Narayana Hrudalaya

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IBS | BUSINESS | SCHOOL

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Students Bikash J., Deepali J., Fareed A., Suvichar S., Swati V. and Vijay G. prepared this case. Cases are

developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of

primary data, or illustrations of effective or ineffective management.

This document is authorized for use only under permission by Purna Prabhakar Nandamuri, AssistantProfessor at IBS Business School.

Rev: February 4, 2013

BIKASH JAISWAL

DEEPALI JAIN

FAREED AHMED

SUVICHAR SHARMA

SWATI VERMA

VIJAY GYANCHANDANI

Narayana Hrudayalaya: A Business Model Innovation

We all have one life to live and you want to do as much as you can in that. So I decided to

focus on making a difference in the lives of the poor.- By Dr. Shetty

In 2001 Dr Devi Prasad renowned cardiac surgeon, founded Narayan Hrudayalaya (NH)

which means Gods Compassionate Home in Sanskrit. Located in the city of Bangalore, NH

has always attracted attention because of its unique features ranging from its buildings and

equipment to the doctors, nurses, and their treatment and care of patients. The entrance to the

main foyer of the hospital has a circular chapel equally divided into four independent

quadrants, each a place of prayer and meditation for the four main religious faiths of its

patient population- Hindus, Muslims, Christians, and Sikhs.

NH has more than 500 beds, 10 fully commissioned operation theatres (OTs), two cardiac

catheterization laboratories, and its own blood and valve banks. The paediatric intensive

therapy unit consisted of more than 50 beds and is one of the largest in the worlds with 40%

of procedures performed at NH being paediatric treatments. Since 2001, NH has completed

over 11,228 open heart surgeries (OHSes), half of which were paediatric.


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Naryana Hrudayalaya: A Business Model Innovation

2 This document is authorized for use only under permission by Purna PrabhakarNandamuri, Assistant Professor at IBS Business School.

Dr Shetty, like many doctors of his era, went to England after graduating in 1982 from

Kasturba Medical College in the coastal town of Mangalore in Karnataka, India. He worked

at a hospital in Midlands, England and later at the Guys Hospital in London. But after a

decade of experience abroad, he returned to India and founded the Asian Heart Foundation

(AHF) in Calcutta in 1989 as a non-profit foundation focused on cardiac care. AHF initially

helped set up hospital for other organizations. The first one was opened in 1989 by the B.M.

Birla Heart Research Institute. In 1997, Dr Shetty assisted in setting up the Manipal Heart

Foundations hospital in Bangalore.

Dr Shetty never had problems raising the funds to build the hospital. A stockbroker patient

donated 72,000 (US$142,732) as working capital, while a private company, Tata Finance,

provided soft loans for buying equipment. Another patients son, who had a construction

company, offered to build a cardiac diagnostic laboratory, and the Armenian Church,

impressed by Shettys venture, came forward with a pledge of US$1 million. Believe it or

not, its not difficult to arrange for funds when your cause is noble, opined Shetty in an

interview to the New Scientist magazine in 2002

While Dr Shetty was in Calcutta working at RTIICS (Rabindranath Tagore International

Institute of Cardiac Sciences), he also served as Mother Teresas personal cardiac surgeon,

and this association deeply inspired him to think deeply about how he could better serve the

poor. In a letter he wrote to children on completing 4,000 paediatric surgeries, Shetty shared

what the nun had told him at the ICU of the hospital where she was convalescing: Now I

know why you are here. To relieve the agony of children with heart disease. God sent you to

this world to fix it. Shetty wrote, ... [this is] perhaps the best compliment that I have ever

received.

Demand for cardiac surgeries in India was underserved. In 2003, it was estimated that there

were only 55,000 open-heart surgeries that were performed in India per million people

whereas the demand was upwards of 125,000

The cost also remained high and varied from hospital to hospital, depending on the type of

facility. The top-tier private hospitals typically charged anywhere from US$1,500 to $6,000

for an open-heart surgery. Some of the government hospitals, such as the All India Institute

of Medical Sciences in Delhi (AIIMS), charged much less (US$1,200) but did not have

adequate capacity to treat a large number of patients.


