless it passes the radar of an auditor.

Clearly, financial mismanagement can wreak havoc for a business, especially a hospital. Controlling costs and generating revenues is a tough task.

Cardinal Rule :

Cost Structure plays an Important Role in the Financial Health of a Hospital.

While it doesn’t appear in the priority list of hospitals, the importance of cost analysis is significant. “Majority of Indian hospitals don’t do cost analysis, that’s their hamartia,” says Narendra Karkera, Director of Hosmac. Hospitals don’t come under Cost Record and Audit  rules, so many ignore it. Due to this they often transfer this cost, due to underutilization, inefficiency and wastage of resources to the consumer,” he notes.

Of course, healthcare is a highly fragmented industry, which relies heavily on manpower, technology and capital. And according to Karkera, there are two types of cost centres namely service centres and revenue centres. Revenue centres generate revenue and also incur cost. But service centers like biomedical engineering do not generate revenue. “It is important to manage service centres as they are often taken for granted. If you outsource it to a third party, it’s easier to control costs,” he adds.

Perils of a One-Size-Fits- All Price Benchmarking System

However, what’s cause for worry is how Indian hospitals have been unable, for decades now to put into motion any sort of expense cutting measures, he notes “In their pursuit of growth, hospitals often ignore how much service centers cost them. Every doctor wants the biomedical engineer to check the operation theatre before every operation. But, if it’s a chargeable service, then they won’t ask for their service every time. Similarly, many hospitals often compare themselves with other players in the market to decide their price list. However, the infrastructure cost of each hospital is different, so one cannot blindly create a pricing system based on one’s neighbour. A nursing home cannot charge as much as a tertiary care hospital because the quality of manpower, equipments etc are very different from that of a tertiary care hospital,” he concludes.

Viability versus Sustainability

Take the case of GlenEagles Global hospital. It is part of Parkway Pantai, a fully owned subsidiary of IHH Healthcare. In India, Gleneagles Global Hospitals operates a chain of multi-super specialty hospitals offering tertiary and quaternary healthcare services in Hyderabad, Chennai, Bangalore and Mumbai.

Clearly, the hospital had focused on cost and process innovation to become operationally efficient. According to Dr. Jagprag Gujral, COO of GGHviability of a hospital typically means whether a new hospital will be able to become sustainable. “The first and foremost point that makes a new hospital viable is to get the model right, which means ensuring that the intrinsic quartet – scale, specialty portfolio, total investment and expected pricing -is in line with the needs of the local demography that the hospital is going to serve. An extrinsic factor that significantly affects viability is the intensity of existing competition.”

Sustainability on the other hand is dependent on the ability of a hospital to become the healthcare provider of choice to those who avail its services, while keeping operational efficiency high. The ability of a hospital to create a brand pull, at least in its neighbourhood, is very important. There are two components that create a brand pull for a hospital. One is to become known as an institution of high ethical and clinical standards, and the other is patient centricity which entails a fine balance between empathy and professionalism. Last but not the least, it is important to function with high operational efficiency to keep costs under control, although in the Indian context most of the hospitals have this feature well entrenched in their management philosophy.

Average Length of Stay

But then why do some hospitals accumulate so much debt? “Occupancy is central to a hospital’s functioning because in addition to being a financial metric, low occupancy is also a fundamental question regarding usefulness of the hospital. Average length of stay is a good parameter to optimize because on the one hand it allows patients to not have to spend more time in hospital than required, and on the other hand it also allows the hospital to use its beds optimally thereby staying financially healthy even at relatively lower prices. Net revenue per patient isn’t a very important metric in isolation because depending on the case, revenue can vary widely. Capital Expenditure invested per bed is an indirect metric hence not very useful, although total CE invested is important, and as mentioned previously it forms a part of the intrinsic quartet for evaluating a new hospital,” says Gujral.

Don’t set up your hospital in an already

Overcrowded Market

And of course, some hospitals make poor location choices. “One of the most common strategic mistakes is to set up a hospital in an overcrowded market like Delhi, Mumbai or Bangalore,” says PL Mehta, Managing Director of Neotia Healthcare Limited.

