India's Healthcare Transformation from Public to Private

5
India’s Hospital Sector

The Journey from Public to Private Healthcare
Delivery*
Lawton Robert Burns
Bhuvan Srinivasan
Mandar Vaidya
Introduction
Along with the other parts of India’s healthcare value chain, the hospital sector is growing rap-
idly as the demand for service delivery rises. By 2008, analysts estimated the health care delivery
market to be a $35 billion business projected to grow at 12%.1 The structure of this delivery has
changed, and the sector has undergone several shifts over the last three decades. The period fol-
lowing independence was dominated by care delivery through the government-funded hospital
system. Today, however, the majority of hospital expenditures are through private-sector deliv-
ery of care. National healthcare expenditure is 4.1 percent of gross domestic product (GDP,
2010 data), with roughly 70 percent of this spending from private sources. Government con-
tributes only a small (but growing) proportion of healthcare spending (see Figure 5.1).
Since the emergence of the first Apollo hospital in 1983, a handful of for-profit corpora-
tions involved in the delivery of inpatient services have commanded much of the attention. They
* The first two subsections of this chapter on ‘Rising Demand and Imbalance with Supply’ and ‘Addressing the
Imbalance’ were written by Mandar Vaidya. The remainder of the chapter was written by Lawton R. Burns
and Bhuvan Srinivasan.
169
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170  Lawton Robert Burns Bhuvan Srinivasan Mandar Vaidya
Figure 5.1: Healthcare Spend by Government on a Steady Rise

Total spend by government (central and state) on healthcare
Includes water supply (safe drinking water) and sanitation
INR, Thousand crore
123.7
110.3
+17% p.a.
93.6
75.9 86.1
64.4 78.2
55.7
48.5 65.0
54.4
42.2 46.5
State 36.4
28.5 32.2 37.6
Central 17.9 21.5
12.0 13.5
2005–06 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12
1
Share of GDP
1.43 1.43 1.41 1.43 1.54 1.54 1.50
Per cent
Note: 1 GDP at factor cost

Source: Indian Public Finance Statistics, 2011–12, Reserve Bank of India – Handbook of Statistics on Indian
Economy 2011–2012.
have embarked on several new strategies simultaneously: horizontal integration (multihospital

chains), vertical integration (acquiring upstream and downstream businesses), and diversifica-
tion (expansion into semi-related businesses and other geographic markets). Nonprofit hospital
systems have also developed some interesting organizational models as well, including “focused
factories” (single-specialty hospitals) and “health cities” comprised of multiple specialized hos-
pitals colocated on the same campus.
The growth of the private sector rests on three developments:
1. The increasing amount of money flowing into the sector from the government, the
private sector (including private equity and venture capital), and the patient. Healthcare
spending as a percent of wallet is forecast to rise to 13 percent by 2025 (see Figure 5.2).
2. The emergence of several profitable and entrepreneurial hospital chains that have shown
there is money to be made in this business.
3. The increasing aspirations of successful doctors from India – as more and more either
return from foreign shores or do not go abroad as their predecessors did, both for the
increasing promise of India, and for the increasing difficulty of a postgraduate medical
education in the UK or US.
This chapter describes India’s healthcare infrastructure at the secondary and tertiary care
levels (see Figure 5.3). We first describe the public-sector provision, including the efforts of
the National Rural Health Mission and National Urban Health Mission. We then turn to the
private-sector provision of hospital care, illustrated by a handful of notable venture-funded and
India’s Hospital Sector  171
nonprofit systems (Vaatsalya, Narayana Hrudayalaya) and the large for-profit chains (Fortis,
Apollo, and Max Healthcare). The chapter also evaluates the strategies pursued in the private
sector and the logic behind them.
Figure 5.2: India’s Healthcare Spend Likely to Become Much Higher than Peer Benchmarks
Share of total consumption South
Percent; thousand Indian rupees, 2000 Brazil Korea China
60 82 140 248
100% 4
3 7 9 13
5 Health care 6 8 7
11 2 6
3 9 Education and recreation 13 16 15
4 17
2 19 6 Communication 4 2 7
14 8
3 20 Transportation 13 12 6
5 9
12 3
11 Personal products, services 8 13 4
56 6 12
3 Household products 9 4 6
42 5 10 Housing and utilities 22 18 9
34 5 Apparel 3 4 11
25
Food, beverages, and tobacco 19 23 35
1995 2005E 2015F 2025F

Note: Figures are rounded to the nearest integer and may not add up to 100 percent.
Source: McKinsey Global Institute.
Figure 5.3: Primary, Secondary, and Tertiary Care Levels
Indian Healthcare Delivery Fastest growth

Patient Care Focus rate in this
Share of beds# • Heart and vascular segment due to
• Neurosciences rising incidence of
Tertiary Care
• Joint replacement and orthopaedics lifestyle-related
10%
• Aesthetics and reconstructive surgery diseases
• Oncology
• Surgery and inpatient facilities Growth likely to
Secondary Care • Mother-and-child treatments be in Tier-II cities,
70% • High-end diagnostics: MRIs, CT scans where bed ratio is
• Doctor consultation most averse
• Eye and dental care
Rural sector
Primary Care • GP consultation
20% a priority for
• Basic diagnostics like pathology providing primary
collection care facilities
#
For overall infrastructure/facilities, the percentages may be 10 percent, 30 percent, and 60 percent.
Source: CRISIL Report on India Healthcare Delivery Market (2009), Interviews, Press search.
Rising demand and imbalance with supply

Many of the trends discussed in the prior chapters will impact the utilization of tertiary care and
the type of tertiary care required. There is a shift from infectious diseases to chronic diseases
(especially in urban settings), with cancer, diabetes, cardiovascular diseases, and coronary heart
diseases on the rise.2 India was expected to account for 60 percent of heart disease patients in
the world by 2010.3 The number of diabetic patients in India more than doubled from 19 mil-
lion in 1995 to an estimated 50.7 million in 2010 and 61.3 million in 2011.4 The percentage of
national health expenditures devoted to inpatient care, while only a fraction of the total in 2001
(see Figure 3.14 and Figure 3.15), was expected to rise sharply due to the growing prevalence
of lifestyle diseases.5
Even more dramatic is the recent and sudden spread of tax-funded health insurance
schemes underwritten by the central and state governments (see Chapter 10). The meteoric rise
of these schemes over the last 5 years has increased the proportion of the population with access
to expensive inpatient hospital services to roughly one-quarter. This will fuel rising demand for
and utilization of hospitals, given the limitation of this coverage to inpatient (and sometimes
outpatient) surgery.
India’s economic growth following the market liberalization reforms in 1991 has created
a large middle class eager to spend more on healthcare (see Figure 5.4). The combination of a
growing middle class – estimated to be 500 million people in 2010 and growing to 650 million
by 2022 – which has not only facilitated private health insurance but also the ability to pay out
of pocket, along with the newly enfranchised lower class that can access low-cost insurance, will
significantly increase the monies spent on service delivery. 6
Figure 5.4: Increase in Household Income 2010–20

Share of population of 6 clusters CAGR, 2010–22 (P)
Percent Percent
1.1 billion 1.2 billion 1.41 billion
100%
0.8
44.7 36.1
54.2 -0.5
Rural poor
25.2 1.4
24.9
23.6 2.6 1.5
Rural middle-class
2.6 9.0
Rural rich 3.1
2.4 7.3
Urban poor 21.9
5.5 3.1
Urban middle-class 17.8
13.7
Urban rich 6.5
1.5 2.9 5.2
2001 2010 2022(P)
Source: McKinsey Global Institute – The ‘Bird of Gold’: The Rise of India’s Consumer Market.
Figure 5.5: India Shortfall in Beds, Physicians and Nurses

Per thousand population
Beds (2005–06) Physicians (2009–10) Nurses (2009–10)
India 0.7 0.6 0.7 1.31 0.9–1.32
Low-income countries
(e.g., sub-Saharan Africa) 1.3
1.0 1.2
Lower middle income countries
(e.g., South Africa) 2.2
2.4 4.0
Upper middle-income countries
3.6
(e.g., Korea)
High-income countries 2.8 8.1

5.9
(e.g., US, Western Europe,Japan)
World average 2.9 2.7 2.8
Notes: 1 Allopathic physicians account for 0.64 per 1000 and traditional providers account for 0.65 per 1000
population; does not include unregistered practitioners.
2
Registered general and auxiliary nursing midwives. If one considers only registered general nurses, the
ratio per thousand population is 0.9 nurses.
Source: World Health Statistics WHO 2010; Central Bureau of Health Investigations 2009; team analysis.
India will be challenged to meet this rising demand due to an undersupply of hospital
capacity. As of 2009, India had 0.7 beds per 1,000 patients, compared to a world average of 3.3
and an OECD median of 4.9 (see Figure 3.17 and Figure 5.5).7 This is much lower than other
middle-income countries (average of 3.1) and several times lower than high-income countries
(e.g., US, Western Europe).8 To correct India’s huge shortfall in bed capacity would require an
estimated total investment of anywhere from $80-200 billion.9 The price tag reflects the cost of
a new hospital bed (Rs. 2.5–3.0 million on average, with Rs. 7.0 – 8.0 million for a tertiary care
bed which increases to Rs. 8.0 – 10.0 million for a tertiary care bed in a large city), which in
turn reflects the high cost of real estate and medical equipment (estimated to be 60–65 percent
of project cost). 10
The upper portion of this range of needed investment far exceeds all of the money India
now spends on healthcare (roughly $60 billion). Patient demand and utilization alone will not
finance all of this spending, at least in the short term. The country will have to rely on pri-
vate equity and venture capital to make some of the needed investments. As noted earlier in
Chapter 3, this is already occurring in 2012.
Going forward, India will face an imbalance in supply and demand to deal with this issue.
The country will need to confront and tackle several entwined paradoxes. First, while the total
number of beds is far below the world average, most hospitals are underutilized. This is espe-
cially true of the public hospital segment. Second, while the total number of doctors is perhaps
half of what is required to take care of the demand (see Chapter 4), not all doctors are fully
occupied. Third, while India needs 100 percent more nurses than it now has (e.g., to reach the
Figure 5.6: India Lags behind Most Other Countries in Immunization Rates, at Full Immunization Rate of
around 61 percent
Country DTP3 Coverage Measles Coverage Pol3 Coverage
Percent Percent Percent
China 99 99 99
Germany 99 99 95
Mexico 97 99 97
Bangladesh 96 96 96
Brazil 96 97 97
UK 95 90 95
Vietnam 95 96 96
US 94 90 94
Pakistan 80 80 75
Full
India 72 74 70 immunisation
South Africa 72 78 73 coverage of
only 61% in
Nigeria 47 71 73 India
Rank of India
171/194 162/194 175/194
globally
* All coverage rates are WHO estimates. May differ from NFHS/DLHS figures
Source: WHO Coverage Estimates 2011, UNICEF CES-2009.
OECD median of nurse/physician ratios; see Figure 3.22), not all nurses are performing (or
are allowed to perform) the right set of duties that will help maximize their utilization. Finally,
while the central government has historically spent little on healthcare (see Figure 3.3), which
is low by all reckonings, available funds are not fully utilized. As one example, the Ministry of
Health and Family Welfare (MoHFW) procures enough vaccines to vaccinate all the children
under the national routine immunization scheme, yet full immunization rates are just above
61 percent (see Figure 5.6).
It is widely known that in India a large share of diseases go untreated, a large section of the
population does not have access to healthcare, and millions of preventable deaths occur. Yet
resources lie underutilized. As a result, increasing supply alone will not bring the country to the
next level.
Addressing the imbalance: Causes and solutions

What, then, is causing this imbalance? Three main factors drive India’s inability to make
demand serviceable. First, a lack of accurate and accessible information means that care is not
at the right site for the right patient – in terms of acuteness of illness, ability to pay for treat-
ment, and geographic proximity to the patient. Such information might encompass provider
electronic medical records, insurer data on provider networks, consumer information on pro-
vider performance (e.g., cost and quality), electronic appointment systems, and emergency
response networks.
Second, there are leakages in demand (see Figure 5.7) – from awareness through diagnosis,
treatment, and compliance. For example, consumers have low awareness of prevention due to
low literacy in the rural population, while physicians have limited incentives to practice pre-
ventive medicine since they are only paid for the acute services they render. At the incidence
stage in the Figure, disease may not be caught due to differing levels of training across India’s
physicians (see Chapter 3) and the financial, geographic, and work-related barriers faced by
patients in accessing care when needed. At the diagnosis and treatment stage, demand leakages
occur due to poor referral networks and physicians practicing across the boundaries of primary,
secondary, and tertiary care. Finally, leakages also occur due to failures in patient compliance
(e.g., repeated visits for tuberculosis treatment).
Third, stakeholder incentives differ: primary caregivers do not have incentives to prevent
illnesses and refer cases that need more specialized care to secondary and tertiary providers;
secondary providers have no incentives to refer cases onward to tertiary care; and similarly the
reverse linkages between tertiary and secondary/primary care are equally weak. Despite the
three-tiered delivery system operating in rural and urban areas, referrals are further impeded by
travel distances, travel costs, and the burden of out-of-pocket payment.
Linking variably constrained demand to inconsistently present supply will require action
on three fronts: “right-siting” care, plugging demand leakages, and providing appropriate and
aligned incentives for stakeholders. Typically, the term right-siting means ensuring patients
go to the right type of provider to get the right type of care: health workers and nurses for
Figure 5.7: Multiple Gaps Lead to Demand Leakages

Prevention Incidence
Diagnosis
Treatment
Compliance
Demand
funnel
• Low awareness • Limited • Suboptimal • Limited awareness