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In 2001, Dr Shettys father-in-law Narayan Shetty, who owned a construction firm

Shankaranarayana Constructions (SNC) that was celebrating its 50th anniversary, invited him

to start a state-of-the-art cardiac hospital in Bangalore. SNC provided 25 acres of land on a

30-year lease to Dr Shettys NH Private Limited and provided the initial capital to build and

operate the hospital. Dr Shettys family also stood as guarantors for the loans that NH needed

to raise to equip the facility. The hospital was named Narayana Hrudayalaya with the

following mission statement:

A dream to making quality healthcare accessible to the masses worldwide

In order to support its mission to serve the poor, NH created a business model that, in its core,

operated on the principle that high quality care would attract full-price paying patients, and

along with NHs foundation, these patients would subsidize surgeries performed for the poor.

NH was modelled as a business enterprise as opposed to AHF that was a non-profit

foundation. Dr Shetty realized the limitations of completely charity-based models that were

incorporated as charitable trusts. As Dr Shetty put it, We realize that a trust cannot grow and

become huge since only way a trust can raise money is by donations and loans and both

models will not scale up to the size we are looking at. So we are effectively using both

models to suite the current legal requirement of the country.

In the initial part of the first phase, in 2001, NH had 225 beds. That figure has increased by

100 beds each year until the hospital reached a built-up area of 250,000 square feet of state

of-the-art facilities with ten state-of-the-art operating theatres and 500 beds in 2005 and 2006

with a capacity to perform up to 25 surgeries daily. NH was also working on a second phase

that began later in 2005 and is slated to end in 2008. Shettys long-term staff member,

Vasuki, a long-standing associate of Dr Shetty and NHs communications head, recalled the

grand opening day in 2001: We were very sceptical on the day of inauguration. We had

distributed 500 invitations and ordered 300 chairs to seat the guests. Some of us felt that the

hospital being several miles from the centre of the city may not be able to attract people for

the function and later for the treatment as well. But, Dr Shetty was sure. They will come, he

said.


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Indias Healthcare Scenario:

The Healthcare sector, in India, is at an inflection point and is poised for rapid growth in the

medium term. However, Indian healthcare expenditure is still amongst the lowest globally

and there are significant challenges to be addressed both in terms of accessibility of

healthcare service and quality of patient care. (Refer Exhibit 1) While this represents

significant opportunity for the private sector, the Government can also play an important role

in facilitating this evolution.

Between 2008 and 2030, the global population is projected to grow by 20%, from 6.7 billionto 8.1 billion people. The crude death rate is expected to remain more or less stable at around

8.4 deaths per thousand. However, a major shift is currently underway in the overall disease

burden in the world. In 2008, five out of the top ten causes for mortality worldwide, other

than injuries, were non-communicable diseases; this will go up to seven out of ten by the year

2030. By then, about 76% of the deaths in the world will be due to non-communicable

diseases (NCDs). (Refer Exhibit 2)

Cardiovascular diseases (CVDs), also on the rise, comprise a major portion of non-

communicable diseases. In 2010, of all projected worldwide deaths, 23 million are expected

to be because of cardiovascular diseases. In fact, CVDs would be the single largest cause of

death in the world accounting for more than a third of all deaths. (Refer Exhibit 3 and 4)

Epidemiological transition of NCDs

NCDs, particularly heart diseases, were once associated with the developed and affluent

nations while the developing nations were afflicted by infectious and parasitic diseases.

However, over the past few decades there has been a change in the landscape of non-

communicable diseases across the world.

In the developed nations, determined government policies and action, improved standards of

medical care, and advances in medical technology have helped cut the death rates from

cardiovascular diseases by more than 50% since the 1970s.