He also notes that several hospitals face a competitive future in which a growing number of organizations seek to serve the growing middle class market. The increase in delivery infrastructure requires an increase in healthcare professionals and supply has been inadequate. This has created even greater competition among hospitals. Labor shortages might also bid up the hospital’s labor costs, which already account for 40 percent of hospital’s cost structure. High attrition rate also threatens the efficacy of several low cost SOPs developed by hospitals.

“A hospital needs to ensure itself a steady supply of clinicians and nurses by diversifying into clinical  and research activities. In order to achieve sustainability, it’s important to minimize the expenditure on manpower, by avoiding employment models,” he says.

Balancing Price, Quality and Service

So, what is the real test of a hospital’s business model? Siddharth Ranjan, former CFO of Kalinga Hospital, points out that a sound business model ensures viability and sustainability in the long run. “The business model of a for profit hospital which intends to reach out to most patients in its geographic area would be different from one which want to attract discerning corporate clientele. Factors like average length of stay, occupancy rate, net revenue per patient, CE invested Per Bed Day capacity affect the viability of a project. Each hospital, whether for profit or not should constantly review these benchmarks and take prompt corrective measures whenever required. However, what’s singularly most important is creating and maintaining trust amongst the target audience . Unfortunately there are few hospital in our area which pass this litmus test,” he adds.

Factors Hospitals Should Focus On

Ranjan points out that hospitals should focus on hygiene, quality para-medical staff,  right kind of medicos / doctors suitable to the adopted business model and corporate philosophy, weeding out the black sheep and aggressively update technology to keep it sustainable.

Technology obsolescence, in addition to the generally high setup cost, also continues to be a challenge for Indian healthcare sector because many of the equipment are expensive or imported. “For most setups in India the wish to always have the cutting edge technology may spell doom. For example a 1.5 tesla machine could still suffice today if the target audience is cost sensitive. Replacing a 1.5 tesla machine with 3 tesla machine to remain up to date may very adversely affect cash flow and thereby lead towards bankruptcy for many Indian hospitals operating in smaller towns. It’s better to have a documented approach regarding adopting and updating/ replacing ageing equipment,” adds Ranjan.

Cloud Nine

on how it solved its Cost Challenges

There is also a reasoned mature way out. Rohit MA, cofounder of Cloud Nine recalls that during initial days, everyone was sceptical about the business model. “We had incorporated all the features of a nursing home and a corporate hospital in to our model. The fact that we have delivered more than 1000 babies in the last ten years is a proof of our viability,” he adds. Rohit explains that CloudNine had deliberately kept the model simple. “ We are a single-specialty hospital with only private rooms. And the average length of stay is 3 days. Our units have 2 OTs and 2 labour delivery rooms for 30-40 beds. Using this configuration, we do 6-8 deliveries in a day. This is due to our focus on high efficiency.”

He also points out that innovation has been key to the success of the brand. “We had adopted cluster model consciously. It helped us to attract talented physicians as well as administrators. It also helps us to pool resources and use them at multiple locations.

He also  admits that there has been challenges too. “We have an asset light model and usually don’t buy land or buildings. However, initially our focus was on distance between the patient and the hospital. However, in cities like Bangalore, one need to be more conscious about time, rather than distance. Because pregnancy is like emergency care and you can travel only 3-4 kilometers in 40 minutes in cities like Bangalore. We had to rework our strategy based on this understanding and it helped us to improve access,” he concludes.

At a time, when other industries can find a way around high operating cost, what can private hospitals do? Healthcare can clearly take a leaf out of sectors like IT in the last couple of years, several IT companies have streamlined their financial planning. The first step in this direction will be to set clear norms for cash outflow.  The second step will be to hire competent hospital administrators with more than five years of experience and not fresh MHAs. In addition, independent studies need to be taken up on the expenditure of each unit of a hospital, to help managements take informed decisions. Else, the coffers of the hospitals will soon become empty.