Challenges among population awareness among training levels of of patients
• Limited incentives population providers • Limited touch
among providers • Different • Imperfect referral points with other
• Ignorance among training levels of dynamics stakeholders
population providers • Misaligned • Treatment
incentives of economics
providers
Source: McKinsey & Company.
Figure 5.8: Right Siting is Critical to Ensure Demand–Supply
Delivery facilities optimally

ing located to provide appropriate Ge
sit Optimal set of providers
care at right quality, time and
og
t
gh
ra
Doctors cost
ri
ph
al
ica
ic
Clin
l
righ
Hospital/
Ambulance centre
t siting
Hospitals Nurses
Right information, right

incentives and optimal
Tele-
option, leads to right choice
medics
Payment
options
Awareness
Aligned
incentives
Economic right siting
Source: McKinsey & Company.
preventive care, outpatient clinics for primary care, clinics for secondary care, and so on. Here,
however, we use three distinct dimensions of the term: clinical right-siting, geographic right-
siting, and economic right-siting (see Figure 5.8). Balancing these three dimensions requires a
systems view rather than a stakeholder-specific view.
Clinical right-siting of care
Currently, patients or their families decide on the type and site of healthcare to be used, based
on which provider is available, patient awareness, and referral systems. On occasions, however,
this methodology appears to be insufficient to arrive at an optimal decision. To compensate,
providers have taken on a “sidestep” role, with tertiary practices conducting basic procedures
and specialist physicians delivering primary care, leading to less than optimal utilization. This is
bound to happen in any fragmented, private investment-driven, and entrepreneurial market. In
a resource-constrained environment such as India’s, such sidestepping exacerbates the demand–
supply imbalance. This makes clinical right-siting particularly important in unlocking supply
capacity, especially in a country where providers of traditional systems (ISM/AYUSH) form a
significant proportion of healthcare practitioners (see Chapter 3).
Geographic right-siting
Physical access to care is a widespread problem in a large country like India. The problem is
compounded by patients’ lack of information, which in turns adds to the cost of care. Players
will need to innovate to resolve the geographical challenges. Several solutions and innova-
tions are already in play, albeit in small pockets spread across the country: ambulance net-
works backed by call centers, attempts at providing affordable secondary care in Tier II and
Tier III cities, using technology to link referrers to specialists, etc. Some of these ventures are
more successful than others. Nevertheless, even successful solutions find it difficult to scale up.
Bottlenecks range from managerial resources and investment muscle to insufficient forums for
multiple stakeholders to meet. Chapter 2 discusses options for stakeholder partnerships that
can address some of these issues.
Economic right-siting
Ultimately, the way healthcare is accessed across the country is influenced by its affordability
and the liquid funds available to patients, even those at higher income levels. Since the bulk of
healthcare is still financed out of pocket, people make inefficient decisions on the cost-benefit
equations of a particular healthcare offering. As a result, poor(er) patients are often pushed
into bankruptcy by healthcare events when care could have been available at the same quality
but lower cost. At the same time, rich(er) patients often find themselves dissatisfied with care
given, and are willing to pay more for better quality and service.
The majority of such decisions is driven purely by the patient’s liquid funds, as most
patients have limited financing options. A massive information asymmetry in the market also
plays a critical role. Currently, choices are driven by physical proximity and word of mouth.
With the advent of health insurance, payers might be best positioned to push for the overall
effectiveness of the system. But as more and more providers span the spectrum of care, they too
will need to focus on building stronger referral linkages, simplifying primary care provision, and
pushing primary care-seekers to utilize appropriate providers. In turn, patient awareness will
gradually increase.
The public healthcare system

Policy
Following independence in 1947, India adopted a welfare state approach with healthcare falling
under the auspices of the government. The public healthcare system was conceived as a national
health system in which central and state governments would play a leading role in determin-
ing priorities, financing, and the actual delivery of healthcare services to the population, in a
manner similar to that of Britain’s National Health Service (which formed in 1948). According
to the Health Planning and Development Committee (Bhore Committee) Report of 1946,
If it were possible to evaluate the loss, which this country annually suffers through the
avoidable waste of valuable human material and the lowering of human efficiency through
malnutrition and preventable morbidity, we feel that the result would be so startling that
the whole country would be aroused and would not rest until a radical change had been
brought about.
The Bhore report was based on a countrywide survey in British India.11 The main concerns
at the time were malnutrition, infectious diseases, and sanitation. It was decided that (a) medi-
cal benefits would be available free to all at the point of delivery and (b) those who could afford
to pay should channel contributions through the mechanisms of taxation.
The recommendations of the Bhore report were taken up in the First (1951–56) and Second
(1956–61) Five-Year Plans (see Figure 1.15 and Figure 3.7) The plans emphasized the devel-
opment of the basic infrastructure and manpower visualized by the Bhore Committee. The
priorities included provision of water supply, control of malaria, preventive healthcare for the
rural population, and programs for mothers and children.12 The delivery of these services was
accomplished through vertical programs such as the Malaria Control Programme. By focusing
on vertical programs, the First Five-Year Plan established the precedent of specialization and
verticality, rather than a horizontal integration and delivery of a broad range of services.
The next big policy push, the National Health Policy of 1983, aimed to provide universal,
comprehensive, primary health services. The Seventh Plan (1985–90) reiterated the need to
invest in a three-tier (primary/secondary/tertiary) health services system to make up for defi-
ciencies in personnel, equipment, and facilities.13 The Eighth Plan (1992–97) was influenced
by the rapidly changing attitude toward privatization of industries, set in motion by the balance
of payments crisis and subsequent deregulation in 1991 (see Chapter 3). It distinctly encour-
aged private initiatives, private hospitals and clinics, and suitable returns from tax incentives.
By the mid-1990s, it was clear that the goals of the earlier plans remained unmet; most
had not been even partially achieved. Thus the Ninth (1997–2002) and Tenth (2002–07) Five-
Year Plans acknowledged the dismal state of the health delivery infrastructure that the govern-
ment had been building for half a century. While these plans talked about the importance of
investing in effective primary care and referral service networks, they did not elucidate how to
implement such measures. The Plans once again stressed the role of the private sector in both
referral and tertiary care services.
The National Rural Health Mission (NRHM), launched in April 2005, represented a
significant change in the mind-set behind primary care provision. Whereas previous initia-
tives had focused on vertical programs, NRHM sought to train 250,000 women volunteers
designated as accredited social health activists (ASHAs) across 18 states with weak rural health
infrastructure.14 These health workers would serve as the first line of defense against both infec-
tious and chronic diseases and could be retrained periodically to deal with the needs of their
local rural populations. There are currently about 700,000 trained ASHAs working to connect
Figure 5.9: Structure of NRHM (11th Five-Year Plan)

BLOCK LEVEL HEALTH OFFICE
BLOCK • Health Manager

LEVEL
Accredit private • Accountant
1,00,000 Population HOSPITAL
providers for public • Store Keeper
100 villages Ambulance, Telephone,
health goals Obstetric/Surgical Medical
Emergencies 24*7 Strengthen
Round the clock services Ambulance/Transport Services
Increase availability of Nurses
30–40 villages Cluster of GPs – PHC Level Provide Telephones
Encourage Fixed Day Clinics
3 staff nurses; 1LHV for 4–5 SHCs; Ambulance/Hired vehicle;

Fixed Day MCH/Immunization Clinics; Telephone; MO i/c; AYUSH
Doctor; Emergencies that can be handled by nurses 24*7; Round
the clock Services; Drugs; TB/Malaria etc. tests
5–6 villages
GRAM PANCHAYAT– SUB HEALTH CENTRE LEVEL
Skill upgradation of educated RMPs/2 ANMs, 1 male MPW for 5–6

villages; Telephone Link; MCH/Immunization Days; Drugs; MCH Clinic
VILLAGE LEVEL – ASHA, AWW, VH & SC
1 ASHA, AWWs in every village, Village Health Day Drug Kit, Referral chains
Note: TB = Tuberculosis, MO = Medical Officer, MCH = Maternal and Child Health.

Source: NRHM.
households with health facilities. The funding for NRHM is expected to increase to approxi-
mately $3 billion as the program expands. The program has sought to allocate 10 percent of
resources to the state level, 20 percent to the district level, and 70 percent to entities below the
district level (see Figure 5.9).
The National Urban Health Mission (NUHM), the urban corollary to the NRHM,
was taken up as a priority area in the Eleventh Five-Year Plan (2007–12). The NUHM was
designed to focus on providing healthcare services to the urban poor and slum dwellers and
intended to cover all cities with a population of more than 100,000 (over 400 cities nationwide).
Gap between policy aims and achievements
While the Five-Year Plans have proposed ambitious targets ever since the First Plan envisioned
universal free healthcare, the current state of government-run infrastructure remains dismal.
While the government hospital infrastructure is extensive (12,760 hospitals, 549,000 or more
beds), the poor condition of many of these hospitals deters many patients from using them. 15
Despite higher costs, patient preference for private-sector facilities has precipitated a steady
reduction in the utilization of government facilities and consequent further decline in their
condition. Figure 5.10 contrasts the market shares of public and private hospitals in both rural
and urban areas.16
Such patient preferences have resulted in the awkward and inefficient imbalance between
capacity and utilization: roughly two-thirds of hospitals are publicly owned, while nearly two-
thirds of utilization occurs in the private sector (see Figure 5.11). 17 Outpatient utilization of
public facilities remains especially low (see left panel of Figure 5.12). Patient preferences have
continued to shift to the private sector despite the relatively higher costs (see the right panel of
Figure 5.12).
Figure 5.10: Hospital Inpatient Market Shares, by Public–Private and Rural–Urban

70
59.7 58.3 70 61.8
60 56.2 60.3
60 56.9
50 43.8
40.3 41.7 50 43.1
40 39.4 38.2
40
30 30
20 20
10 10
0 0
1986-1987 1995-1996 2004 1986-1987 1995-1996 2004
(42nd) (52nd) (60th) (42nd) (52nd) (60th)
Government Private Government Private
Source: Agarwal & Shah, Indian Hospitals (November 2010).
National Sample Survey Organization (NSSO), 60th Round (2004).
Figure 5.11: Imbalance in Bed Supply and Utilization
% Capacity % Share
Public Beds 62 % 38–42 %
Private Beds 38 % 58–62 %
Source: Authors.
Figure 5.12: Public Share of Outpatient Market, by Rural–Urban

Percentage of Treated Ailments Receiving Non- Average Medical Expenditure per Hospitalization
hospitalized Treatment from Government Sources Case (Rs.)
11,553
Medical Expenditure
24
21 22
20
19 19
Percentage
7,408
5,344
2,877 4,300
3,238
2,195 2,080
1986–1987 (42nd) 1995–1996 (52nd) 2004 (60th) 1995–1996 2004 1995–1996 2004
Rural Urban Government Hospital Private hospital
Source: Agarwal & Shah, Indian Hospitals (November 2010).

National Sample Survey Organization (NSSO), 60th Round (2004).
The out-of-pocket spending burden for patients for outpatient treatment is low enough
to be considered free; indeed, at primary health centers and subcenters run by the various state
governments, care is free. The rates charged at tertiary and quaternary centers are heavily sub-
sidized, such that the patient typically pays for expensive consumables used for their treatment,
if required (specific stents, prosthetics, etc.).
There continues to be a shortfall in government-run facilities, especially among the com-
munity health centers (CHCs) tasked with linking patients to tertiary facilities (see Figure 5.13).
There is also a shortfall in the workers needed to staff these facilities, particularly among the
health workers in subcenters and specialists in CHCs (see Chapter 3). In addition, due to the
division of responsibility for healthcare provision between the central and state governments,
there are large variations across India in healthcare infrastructure. States such as Bihar and
Assam have high ratios of population per bed (3,029 and 1,782, respectively), and thus high
ratios of users for every public bed (see Figure 5.14); conversely, due to the high demand, they
tend to have low rates of hospitalization per 1,000 (10 urban and 10 rural in Bihar; 16 urban
and 11 rural in Assam).
The problems pervading India’s government-run sector are no longer confined to shortages
of capital and facilities, but now extend to failures in strategy and execution. For example, one
definitive conclusion to be drawn from NRHM’s contribution to the Indian public health sys-
tem is this: the bottleneck has shifted from funds to ideas. Typically, only three-quarters of the
health budget allocated to states is utilized (see Figure 5.15); moreover, in some states, what is
Figure 5.13: All-India Shortfall in Health Infrastructure
As per 2001 Population Required Existing Shortfall * % shortfall

Sub-Centres 1,58,792 1,44,998 20,903 13.16%
Primary Health Care (PHCs) 26,022 22,669 4,803 18.46%
Community Health Care (CHCs) 6,491 3,910 2,653 40.87%
* The all-India shortfall is calculated by adding the state-wise figures of shortfall and ignoring the existing surplus
in some states.
Source: Bulletin of Rural Health Statistics in India, Special Revised Edition, MOHFW, GOI (2006).
Figure 5.14: State Variations in Government-Provided Hospital beds

35,000
30,000
25,000
Users per bed
20,000
15,000
10,000
5,000
0
Andhra Pradesh
Kerala
Uttar Pradesh
Arunachal Pradesh
Assam
Bihar
Meghalaya
Iindia
Chattisgarh
Goa
Gujarat
Haryana
Himachal Pradesh
Jharkhand
Madhya Pradesh
Mahrashtra
Uttarakhnd
West Bengal
Manipur
Mizoram
Nagaland
Orissa
Punjab
Rajasthan
Sikkim
Tamil Nadu
Tripura
Andaman & Nicobar
D&N Haveli
Chandigarh
Daman & Diu

Delhi
Lakshadweep
Puducherry
Source: Central Bureau of Health Intelligence, National Health Profile 2007.
spent is misspent on tertiary care and other non-mission centric issues rather than primary care.
This has created an ecosystem hungry for innovative ideas and pilot programs. The following
section describes three innovative programs in the public sector.
Innovation in the public sector