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At the same time, an increasing number of people from developing countries suffer from

NCDs. By 2030, four fifths of all NCD related mortality is projected to take place in

developing nations.

The global cost of cardiovascular diseases between 2010-2030 is expected to exceed

USD 20 trillion, out of which around 45% would be due to productivity loss from

disability, premature death, or absenteeism.

For CVDs specifically, in 2005, the age standardized mortality rate for developing nations

like India, China, and Brazil was between 300-450 per 100,000, whereas it was around 100-

200 per 100,000 for developed countries like USA and Japan. (Refer Exhibit 5)

This shift is a major cause of concern for developing countries. These diseases are expensive

to treat and manage, and eat a big chunk of the already stretched healthcare budgets. Due to

lack of proper medical care at an early stage, complications from the diseases occur at

relatively younger ages in developing nations and reduce the productivity of the labor force.

The situation in India

Indian healthcare overview

The Indian healthcare sector has seen improvements over the past couple of decades, but

there is still a long way to go before we meet international standards. The improvements have

not been uniform inequities based on gender, rural vs. urban, and even social status still

remain.

While the government assures healthcare to all its citizens, 80% of all out-patient and 60% of

all in-patient care is handled by the private sector which accounts for 68% of all hospitals in

the country.

Healthcare financing also remains a key issue. In 2010, 5.0% of the GDP was spent on

healthcare4, less than any other BRIC nation, out of which the government spend was a


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meager 0.9%. Further, 74% of total health spending in India was out-of-pocket (OOP), with

only 14% of the population being covered by some form of health insurance.

Indiatransition to NCDs

India has seen a rapid transition in its disease burden (number of cases/lakh) over the past

couple of decades. The load of communicable and non-communicable diseases (NCDs) is

projected to get reversed in 2020 from its distribution in 1990.

This is largely because, with Indias economic growth and urbanization over the past

decades, a large section of the population has moved towards unhealthy lifestyles with

decreasing physical activity, increasing stress levels, and increasing intake of saturated fats

and tobacco. The average life span has increased due to improvements in medical care; the

rapidly ageing population, more prone to NCDs, will also fuel the growth of NCDs over the

next few decades. Finally, most NCDs share common risk factors, whose prevalence is high

in India and they generally occur as co morbidities.(Refer Exhibit 6)

Cardiovascular diseases are the largest cause of mortality, accounting for around half of all

deaths resulting from NCDs. Overall, CVDs accounted for around one-fourth of all deaths in

India in 2008. CVDs are expected to be the fastest growing chronic illnesses between 2005

and 2015, growing at 9.2% annually, and accounting for the second largest number of NCD

patients after mental illnesses. A more worrying fact is that the incidences of CVDs have

gone up significantly for people between the ages 25 and 69 to 24.8%, which means we are

losing more productive people to these diseases.

Economic impact of CVDs

The interdependence between health and economic well-being is well established and there is

a huge impact of cardiovascular diseases on economic growth and development.

Between 2005 and 2015, India is projected to cumulatively lose USD 236.6 billion because of

heart disease, stroke, and diabetes, shaving 1% off the GDP.


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In 2000, in the age group of 35 to 64, India lost 9.2 million years of productive life (PYLLs),

almost six times the figure for US. (Refer Exhibit 7)

Further, in the absence of any national program for prevention and management of CVDs, it

is expected to increase to 17.9 million PYLLs by 2030, more than nine times the

corresponding figure for the US. The estimates above do not include the indirect losses, such

as losses incurred from not investing the same amount in other areas of human development

such as education.

In addition to these losses, the cost of care has also increased. According to IIB (Insurance

Information Bureau) data, the average amount claimed from health insurers for circulatory

diseases (mostly heart related) increased at an astounding 52.5% annually between 2007-08

and 2009-10. Not only this, the total claimed amount for heart diseases was more than twice

the total amount claimed for the next highest disease category, cancers.

