Cardiac surgeon Dr.

Devi Shetty is on a mission to build 5,000-bed health cities

across India, encouraged by the success at his nine-year-old Narayana Hrudayalaya
hospital in Bangalore. He has contained costs by tweaking processes, driving hard
bargains and negotiating creative partnership deals, but faces challenges in
replicating that model on a bigger scale. Shetty wants to make quality health care
accessible and affordable using economies of scale, or the cost advantages businesses
obtain due to expansion. His hospital in Bangalore focuses on cardiac medicine but
he wants to extend the model to other specialties, in addition to other locations.

Shetty believes his success could lead to a new health care model not only for India
but perhaps also for the world. The first heart surgery was done over a hundred
years ago but even today only 8% of the worlds population can afford heart
operations, Shetty notes. In India, around 2.5 million people require heart
surgeries every year but all of [the countrys doctors] put together perform only
80,000 to 90,000 surgeries a year. We clearly need to relook and change the way
things are being done.

At his Narayana Hrudayalaya Institute of Cardiac Sciences in Bangalore, the 56-year-

old Shetty is doing just that. Patients at his hospital get cardiac care at a cost lower
than any other hospital in the country and at a fraction of what it would cost
elsewhere in the world, a feat accomplished through what Shetty refers to as process
innovation. Shetty, who has been in the medical profession for close to 25 years and
worked at Guys Hospital in London, the Birla Heart Research Foundation in Kolkata
(formerly Calcutta) and the Manipal Heart Foundation in Bangalore before
branching out on his own, was formerly personal physician to Mother Teresa. His
interactions with her, he notes, not only offered the opportunity to closely observe
the famed humanitarians charitable work but also caused the doctor to begin
thinking about how quality health care could be made widely accessible and
affordable.

That was how Shetty came to the conclusion that the health care industry needs more
process innovation than product innovation. The industry does not need a magic pill
or the fastest scanner or a new procedure, he states, but instead requires
improvements that lower the cost of medical attention and make it more widely
available. Shettys premise of economies of scale is not radical; in fact, the doctor
describes his way as the Walmart approach. What sets him apart, however, is that
he has successfully adapted the method to a field as complex and costly as cardiac
care. There is no doubt that he has created a very distinct model to take cardiac care
to the masses, notes Vishal Bali, chief executive officer of Fortis Hospitals, a
prominent Indian healthcare group.

Now Shetty is ready to aim higher. India currently has around 0.7 hospital beds per
thousand people; the key to better aligning those numbers with the population, he
states, is creating a chain of large health cities across the country. To set the ball
rolling, Shetty spearheaded the creation of a 1,400-bed cancer and multispecialty
hospital the largest cancer hospital in the country at the Bangalore campus. A
women and childrens hospital and another for nephrology are also in the works. In
addition, the Bangalore facility which is set to expand to a total of 5,000 beds over
the next three years includes a 500-bed orthopedic hospital, an eye hospital,
research facilities and room for about 50 training programs.

Over the next five years, Shetty wants to build similar 5,000-bed health cities across
the country. An expansion at his Kolkata hospital is currently underway, and new
hospitals in Hyderabad and Jaipur are expected to open for business later this year.
Construction is starting on a 1,400-bed hospital in Ahmedabad; additional locations
have also been identified. We want to have around 30,000 beds over the next five
years, Shetty says. As our volumes increase, we will get further economies of scale.
In the next five years we want to be able to do a heart operation for US$800 from
point of admission to point of discharge. We believe it is possible.