Health ship
On the saporis (river islands) of Assam, which are inundated with floods every time the mighty
Brahmaputra River unleashes its fury, life is a constant struggle against disease and deprivation.
Figure 5.15: 73 percent of Total Funds Allocated by Central to State Government Used
2007–08 2006–07 2005–06
Central funds allocated (US$ mn) Percentage spent Percentage spent Percentage spent
Madhya Pradesh 135 114 90 56
Sikkim 4 105 51 55
Rajasthan 137 100 73 72
Kerala 55 98 67 51
Uttarakhand 170 94 33 46
Tamil Nadu 108 87 83 75
Gujarat 95 82 68 58
Jammu and Kashmir 22 82 38 81
Assam 161 81 39 16
Himachal Pradesh 17 80 86 76
Karnataka 99 78 54 66
Andhar Pradesh 149 77 80 104
West Bengal 135 77 82 68
Orissa 86 73 61 70
Nagaland 14 70 75 46
Arunachal Pradesh 11 66 90 53
Maharashtra 168 62 31 62
Haryana 34 61 76 79
Punjab 40 61 93 78
Uttar Pradesh 365 58 63 77
Mizoram 9 56 135 33
Bihar 170 43 49 51
Chhattisgarh 56 41 78 72
Jharkhand 66 39 56 40
Tripura 22 34 35 33
Delhi 20 31 66 84
Manipur 17 31 33 29
Meghalaya 16 27 34 19
Goa 3 18 36 41
Source: National Rural Health Mission Progress Report (April 2008).
Some 3 million people live in 2,300 remote and floating villages on the Brahmaputra in
Upper Assam. Here, there are no functional anganwadis, health centers, schools, power, or
even clean drinking water. Until recently, immunization, antenatal care, disease management,
and treatment were all unknown.
In 2005, the Centre for North East Studies and Policy Research intervened. The center
partnered with the NRHM, The United Nations Children’s Fund (UNICEF), and the State
Government of Assam to start Akha (“hope” in Assamese): a 22-meter-long, 4-meter-wide ship
that carries hope and healthcare to 10,000 forgotten people in the Tinsukhia, Dhemaji, and
Dibrugarh districts of Upper Assam. The ship has an outpatient department, cabins for medical
staff, medicine storage space, a kitchen, bathrooms, and a general store. A generator and 200-
liter water reservoir are also installed to ensure that the medical team that travels to the saporis
has adequate power and water supply.
The idea behind Akha is simple: use the river to tackle the problems and challenges it cre-
ates. Physicians and nurse midwives who are unwilling to live and serve on these remote islands
live instead on the ship and hold health camps on the saporis. They immunize, treat, prescribe
medicines, and advise people on preventive measures. They even take critically ill patients to
the nearest health center in Dibrugarh. In less than 2 years, Akha has provided succor to many.
If the NHRM can successfully scale this innovative intervention, healthcare may no longer be
so distant a reality for the people living on this highly volatile river. Akha could be scaled to
include a hospital ship with diagnostic facilities, an inpatient ward, and an operating theater –
thereby making healthcare in the region truly inclusive.
Tribal treatment centers
Cultural alienation, coupled with physician apathy, often drives tribal populations away from
big hospitals and government-run healthcare facilities. The best way to deliver healthcare to the
tribals is in a familiar environment. This has been accomplished by the Society for Education,
Action and Research in Community Health (SEARCH), a nongovernmental organization in
Gadchiroli, an administrative district in the state of Maharashtra. The SEARCH hospital is a
habitat of huts built between trees. The reception area resembles a ghotul – the traditional place
for social and cultural events in a Gond tribal village. Patients stay not in wards but in individual
huts with their families. Everything from bedsheets to towels is of khadi (a coarse homespun
cotton cloth). The tribals often feel isolated and scared in big buildings; here, surrounded by
their natural environment and loved ones, patients feel at ease. As a result, thousands of tribal
patients from 10 blocks of Chandrapur and Gadchiroli flock to this hospital for treatment.
SEARCH has also demonstrated how tribal beliefs can be used to disseminate health
education. Every year, a jatra (popular folk theatre) is organized in Shodhgram (SEARCH
campus at Gadchiroli) in the honor of Goddess Danteshwari, the deity revered by tribals.
Representatives from as many as 40 tribal villages participate in this jatra. At the end of it, an
Aarogya Sansad is held, where the tribals are asked to enumerate their health concerns. After
voting, one health problem is identified as the year’s priority. Representatives then go back
to the villages and start working on the identified problem. This is regarded as a command
from the Goddess herself that no one can oppose. One year, for example, the tribals voted for
eradication of malaria. They were shocked to learn that malaria was caused by mosquito bite
and immediately wanted to know how to check the breeding of mosquitoes. By communicating
with the tribals in a language that they understand, SEARCH has been able to tackle many
superstitions and unhealthy practices.
Low-cost diagnostics
For the last 7 years, a group of dedicated young doctors from institutes like the Christian
Medical College (CMC-Vellore) and All India Institute of Medical Sciences (AIIMS) have
been working to make healthcare in the hinterlands available, accessible, and affordable. The
Jan Swasthya Sahyog (JSS) team has given up lucrative jobs, sparkling city lights, and hefty pay
packets to develop cheap, accurate, and easy-to-use technology that can be employed to pre-
vent, diagnose, and treat diseases in remote tribal areas of Bilaspur and Chhattisgarh. The JSS
method for early detection of urinary tract infections costs less than Rs. 2 (about $0.04) per test;
the costs are similarly low for detecting anemia (Rs. 1), diabetes (Rs. 2), and pregnancy (Rs. 3).
The team has also developed low-cost mosquito repellent creams, breath counters for detection
of pneumonia among children, easy-to-read blood pressure instruments to prevent preeclamp-
sia, and a simple water purification method (whereby one can bicycle for 15 minutes to treat
a bucket of potable water by UV light). Low-cost delivery kits with everything needed for the
mother and child in the first 24 hours – gloves, large plastic sheets, soap, disinfectant, blade,
gauze, sterilized threads, cotton cloth to wrap the baby, thick sanitary pads for women – are
available for just Rs. 40 ($0.75).
These simple techniques are designed for use by illiterate and semiliterate village women
and school students. In addition, the team has developed more complicated tests like a sputum
concentration system for increasing the sensitivity of microscopic diagnosis of tuberculosis,
and electrophoresis for detection of sickle cell anemia, a common malady in the area. While
electrophoresis costs Rs. 300 (about $5.50) in the market, JSS technology costs just Rs. 20
(about $0.35).
The most innovative strategy put in place by JSS, however, is a malaria detection system.
They have trained village health workers to take blood smears. These are labeled and neatly
packed in small soap cases that are handed by school children to bus drivers. On their way to
school, the drivers drop the smears at the Ganiyari hospital run by JSS, where they are imme-
diately tested. The test reports are sent back through the same buses on their return trip. This
courier system has been operational in 21 villages in the area for the last 5 years and has saved
many lives. It is now being extended for tuberculosis detection. All health workers can use these
simple but innovative JSS technologies to improve diagnoses in remote areas and decrease inap-
propriate use of drugs.
The private healthcare system

Background
India’s private healthcare provider system has developed exponentially since the 1980s. Privati-
zation received a major spur from the country’s pursuit of economic liberalization in the 1990s
and has been given increasing support in public policy statements over time. As noted in
Chapter 3, the majority (roughly 95 percent) of the country’s delivery system is fragmented
and operated out of small physician practices; the majority of hospital capacity is similarly
fragmented among community health centers, small nursing homes (fewer than 30 beds), and
small hospitals (less than 100 beds). Perhaps only 10 percent of the country’s hospitals are larger
than 100 beds. Consultants estimate that 90 percent of the country’s hospital capacity lies in
this unorganized segment.18 This section focuses on the 10 percent of hospital capacity that is
organized into multihospital chains.
Policy
From August 1991 to August 1997, the Foreign Investment Promotion Board (FIPB) approved
foreign direct investment (FDI) proposals worth $100 million in the Indian healthcare sector,
hospitals, and diagnostic centers.19 Since January 2000, 100 percent FDI has been allowed in
the hospital sector under the automatic route. No government approval is required as long as
the Indian company files with the regional office of the Reserve Bank of India (Central Bank).20
A controlling stake is also permitted in hospitals for foreign investors. Tax exemption for long-
term capital investments in hospitals (systems) with more than 100 beds was aimed at corporate
chains as well as the financial institutions investing in these projects. In its 2008 budget, the
central government offered a 5-year tax exemption to any new hospital opening in Tier II cities
in order to spur investment outside the six largest metropolitan areas of the country (Mumbai,
Delhi, Kolkata, Chennai, Hyderabad, and Bangalore).
Private equity funding
Much of the funding for hospital expansion has come from private equity and venture capital
(see Chapter 12). The International Finance Corporation (IFC), the private-sector arm of the
World Bank, has funded several hospital chain projects through debt or equity deals. Since
1997, the IFC has invested or loaned approximately $225 million to hospital chains in India.
The IFC has increasingly been joined by other foreign institutional investors (FIIs) looking
at the tertiary care market (see Figure 5.16). International investors such as AIG, JP Morgan, the
Blackstone Group, Apax Partners, the Acumen Fund, and Carlyle have invested in the hospital
market. Indian investment firms such as ICICI Ventures and Helion Venture Partners have
also been increasingly active. ICICI Ventures, through its IVEN Medicare fund, has invested
Rs. 400 million ($7.5 million) in the RG Stone hospital chain, Rs. 1.4 billion ($26.2 million)
in Sahyadri Hospital to build an integrated hospital network in and around Pune, and Rs. 650
million ($12.2 million) in Medica Synergie, a new hospital chain in West Bengal.
Figure 5.16: Hospital Projects Funded by the IFC in US $ Million
Corporations Project cost IFC Loan/ Investment Year of signing

Duncan-Gleneagles 29 7 (24%) 1997
Max Healthcare 84 18 (21%) 2002
Apollo Hospitals 70 20 (29%) 2005
Artemis 40 10 (25%) 2006
Rockland 76 22 (29%) 2008
Apollo Hospitals 200 50 (25%) 2009
Note: Percent of project total costs within brackets in column 3 of the table.
Source: International Finance Corporation.
Registration and accreditation
Only 13 of India’s states mandate registration of hospitals and nursing homes under the coun-
try’s Nursing Home Act. Facilities in the remaining states are registered under the Shops and
Establishments Act or the Societies Act. As a result, the private hospital sector has developed
without much regulation or uniform oversight. In 2010, the central government passed the
Clinical Establishments Bill, which required all clinical facilities to register. To maintain regis-
tration, hospitals had to fulfill several conditions, which were vaguely outlined. These included
“minimum standards of facilities and services as may be prescribed,” “minimum requirement of
personnel as may be prescribed,” “provisions for maintenance of records and reporting as may
be prescribed,” and “undertake to provide within the staff and facilities available such medical
examination and treatment as may be required to stabilize the emergency medical condition
of any individual who comes or is brought to such clinical establishment.” Moreover, the bill
applied only to four states and the union territories. Physicians and local units of the Indian
Medical Association objected to the bill, claiming they would incur costs in meeting its provi-
sions and thus be forced to increase their professional fees.21
The Quality Council of India (QCI) operates India’s national accreditation structure
and obtains international recognition for its accreditation schemes. There are also several
international accreditation bodies present in India. The most important of these is the Joint
Commission International (JCI), which began surveying healthcare facilities in 1999 through
a voluntary accreditation process.22 Most large hospital chains in India have obtained JCI
accreditation, including Apollo, Fortis, and Wockhardt. The National Accreditation Board for
Hospitals (NABH), launched in 2005, is a constituent board of QCI that has been set up to
establish and operate the accreditation program for healthcare organizations in India. Over the
past few years, the number of NABH-accredited hospitals has increased dramatically: from 38
(2009) to 54 (2010) to 137 (2012).
Low-cost innovative models in the private sector

Vaatsalya
Several players in the private hospital market have developed innovative, low-cost approaches
to healthcare delivery. Vaatsalya, for example, has stayed outside of the fiercely contested Tier
I markets and focused on Tier II cities (see Chapter 9 for more details on Vaatsalya). The
company seeks to fill the infrastructure void caused by the fact that 70 percent of Indians live in
semiurban and rural areas while 80 percent of India’s healthcare facilities are located near urban
areas (see Chapter 3).
Dr Ashwin Naik and Dr Veerendra Hiremath set up Vaatsalya in 2004 by tapping their
family and nonresident Indian friends to invest.23 By 2010,Vaatsalya was running eight loca-
tions in Karnataka, with 520 beds and a volume of 20,000 patients per month, and looking
to open centers in Maharashtra and Andhra Pradesh. Vaatsalya hospitals offer primary and
secondary care services in pediatrics, gynecology, surgery, and medicine, with special emphasis
Figure 5.17: Vaatsalya Hospital Structure
Specialty Multi-specialty
Size 50–70 beds in size
Facilities Surgical Suite (Major and Minor Surgeries)
Full range of maternity and pediatric services along with medical and surgical
facilities
Space 15,000 – 20,000 sq. ft
Two full-time specialists, focus on surgery, gynaecology, pediatrics and medicine.
Doctors/Staff
Total staff strength of 20, including nurses, ayahs, administrators and social workers.
Diagnostic lab, attached pharmacy , X-Ray & Ultrasound facility and a basic intensive-
Other Facilities
care facility.
Technology/Tele- Connected via audio-visual tools to daycare clinics. Specialists also visit daycare
medicine support clinics on a fixed schedule.
Target population size Target population > 2 lakhs
Vaatsalya has complete ownership over the systems and processes along with the
Ownership
facilities
Source: Authors.
on prevention and rehabilitation.24 While some specialist services like nephrology and neuro-
surgery are offered, the focus is on providing fewer services at a lower cost (see Figure 5.17). 25
According to Dr Naik, “We structure our hospitals in such a way that we are able to cater to
60–70% of the local population’s healthcare needs. And our mission is to ensure that we are
able to offer quality services to our customers.”
Narayana Hrudayalaya
Background
Narayana Hrudayalaya (literally “God’s compassionate home” in Sanskrit) was started in
Bangalore by Mother Teresa’s cardiac surgeon, Dr Devi Shetty, in 2001. His mission was to
lower the cost of heart surgery and other tertiary care in order to make it affordable for a greater
percentage of the Indian population. Cardiac surgeries in the US can cost up to $50,000; in
India, by contrast, they typically cost $5,000–$7,000. Dr Shetty has managed to reduce the cost
even further to $1,800, and has also implemented schemes to help patients pay their medical
bills (see Chapter 10).
Unique approach and media attention

In contrast to Vaatsalya’s strategy of smaller, multi-specialty facilities but larger footprint,
Narayana Hrudayalaya has pursued economies of scale through high patient volumes run
through single-specialty hospitals.26 Dr Shetty’s hospitals have come to be known as focused
factories for their single-specialty approach and their drive to increase operating efficiency and
patient throughput. This has gained both Dr Shetty and his hospital system considerable noto-
riety, including a Harvard Business School case study and an article in the Wall Street Journal.27
The positive attention showered on Dr Shetty’s venture is in sharp contrast to the negative
scrutiny directed at single-specialty hospitals in the US. While specialty hospitals – such as
facilities dedicated to children, cancer, tuberculosis, eye care, psychiatry, and rehabilitation –
have long played an important (although niche) role in the US hospital sector, they have devel-
oped since the early 1990s in more mainstream specialty areas such as cardiac care, orthopedics,
and neurosurgery. They thus compete directly with general medical-surgical hospitals that offer
a full range of clinical services, both profitable and unprofitable. Moreover, the specialty hos-
pitals come with a new management language such as “product line management,” “profitable
line of business,” and “service line competition” that seems to undermine the more community-
oriented mission of the generalist hospitals. To make matters worse, the growing evidence
base on the performance of specialty hospitals in the US suggests that (compared to general
medical-surgical hospitals) they offer slightly higher levels of quality at equivalent cost and
efficiency, which might be partially explained by patient cream-skimming (treat patients with
lower severity of illness, avoidance of Medicaid and uninsured patients) and physician self-
referrals to facilities in which they have an ownership stake.28 Not surprisingly, the US govern-
ment has twice placed a moratorium on new construction of such facilities.
The contrast between what Dr Shetty has accomplished and the shadowy track record of
similar facilities in the US makes the Narayana system even more intriguing and controversial.
The apparent disjunction in the US between the theory and practice of focused factories sug-
gests that it is important to briefly consider the theory behind this approach.
Box 5.1: Theory behind the focused factory
Specialty hospitals are presumed to be more efficient for several reasons. First, by virtue of focus, they
minimize the distractions, conflicts, and competing attentions for physicians and hospital staff. Second, by
virtue of focusing on the needs of only one clinical specialty (e.g., cardiac surgery), they can be equipped
with one set of technologies that receive high use, and can be designed for one type of patient needs and
patient flow that improves throughput and reduces length of stay. Third, by increasing patient through-
put and operating efficiency, they can maximize patient volumes and achieve scale economies. The high
volume also enables the hospital to move down the learning curve, discover new modes of operation, and
thereby improve both quality and efficiency. Finally, by focusing on one type of patient (client), the hospi-
tal can improve customer satisfaction and faster access to specialized care via its physical design and layout.
In this manner, the specialty hospital solves the dilemma of the iron triangle (see Chapter 1). As is evident
here, however, the advantage of “focus” may be confounded with other effects of volume (scale economies),
learning, and favorable risk selection.29
Specialty hospitals may possess additional advantages. The focus on one clinical area attracts physicians
in that specialty who know that (a) their focus is also the hospital’s focus; (b) there are no other clinical
areas competing for the hospital’s resources that need cross-subsidies; (c) the hospital’s staff will be dedi-
cated to serving physicians in that clinical area, thus offering physicians the availability of personalized
and experienced teams; (d) the physicians may have greater control over their work environment and work
scheduling; and (e) the hospital may develop a reputation as a center of excellent care in that area which
helps to attract patients. Patients may be attracted to the hospital for a similar set of reasons.
(Box contd.)
(Box contd.)
Overall, the theory of focused factory is based on scale economies, efficiencies in the division of labor,
and the productivity of highly specialized labor. There are, nevertheless, downsides to focus. One is the
potential boredom (at least at the level of the individual worker) from performing one task repeatedly.
Another possible problem is the weaker ability to coordinate care among the different specialties that
might be needed to treat a patient’s condition (e.g., a cardiac patient with depression, diabetes, or other
chronic illnesses). The focused approach also foregoes scope economies that might attend to strategies of
diversification.
A city of focused factories