The information presented above clearly suggests that NCDs in general and CVDs in

particular are a big cause of concern for India. While the Indian government and other

stakeholders have realized this and started some corrective action, a lot more focused and

collaborative effort needs to be made to prevent a heart disease epidemic, one a developing

India can ill-afford.

Between 2011 and 2031, the number of people above 60 years of age is expected to

more than double in India.

The strategy-creating focused factories of healthcare:

The term focused factory, was introduced in a 1974 Harvard Business Review article by

Wickham Skinner. One of the strategies of the NH has been to focus on a limited number of

core competencies and bring in factory like efficiencies in each hospital .This is the best way

to compete effectively, by dedicating to a manageable set of services with greater

standardization, rather than being multi-purpose. The core competencies are precisely defined


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by the organizations strategy and its humane approach, and backed by its technological and

economic strengths.

OPERATIONAL STRATEGY

Two aspects stand out when it comes to the operational strategy of NH hospitals. First, all

started and managed its founder who was driven by more than mere commercial interests. He

was genuinely interested in bringing about a fundamental transition in the availability and

accessibility of affordable and quality healthcare for the masses. Second, there is a

continuous focus on cost control across the complete value-chain. Vision Spring focuses on

cost optimization on the supply side by hiring locals as direct sales force (the VEs) and

leveraging the existing distribution network of entrepreneurs, government cooperatives,

community health workers and civil society organizations. Narayana Hrudayalaya adopted a

lean organizational structure.(Refer Exhibit 10 for Organization Structure) Here,

specialists focus only on surgeries and consultations rather than administrative tasks; girls

from poor communities are trained as nurses; and high volumes of surgeries and

catheterization procedures are made possible thanks to extended working hours for doctors

and extended availability of operation theatres. (Refer Exhibit 9 for process)

COST STRATEGY

Keeping in view the great demand for healthcare, NH has adopted a unique principle of

economies of scale for lowering healthcare costs and increasing accessibility. The NH has

created Health Cities with huge capacities in terms of infrastructure (hospital beds, OTs,

catheterization labs, dialysis centers and human resources). Consider these facts -today, NH

hospitals perform about 12 percent of all cardiac surgeries in the country; the maximum

number of dialysis than any hospital chain in India at the modest cost of Rs 400/- ; highest

number of surgeries on children in the world; the highest amount of bone marrow transplants

at Mazumdar Shaw Cancer Centre in India. NH has the worlds largest Pediatric ITU

attracting children from over 73 countries.

By handling greater volumes (Refer Exhibit 8) the Organization has been able to hone its

physicians towards greater proficiency levels, and also negotiate better prices for inputs

directly from vendors. Facility use was increased through a shift system wherein the


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operation theatres worked longer hours, This enables to streamline Organizations workflows,

processes and build systems towards better efficiency and costeffectiveness.

Inventory Management: High volumes of patients and procedures enabled NH to have

stronger purchasing power for their medical supplies. An interesting aspect to its purchasing

practice was to eliminate long-term contracts and to bargain with suppliers every week. This

also brought down their inventory carrying costs and reduced scope for opportunistic

behaviour by suppliers. Appendix F shows the distribution of costs with consumables being

the largest expenditure, and supplies were closely monitored and bought in bulk on a weekly

basis. NH had brought down its prices by almost 35 percent since it started procurement. It

did not purchase much medical equipment, opting instead to lease; NH paid only for the

reagents needed for the equipment. The high volumes allowed the suppliers to make enough

of a profit to enter into such partnerships.

Work Time: The hospital has moved to digital X-ray technology, saving on the recurring

cost of film. Most hospitals use their CT scanners, MRI (magnetic resonance imaging) and

other machines for only eight hours a day, but Narayana Hrudayalaya uses them for 14 hours

and offers these tests to the patients at lower rates in the late evenings. As volumes increase,

per unit costs naturally come down.

Human Capital Management: Staff retention and recruitment was a major challenge for

NH. It used continuous training programmes to promote specialists and other medical staff

from within its staff pool to keep costs down, while providing a growth path for its staff.