Shetty has reason to be confident. Over the years, the Bangalore heart hospital he
opened in 2001 grew to 1,000 beds; the facility has added advanced technology and
doctors there perform some 30 surgeries a day the highest number of cardiac
surgeries done by any hospital in India. Other hospitals in India, including Escorts,
Apollo, Wockhardt and Fortis, perform about half that number. In addition, Shettys
staff has the capability to do a large number of different cardiac procedures. The
hospitals mortality rate of around 2% and hospital-acquired infection rate of 2.8 per
1000 ICU days are comparable to the best hospitals across the world, Shetty asserts.
In an article in Forbes India, the University of Michigans C. K. Prahalad said the
mortality rate in Narayana Hrudayalaya is much lower than in New York State for
similar kinds of heart disease.
Serving the Poor
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Cardiac surgeries in the United States can cost up to US$50,000. In India, they
typically cost around US$5,000-US$7,000. Depending on the complexities of the
procedure and the length of the patients stay at the hospital, the price tag increases.
At Narayana Hrudayalaya, however, surgeries cost less than US$3,000, irrespective
of the complexity of the procedure or the length of hospitalization. About 45% of
Shettys patients pay even less. Of these, about 30% are covered under a micro-
insurance plan for health care called Yeshasvini that reimburses Narayana
Hrudayalaya at about US$1,200 a surgery. Conceptualized by Shetty and run by an
independent trust, Yeshasvini was launched in 2002 in association with the
Karnataka state government.

For those who are not part of the insurance plan and cant afford the hospitals
regular charges, Shetty offers concessional rates. The discounts depend on patients
financial capacity and are funded either by the hospitals charitable trust, individual
donors or by the hospital itself. Almost 15% of the hospitals patients benefit from
these concessions. In addition, Shetty and his team reach out to patients through a
network of rural clinics and via telemedicine facilities. Patients come to the
Bangalore facility from more than 50 countries. Shettys instructions to his team are
clear: No one who comes to Narayana Hrudayalaya will be denied treatment due to a
lack of funds.

To ensure the viability of the project, Shetty has devised a hybrid pricing model.
Apart from the regular package of US$3,000 a surgery, he also offers semiprivate
and private rooms for those who want and can afford better personal amenities. The
medical facilities are the same for every patient, however. The upgraded rooms,
which comprise around 20% of the total available at the hospital, are priced at
US$4,000-US$5,000 and offset the losses incurred from treating the poor, Shetty
notes.

The managing team at Narayana Hrudayalaya follows the unique accounting practice
of studying the profit and loss account on a daily basis. By monitoring the average
realization per surgery and our profitability on a daily basis, we are able to assess
how much concession we can afford to give the following day without adversely
impacting our profitability, states Sreenath Reddy, the hospitals chief financial
officer. Reddy expects revenues of US$80 million for the year ending March 2010
and to generate US$200 million annually over the next two years. The hospital has
been profitable from the first year. JP Morgan and PineBridge Investments (formerly
known as AIG Investments) each hold a 12.5% stake in the company. Kiran
Mazumdar-Shaw, chairman and managing director of biotechnology firm Biocon
owns a 2.5% stake, and Shetty and his family own the remainder of the
company. Shishir Jain, executive director at JP Morgan believes Shetty has shown
that it is possible to fulfill a great social need without compromising on the
profitability. Santosh Senapathy, managing director of PineBridge Investments adds
that Narayana Hrudayalaya will change the way healthcare is delivered across the
world.

Innovations in Operations
Indeed, Shetty has already turned some standard industry practices on their heads.
One of his first innovations when he set up Narayana Hrudayalaya in 2001 was in the
way doctors are compensated. Typically, cardiac surgeons are paid per surgery and
their costs constitute a significant proportion of a hospitals total expenses. Shetty
invited his staff physicians to work for fixed salaries; he did not pay them less than
what they would have normally taken home at the end of the month, but he required
doctors to perform more surgeries, bringing down the cost per procedure. This
approach continues to be one of the core savings areas at Narayana Hrudayalaya.

In addition, Shettys father-in-law who was in the construction business built

the first hospital for him, keeping costs to the minimum. Shetty claims he passed on
those savings to patients, and maintains that, even today, construction costs at his
hospitals are less than half of that for others. The way we design the hospitals and
our close monitoring of our projects help us to keep a very tight control of our
construction costs, notes Shettys son Viren, an engineer and director at the
hospital. Shettys two other sons are studying medicine.

