By Debojyoti Ghosh| Jan 20, 2015
Can Dr Devi Shetty replicate the India success of Narayana Health in Cayman Islands, and deliver affordable, quality health care to the Western markets? For now, he is happy to have made a start
From his sprawling health city in Bangalore’s Hosur area, Dr Devi Shetty lords over a medical empire. The founder-chairman of Narayana Health (NH) and one of India’s leading cardiac surgeons, Dr Shetty offers cutting-edge therapy at costs unimaginable elsewhere in the world, a feat that has earned him the monicker, “Henry Ford of heart surgery”. His hospital’s success rate has ensured that it has patients flocking to it, not only from across the country but also from Africa, South-East Asia and the Middle East. And by leveraging economies of scale, Shetty tries to make sure that not a single patient, not even the poorest, is sent back without treatment.
For a man obsessed with delivering affordable health care, it is perhaps only natural that even in the few waking hours he spends without his scrubs or the scalpel, his mind keeps going back to work and, in particular, to the words of a friend. “The most profitable hospital in the world is the one which is built on a ship and parked outside US waters because it gets to serve American patients, and yet stays away from its jurisdiction,” his friend had said.
Shetty’s latest venture in Cayman Islands, a mere hour-and-a-half flight from Miami, is all of that. “Our Cayman Islands operation nearly fits in with the description of a hospital built on a ship. It is closer to the US, but doesn’t follow its regulations,” says Shetty, whose Narayana Health won the 2013 Forbes India Philanthropy Award in the Good Company category. (Shetty had articulated his Cayman Islands plan in an interview to Forbes India at the time and, today, that dream is seeing fruition.)
With its inflated costs, health care is a highly contentious issue in the US. Hospital charges represent about a third of the $2.7 trillion annual US health care bill, forming the biggest single segment, and are the largest driver of medical inflation, according to a New York Times report. The report also noted that health spending in the US averaged $9,255 a person in 2013 and grew at about the same pace as the economy, accounting for 17.4 percent of the GDP. However, the quality of medical services (infection rate, nature of hospital stay) doesn’t change with the higher cost; what changes is merely the ancillary services and frills that hospitals provide.
In February 2014, Shetty took his globally renowned low-cost, high-quality health care mantra to Cayman Islands, his group’s first venture outside of India. Tucked away in the Caribbean region, Health City Cayman Islands (HCCI) is a 104-bed tertiary-care hospital providing cardiac surgery, cardiology and orthopaedic services. Long considered a backdoor to the US, a foothold in the islands is expected to give the Indian hospital chain access to the US health care market. However, though the largest in the world, the American market is also too highly regulated to allow any kind of disruptive model easily.
This is despite the fact that information technology so far has done little to make health care cheaper in the US. So, using Cayman Islands as a test site, Shetty and his team are working on projects with two large hospital groups in the US to develop software that would replace the desktop-based hospital information system. Shetty is also in talks with various institutions and governing bodies in the US to start a medical college in Cayman Islands.
“We realised that we needed to be involved in some way with the US health care industry—that’s the only way we would be relevant to the world. But the regulatory structure in America is such that it is impossible to come up with any innovation. In Cayman Islands, we will address all the disadvantages that a patient experiences in the US,” says Shetty.
HCCI, a joint venture between Ascension Health Alliance, one of the largest not-for-profit health care chains in the US, and NH, so far has recorded over 100 cardiac procedures and around 20 joint replacements. With a history of dealing with complex surgeries and procedures back home, the hospital’s fourth heart surgery in Cayman Islands was the implantation of an artificial heart. According to Shetty, in the US, there are less than 25 hospitals that would conduct the procedure for anything under $1.2-$1.3 million. “We were able to do it in less than half the price,” he says.
__PAGEBREAK__For a heart implant surgery, HCCI charges not more than $50,000, while for an open heart surgery the cost is around $45,000. For similar procedures in the US, the cost varies between $80,000 and $100,000.
Typically in the US, it is only after conducting over 10,000 heart surgeries and building a strong track record that a hospital gets accredited to conduct an artificial heart implant. NH has been performing such surgeries back home for the last seven years. “For us, it is a routine surgery,” says the 61-year-old cardiac surgeon.
Tarun Khanna, director, South Asia Institute (SIA), Harvard University, points out that NH has had a culture of experimentation right from the beginning. “Cayman Islands is an experiment-in-progress,” he said in an email interview. “I’m quite optimistic about it, but there is a lot of experimentation that needs to be done. Narayana has a history of learning-through-experimenting that should stand it in good stead.”
An overseas British territory, Cayman is a cluster of three islands located in the western Caribbean Sea, with the cost of living estimated to be about 20 percent more than the average in the US. How, then, does Shetty manage to offer services at less than half the average price for surgeries in the US?
Robert Pearl, CEO of the US-based Permanente Medical Group and a practicing physician, offers an answer in an article he wrote for Forbes: “His approach to cost cutting is not based on paying lower wages. And he won’t be purchasing inferior supplies or medical implants. Nor will he use shabby construction or outdated technologies. In fact, his approach is just the opposite. He invests heavily in state-of-the-art medical and information technologies. His approach builds on his personal passion for quality, a fervour for operational excellence and a commitment to technology.” For instance, to bring down the cost of air conditioning, NH uses deep sea water which is much colder than the water used in conventional cooling systems, helping to absorb heat while reducing energy costs.
