Here’s How You Manage Healthcare Costs

There is a terrific piece in the WSJ today about Narayana Hrudalaya and Dr. Devi Shetty called The Henry Ford of Heart Surgery. Narayana Hrudalaya has successfully “mass produced” heart surgery, in the process reducing its price by an order of magnitude.

His flagship heart hospital charges $2,000, on average, for open-heart surgery, compared with hospitals in the U.S. that are paid between $20,000 and $100,000, depending on the complexity of the surgery.

Although the data is not strictly comparable, it appears that the outcomes are at least as good, if not better than the averages in the US.

Dr. Shetty’s success rates appear to be as good as those of many hospitals abroad. Narayana Hrudayalaya reports a 1.4% mortality rate within 30 days of coronary artery bypass graft surgery, one of the most common procedures, compared with an average of 1.9% in the U.S. in 2008, according to data gathered by the Chicago-based Society of Thoracic Surgeons.

So what is behind the success of Narayana Hrudalaya. Two words – scale and throughput. It alone does 12% of India’s cardiac surgeries.

Narayana’s 42 cardiac surgeons performed 3,174 cardiac bypass surgeries in 2008, more than double the 1,367 the Cleveland Clinic, a U.S. leader, did in the same year. His surgeons operated on 2,777 pediatric patients, more than double the 1,026 surgeries performed at Children’s Hospital Boston.

But this scale is not just a result of having more doctors and being bigger. The number of surgeries per doctor and the utilization of the expensive medical equipment is both higher.

Narayana surgeon Colin John, for example, has performed nearly 4,000 complex pediatric procedures known as Tetralogy of Fallot in his 30-year career. The procedure repairs four different heart abnormalities at once. Many surgeons in other countries would never reach that number of any type of cardiac surgery in their lifetimes.

There were some quotes alluding to the impact of such high throughputs on quality. But others said that the higher level of experience gained by the surgeons should actually result in better results.

I hope policy makers in the US are paying attention. (This was the most read and emailed article on WSJ online today). When the difference in price of the same service is 10X to 50X, there is probably more than one difference between the two systems.

The easiest one is of course wages. Aside from surgeons wages (the article says $110,000 to $240,000) which are somewhat lower, all other wages in the hospital system in India will be much lower – perhaps by 5X to 10X.

The other is scale. Centers like Narayana Hrudalaya are like oases in a desert and get patients from around the country. A 12% national market share is huge. Scale allows the hospital to negotiate and get the best deals for equipment and consumables.

But even putting both these together can’t explain everything. As Dr. Shetty says in the article,

“In health care you can’t do one big thing and reduce the price,” Dr. Shetty says. “We have to do 1,000 small things.”

But Dr. Shetty and Narayana Hrudalaya have the will to do that. No, make that compulsion. They have to lower the price to $2,000. Otherwise they don’t have a market. In the US, hospitals try to save costs to improve margins. Their revenue comes from patients who don’t care about the price because insurance is paying for it. That’s a very different dynamic.

A couple of years ago I was in Mumbai over a weekend and decided to take Hinduja Hospital’s Premium Health Checkup. It was a full day affair with a battery of tests and consultations (the page carries a list). It included lunch and a session on yoga and meditation. The total bill was Rs. 5,000 (it’s now Rs. 10,000 or about $240). Cut to the US. My annual physical is a half an hour visit to the doctor’s office and a lipid profile. That’s all. Total bill $540.