In the initial days of Narayana Hrudayalaya, patients came because of Shettys skill
and his reputation. The cost savings he offered started attracting customers in
greater numbers. Apart from the surgeries, the Bangalore campus treats about 2,500
people daily in its out-patient department. The increasing volumes in turn have
helped lower costs in many ways, staff says. Instead of buying surgical gloves in
India, for example, Narayana Hrudayalaya saves about 40% by importing them in
container loads from Malaysia. The hospital has moved to digital X-ray technology,
saving on the recurring cost of film. Most hospitals use their CT scanners, MRI
(magnetic resonance imaging) and other machines for only eight hours a day, but
Narayana Hrudayalaya uses them for 14 hours and offers these tests to the patients at
lower rates in the late evenings. As volumes increase, per unit costs naturally come
down.

For procedures like blood gas analysis, Shettys team convinced the equipment
vendor that, instead of selling the machine to the hospital, he could simply park it
there and make his money by selling the chemical reagents required for the test. The
hospital saves on the cost of the machines while the vendor also profits. For the past
six months, another vendor has parked his catheterization laboratory equipment at
the hospital free of charge. The deal came together because the vendor wants to use
Narayana Hrudayalaya as a referral, Shetty notes, with the idea that if he can show
that his equipment can cope with the patient volumes at Narayana Hrudayalaya, it
can work anywhere, he adds.

The high patient volumes help Shetty drive a hard bargain with vendors when
negotiating prices for everything from basic supplies to sophisticated medical
equipment. The new cancer hospital, for example, purchased two linear accelerators
(for producing X-rays) that typically cost US$6.4 million each for the price of one
machine. The cost of the machines was spread out, interest-free, over seven years.
Given [the hospitals] volumes and Shettys own credibility, every negotiation is as
tough as it can be. He certainly gets his pound of flesh, notes V. Raja, president and
CEO of GE Healthcare South Asia, who has been associated with Narayana
Hrudayalaya from the beginning. With Shetty now on an expansion drive, Raja is in
discussions with him to see how they can structure deals that enable Shetty to
achieve economies of scale while bringing more business for GE Healthcare.

Testing an Untested Model

Shettys model of 5,000-bed health cities has its share of risks and challenges. It
remains to be seen if the doctor can replicate his success in volume-based cardiac
care across specialties and cities. He is also considering setting up health care
facilities in the Cayman Islands and Malaysia. Observers say to succeed, Shetty needs
to build organizational and management bandwidth; create teams of medical
professionals that share his vision and are willing to work hard; put in place robust
processes, and raise the required funding. The scalability of any model is based on
the creation of an organizational structure, says Bali, of Fortis. One does not see
this at Narayana Hrudayalaya. It has been around for many years and by now the
structure should have emerged. One will have to wait and watch if Shetty can indeed
scale [his model] beyond one or two institutions.

Amit Varma, president, healthcare, at Religare Enterprises, a financial services group

and director of critical care medicine at the Fortis Escorts group of hospitals, raises
another concern. Varma was part of Shettys team at Manipal Hospital and at
Narayana Hrudayalaya. The intention is absolutely right but there is a base cost to
any procedure and you can bring that down only to a certain level, he notes. There
is a tipping point beyond which the volume that you do will have an adverse impact
on the quality. What that tipping point is remains to be seen.

But Girdhar Gyani, CEO of the National Accreditation Board for Hospital and
Healthcare Providers believes a commitment to delivering quality service is part of
the culture of strong teams. Shettys team in Bangalore is top-of-the-line in terms of
quality and I am confident that the rest of the facilities that he builds will be the same
too. Shetty is a transformational leader who can bring about a sea change in this
industry.

Mazumdar-Shaw of Biocon, who owns a stake in Shettys company, says the doctor
brings a missionary work ethic to his efforts and has attracted a talented and
committed team of doctors, nurses, paramedics and professionals. She credits
Narayana Hrudayalaya with consistently focusing on training and developing
specialized skills. I have no doubt that Narayana Hrudayalaya is scalable in India
and Shettys concept of 5,000-bed health cities is the way to go. Indias medical
talent pool is vast and can certainly sustain this growth. Raja of GE Healthcare also
adds his vote of confidence: This is a pretty much untested model across the world
but Dr. Shetty is fully committed to it and, if anyone can, he can.