Background – A new private hospital has been set-up in the National Capital region – Delhi, India. The new hospital was set-up by senior executives of ABC hospital, which was sold after owners’ family had financial and regulatory issues as a result of government and social pressures. The executive team is experienced in setting up ABC hospital from scratch since the hospital was founded in 2001. The team has experienced a lot of ups and downs in hospital business; they witnessed a sudden rise of ABC in the first decade (2001-2010) and also witnessed the fall of ABC in the second decade.
The team is very wary of the image of the new hospital they have set-up now and they want the hospital to be profitable and reach the break-even point in the first three years of launch. They have asked their CFO to submit a proposal to achieve this objective.
*Disclaimer – All hospital or business names mentioned in this project report are fictitious and no resemblance with reality, names are quoted only for reference
THE PROPOSAL
Challenges identified
- Imperative to have marketing edge – Though the doctor-patient ratio in India is all-time low at 1:1800, still the competition for the new hospital is intense because most of the hospitals offering world-class care are located in the metro cities. Hospitals in metro cities have to re-invent strategies to have a continuous inflow of patients vis-à-vis competition. A new hospital cannot match the marketing spent on competitor hospitals that are well established for decades. The offering needs to be innovative and help the new hospital stand out from the crowd.
- Changing regulatory environment – All private hospitals in India are caught in between the nutcracker of low margins on one hand and rising costs on the other. The rising trend of private insurance has become a credit trend for hospitals and payments are not upfront, which adversely affects the cash flow for the hospitals. Moreover, there is price capping by the government for reimbursements to hospitals by the insurance companies for various procedures. Also, the recent introduction of Ayushman Bharat (a scheme insuring 900 million people from unprivileged economic backgrounds) is a challenge as well as the opportunity for private hospitals. The hospitals that can optimize healthcare costs will have an edge over the competition because Ayushman Bharat also has to cap over the procedure costs for the hospitals.
Roadmap proposed
- Invest in technology – Data-driven insights with healthtech can help to negotiate better contracts with private insurers and government (Ayushman Bharat). Through investment in technology will be a challenge as returns will be in the long-term, and investments will be immediate and huge. Once invested upon the technology, adoption of the technology will take time, and the generation of credible data to generate predictive insights will take 3-4 years. So, we have to look forward to industry partnerships who can sponsor the immediate investment and both hospitals and sponsors are mutually benefitted in the long run.
- Renegotiate payment model with insurers and government – The insurance of government reimburses hospitals basis Fee-for-service model. The bundled payment concept is yet to be established in India. If a new hospital offers complete care during the end-to-end process when a patient requires the procedure to be done and the hospital takes accountability of all consequences of care provided, more of the private insurers will be interested in impaneling the hospital which means a greater number of patients will be received by the hospital. Because hospital will be among the very few initiators of bundled payment (we call that package deals in India), the payment terms can also be better negotiated and hence the cash flow will be better
- Shift to capitation model in the coming years – Once the concept of bundled payment is established, many competitor hospitals will also start offering the package deals (bundled payment model) to insurers and the government. In 5-6 years, this hospital would have generated enough data as a result of planned investment on technology keeping this hospital ahead of the competition. Basis data, the hospital can negotiate cost per population subset with the insurers. There will be fixed payment per patient in each subset defined as per data analytics generated and the hospital will get their payment regularly whether there is any procedure or test conducted for the insured set of patients. This capitation-based model will be welcomed by many insurers and will increase the empanelment of the hospital with a greater number of private insurers. This will result in better cash flow and edge over the competition for the hospital
Opportunity to the source of funds for investment on technology – HealthTECH
Just like hospitals, pharmaceutical companies, and medical device companies are facing regulatory issues in terms of price capping and marketing operation regulation issues.
The pharmaceutical and device companies have been under pressure to reduce margins and keep pricing as proposed under Drug Price Control Order (DPCO) and National List of Essential Medicines. The medical devices like stents are also price-controlled under the Drugs and Cosmetic Act (DCA).
Also, the pharmaceutical and medical device companies cannot sponsor doctors in terms of gifts and travel sponsorships as per government guidelines that emerged in the last decade.
- Explain the big picture to these companies – The hospital procurement department will call the decision-makers of the above-mentioned companies and explain to them the long-term vision of the hospital in terms of improving the healthcare delivery model. A core team established by the hospital will present the roadmap of the hospital about shifting towards value-based-care by involving partners like drug companies and medical device companies.
- Engage the suppliers as partners – The hospital will encourage the suppliers to invest in the technology (HealthTech) for the transition of the hospital as a data-driven healthcare organization. They will invest in HealthTech applications like electronic health records, clinical decision support systems, and analytics generation for the hospital. This healthtech investment will yield them both long-term and short-term business returns. The hospital will purchase the medicines and devices from these companies at premium pricing which will be mutually agreed, however, the hospital will charge the patients within the costs approved by the government as per the above-mentioned laws related to capping prices. This will be a win-win situation for both hospital and the supplier. The supplier will have an agreement of supplying drugs and devices at a better price (can even become the exclusive supplier for a category of products to the hospital as a part of agreement basis negotiations) while not impacting patient pocket, the hospital will get initial investment for the technology required to reach their healthcare excellence goals. The initial arrangement will be for 5 years and this will take care of hospital cash flow despite the investment in HealthTech.
- Set future expectations – The investment in HealthTech will be the first step towards collaboration for better healthcare between the hospital and suppliers. In the future, both hospitals and suppliers will together work towards the concept of value-based care once significant data insights are generated. Just like the hospital moving towards value-based pricing, the suppliers will also shift to value-based or outcome-based pricing once credible data-driven insights are generated as a result of technology investments.
- Proof of the model – The hospital will set a new trend in healthcare improvement and the model is inspired by the paper published by Dr. Atul Gawande in “The Newyorker” magazine in the year 2015 and the solution is customized to the Indian scenario.
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