Nursing had an especially high turnover rate. Training programs were developed to try to

retain nurses. Intensive training with critical-care experience aside NH also started a nursing

college to ensure constant supply of qualified nurses at relatively lower costs. Financial help

in the form of loans from banks and government subsidies encouraged people from poorer

communities and remote areas to study and train to be nurses.

Compensation: Typically, cardiac surgeons are paid per surgery and their costs constitute a

significant proportion of a hospital's total expenses. Shetty invited his staff physicians to

work for fixed salaries; he did not pay them less than what they would have normally taken

home at the end of the month, but he required doctors to perform more surgeries, bringing


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down the cost per procedure. This approach continues to be one of the core savings areas at

Narayana Hrudayalaya. (Refer Exhibit 13)

Equipments: For procedures like blood gas analysis, Shetty's team convinced the equipment

vendor that, instead of selling the machine to the hospital, he could simply park it there and

make his money by selling the chemical reagents required for the test. The hospital saves on

the cost of the machines while the vendor also profits. For the past six months, another

vendor has parked his catheterization laboratory equipment at the hospital free of charge. The

deal came together because the vendor wants to use Narayana Hrudayalaya as a referral,

Shetty notes, with the idea that if he can show that his equipment can cope with the patient

volumes at Narayana Hrudayalaya, it can work anywhere, he adds.

Infrastructure: In addition, Shetty's father-in-law -- who was in the construction business --

built the first hospital for him, keeping costs to the minimum. Shetty claimed he passed on

those savings to patients, and maintains that, even today, construction costs at his hospitals

are less than half of that for others. "The way we design the hospitals and our close

monitoring of our projects help us to keep a very tight control of our construction costs,"

noted Shetty's son Viren, an engineer and director at the hospital.

REVENUE STRATEGY

For revenue Narayana Hrudayalaya follows the cross-subsidized approach, where they target

the high- and mid-income segments apart from the low-income segment, and charge them as

per their paying capacity. This has helped both offers a high performance/ price ratio to the

poorest segment. (Refer Exhibit 12 and 14)

Hybrid Pricing Model: Cardiac surgeries in the United States can cost up to US$50,000. In

India, they typically cost around US$5,000-US$7,000. Depending on the complexities of the

procedure and the length of the patient's stay at the hospital, the price tag increases. At

Narayana Hrudayalaya, however, surgeries cost less than US$3,000, irrespective of the

complexity of the procedure or the length of hospitalization. About 45% of Shetty's patients

pay even less. Of these, about 30% are covered under a micro-insurance plan for health care

called Yeshasvini that reimburses Narayana Hrudayalaya at about US$1,200 a surgery.

Conceptualized by Shetty and run by an independent trust, Yeshasvini was launched in 2002

in association with the Karnataka state government.


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To ensure the viability of the project, Shetty has devised a hybrid pricing model. Apart from

the regular package of US$3,000 a surgery, he also offers semiprivate and private rooms for

those who want and can afford better personal amenities. The medical facilities are the same

for every patient, however. The upgraded rooms, which comprise around 20% of the total

available at the hospital, are priced at US$4,000-US$5,000 and "offset the losses incurred

from treating the poor,"

CUSTOMER INTERFACE STRATEGY

Devi Shetty involved locals in its operations, building skills and engaging them for last-mile

connectivity with the consumers. In addition, Narayana Hrudayalaya has launched micro-

insurance schemes like Yeshaswini and Arogya Raksha, which help make healthcareaffordable for the masses.

Partnerships: Partnerships included the one with Texas Instruments for technology that will

bring down cost of patient monitoring (under development), as well as a partnership with

government for health insurance schemes. In partnership with Biocon Foundation and a

private company called ICICI Lombard Ltd, NH launched an insurance scheme in 2004 to

cater to low-income patients. The scheme was known as Arogya Raksha, and it required

individuals to pay Rs 15 (approximately US$3) per month, and the individual was insured for

1,650 types of surgeries. Biocon Foundation set up a generic drug shop where it sold drugs 20

to 30 percent cheaper to their members.