Dr Shetty has gone beyond the focused factory to develop a city of such factories. The Narayana
Hrudayalaya Health City in Bangalore is a conglomeration of hospitals in one campus that
includes a 1,000-bed heart hospital, a 1,200-bed cancer hospital, a 500-bed orthopedic and
trauma hospital, and a large eye hospital.30 The four “institutes” total about 3,000 beds and treat
8,400 outpatients daily; their target goal is to treat 12,000 outpatients a day.31 The system, which
currently has more than 6,000 total beds, has expanded to include a Health City in Ahmedabad
and plans to develop others throughout India including one in Jaipur and two near Kolkata.32
Business model
Narayana’s business model is based on several components. First, outpatients who seek care at
the facilities finance the care of inpatients; margins on the outpatient side approach 80 per-
cent, while inpatient margins are negligible. Second, Dr Shetty focuses on high volume and
patient throughput, based on reductions in lengths of stay and the productivity of his surgeons.
By 2012, his Bangalore hospital performed 35 heart surgeries a day; his goal is to reach 50–60
surgeries per day. Third, Dr Shetty has his physicians specialize in only three or four types of
operations; younger surgeons, by contrast, do anywhere from 10–15 different types of proce-
dures. The focus and specialization foster not only scale economies but also continual learning,
thereby improving the quality of patient outcomes.
In addition, Dr Shetty places great emphasis on the ability of large volumes to drive down
costs for hospital vendors, which then pass savings along to his facilities in the form of lower
input prices.
The bulk of the cost in healthcare is the R&D cost. The actual manufacturing cost is very
small. So with higher volumes, the vendors can cover their costs. The more procedures you
do, the more efficiency you allow at every step of the process, including manufacturing.
Moreover, last year [2010] we implanted the largest number of heart valves in the world –
so the valve companies give us a better price on the valves.33
The large volume of surgeries at Narayana thus allows Dr Shetty to achieve savings in con-
sumables and equipment. Narayana Hrudayalaya saves 40 percent on gloves by importing them
by the container load from Malaysia. Dr Shetty’s team also convinced an equipment vendor
who wanted to use Narayana as a referral to park its catheterization laboratory at the hospital
free of charge.
Dr Shetty employs cardiac surgeons and pays them a fixed salary at rates comparable to
those at other hospitals. However, he requires them to handle higher volumes, thereby bringing
down the cost per procedure. To promote efficiency, CT scanners and MRI machines are used
for 14 hours a day (compared with 8 hours per day at most hospitals); higher utilization reduces
the cost per test. To smooth out patient demand, patients are charged lower rates for tests
conducted in late evening. The system foregoes extraneous amenities (e.g., air conditioning
in cooler climates), halving hospital construction costs compared to rival systems. According
to Dr Shetty’s son Viren, an engineer and director at the hospital, “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.”
The Narayana Hrudayalaya organization has gone beyond cost-saving innovations. In the
early 2000s, a famine in the region caused problems with the affordability of healthcare for
farmers. To increase access to healthcare, Dr Shetty proposed a micro-health insurance scheme
to increase the patients’ ability to pay (see Chapters 10 and 11). The Karnataka state govern-
ment launched the Yeshasvini micro-health insurance plan (run by an independent contractor)
in 2003. Farmers paid $0.11 a month to obtain coverage for 1,650 different types of surger-
ies. The plan initially covered 1.7 million farmers, and has since expanded to cover 4 million
farmers; enrollees account for about 10 percent of Narayana’s patients; another 15 percent of
patients receive discounts depending on their ability to pay. Dr Shetty also offers luxury private
and semiprivate rooms for procedure recovery as part of a high-end package priced at $4,000–
$5,000, which helps to subsidize the procedures for patients who cannot pay. To understand
their ability to offer discounts and subsidies while maintaining financial viability, the manage-
ment team studies profit-and-loss performance on a daily basis, allowing them to assess the
discounts they can offer the next day without adversely impacting profitability.
Future growth
As noted, Narayana plans additional health cities in the future. Dr Shetty is in discussion with
at least one state government to build multiple mini-specialty hospitals adjacent to a large gov-
ernment healthcare facility and install a CT scanner, an MRI unit, a cardiac catheterization lab,
and dialysis facilities, but only build 40 beds. In this manner, Narayana can perform complex
procedures for patients yet allow them to recover back in the government facility. Hospitals
contained within a given health city share the same ancillary services and back-office functions:
imaging center, clinical laboratory, blood bank, finance team, and management team. The only
difference is a separate building for each clinical specialty.
Narayana is also pursuing a partnership with the Government of the Cayman Islands
to build a new health city in the Caribbean (see Chapter 6). This city is not only expected to
attract US and British medical tourists, but will also be designed to provide affordable care to
the 40 million people in the Caribbean who do not have access to large, specialized hospitals.34
Narayana is partnering with the US-based Ascension Health system, which will provide facili-
ties planning, supply chain management, and biomedical engineering services to the project.
Is Narayana scalable or replicable?

As in other hospital systems in India, family ties played a major role in getting Narayana off
the ground. Dr Shetty’s father-in-law, through his construction company, provided the land
on which the Bangalore facility was built (in a 30-year lease), as well as the initial capital to
build and operate the hospital. Dr Shetty’s family also guaranteed the loans needed to raise
the capital to equip the hospital.35 Today, Dr Shetty partly finances the health cities through
a private equity company (25 percent), with the majority equity remaining with the family.
Family control will remain a constant theme going forward, although Dr Shetty is evaluating
some alternative approaches: debt, joint ventures with strategic partners, and arrangements to
lease land and equipment from real estate companies. The latter will enable Narayana to avoid
ownership of both land and facilities, and thereby commission large-scale projects that can be
quickly scaled across the country.
The family connection and the deals with governments raise questions whether Narayana’s
model can be scaled on a widespread basis and/or replicated by others. These quirks in
Narayana’s development also raise the possibility that the ability of such systems to finance care
at the bottom of the pyramid may be overstated. This is because a large component of hospital
costs (the real estate) are artificially reduced in ways unavailable to other hospital operators.36
Major private hospital systems

Figure 5.18 depicts the leading hospital players in the private sector in India. This section
focuses on three systems: Fortis, Apollo, and Max Healthcare. These systems have commonly
pursued strategies of “horizontal integration”: that is, building chains of hospitals. Two of the
systems have also pursued strategies of “vertical integration”: acquiring potential feeders of
needed inputs (e.g., physician practices, diagnostic centers, training institutions) and potential
distribution outlets (e.g., pharmacies). Some have also pursued strategies of diversification into
quasi-related businesses (dental practices) and other geographic markets.
For each system, we outline their history and growth, business model and strategies, rela-
tionships with physicians, current challenges with their horizontal integration, and likely future
challenges with their vertical integration. To put these strategic efforts in context, we first
review the theory of horizontal integration, vertical integration, and diversification; we also
briefly review the evidence base regarding how these hospital strategies have fared in the West.
Figure 5.18: Leading Hospital Players in India
(1)
Fortis(2)
Hospitals
# of Beds: 6,881 # of Beds: 8,276
# of Hospitals: 51 # of Hospitals: 50
India
Pan
CARE
Hospitals(3)
# of Beds: 1,600
Multiple
Regions
# of Hospitals: 12
Geographic Presence
Manipal
Hospitals(4)
Region
Single
# of Beds: 4,900
# of Hospitals: 15
MAX
Sterling
Healthcare(6)
Hospitals(5)
Single
State
# of Beds: 1,027 # of Beds: 1,100

# of Hospitals: 6 # of Hospitals: 8
Narrow Wide
Business Span and Breadth of Services
Source:
(1) Company Earnings Release. Figures as of March 31, 2012.
(2) Fortis corporate presentation as of September 2011. Excludes hospitals and beds as part of ‘Projects’.
(3) Care Hospitals website. Information retrieved on June 22, 2012.
(4) Manipal Hospitals website. Information retrieved on June 22, 2012.
(5) Sterling Hospitals website. Information retrieved on June 23, 2011.
(6) Max India investor presentation as of August 2011, publicly available on Max india Ltd.’s website.
(7) The number of beds for FY90, FY95, FY00, and FY05, are approximate figures.
Note: Bubble size denotes no. of beds (owned + managed). The Company has not independently verified
the data presented on this slide, except for data relating to the Company.
Source: Apollo Hospitals Investor Presentation (July 2012)
Box 5.2: Horizontal Integration
Horizontal integration can be achieved through a merger and acquisition (M&A) or building a multi-
plant operation (i.e., chain stores). The rationale differs slightly depending on which approach is taken.
For M&A, the academic rationale is often to make better use of the target’s assets, to reduce the number
of competitors (and thereby achieve market power), to achieve market entry without expanding existing
capacity (and adding a new competitor to the mix), to speed up market entry (i.e., faster to buy than to
build), or perhaps to take advantage of a rising stock market (i.e., acquire firm using stock that has appre-
ciating value). For multiplant operation, the academic rationale is to expand geographic presence and
delivery capacity, to transfer learning across operating units, and to achieve scale economies by sharing
common resources.
(Box contd.)
(Box contd.)
Unfortunately, the arguments offered by hospital executives for pursuing these strategies often diverge
from the academic rationales.37 Executives commonly mentioned the need to prepare for new reimbursement
environments, increase their access to capital and/or strengthen their financial position, and reduce excess
capacity in the system. The one academic rationale commonly cited was the pursuit of scale economies.
Summarizing the evidence (mostly from the 1990s), there are some efficiency gains from hospital
M&A, particularly when the merging hospitals are small in size. Scale economies are exhausted quickly as
hospital size increases (perhaps by 300 beds). On the other hand, there are few efficiencies, quality gains,
access improvements, or scale economies resulting from the formation of multiunit systems.38 Their ability
to tackle the three angles of the iron triangle is thus unsubstantiated. Over time, most hospital systems
have failed to operate as centralized systems. Instead, hospital systems have pursued more decentralized
approaches that augmented individual hospital autonomy at the expense of system-level direction, coordi-
nation, and centralization.
Why are the operating results of multiplant systems in the US so dismal? Such enterprises face a number
of challenges including the following:
• Mechanisms to coordinate activity across operating units

• Settling decision rights between headquarters and the operating units
• Division of responsibilities between headquarters and the operating units
• Balancing standardization (at headquarters) with customization and local responsiveness (at the
operating units)
• Consistency in execution and implementation of service
Such multiunit chains are also plagued by a host of centrifugal forces that retard coordinated and systemic
operation. These include geographic dispersion, the presence of geographic boundaries that separate the
operating units (and thus inhibit transfers), heterogeneity in staff and clients, differences in missions, vari-
ations in operating unit capabilities and management, and difficulties in getting previously independent
operating units to share anything.39
Vertical integration
As with horizontal integration, there are a host of academic rationales for vertical integration. The most
widely cited reason is the desire to minimize transaction costs: firms elect to acquire an upstream supplier
or downstream distributor when the transaction costs in coordinating those market exchanges exceed the
economies from specialized production. That is, it is more efficient to acquire the supplier/distributor and
make them part of your organization if the costs of locating them, negotiating contracts, and monitoring
and enforcing those contracts with them exceed the gains to be had by allowing them to be a specialized
supplier on their own.
To be sure, there are other rationales for vertical integration. These include the need to make transac-
tion-specific investments in trading partners, ensure access to needed supplies, block competitors’ access
to those supplies, create power over buyers and suppliers, pool complementary assets to increase the firm’s
value, deal with information asymmetry (supplier or distributor has knowledge you do not), and serve as a
defensive hedge against strategic uncertainty.
As with horizontal integration, hospital executives in the US typically cited other rationales for their
strategies of vertical integration. These included preparation for national or state healthcare reform, prepa-
ration for changes in reimbursement, increased size to manage risk, alignment of the hospital’s interests
(Box contd.)
(Box contd.)
with those of physicians, increased profits and market share, achievement of scale economies, provision of
a seamless continuum of care, and improvement of the health status of the population served. Only a hand-
ful of cited reasons conformed to academic theory: increased market power over suppliers and distributors,
and enhanced recruitment of needed inputs (e.g., physicians).
In practice, vertical integration strategies have yet to pay off for most hospital providers in the US.
Hospital acquisition of physician practices have led to heavy financial losses per physician, both in the
1990s as well as in the present. As noted in Chapter 4, hospitals have also seen only a small increase in
physician loyalty from vertical integration, and perhaps a less than anticipated increase in the volume of
referrals from physician practices. Moreover, there is no reduction in hospital costs and no improvement
in quality of care when physicians are incorporated into the hospital. Thus, again, such strategies may fail
to address the iron triangle. As in many corporate M&A efforts, researchers have attributed the mediocre
results to the difficulties in merging two very different cultures (physicians and executives).
Diversification
Finally, there are several academic rationales for corporate diversification. These include the desire to grow
and expand, to escape an undesirable or unattractive industry, to balance an incumbent industry that has
matured or stagnated, to make use of surplus cash flows, to spread risk and reduce cyclical fluctuations
in sales, to more fully utilize existing resources and capabilities in additional businesses, and to thereby
achieve scale and scope economies. Scope economies require the transfer of competencies across businesses
and/or the sharing of resources; to maximize such economies, the resources shared should be central to
each firm’s internal value chain of activity. The often-used rationale of “synergy” rests on the achievement
of scope economies, as well as the reduction in the average costs of the different firms and an increase in
their joint revenues over what they could generate individually.
In practice, diversification has demonstrated very mixed results. The research community is still unde-
cided whether firm focus and specialization (e.g., the Narayana model) is superior to related diversification
in terms of profitability. Indeed, over time, corporations have moved away not only from unrelated diversi-
fication (the conglomerates of the 1950s and 1960s) but also from related diversification (1970s and 1980s)
and opted for a more focused approach (the core competencies movement of the 1990s). In healthcare, one
major diversification strategy undertaken in the 1990s was the effort by both hospitals and physicians to
get into the health insurance business. This strategic move was a huge failure. Problems included a lack of
provider expertise in the new business area and the lack of overlap in the value chains of the provider and
payer businesses, meaning that few resources could be shared or leveraged.40
Fortis Healthcare
History
Fortis Healthcare was established in 1996 by the owners of Ranbaxy, one of India’s largest
pharmaceutical companies and one of the world’s top generic pharmaceuticals manufacturers.
Ranbaxy’s owners envisioned Fortis as a vertically integrated, “end-to-end” healthcare organi-
zation with capabilities in drug research, clinical trials, laboratory services, and healthcare ser-
vices delivery.41 During the earlier years of its operation, Fortis focused on the hospital business,
building up a large chain of facilities. More recently, Fortis executives have returned to the
vertical integration strategy full throttle.
The first Fortis hospital was opened in 2001 in Mohali, a city in the northern Indian state
of Punjab. The per-capita income in the area is among the highest nationwide and the region
is home to one of the largest populations of affluent nonresident Indians. Like its US investor-
owned counterparts, from the start, the Fortis Healthcare system targeted more lucrative geo-
graphic markets.
Fortis built its first few hospitals on a greenfield basis, diversifying into New Delhi in
2003–04. As with investor-owned systems in the US, however, Fortis expanded largely through
acquisitions of other systems. In 2005, Fortis acquired Escorts’ three owned and one managed
hospitals, thereby tripling its bed capacity. In 2008, Fortis acquired a stake in Malar Hospitals
in Chennai (diversification into southern India), and in 2009 acquired 10 of Wockhardt’s hos-
pitals (diversification into southern and eastern India) – the largest healthcare acquisition in
India. The Ranbaxy owners sold off the drug business earlier that same year in an apparent
de-diversification and de-verticalization strategy; they utilized the proceeds to acquire these
hospitals. By January 2010, Fortis owned or managed 45 hospitals in its network, and a total of
6,709 beds, with several newly commissioned greenfield projects (in New Delhi, Kolkata, and
Mumbai) and several more planned (see Figure 5.19). It also added hospitals in Tier II and III
cities (Moradabad and Raigarh).
Figure 5.19: Fortis Hospitals: Establishing Itself as a Multi-specialty National Chain
Top 5 hospitals contribute ~50% of India Fortis India footprint

