Narayana Hrudayalaya: A Model for Accessible,
Affordable Health Care?
Published: July 01, 2010 in India Knowledge@Wharton
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 world's population can afford heart operations," Shetty
notes. "In India, around 2.5 million people require heart surgeries every year but all of
[the country's 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
Guy's 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 humanitarian's
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. Shetty's
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 children's 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, Shetty's staff
has the capability to do a large number of different cardiac procedures. The hospital's
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 Michigan's 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

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 patient's 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 Shetty's 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 can't afford the hospital's regular
charges, Shetty offers concessional rates. The discounts depend on patients' financial
capacity and are funded either by the hospital's charitable trust, individual donors or by
the hospital itself. Almost 15% of the hospital's 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. Shetty's 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 hospital's 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 hospital's 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, Shetty's 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 Shetty's son Viren, an engineer and director at the hospital. Shetty's two other
sons are studying medicine.
In the initial days of Narayana Hrudayalaya, patients came because of Shetty's 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, Shetty's 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 hospital's]
volumes and Shetty's 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

Shetty's 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 Shetty's 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. "Shetty's 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 Shetty's 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 Shetty's concept of
5,000-bed health cities is the way to go. India's 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."