The healthcare industry in India is a major paradox: it has been characterized by a great demand and at the same time, wrong business orientation where profit-making is the key objective, rather than patient care. Conventional hospital facilities have been stuck in a vicious cycle of excessively spending money on upfront capital expenses (CAPEX) in the form of systemic problems like the incentivization of the doctor to generate revenue, but not to provide optimum care to the patient. To astute investors, though, this low-trust, high-demand, high-ticket business environment is a big opportunity to develop an ethical and scalable business in health.
The Systemic Blemish: the Large Capital Investment and the Debt Load
The very cause of the Indian privatized healthcare crisis is the huge amount of capital that is needed to open the traditional hospitals. The construction of a normal 500-bed hospital will cost around 1,000 crores at the time of opening. This is an expensive cost which amounts to approximately 2 crores per bed. By considering the cost of acquiring land, litigation costs and construction time (this would take 6 years) the price per bed would be increased immensely to 3 crores.
Because these projects are normally financed with debts, they require the money at the very start to service bank loans and invested capital and the investor would need to retrieve the money. Such economic pressure implies a single objective: to maximize revenue. The medical team is put in a very difficult position to deliver on this capital. The traditional healthcare system delivery breakup cost is around 20 percent of land, construction, equipment, medicines, and people.
Motivation Problems Misaligned Incentives: Doctors as Salesmen
Hospitals need revenue now- forcing them to buy physicians with an established patient base- a process that is associated with demand acquisition. To attract these physicians, hospitals are providing high commission plans, which is generally an industry standard of 20 to 23 percent of the income that the department generates by the doctor.
Minimum Guarantee (MG) Recovery: This is applied to high-confidence physicians whereby the hospital pays a guaranteed amount of money to the doctor in the form of an initial salary (e.g., 4 crores a year).
The doctor is required to produce at least 5x the MG and therefore there is a lot of pressure to achieve the minimum guarantee. Fee for Service (FFS): This is a pure commission arrangement in which the doctor is paid a percentage (e.g., 20) of each service/procedure they refer to, but is not guaranteed upfront.
Full-Time Salaried: This is the model that doctors like; they are paid a fixed salary regardless of sales but few traditional hospitals will choose this model since it eliminates the sale drive to service the high debt.
The operations department of the hospital follows a ratio of the Outpatient to Inpatient (OP to IP) ratio, which sees the patients as a sales channel. When the conversion rate of a doctor (industry average 8%12) drops below the mark, he or she is put under pressure by the unit CEO to rectify this by prescribing more surgeries or procedures that have high value. This system pushes doctors who initially wanted to do the right thing to become salesmen, resulting in unnecessary procedures (e.g. recommending knee replacement rather than Volini).
Pricing Lack of Opacity and Customer Interaction Failure.
Restricted capex greatly motivates hospitals to monetize each and every interaction that results in confusing and inflated billing techniques. Patients will have drastically different bills even when it comes to the same hospital just because of the same treatment. No matter how the estimate desk is, estimates are never correct.
Hospital personnel can examine the financial capacity of a patient (i.e., by looking at his watch, shoes, or address) and decide how much they can charge. The cash rates tend to be 10-15 percent greater than the negotiated insurance rates and no limit is imposed. Although package rates remain fixed, hospitals tend to switch procedures to open billing by stating that they found some anomalies. This enables them to charge at considerably higher rack rates on all consumables and services and to significantly inflate the bill and the commission received by the physician.
Super Health: Low Capex Rapid Scaling
The business model of Super Health is clearly aimed to resolve the problem of the model central to traditional healthcare. The outstanding innovation is getting rid of gigantic initial capital expenditures. Super Health targets hyper-local facilities (that reach a 35 km radius) that have a fixed number of 50 beds. They do not purchase land or buildings but use long term leases and reorganize the old large buildings (e.g., a Shopping Mall).
Construction time is cut by almost half (3-6 years to 120-130 days) by standardized designs, BIM (Building Information Management) models as well as prefabrication off-site. This model saves up to 15-16 crores on constructing a 50 beds hospital. Most importantly, the unit cost per bed is lower by 2 crores (or higher) to approximately 70 lakh rupees per bed. This low cost (much of this is the removal of land and construction capex) releases the hospital out of the debt recovery cycle under pressure.
Super Health has fewer beds (50), but its procedures have a short length of stay (LOS), about 1 to 1.5 days, versus the industry average of 3 to 5 days. This high rate of turnover implies that a 50-bed facility will be able to match the 150-bed traditional hospital in terms of patient throughput.
Redefining Value: Patient-Centric Design and Fixed Pricing
The low-capex model allows Super Health to re-innovate physician incentives as well as patient experience. Physicians are put on a full-time fixed salary basis where commissions, referral fees and MG recovery pressure do not exist. They are also motivated by ESOPs (equity shares) which aligns their long-term interests to the success of the company.
Prices at Super Health are fixed (e.g. appendicitis operation costs 85,000 rupees). This will be assured to the rupee, whether the patient is a cash-paying or insured. This is feasible since any minor cost variances are absorbed by the hospital considering proper pricing as the role of the hospital.
Since the hospital has a small number of 50 beds, the need to overcrowd the OPD is removed. Physicians are able to take 1015 minutes with each patient, which means there is no waiting time to book an appointment. Super Health undertakes the time of discharge during admission. Due to the fixed prices and reconciliation in real time, a complex and time-consuming discharge summary process is removed. Within 15 minutes of the doctor, patients are able to walk out.
VIP Pass Subscription: A family of four is entitled to limitless doctor consultations and any test prescribed by a Super Health doctor at no cost in the case of 999 rupees per annum. This becomes feasible due to the fact that B2B price of common tests (such as CBC or Vitamin D) is incredibly low. This establishes a friction-free, anxiety-free entry point on the part of the patient.
The overall theme of this disruption is that you can have high-quality and high-trust healthcare and be successful in business; conscious capitalism is a possibility in this critical industry. The radical cost-cutting of land and construction (2 crores to 70 lakhs per bed), the transition to a fixed salary of doctors and the price transparency demonstrate that a patient-centered and highly efficient network can be quickly expanded.
As an investor, it is very important to realize that the way to a long-term, ethical, highly profitable enterprise lies in resolving the fundamental issue of trust in healthcare. The local, lean, highly customer-experience-oriented next frontier of medical infrastructure is the next opportunity to create the 100 centers that India so desperately needs within the next five years, the prototypes that are long term patient value-driven rather than short term revenue maximization to establish yourself as part of the indispensable healthcare future of India.