Hospital revenue
~3,000 Rs. 23B

100%
Other
80 % Other
Faridabad
Shalimar Bagh
60 % Faridabad
Jaipur
Shalimar Bagh
Jaipur Noida
Noida BG Road
40 %
BG Road Mulund
Mulund Mohali
20 %
Mohali
Escorts
Escorts
0%
Owned beds FY13E Revenue
(operational)
Note: The acquisition of Wockhardt hospitals has expanded the footprint to the south, especially Bangalore and
Mumbai
Source: Fortis Investor Presentation – November 2011, Barclays Analyst Report – Dec 2012
One concern with Fortis’ “expansion via acquisition” strategy is the mix of hospitals in its
network and potentially consequent lack of cultural cohesion. Fortis has sought to counteract
such centrifugal tendencies through (a) a coherent organizational model that links operating
units, and (b) a standardized, formal operating system implemented in each acquired facility.
These two approaches are considered below.
Organizational model
Fortis has followed a hub-and-spoke model where smaller multi-specialty hospitals (less than
100 beds) refer patients to larger super-specialty hospitals (200–500 beds) offering advanced
care in one or more specialties in the region. The hub hospital serves as Fortis’ anchor in that
region, serving patients with higher severity of illness. For example, the main Escorts hospital
acquired in 2005 (Escorts Heart Institute and Research Centre in New Delhi) was a large
cardiac care facility performing thousands of Coronary Artery Bypass Graft Surgery (CABG)
procedures (see Figure 5.20). Spoke hospitals are standalone hospitals which are independently
viable and provide more comprehensive services. Such a model serves to reduce duplication
of expensive clinical services across hospitals, as well as promote regionalization of care in a
single high-volume facility (which is associated with higher-quality outcomes, based on evi-
dence from the US). Physician experts at the hub hospital provide the clinical leadership for
practitioners at the spoke facilities.
Figure 5.20: Fortis Hospitals: Escorts Acquisition Helped Fortis be EBITDA Positive
Escorts acquisition played a key role in EBITDA
Fortis approach
profitability in FY06; Fortis Intl acquired in FY13
60 • Grew through acqugh acquistions

Rs. 60B 20% (e.g. Escorts, Wockhardt)
Hospital • Open to O&M models
Model • Feeder for super–specialty hubs
(e.g. multi–specialty tertiary
centers, facilities in Tier I,II cities)
Rs. 40B 10%

EBITDA margin
Revenue (Rs. B)
• Current skew to NCR but has built

30 Geography up presence in other regions (e.g.
Mumbai, Bangalore)
Rs. 20B 0%
15
Case Mix • Emphasis on Cardiac, Gynaecology
9
5 5 6
3
Rs. 0B -10% Customer • Focused on the mass and mass
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Segment affluent Market
Source: Authors.
Fortis also operates and manages several hospitals, ostensibly to generate referrals to other
in-network hospitals. Fortis reportedly accumulates the majority (70 percent) of its surgical
volume from within-network referrals, and the majority of its operating revenue from inpatient
admissions (also dependent on referrals).42 In its presentation to investors for the first quarter
of 2012, Fortis stated that it managed more hospitals than it owned (30 versus 21, with another
17 projects underway). However, contract-managed hospitals currently account for less than
one-third of bed capacity, and will account for only one-fifth of bed capacity once the new
projects are completed.
Fortis seeks to treat patients with more complex conditions and higher severity of illness.
In recent years, Fortis has opened new medical programs at its hospitals in bone marrow trans-
plantation, chemotherapy, stroke treatment, and higher-end urological care, as well as higher-
end technologies such as 64-slice CT scanners. It has achieved significant procedural growth in
the lucrative clinical areas of cardiac care (34 percent of patient mix), orthopedics (7 percent),
neurosurgery (6 percent), oncology (4 percent), and dialysis (4 percent).43 As in the US, hospi-
tals like Fortis charge higher prices for higher-end and less price-elastic specialty care compared
to services offered in the spoke hospitals. Higher prices help to support the large investments
in infrastructure at the specialty centers, as well as the high salaries paid to specialists who are
recruited to work there (discussed in the following section).
To generate synergies from its network, Fortis implements common back-office functions
across its hospitals, such as human resources, finance, information technology (IT), and pur-
chasing. The system also seeks to provide network benefits to its hospitals in areas such as
revenue cycle management, clinical research, attraction and retention of talent, optimization of
clinical resources, and leveraging the Fortis brand.44
Operating system
The Fortis Operating System (FOS) constitutes an explicit effort to standardize all administra-
tive processes across the Fortis hospital network. The system aims to achieve several goals: to
ensure uniform high quality of patient-facing processes, make these processes more patient-
centric, embed best practices in operational efficiency, facilitate performance management
across all hospital sites, and positively impact the system’s bottom line. The ultimate goal is
to help Fortis scale up its hospital network faster and with the right quality of care. Moreover,
Fortis executives believe this effort will enable the system to pursue its “ability mantra” to pro-
vide service that is predictable, service that is on time, and service that is available for all – in
effect, conquer its own version of the “iron triangle of healthcare” (see Figure 1.1).
The FOS developed initially at Fortis Hospital in Mohali out of a major investment in
information technology (IT). It is used to manage hospital capacity, patient flow, facility ser-
vices, and performance monitoring. FOS concentrates on the drivers of “average revenue per
occupied bed” (ARPOB): specialty mix, pricing, length of stay, bed turnover, patient volume,
and procedure volume (see Figure 5.21). This is Fortis’ key operating metric, reflecting their
heavy preoccupation (shared by other hospital systems in India) with efficient, low-cost, and
high-volume operations. In keeping with this strategy, full occupancy and efficiency trump
Figure 5.21: Fortis ARPOB Model
Surgical vs. Non-

surgical
Critical Care Beds

vs. General Care
Beds
Medical Program
Specialties chosen
Total Revenue
Pricing
Average Revenue Quicker turn-
Per Occupied Bed around of assets
(ARPOB)
Average Length of
Stay (ALOS)
Creating excess
Occupied beds capacity without
additional Capex
Volumes
Utilization/Bed
Number of
Procedures with
same infrastructure
Source: Shivinder Singh, Presentation to Indian School of Business (January 2010).
brand image. Indeed, the fastest and easiest way to achieve scale economies is by increasing the
utilization of existing capacity, for example, by decreasing length of stay, decreasing procedure
times, increasing bed and procedure room turnover rates, increasing patient volume, and expe-
diting patient discharge. Full occupancy nevertheless synergistically promotes brand image:
high volumes give Fortis facilities the public perception of being “busy places” and thus highly
demanded sites of care.
As a result of its focus on maximizing ARPOB, Fortis is able to quickly implement new
processes and monitoring of those processes in acquired hospitals. Such processes include an
array of access measures (e.g., percentage of patients waiting beyond the appointment time,
percentage of same-day consultations), throughput measures (e.g., turnaround time for labora-
tory results, percentage of X-ray reports ready within 30 minutes, percentage of critical callouts
not communicated to clinicians), and output measures (e.g., percentage of planned discharges,
percentage of discharges before 11 AM, and overall discharge time).
Healthcare IT acquired from Boston-based Partners Healthcare in the US forms the

backbone of Fortis’ system for electronic medical records (EMRs), patient safety, and qual-
ity compliance. As a result, patients’ medical records are easily transferred between hub and
spoke hospitals. The continuous monitoring of outcomes also allows systems to be modified
to increase efficiency and make them more convenient for the patient. For example, the lab
turnaround time for results was reduced from over 7 hours to 1 hour.
Physician engagement model

Relationships with clinicians are a key to the successful functioning and profitablility of hospital
systems in the US. Fortis has reportedly sought to avoid the traditional hospital dependence
on physicians for their referrals and admissions found in the US. It has instead followed an
employee model for doctors in key sub-specialties by hiring them at high base salaries and
offering them other incentives such as investments in their specialty, investments in outpa-
tient diagnostic facilities to serve as feeders, and variable compensation. A variable compo-
nent of salary is calculated using a formula that factors success rates in various procedures,
patient referrals, patient rapport, administrative responsiblities, and academic publications.45
Some Fortis physicians have expressed concern over the impact of such incentives on supplier-
induced demand, unnecessary tests and procedures, and kickbacks to physicians for referrals to
diagnostic labs.46 Physicians are not allowed to have private practices and must treat all of their
patients at the Fortis facility. High salaries are extended to physicians with the understanding
that they will treat higher volumes of patients.
However, evidence from the 1990s and US hospitals’ experience of employing physicians
suggests that transition from fee-for-service to salaried employment may result in lower physi-
cian productivity and high hospital losses in managing their practices. Thus, Fortis’ efforts to
hire star physicians for its hospitals in any city may serve to pull in patients but may not maxi-
mize physician patient volumes. There are only a handful of star physicians in any given city.
The Fortis system may need to transition away from a model where patients want to see a par-
ticular star physician to a model where patients are attracted by the reputation of the hospital
medical staff, the services available at the hospital, and the Fortis brand. Such brand attraction
will more likely rest on the aggregate quality of the clinicians, nurses, and clinical processes in
the hospital in a given service line.
Moreover, doctors used to a high degree of autonomy in their own practice or in other hos-
pital systems may resent micromanagement from administrators, particularly when the system
replaces physician-led management with professional managers, as Fortis has done in its hospi-
tal acquisitions. This can cause friction between hospital management and physicians, generate
physician ill will, and possibly reduce the long-term physician retention rate.47
Fortis executives candidly discuss the issues of working with physicians. Their job is com-
plicated by the fact that, in contrast to the US, in India the medical profession remains a cottage
industry with lots of very small practices (“one-sies and two-sies”). It is further complicated by
the lack of a well-developed third-party payment system in the private sector (found in the West)
that scrutinizes how physicians practice and charge for their services. Discipline and control
over physician behavior is barely in its nascent stages in India.
Fortis does allow physicians in noncore specialties (dentistry and ophthalmology) and in
multi-specialty practices to maintain their own separate private practices and to consult at other
hospitals. They are compensated on a fee-for-service or revenue-sharing basis.
Challenges with hospital operations

Fortis acknowledges several challenges going forward with their hospital chain. These include
the need to cultivate public–private parternships (PPPs) in managing former government facili-
ties that may serve as new expansion avenues for private chains and as referral sources for
sub-specialty hubs. The advantage of developing such PPPs is that the underutilized public
hospitals can serve as a source of new beds, buildings, and trained staff that neither Fortis nor
other private chains will need to invest in. The expansion strategy also rests on the need to
document and increase quality in order to appeal to primary care physicians and solicit their
patient referrals. In addition, expansion entails a similar drive to obtain accreditation (and
perhaps work with prestigious US hospitals) in order to impress patients and attract them to
Fortis facilities.
Fortis may be increasingly challenged to respond to increased government regulatory
mechanisms imposed on the hospital sector. In 2006–07, the Indian Supreme Court reviewed
Fortis’ acquisition of the main Escorts hospital, and subsequently ruled that it must offer a
stipulated percentage of free care (on both inpatient and outpatient sides). The hospital had
been established as a nonprofit charitable institution with a land lease from the government at
below-market rates; the Fortis acquisition violated the initial provisions in the land allocation.
Future government regulation may extend to stricter hospital licensing laws (which currently
do not exist, making it easier to erect hospitals), as well as scrutiny of kickbacks for physician
referrals and potential conflicts of interest.
Fortis also must deal with the challenge of competing with other large hospital chains such
as Apollo (detailed in the next section). Private hospitals compete for referrals from primary
care physicians as well as for the medical tourism business (see Chapter 6); medical tourists pay
cash for higher-end services and help to utilize underutilized facilities. In 2006–07, however,
international patients comprised only 0.8 percent of Fortis’ patients. Becoming the desired
destination for the global medical tourism business may be more aspiration than anything.
The major systems are also commonly raising capital for future expansion via initial public
offerings (IPOs); Fortis raised $100 million in a 2007 IPO. Expansion may be limited by the
growing shortage of physicians and nurses, however. To deal with this issue, Fortis has set
up its own nursing school and has heavily invested in the Fortis International Institute of
Medical Sciences.
Finally, Fortis must deal with a host of financial issues. First, Fortis did not report a profit
until Fiscal Year 2009 ($208 million); the prior year, Fortis lost $555 million. Historically, the
system has had to carry huge loans ($108 million of the $190 million on its 2007 balance sheet)
and thus substantial interest and (especially) depreciation expenses. This situation has been
ameliorated somewhat by the system’s IPO, which increased shareholder equity and decreased
loans and debt as a percentage of total capitalization. The initial Fortis hospital in Mohali took
5 years to reach breakeven. Some industry analysts suggest that this is the norm;48 there is also
some evidence that such greenfield projects take longer to break even compared to acquisitions,
suggesting Fortis’ preference for the latter expansion strategy.49
Second, the Fortis hub-and-spoke model contains hospitals of varying profitability: the
sub-specialty centers contribute a large share of system revenues ($114 million in 2007), while
the spoke facilities earn much lower revenues ($21 million). Similarly, the owned facilities earn
more than the managed facilities ($122 million vs. $13 milllion). This is important given the
large number of contract-managed facilities in the Fortis system.
Third, it is unclear from US evidence whether or not substantial scale economies may be
reaped from multihospital systems. The western data show cost savings from mergers of small
hospitals in a local market but not from the development of multiplant systems across geo-
graphic markets where little physical or clinical consolidation occurs. As noted, Fortis has expe-
rienced this issue in the wake of the Escorts acquisition. Fortis’ effort to reap scale economies
is partly based on the ARPOB system. In its latest annual report, Fortis reported that ARPOB
had increased from 81 lakhs (2011) to 93 lakhs (2012); however, as of early 2012, only 13 Fortis
hospitals were running the system. The system was also running at only 73 percent occupancy.50
Fourth, Fortis has begun to diversify away from northern India into less affluent states.
The system may thus benefit greatly from the expansion of private health insurance that will
enable more of the population to access hospital services (particularly on the inpatient side).
Fifth, Fortis has reportedly paid physicians enormous salaries to attract them and their
patient caseloads. Salaries are reported to range from $100,000 to $600,000.51 Recent evidence
from the West suggests that hospitals lose anywhere from $100,000 to $200,000 per employed
physician per year; efforts to recoup these costs via higher referrals and utilization rates have
often fallen short. Fortis’ problems here may have been exacerbated by the Wockhardt acquisi-
tion: Wockhardt, like Fortis, had a high number of salaried physicians.
Vertical integration redux