INNOVATION FOR SUSTAINABLE ADVANTAGE

NH also constantly works on technological innovations to bring down costs. In one instance,

it brought down the cost of ECG (Electro Cardio Grams) machines from US$750 to less than

$300. NH unbundled the software and hardware costs of the ECG machine and had its own

software company write the software to read the data from the machine into a PC. NH gave

this software for free to anyone that wanted to use it and didnt charge any licensing fee. In

another instance, NH collaborated with Texas Instruments (TI) to develop a digital X-Ray

plate based on a product that was going off-patent in 2004. The original product cost was a

whopping US$82,000 and the product NH and TI developed on this expired patent was only

US$300.


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CHALLENGES FACED BY DR. DEVI SHETTY

One major barrier for growth that remains is the overly bureaucratic public sector. Since its

inception, NH has asked for various types of assistance from the government including

financial incentives, tax subsidies, resources for medical training centers, or public land for

constructing newer medical facilities. While positive media exposure and public awareness of

NH has increased government supporting areas, such as low cost insurance, the actual help

needed from the government was not forthcoming. For instance, several key imported

components that went into consumables such as heart valves attracted hefty duties and stood

in the way of NHs mission of achieving low-cost cardiac care. There were several regulatory

hurdles in the way of beginning new colleges to train doctors and nurses. This hindered NHs

expansion plans. Despite the fact that NH was set up in a region where there had been a boom

in the information technology industry (i.e. Bangalore), it did not expand into the healthcare

sector, which had the potential to provide even greater employment and economic growth.

FUTURE PLANS

Devi Shetty is using this multi-skilling for a larger cause of expanding his primarily heartcare

hospital chain comprising 14 hospitals to multiple specialities in many geographies. By 2020,

he expects to take the chain to 30,000 beds from 5,700 now. The company is currently ranked

fourth behind Fortis Healthcare, Apollo Hospitals and Manipal Group. Over the next 18

months, NHPL will be adding new hospitals in Siliguri, Bhubaneswar, Mysore, Mumbai and

Delhi in addition to its first international forays in Cayman Islands and Malaysia. These

expansions alone could add close to 2,500-3,000 beds to its capacity. The unlisted NHPL has

the backing of private equity investors JP Morgan and Pine Bridge Investments (formerly

AIG). (Refer Exhibit 11)

Conclusion

Dr. Shetty, in a recent presentation at Harvard Medical School, said that poor people are

weak when they are alone but have a lot of power when together. He successfully used this

notion to craft a business model that focused on the strength of large numbers to drive down

costs in all aspects of cardiac healthcare. He followed an economic model that was quite

distinct from that of the west. For instance, western hospitals spent 60 percent of their


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revenue on salaries, while NH spent only 12 to 13 percent under that heading. NH tirelessly

innovated, bargained and lobbied to bring a new hope for the poor into the Indian healthcare

scenario. Several developing nations approached NH for collaboration in healthcare. Several

state governments from India also tooknote of NHs success and started to reach out to NH

for setting up cardiac hospitals and creating health insurance schemes. This is only the

beginning, as the Indian healthcare sector needed many more NHs before 2015 to keep its

population healthy. This has to be seen, can NH hospitals replicate the same business model

in other developing countries?


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Exhibit 1 Indias Spending on Healthcare as the % of GDP

Exhibit 2 Causes of Mortality


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Exhibit 3

Exhibit 4


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Exhibit 5

Exhibit 6


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Exhibit 7

Exhibit 8


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Exhibit 9

Exhibit 10


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Exhibit 11

Growth of inpatients, out-patients, and surgical procedures at NH:

Exhibit 12

Sources Of earnings for NH in a typical month:


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Exhibit 13

Distribution of Spending For NH in typical months:

Exhibit 14

Revenue Source for NH:

Narayana Hrudalaya

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