At present, the patients in the hospital are mostly from Cayman Islands and its surrounding Caribbean regions; only a small fraction come from the US. Can Shetty change that? It would depend on how far he succeeds in replicating the performance of his hospitals in India.
Started in 2001 as a 225-bed hospital in Bangalore, Narayana Health (formerly Narayana Hrudayalaya) has been revolutionary in providing health care in the world’s largest democracy. In India, the hospital chain performs 150 major surgeries, including an average of 45 cardiac surgeries a day for $1,400-$1,500 (Rs 80,000-90,000) each. In the US, a similar surgery would cost about $144,000 (over Rs 80 lakh).
In the September 2014 edition of Harvard Business Review, Khanna wrote that NH’s cardiac surgery group performs 12 percent of all heart operations done in India each year. Also, 50 percent of its patients in India are from financially-weaker sections. This has been possible due to the low cost of surgery. Coronary artery bypass graft surgery costs the patient around $2,000 (about Rs 1.2 lakh) in India, compared to $60,000-$100,000 (Rs 38-63 lakh) in the US, yet NH’s mortality and infection rates are the same as those of its US counterparts.
However, Khanna feels it is still unclear whether the group’s operating model will transfer easily to Cayman Islands because it succeeded in specifically Indian conditions. “In the Caymans, Narayana will inevitably have to pull apart this operating model, and a coherent replacement will emerge only gradually. Some early signs are encouraging. The Caymans’ material and labour costs are higher than India’s, but construction practices honed at home have already allowed Narayana to build a state-of-the-art hospital there for much less than it would have cost in most Western locations,” he says.
To build a similar sized 100-bed hospital in the US, it would have cost over $300 million, but HCCI was completed in a year, for about $70 million. The hospital is expected to break even by June.
NH bought 50 acres in Cayman Islands, while Ascension Health, its US-based partner in the project, blocked another 200 acres of the surrounding area to start a medical university and an assisted-care living community. Shetty didn’t specify the details of the deal, but said it was a 50:50 joint venture where a majority of the investment was made by Ascension Health.
__PAGEBREAK__In 2010, McKeeva Bush, former premier of Cayman Islands, the health minister and a few key industrial ministers visited Bangalore for three days to understand how NH operates. Impressed, the delegation made an offer within a few months, asking NH to set up a hospital in their country. But, before giving his final nod, Shetty was clear about his own set of requirements.
“An Indian medical degree is not recognised anywhere in the world. We were very clear that the government has to amend the law and recognise Indian medical degrees. And they changed the law for us. Deduction on import duties was also given to us. Another key requirement was the delivery of visas to patients from anywhere in the world, through mail within 24 hours of applying. The Cayman Islands government agreed to all these terms,” says Shetty.
With plans to introduce a wider array of services such as oncology, gastric surgery and neurology, the concern, at present, is to get things rolling at a frenetic pace. “We now need to create a pan-Caribbean network of referral bases. The next step is to attract large US-based insurance companies and build strategies to get their insurance holders as our patients,” says Viren Shetty, Devi Shetty’s son and senior vice president, strategy and planning, Narayana Health.
Of course, HCCI has several roadblocks to contend with going forward. At present, its team of 140 staff members, including 20 doctors, do one to two surgeries a day. “The patients haven’t come in the volumes that we had expected. But it is picking up every day,” says Viren Shetty. “It takes time to build credibility. Once people visit the hospital, it will be easy for them to trust us.”
The hospital also doesn’t want to be dependent just on a specific region. It is working on a steady flow of patients from the Caribbean region, and both the Americas. “To get volumes from these areas, we need to tap into the insurance network base. For a lot of people, unless you have a contract with the insurer, they won’t come. We have a few patients from the US, but most of them are self-funded,” says Dr Chandy Abraham, head of medical services and facility director, HCCI.
Getting an endorsement from insurance companies would be one of its biggest challenges, says Ranjan Pai, chief executive and managing director, Manipal Education and Medical Group. He admits that the idea is definitely worth watching, but the scalability of the business model is yet to be proven. “We have had a medical school in the Caribbean region for the last 10 years and have been toying with the idea of setting up a hospital for a long time,” points out Pai.
HCCI is not sparing any effort to get the insurance piece right. It is building up its patient data and getting its systems in place to apply for a Joint Commission International accreditation, an offshoot of Joint Commission America, which accredits hospitals around the world. NH has a department comprising 50 people whose only job is to ensure that all its hospitals cater to quality standards.
“When that [the accreditation] happens, it becomes a gamechanger for us because then we can directly go to insurance companies and get empanelled with them. Once we get that validation, it will boost our operation even more. The accreditation is expected in the first quarter of 2015,” says Viren Shetty.
However, some industry experts feel even after the accreditation, it might not be that easy.
“There are only a few US health insurance companies as well as self-insured employers with a medical travel benefit in their plans. There are boosters in the sector who have been preaching about marketing foreign destinations to US-based health insurance companies for years,” Irving Stackpole, president, Stackpole & Associates, a US-based consulting firm, told Forbes India. “But in the current environment, it is unlikely that a large national health insurance company would embrace a disruptive solution such as international medical travel. Not impossible, but unlikely.”
Shetty is aware of what he’s up against. “But,” he says, “someone has to do it differently. If we can offer the same outcome as an American hospital at a fraction of the price, it will wake everyone up. We have given ourself a year to establish the Cayman Islands project. Then, our target is to create similar models in different locations outside the US. We have requests from the Bahamas, Canada, Mexico and other places.”
Given his long term focus and passion for his work, this isn’t a pipedream either.