In the last few years, Fortis has complemented its historical emphasis on a horizontal chain of
hospitals with a renewed interest in vertical integration into related and quasi-related health-
care businesses. This interest began, oddly enough, with an effort to diversify Fortis’ hospital
holdings beyond India. In March 2010, Fortis made a concerted effort to acquire Parkway
Holdings, the largest hospital operator in Asia, by paying $685 million for a 23.9 percent equity
stake. It then took management control and boosted its stake, setting off a 4-month bidding
war for control of Parkway with the then-minority shareholder and Malaysian sovereign wealth
fund Khazanah Nasional Bhd. Khazanah won control in July 2010 with a bid that valued the
company at $3.3 billion. Fortis’s top two executives (Malvinder Mohan Singh and Shivinder
Mohan Singh) then established Fortis Healthcare International to develop a pan-Asian pres-
ence; in 2011, it was acquired by Fortis for $665 million.52
By virtue of the Fortis Healthcare International acquisition, Fortis became a horizontally

integrated, vertically integrated, and geographically diversified corporation all at once. Its busi-
nesses now include 600 primary care centers (via the acquisition of Quality Healthcare in Hong
Kong), 210+ diagnostic laboratories (via two acquisitions: Super Religare Laboratories, SRL,
in India, and Medical Diagnostic Center in Hong Kong), 191 specialty/daycare centers, and
175 dental practices in Australia and New Zealand (via the acquisition of Dental Corporation).
By virtue of acquiring SRL (one of the largest diagnostic service providers in India with 65
labs), Fortis also gained Piramal Diagnostic Services, itself a dominant player in the radiology
segment (105 imaging labs). The combined operations are depicted in Figure 5.22; the geo-
graphic and business diversification is depicted in Figure 5.23.
What is the Fortis vision for this new conglomerate that combines multiple verticals and
geographies? One word seems to define Fortis management’s current priorities: “integration.”
According to its 2011–12 annual report, Fortis suggests it has multiple strategic aims relating
to integration:
• Fortis’ vision is “to be the global leader in the integrated healthcare space.”
• “Extending our presence to the entire healthcare delivery value chain.”
• “Most of our ventures have been self-contained and profitable in their own right. However
the real potential comes alive exponentially when natural dependencies within units can
be leveraged in an integrated manner.”
Moreover, Fortis believes that it can develop and wield competitive advantage by taking
this approach, including (apparently) scale and scope economies:
• “This will help to stabilize processes and usher in greater efficiencies with a net upsurge
in value created.”
• “Unique capabilities” brought in by “strategic and bold decisions.”
The annual report is vague on the details regarding how these synergies and efficiencies
will be achieved. As discussed above, the promises of horizontal and vertical integration are
many; the results to date have been few. One possibility is that the newly acquired diagnostic
labs might drive more inpatient hospital business, since 60–70 percent of treatment decisions
are based on diagnostic results. For this to occur, however, the diagnostic testing facilities need
to not only be colocated in the same cities as the Fortis hospitals, but also be in geographic
proximity to the hospitals to minimize patient time and travel costs (i.e., do not defy the
“gravity model”). It is less clear how Fortis’ hospitals (which are primarily based in India) can be
positively affected by the ownership of physician practices in Hong Kong and dental practices
in Australia and New Zealand.
Market analysts have been skeptical for other reasons, including the company’s contin-
uing huge debt load, which has increased as a result of the international expansion. As of
August 2012, Fortis had gross debt of Rs. 60.5 billion and net debt of Rs. 55.5 billion, and a
debt/equity ratio of 1.6.
Figure 5.22: Fortis Combined Operations
Our Healthcare Assets
India International India International
Hospitals1 68 7 75
Total Beds1 c.10,800 c.1,200 >12,000
Primary Care2 - ~600 ~600 centres
Diagnostic Labs >200 9 >210
Day Care Specialty 1 ~190 ~191
1 9 10 Countries
Australia, New Zealand, India, Australia, New Zealand,

Geographic Hong Kong, Vietnam, Dubai, Hong Kong, Vietnam, Dubai,
Coverage India Mauritius, Singapore, Sri Mauritius, Singapore, Sri
Lanka and Canada Lanka and Canada
>1,800 >2100 >3,900

Doctor Network3
Total Employees >17,000 >7,000 >23,000
1. Includes project hospitals and beds.
14 2. Includes affiliate centres and physiotherapy centres.
3. Doctor Network Includes Hygienists in Australia
Source: Fortis Healthcare Investor Presentation (February 2012)
Apollo Hospitals
History
Apollo began in 1983 as a 150-bed hospital in Chennai organized by Dr Prathap Reddy, a car-
diologist with considerable clinical experience in the US. The hospital was the first for-profit
facility in India. In contrast to Fortis, Apollo initially concentrated much of its capacity in
southern India (see Figure 5.24). From there, the system expanded to include 54 hospitals and
over 8,700 beds across India and Asia, with some further international presence as well.53 Like
Aravind (see Chapter 7), the founder has heavily involved his family in the governance of the
system. Dr Reddy’s four daughters all have leadership roles in Apollo.
Figure 5.23: Fortis Geographic and Business Diversification
Verticals and Geographies Matrix

Emerging Developed
Middle Hong New

India Vietnam Sri Lanka Mauritius East Singapore Kong Australia Zealand Canada
Primary  
Care
   
Diagnostics
Specialty      
Day Care
Centres
Secondary  
Care
Hospitals
Tertiary     
Care
Hospitals
Source: Fortis Healthcare Investor Presentation (February 2012).
Figure 5.24: Apollo Hospitals: Concentrated in the South, Expanding to Other Regions
2 cities account for 1/2 the capacity and
Apollo – National Play
2/3 of the sales
4,645 Rs. 24 B
100%
JVs
JVs
Subs
80% Subs
Others
cluster
60% Others
cluster Hyderabad
cluster
40%
Hyderabad
cluster
Chennai
20% cluster
Chennai
cluster
0
Owned beds FY13E Revenue
Source: Spark Capital, Company Investor Presentations
Figure 5.25: Apollo Hospitals: High Margins Despite Capacity and Regional Expansion
Margins have fluctuated but expected to stabilize Apollo’s approach
Rs. 40B 38 20% • Focused on organic growth

Hospital • Associate hospitals are a source
31 Model of revenue and act as feeders to
super-specialty centers
Rs. 30B 15%
26
• Currently skewed to South India
Revenue (Rs. B)
EBITDA margin
Geography • Seeks national footprint but will
20 not compromise quality
Rs. 20B 10%
16
12 • No particular focus, though

9 Case Mix Cardiac is the biggest segment
Rs. 10B 8 5%
7
• Price-cuts to gain market share
• 20-30% price premium in
Customer
Rs. 0B 0% markets where it has high
Segment
FY05
FY11
FY12
FY06
FY07
FY08
FY09
FY10
FY13
market share and occupancy

(e.g. Chennai)
Source: CapitalIQ
Growth strategy
In contrast to Fortis, Apollo has grown more slowly and organically (see Figure 5.25). Starting
from its base in Chennai, Apollo has built rather than acquired, and has focused on build-
ing tertiary and quaternary hospitals in several Tier I cities. The Chennai facility has grown
from 150 to 600 beds. In 1988, Apollo built a second hospital in Hyderabad. By 2000, Apollo
had added six more facilities: in Delhi, Madurai, Vizag, Aragonda, and a specialty facility
in Chennai; by 2004, it had added facilities in Mysore, Ahmedabad, Bilaspur, Kolkata, and
Colombo. Between 2004 and 2010, Apollo doubled its overall capacity from 4,000 to 8,000
beds; operating revenues jumped from $147 million to $457 million.
Apollo now has some hospital presence in every Indian Tier I market, and (like Fortis) is
expanding into Tier II and III cities around the country. Apollo is using the concept of a “reach
hospital” in this geographic expansion to develop an Apollo network across India, with 10
reach hospitals developed thus far. In effect, it is trying to replicate a top-tier hospital in Tier II
and III markets in order to maximize patient access and convenience (i.e., less travel time to an
Apollo facility). The hospitals have a lower cost structure, charge lower prices (30 percent less
than in Tier I markets), and deal with lower-severity-of-illness patients. The hospitals have a
minimum of 100 beds, with the ability to increase to 200 beds; roughly one-third of the beds
are deluxe or private rooms, with possible facilities for children’s play areas and libraries, fur-
ther increasing patient convenience. Hospitals in these markets have half the construction cost
of hospitals in Tier I cities. In contrast to Fortis, Apollo has been more active in the contract
management of other hospitals: in FY 2010, the number of managed beds (2,875) was nearly
half the number of owned beds (5,842).54
Clinically, Apollo has focused on cardiac surgery and higher-end technological care, much
like Fortis. Apollo was the first hospital in India to introduce a 3T MRI, a 64-slice CT scanner,
a 320-slice CT scanner, a PET CT scanner, a Cyberknife, and Novalis.55 It has also developed
its capability in beating-heart surgical techniques, and is actively developing telemedicine cent-
ers to reach potential patient populations in smaller urban areas. Such technological advances
increase the costs of patient care. Yet Apollo has striven to keep the cost of a CABG procedure
in India at a fraction (10 percent) of the cost in the US. Apollo manages this balancing act in
several ways: it seeks to run a higher volume of patients through the technology in order to
reach breakeven faster; it charges patients more for more sophisticated technology; it acquires
the equipment at lower prices; and it foregoes certain high-end equipment (e.g., da Vinci robot)
that it believes offers no patient benefit.
Like Fortis, Apollo is also developing centers of excellence in specific clinical areas to try
to differentiate itself and attract both patients and physicians. These clinical areas cover cardiac
care, oncology, neurosciences, transplantation, pediatrics, and emergency medicine. Unlike
Fortis, Apollo has diversified into the construction of pediatric hospitals – the first chain in
India to do so – and plans to build a pediatric facility in Nigeria.
Another interesting expansion strategy has been to develop, build, or manage hospitals
outside of India, particularly in the Middle East (Kuwait, Oman, Yemen, Saudi Arabia, Qatar,
and Sharjah). The healthcare market in the Middle East is especially attractive given the pres-
ence of both governmental and private-pay sources for financing healthcare delivery, and thus
the population’s substantial ability to pay. This market has also been (until recently) politically
stable and viewed by Indian clinicians as a more comfortable locale in which to work.
Diversification
Apollo has diversified into several “verticals” that, along with its acute-care hospitals, mark the
formation of a vertically integrated delivery system. Apollo has developed a chain of hospital-
based and retail pharmacies to tap into the revenue stream flowing from the high out-of-
pocket expenditures of the Indian population on pharmaceuticals. Consultants estimate the
retail pharmacy market to be roughly Rs. 488 billion ($9.1 billion) in size and growing at a
15–16 percent rate (2006–07 data). This is a fragmented marketplace with only 3–4 percent of
total sales from the organized sector.56
By 2007, the pharmacies accounted for 40 percent of Apollo’s revenues (compared with the
57 percent generated by its hospitals). Analysts projected this portion of Apollo’s business to
grow to 49 percent by 2009, especially with expanding health insurance coverage and concerns
over the integrity of the pharmaceutical supply chain (e.g., counterfeit drugs). Apollo started
this business to improve quality (reduce spurious drugs), improve access (via 24-hour access to
the pharmacy), improve convenience (allow physicians to get their prescriptions filled), and
improve pricing (order higher volumes from drug manufacturers at lower unit costs). Apollo
also sees the retail pharmacy business as akin to its hospital business in the following sense:
both are about volumes and margins. As a result, Apollo’s pharmacy network now boasts 1,199
stores across 20 states. The pharmacies may also have clinicians (e.g., nurses) on hand to do
diagnostic testing.
Apollo has also developed a network of over 62 primary care clinics (Apollo Health and
Lifestyle) in an effort to consolidate this cottage industry as well as to tap into the revenue stream
of noninstitutional care (e.g., outpatient and diagnostic care), where a large percentage of Indian
healthcare spending occurs. Pathology tests, for example, reportedly comprise 5–6 percent
of hospital revenues and enjoy high margins.57 Apollo clinics thus offer radiology, clinical
pathology, and imaging services; some are equipped with MRI and CT machines.
The clinics are franchise operations that do not involve salaried or employed physicians;
indeed, the franchisees need not be (and oftentimes are not) physicians. They are standalone
businesses that pay Apollo a one-time franchising fee ($50,000 in the mid-2000s) and a 5 per-
cent royalty on sales. For its part, Apollo provides a comprehensive suite of services including
clinic design, recruitment and training of all clinic staff, and procurement of medical equipment
and IT systems.58 Each clinic also operates a retail pharmacy, which might account for up to
one-third of all clinic revenues. While the clinics are not always colocated in the same cities
as Apollo’s hospitals (where they might boost diagnostic referrals and inpatient admissions),
Apollo executives believe their presence may increase public awareness and brand image.
There have been some performance issues with this franchising approach, however. Apollo
executives report that some of the physicians credentialed to staff the clinics fail to show up for
work and get other physicians to fill in for them. Apollo is thus rethinking this model. One
possibility is to have the clinics serve as pseudo-outpatient departments for Apollo hospitals and
serve as referral sources. Another issue is the fact that the physicians staffing these clinics may
refer patients to non-Apollo hospitals, especially when the latter are nearer in proximity. Apollo
has reportedly sometimes placed its own physicians in these clinics to stem this patient “leakage.”
Other business lines at Apollo include (a) a medical business process subsidiary (Apollo
Health Street) to handle medical transcription and claims processing; (b) an international con-
sultancy to help clients build and operate hospitals; (c) a third-party administrator, or TPA,
called Family Health Plan that helps manage health insurance for groups; (d) a health insur-
ance company (Apollo Munich Health Insurance) developed through a joint venture with
Munich AG; (e) advanced diagnostics and pathology labs; and (f) a telemedicine center to
reach the large Indian population residing outside of the top-tier cities. As described below,
Apollo also offers medical training for physicians (diplomate/residency programs) and nurses
(via 11 schools of nursing), along with clinical trials (in cooperation with Quintiles) and clinical
research capabilities.
One business line that Apollo has eschewed is nursing homes. Nursing homes, run by
individuals or small groups of physicians, have proliferated across India. Apollo did not want to
compete with potential physician customers in this space. Apollo has also endeavored to make
sure its reach hospitals do not look like nursing homes. At the same time, Apollo has developed
some strategic alliances with small hospitals and nursing homes involving investments in equip-
ment and cath labs; Apollo prefers this approach since it does not require it to tie up scarce
capital in expensive land purchases.
Integrated system
Like Fortis, Apollo also sees itself as an integrated delivery system with this spectrum of com-
ponents. To connect its many components (especially on the clinical delivery side), Apollo has
developed a “Health Highway” using EMRs and other IT functions. With the help of IBM,
Apollo has also developed an IT platform that also allows general practitioners and nurse mid-
wives in Indian villages to tap into medical knowledge and link them with district-level facili-
ties. Like Fortis, it has developed a set of standard operating procedures or SOPs (“The Apollo
Way”) and a dashboard of performance metrics (Apollo Clinical Excellence, or ACE) to moni-
tor and standardize its hospitals’ operations, although ACE focuses on the clinical side. These
results are routinely reported to clinicians to provide them with feedback on their performance.
To further connect its operations, Apollo has begun to colocate many of these activities on
an integrated medical campus known as an “Apollo Health Knowledge City” (AHKC). The
first such city has been developed around Apollo’s second-oldest hospital in Hyderabad, with
another slated for development in Chittoor in the same state of Andhra Pradesh. The AKHC
provides services that cover the entire spectrum from wellness to illness, with several institutes
specializing in advanced clinical treatment, while also conducting both research and educa-
tional training of professionals. The AKHC also offers lifestyle management, preventive care,
rehabilitation, and rejuvenation services (e.g., ayurveda). One opportunity for Apollo moving
forward may be to better integrate traditional and modern medicine in both its hospitals and
primary care clinics (e.g., use of ayurvedic drugs).
Serving the bottom of the pyramid

