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. According to Karkera, there are two types of cost centers namely – service centers and revenue centers. Revenue centers generate revenue and also incur cost. But service centers like biomedical engineering do not generate revenue. “It is important to manage service centers 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 centres 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 neighbor. 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. The hospital had focused on cost and process innovation to become operationally efficient. According to Dr. Jagprag Gujral, COO of GGH,viability 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 .”
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 Setup your hospital in an overcrowded market :
“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.
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”