Like Narayana Hrudayalaya, Apollo has taken several steps to increase access to care for those
at the bottom of the pyramid. First, it has sought to build low-cost hospitals in Tier II and III
cities. Instead of owning the land and buildings, Apollo is now moving to lease its clinical sites
in an effort to boost its return on invested capital. Second, with the help of a 5-year tax holiday
from the government, Apollo has developed low-cost health insurance, whereby the enrollees
pay Rs. 1 ($0.02) per day for a policy that guarantees coverage for up to Rs. 30,000 (about $560)
in costs. Apollo executives state that up to 250 million people in the population can afford such
coverage, which may serve to add to its revenues.59 Third, Apollo has partnered with Philips,
the Indian Space Research Organization (ISRO), and the Dhan Foundation to establish a
telemedicine initiative to provide long-distance healthcare to the underserved population using
a mobile “teleclinical van” equipped with several technologies (X-ray, ultrasound, defibrillator,
and ECG). Fourth, Apollo has established several other community healthcare initiatives to
help the hearing impaired, pediatric heart patients, and cancer patients.
Business model
Apollo’s business model can be summarized by its many similarities and differences with Fortis.
Like Fortis, Apollo strives for efficiency in delivering healthcare services, particularly through
tightly controlled operating costs and high utilization of equipment. Also like Fortis, it seeks to
Figure 5.26: Apollo Hospitals: High Local Market Share to Drive Profitability
Targets city dominance + Drives up bed occupancy rates + Charges a premium
No. of Beds in Chennai, Bed Occupancy Rates Hospital Tariffs, Chennai

Key Private Hospitals (ballpark estimates)
75% 70% 3.0
2500 2.3k 60% 2.5 2.5k
Fortis - Mallar 55%
2000 50% 2.0
MIOT 45%
40% 1.5k 1.4k
1500 1.5
Vijaya 1.3k
1000 25% 1.0 1.0k
500 Apollo 0.5
0 0% 0.0
MIOT
Apollo
SRMC
Fortis
Vijaya
Apollo
SRMC
Vijaya
MIOT
Fortis
No. of Beds (FY08)
Source: o3 capital, Large Hospital Chains (June 2009).
grow its revenues by expanding outside of the Tier I cities into Tier II and III markets. More-
over, it has sought to ensure itself a steady supply of clinicians (both physicians and nurses)
by diversifying into clinical education and research activities. Finally, like Fortis, Apollo has
aggressively targeted the international medical tourism market; Apollo has garnered a much
larger number of these patients compared to Fortis.
Unlike Fortis, Apollo has minimized its expenditures on physicians by avoiding employ-
ment models, at least in Tier I cities. It has also distinguished itself by diversifying its revenue
streams to include the sale of pharmaceuticals, and engaged more heavily in contract manage-
ment of hospitals both within and outside of the country. And unlike Fortis, it has sought to
develop high local market share to drive utilization, scale economies, and charge a premium
(see Figure 5.26).
Apollo has also been active in developing PPPs. It has been working with state govern-
ments, government hospitals, and primary health centers (PHCs) to make the government
facilities run more cost-effectively. Some of these PPPs entail equity stakes for providers. Apollo
is also helping to run some government teaching hospitals and to develop government trauma
centers, which are sorely needed to handle the high number of traffic accident victims in India.
Unlike Fortis, Apollo also has an equity investor, Apax Partners. It is hoped that private
equity companies can bring to Apollo global expertise to help with its expansion. Private equity
companies may also be able to transplant best practices and facilitate Apollo’s access to top
research institutions worldwide.
Physician engagement model

Apollo has followed a traditional approach to working with its medical staff. Because physicians
have historically owned the majority of the hospitals in India (e.g., the nursing homes of today),
they may want to retain their autonomy and leadership position when they come to work in
the corporate chains. At Apollo, doctors are allowed to have their own practices and are paid
for their professional services on a fee-for-service basis by the patients (not by the hospital);
Apollo bills the patients for the costs of equipment, facilities, and supplies. This removes the
hospital from the doctor–patient relationship and incentivizes physicians to be productive, as in
the West (“eat what you kill”). Apollo executives state they want to give physicians freedom to
practice medicine; physicians are not evaluated on how much revenue their clinical department
makes but rather on their clinical outcomes.
Earlier on, Apollo utilized a fee-for-service model with guaranteed incomes; it then shifted
to a model where physicians had to take equity (purchase a number of shares) in Apollo’s hos-
pitals; now physicians want to purchase the equity in Apollo’s hospitals and its new companies
as the chain grows. The equity model harkens back to the traditional model of physician own-
ership of hospitals. It also blends with Apollo’s growth into new business lines that physicians
can support and share in. Apollo has never used a salaried model.
Apollo does not emulate Fortis’ effort to recruit “star physicians” to whom patients flock;
on the contrary, Apollo reportedly does not promote the individual physician. Apollo does
market to specialists in a variety of ways to incent them to utilize the system. These include
providing state-of-the-art technology, a comprehensive suite of clinical services, strong nursing
support, assistance with academic research, good medical colleagues, and its informal manage-
ment of procurement. Apollo also holds appeal to physicians due to its continued profitability
and prestige.
At the same time, Apollo also charges fees to the specialists on its staff for the use of its
examination rooms.60 In this manner, the chain avoids being a “physicians’ cooperative” (see
Chapter 4) that uses the hospitals to their own advantage free of charge.61
Apollo has had to resort to other methods of physician compensation during their expan-
sion, however. For example, to develop their delivery networks in Tier II and III cities, where
there is a higher volume of lower-severity patients, Apollo has been more willing to salary phy-
sicians. To induce Indian physicians from the West to migrate back to India, Apollo has also
been willing to guarantee their incomes for 2 years before transitioning back to fee for service.
One additional issue facing Apollo is how to work with its physicians. Apollo executives
state they need to train their physicians in nonclinical areas vital to hospital operations. These
areas include management, finance, and systems thinking. They also state that Apollo physi-
cians need to be more punctual in order to maximize utilization of the expensive infrastructure
and staff time, as well as patient convenience. Like hospitals in the West, they state that a
major need going forward is figuring out how to work together and change together with
their physicians.
Challenges going forward

Like Fortis, Apollo faces a more competitive future in which a growing number of delivery firms
seek to serve the growing middle-class market. The increase in delivery infrastructure requires a
concomitant increase in healthcare professionals; the supply has, unfortunately, lagged behind
and thus fostered even greater competition among hospital chains. The traditional low pay for
nurses combined with their labor shortages may bid up the hospitals’ labor costs, which may
already account for 40 percent of their cost structure. Moreover, the reportedly high rate of
nursing turnover (due to low pay and higher salaries elsewhere in Asia) threatens the efficacy of
the SOPs developed by Apollo. This may threaten the low-cost operating model these chains
have historically followed. Apollo and Fortis have both responded by developing their own
training programs and educational institutions. They may also need to develop multiple levels
of nonphysician support personnel who can complement their existing clinicians. It is unclear,
however, whether Indian physicians (who are largely male and work by themselves in solo
practice) will accept and utilize such support personnel.
Another challenge facing Apollo and Fortis is that these large chains may perform equally
well on cost and clinical outcomes. That is, there is little differentiation among them on these
two vertices of the “iron triangle.” To gain competitive advantage, they may need to focus more
on the third angle – patient access and convenience. This may include the “patient experience”
or nonclinical features of the hospital stay (quality of food, cleanliness of the facility). This will
require training staff in customer service and human relations techniques, as well as greater
investment in hotel-like services.
Finally, Apollo executives state that a growing need that must be addressed is the sizable
physically disabled population (estimated at 30 million). Disability is not a responsibility of the
central government’s Department of Health; at present, this population receives only token
treatment. There is reportedly a huge demand for physical and speech therapists, particularly
in rural areas. As with other types of healthcare, there will first need to be demand creation,
education, and awareness.
Max Healthcare
History and growth

Max India was established in 1985 as a public limited company with a mission to establish
niche “life-centered” businesses in insurance, healthcare, and clinical research. Max Healthcare,
the healthcare delivery business of Max India, opened its first outpatient facility in 2000, its
first hospital in 2002, and then quickly expanded its presence in the northern region of India
(see Figure 5.27).
Max operates nine facilities in Delhi/NCR and three outside Delhi that span the three
levels of care in Figure 5.3. These include a primary care outpatient facility (Max Medcentre,
founded in 2000) and a specialty center focused on eye and dental care at Panchsheel Park;
secondary care hospitals at Pitampura, Noida, and Gurgaon; and state-of-the-art tertiary care
facilities at Saket, Patparganj, and Shalimar Bagh in south, east, and north Delhi, respectively.
Max also operates two tertiary care hospitals in Mohali and Bathinda in a PPP with the gov-
ernment of Punjab. These hospitals, inaugurated in November 2011, provide comprehensive
services with a sharp focus on oncology to address the burgeoning cancer epidemic in the state
of Punjab. Its newest facility opened in June 2012 in Dehradun, Uttarakhand.
Figure 5.27: Max Healthcare: Regional Play – Underserved but Growing Locations
Focus on multi-specialty hospitals in NCR
792 INR 4.2 bn

100%
Max Spl Clinic
Max, Gurgaon Max, Gurgaon
Max, Noida
Max, Noida
80% Max, Pitampura
Max, Pitampura
Max, Pratapganj
60% Max, Pratapganj
Max Super
Speciality, Saket
40% Max Super
Speciality, Saket
20% Max Devki,

Max Devki, Saket
Saket
0%
No. of Beds (FY09) Revenue FY09E*
*Analyst Estimates
Source: o3 capital, Large Hospital Chains (June 2009).
Business model
Max Healthcare has not followed a national and international expansion strategy like Fortis
and Apollo. Instead, Max has remained more regional and focused on the north Indian land-
scape. Max follows the “Shatabdi” strategy: their new hospitals come up along the route of the
Shatabdi train. This enables the organization to leverage the entire network and to allocate its
resources most efficiently (clinical and nonclinical) among all its hospitals.
Like Fortis and Apollo, Max offers specialty care institutes in several clinical areas: heart
and vascular, neurosciences, orthopedics, cancer, plastic and reconstructive surgery, minimal
access and bariatric surgery, obstetrics and gynecology, and pediatrics. The Max network began
as a hub-and-spoke model with primary and secondary care facilities spread across Delhi feed-
ing into its state-of-the-art tertiary care facility at Saket. Over the years, it has evolved into a
truly networked architecture, wherein each hospital occupies a nodal position in the network
with its unique strengths and characteristics.
Revenues are driven through innovative marketing techniques, largely geared toward the
walk-in and international patient channels, supported by robust operating processes. These
processes allow the organization to drive efficiencies in various areas such as discharge turna-
round times, procurement efficiencies, etc.
Two key differentiators for Max have always been its emphasis on clinical excellence and
keen focus on service quality that enable the company to deliver a holistic patient experience
and drive higher brand recall. Clinical excellence efforts at Max are not only geared toward
achieving 100 percent patient safety but increasingly focused on measuring clinical outcomes and
attaining global benchmarks. Continuous training ensures that the clinical staff is up to date
with best practices. In recent times, Max has also focused on leveraging information manage-
ment systems such as electronic health records (EHRs) in order to further its clinical excellence
agenda. The implementation of the EHR system has begun to show early results across a
wide spectrum from cost efficiencies to better resource utilization, process standardization, and,
more importantly, improved quality of patient care.
Service excellence efforts are focused toward ensuring a consistent patient experience across
all Max facilities. To this end, Max has designed and implemented SOPs for all customer touch
points. The staff undergoes extensive training in all nonclinical areas such as front office, finance
and billing, housekeeping, etc., and is audited periodically and retrained wherever required.
Max believes that its people are its greatest strength and works toward creating a unique
value proposition at various levels across the managerial, administrative, and clinical workforce.
Its culture of service, patient care, hospitality, and doing the right thing is integral to the vision
and values of the organization. The company therefore endeavors to hold all its employees to
these high standards.
Max has also vertically integrated from the healthcare delivery into healthcare insurance by
forming Max Bupa Health Insurance Limited (MBHI) in a joint venture with the UK-based
Bupa Group. By FY 2008, the system had turned income positive (see Figure 5.28).
Figure 5.28: Max Healthcare: Turns EBITDA Positive FY08
Breakeven in 3 years with 8 new hospitals Max strategy
Sales (in INR mn) &

• Ownership or service agreement
EBITDA Margins (%) with control
4,500 Hospital • Spoke: secondary hospitals feed
4,200 Model super specialty
4,000 • Hubs are spread across south Delhi,
3,724 east Delhi, Gurgaon
3,500
7.7%
3,000 • Concentrates on NCR
Geography
2,448 5.3% • Prioritises under services locations
2,500
2,000
1,500 1,310 Case Mix • Focus on Cardiac, Gynaecology and
Ortho
1,000 -7.4%
500
-15.3% Customer • Pricing currently cenchmarked to
0 Segment competition
FY06 FY07 FY08 FY09E • Stated intent to charge premium
Source: o3 capital, Large Hospital Chains (June 2009)
Future strategic efforts and challenges

In the immediate future, Max Healthcare will focus on the following four key areas:
1. Ramp up its four new tertiary care hospitals.

2. Develop an effective and scalable operating model that enables faster, dynamic, and
transparent decision making.
3. Build a strong pipeline of clinical and managerial talent.
4. Leverage data and information management systems to drive a sharp focus on improv-
ing cost management.
Future outlook
The hospital sector in India is posed to rapidly expand through private investments. These will
come not only from the nation’s large for-profit systems profiled above, but also from external
firms that enter through relaxed laws governing FDI, as well as from private equity firms that
partner with local firms (see Figure 5.29). The hospital sector is also expecting to grow through
an anticipated influx of foreign medical tourists. Both trends, if witnessed, signal heightened
competition in the sector.
The sector will also undergo significant organizational transformation as major players
develop “health cities,” diversify into adjacent healthcare services businesses (e.g., primary
Figure 5.29: Future Outlook for Private Hospital Sector
Government policies on FDI and tax are encouraging foreign companies to enter
the market
Privete equity firms are investing significantly in hospitals, both large corporate
chains and standalone regional hospitals
Large hospital chains use acquisitions that offer growth at a lower cost but future
opportunities may be limited
Future
Outlook
Major hospital chains are investing in “health cities”,which have scale and
provide a host of satellite services
Telemedicine is emerging as a feasible option for public and private sector

facilities to provede basic medical care to rural areas
Despite increase in number of beds with significant contribution be to four

private groups, supply constraints will remain in top cities
Source: Netscribes, Hospital Market – India (2009).
clinics, pharmacies), and diversify vertically into insurance businesses. As we have learned in
the US, hospital providers have not historically developed the capabilities to run such busi-
nesses; indeed, they have lost a lot of money in these types of diversification moves. Even in the
absence of diversification, the hospital systems in India will likely face the same challenges of
horizontal integration confronting the multihospital chains in the US. These include the dif-
ficulties in extracting scale economies from multiplant operations, the difficulties in standard-
izing clinical operations and achieving clinical integration with medical staffs across sites, and
the challenge of getting multiple units to act in concert in a previously decentralized healthcare
system. India’s systems are relying heavily on performance metrics, performance dashboards,
and IT to provide some of this cohesion. Evidence from the US suggests that while IT is an
important tool for gathering and analyzing data, its impact on improving the cost-effectiveness
of care is still unclear and undemonstrated.
Notes
1. India Brand Equity Foundation. Healthcare – September 2010. Available online at: http://www.ibef.org/
download/Healthcare_270111.pdf. Accessed on May 27, 2013. Hospitals comprised the largest portion
of the delivery market, accounting for perhaps $25 billion in 2008, and rising to $27–31 billion by 2009.
This is consistent with an estimated 50 percent + of national health expenditures going to hospital care.
2. Bertrand Lefebvre. 2010. “Hospital Chains in India: The Coming of Age?” Asie Visions 23: 1–27.
3. David Kohn. 2008. “Getting to the Heart of the Matter in India,” The Lancet 372: 523–524.
4. International Diabetes Federation, IDF Diabetes Atlas. Available at: http://www.diabetesatlas.org/map.
Accessed July 31, 2012.
5. CII-McKinsey. 2002. Healthcare in India: The Road Ahead. New Delhi: Author.
6. McKinsey, India Healthcare: Inspiring Possibilities, Challenging Journey (January 2013).
Jonathan Ablett, Aadarsh Baijal, Eric Beinhocker, Anupam Bose, Diana Farrell, Ulrich Gersch, Ezra
Greenberg, Shishir Gupta, Sumit Gupta.
The ‘Bird of Gold’: The Rise of India’s Consumer Market (McKinsey Global Institute, 2007).
7. India Brand Equity Forum (IBEF). 2009. Healthcare. Gurgaon, India: Author.
8. We should note that there is tremendous variation even within these categories: China and Brazil have
bed capacities of 1.8–2.3 per 1,000 population.
9. McKinsey, India Healthcare: Inspiring Possibilities, Challenging Journey (January 2013). Prior estimates were
$40-88 billion. Nitin Agarwal and Ritesh Shah, Indian Hospitals (Mumbai, India: IDFC International
Securities, November 2010).
10. McKinsey, India Healthcare: Inspiring Possibilities, Challenging Journey (January 2013).
11. Madhurima Nundy. 2005. “Primary Health Care in India: Review of Policy.” In Plan and Committee
Reports in Financing and Delivery of Health Care Services in India. New Delhi: National Commission on
Macroeconomics and Health.
12. Ibid.
13. Ibid.
14. IBEF (2009).
15. The number of public hospital beds may now be as high as 577,000.
16. Agarwal and Shah (2010).
17. Agarwal and Shah, 2010. There is no consensus on the market shares of public versus private hospitals in
terms of beds or utilization. One reason, as noted above, is the muddled definition of a hospital.
18. Ibid.
19. Brijesh Purohit. “Private Initiatives and Policy Options: Recent Health System Experience in India.”
Health Policy and Planning 16(1) (2001): 87–97.
20. Rupa Chanda. 2010. “Constraints to Foreign Direct Investment in Indian Hospitals.” Journal of Inter-
national Commerce, Economics and Policy 1(1): 121–143.
22. IBEF (2009).
23. Damayanti Dutta. “Healthcare Boom.” India Today (April 1, 2010). Accessed July 31, 2012. http://india-
today.intoday.in/site/Story/90895/Healthcare+boom.html?page=5.
24. B.S. Venktesh. “Healing the Hinterland” (November 15, 2009). Accessed July 31, 2012. http://www.
slideshare.net/vaatsalya/the-week-healing-the-hinterland.
25. Ashwin Naik. “Samriddhi 09” (September 1, 2009). Accessed July 31, 2012. http://www.slideshare.net/
vaatsalya/samriddhi-09.
26. India Knowledge@Wharton. “Narayana Hrudayalaya: A Model for Accessible, Affordable Health Care?”
(July 1, 2010). Accessed July 31, 2012. http://knowledge.wharton.upenn.edu/india/article.cfm?articleid
=4493.
27. Tarun Khanna, V. Kasturi Rangan, and Merlina Manocaran. 2005. “Narayana Hrudayalaya Heart Hospital:
Cardiac Care for the Poor,” HBS Case 9-505-078. Boston, MA: Harvard Business School; Geeta Anand.
2009. “The Henry Ford of Heart Surgery.” Wall Street Journal (November 21–22,): A1, A12.
28. Lawton Burns and Ralph Muller. 2008. “Hospital-Physician Collaboration: Landscape of Economic
Integration and Impact on Clinical Integration.” Milbank Quarterly 86(3): 375–434.
29. Robert Huckman and Darren Zinner. 2008. “Does Focus Improve Operational Performance? Lessons
from the Management of Clinical Trials.” Strategic Management Journal 29: 173–193.
30. Narayana Hrudayalaya Hospitals. Corporate website. Accessed July 31, 2012. http://www.narayanahospi-
tals.com/.
31. Lawton Robert Burns and Stephen Sammut. 2011. “Doing More with Less: Lessons from a Doctor.”
Insight 9(2): 16–19.
32. PTI. “Narayana Hrudayalaya to Set Up Four 5,000 Bed Hospitals in India.” The Economic Times (May
3, 2012). Accessed October 20, 2012. http://articles.economictimes.indiatimes.com/2012-05-03/news/
31558834_1_bed-capacity-jaipur-project-cost.
33. Burns and Sammut, 2011.
34. Ibid.
35. Prabakar Kothandaraman and Sunita Mookerjee. Healthcare for All: Narayana Hrudayalaya, Bangalore.
New York: United Nations Development Programme (2007).
36. Dr Malpani’s Blog. “How Sustainable Is the Narayana Hrudayalaya Model for Healthcare?” (June 9,
2012). Accessed October 24, 2012. http://blog.drmalpnai.com/2012/06/how-sustainable-is-narayana-
hrudayalaya.html.
37. Lawton Robert Burns and Mark V. Pauly. 2002. “Integrated Delivery Networks: A Detour on the Road
to Integrated Healthcare?” Health Affairs 21(4): 128–142.
38. Lawton Robert Burns, Douglas R. Wholey, Jeffrey McCullough, Peter Kralovec, and Ralph Muller. 2012.
“The Changing Configuration of Hospital Systems: Centralization, Federalization, or Fragmentation?”
In Annual Review of Health Care Management: Strategy and Policy Perspectives on Reforming Health Systems,
edited by Leonard H. Friedman, Grant T. Savage, and Jim Goes, vol. 13, 189–232. Bingley, UK: Emerald
Group Publishing.
39. Ibid.
40. Lawton R. Burns and Darrell P. Thorpe. 2001. “Why Provider-Sponsored Health Plans Don’t Work.”
Healthcare Financial Management: 2001 Resource Guide: 12–16.
41. Regina Herzlinger and Pushwaz Virk. 2008. “Fortis Healthcare (A),” HBS Case 9-308-030. Boston,
MA: Harvard Business School Publishing.
42. Ibid.
43. Fortis Healthcare. “Investor Presentation – Q3 FY 2011” (December 2010). Available at: http://www.
fortishealthcare.com/pdf/FHL%20Investor%20Presentation%20-%20Q3FY2011.pdf. Accessed March
28, 2013.
44. Shivinder Singh. “Innovations in Health Care Delivery – Hospitals and Health System.” Presentation to
the Indian School of Business (January 2010).
45. Herzlinger and Virk (2008).
46. Ibid.
47. Ibid.
48. Research on India. “Hospital Market – India” (February 2010). Available at: http://www.docstoc.com/
docs/113884799/Hospital-Market-in-India-FEB-2010. Accessed March 28, 2013.
50. Data come from the 2011–12 Fortis annual report.
52. Ben Fidler. “Fortis Continues Global Push.” The Deal Pipeline (November 2, 2011). Accessed October 31,
2012. http://www.thedeal.com/content/healthcare/fortis-continues-global-push.php.
53. Suneeta Reddy, “Creating a Healthcare Powerhouse: Apollo’s Journey,” Presentation to the Wharton
School and Indian School of Business (Hyderabad, India: Indian School of Business, January 2011).
Apollo Hospitals Investor Presentation (June 2011). Available at: http://www.apollohospitals.com/apollo_
pdf/Investor_Presentation_June_2011_USD.pdf. Accessed on April 2, 2013.
54. Ibid.
55. Reddy (2011).
57. Ibid.
58. Felix Oberholzer-Gee, Tarun Khanna, and Carin-Isabel Knoop. “Apollo Hospitals – First World
Health Care at Emerging-Market Prices,” HBS Case 9-706-440. Boston, MA: Harvard Business School
Publishing (2007).
59. Reddy (2011).
60. Gary Loveman. “Apollo Hospitals of India (A),” HBS Case 395-027. Boston, MA: Harvard Business
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61. Mark Pauly and Michael Redisch. 1973. “The Not-for-Profit Hospital as a Physicians’ Cooperative.” The
American Economic Review 63(1): 87–99.

India's Healthcare Transformation from Public to Private

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India's Healthcare Transformation from Public to Private

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5

India’s Hospital Sector

Figure 5.1: Healthcare Spend by Government on a Steady Rise

Note: 1 GDP at factor cost

have embarked on several new strategies simultaneously: horizontal integration (multihospital

1995 2005E 2015F 2025F

Figure 5.3: Primary, Secondary, and Tertiary Care Levels

Indian Healthcare Delivery Fastest growth

Rising demand and imbalance with supply

Figure 5.4: Increase in Household Income 2010–20

Figure 5.5: India Shortfall in Beds, Physicians and Nurses

India 0.7 0.6 0.7 1.31 0.9–1.32

High-income countries 2.8 8.1

World average 2.9 2.7 2.8

Addressing the imbalance: Causes and solutions

Figure 5.7: Multiple Gaps Lead to Demand Leakages

• Low awareness • Limited • Suboptimal • Limited awareness

Source: McKinsey & Company.

Figure 5.8: Right Siting is Critical to Ensure Demand–Supply

Delivery facilities optimally

Right information, right

Source: McKinsey & Company.

Clinical right-siting of care

The public healthcare system

Figure 5.9: Structure of NRHM (11th Five-Year Plan)

BLOCK • Health Manager

3 staff nurses; 1LHV for 4–5 SHCs; Ambulance/Hired vehicle;

Skill upgradation of educated RMPs/2 ANMs, 1 male MPW for 5–6

VILLAGE LEVEL – ASHA, AWW, VH & SC

Note: TB = Tuberculosis, MO = Medical Officer, MCH = Maternal and Child Health.

Gap between policy aims and achievements

Figure 5.10: Hospital Inpatient Market Shares, by Public–Private and Rural–Urban

Figure 5.11: Imbalance in Bed Supply and Utilization

Figure 5.12: Public Share of Outpatient Market, by Rural–Urban

Rural Urban Government Hospital Private hospital

Source: Agarwal & Shah, Indian Hospitals (November 2010).

Figure 5.13: All-India Shortfall in Health Infrastructure

As per 2001 Population Required Existing Shortfall * % shortfall

Figure 5.14: State Variations in Government-Provided Hospital beds

Andaman & Nicobar

Daman & Diu

Source: Central Bureau of Health Intelligence, National Health Profile 2007.

Innovation in the public sector

Source: National Rural Health Mission Progress Report (April 2008).

Tribal treatment centers

The private healthcare system

Private equity funding

Figure 5.16: Hospital Projects Funded by the IFC in US $ Million

Corporations Project cost IFC Loan/ Investment Year of signing

Registration and accreditation

Low-cost innovative models in the private sector

Figure 5.17: Vaatsalya Hospital Structure

Unique approach and media attention

Box 5.1: Theory behind the focused factory

A city of focused factories

Is Narayana scalable or replicable?

Major private hospital systems

Figure 5.18: Leading Hospital Players in India

# of Beds: 1,027 # of Beds: 1,100

Source: Apollo Hospitals Investor Presentation (July 2012)

Box 5.2: Horizontal Integration

• Mechanisms to coordinate activity across operating units