Narayana Hrudayalaya: a noble route to quality and affordable healthcare

It’s a business approach which runs counter to the conventional logic in the hospital business – if
you focus on quantity then quality is bound to come down and that could eventually kill the
business. Infact hospitals go to the extent of invest significant money on the appearance to
communicate exclusivity and hence quality – a la hospitality sector.

But Narayana Hrudayalaya is turning, infact already turned this logic on its head with its
‘manufacturing sector type / conveyer belt’ approach to run the hospital. Surprisingly for
everybody, especially for peer group hospitals in the private sector, it is delivering profits
which are better than the industry average.

And the person behind the success is 54 years old, talkative and lanky man who goes by the
name Dr. Devi Shetty. It’s single handedly his vision and passion which has created such a
hospital of repute. One look at him, it is quite apparent that he is a man possessed. A native of
Mangalore, a south Indian city, the eighth of nine children, decided to become a doctor (and that
too a heart surgeon) in a moment of inspiration when his class 5th teacher informed the class that
a South African surgeon had just performed the world's first heart transplant. For him, his destiny
was made then at that moment.

He seamlessly juggles between the multiple roles of a surgeon, a businessman, administrator,

and an uncanny negotiator and a deal maker

Hospital offers gold standard medical care in India at a cost which is just a fraction of global cost.
His flagship heart hospital charges $2,000, on an average, for open-heart surgery, compared with
$5,000 charged by other private hospitals in India and between $20,000 and $100,000 by US
hospitals, depending on the complexity of the surgery.

Principle is simple that works in manufacturing: economies of scale. Common to other industries,
this principle has never been tried for procedures as sophisticated, delicate and dangerous as
heart surgery. With this Dr. Shetty has managed to drive down the cost substantially

Numbers speak for themselves.

Narayana Hrudayalaya Hospital with 1000 beds operates at the occupancy level which is
unheard of in other countries. For example, average hospital in US has 160 beds according to the
American Hospital Association. In 2008, 3174 bypass surgeries were conducted by 44 surgeons
of the hospital, which is more than double the 1,367 done by Cleveland Clinic, a leader in the
U.S. In the same year, it operated on 2,777 pediatric patients, more than double the 1,026
surgeries performed at Children's Hospital Boston.

Dr. Devi Shetty and his fellow cardiologists perform about 600 operations a week.
At that volume, he says, he would be able to cut costs significantly more by bypassing medical
equipment sellers and buying directly from suppliers. His family-owned business group, Narayana
Hrudayalaya Private Ltd., reports a 7.7% PAT margins, or slightly above the 6.9% average for a
U.S. hospital, according to American Hospital Association data. Even in India, PBIT margins of
the listed hospitals is in the range of 9-10% and for unlisted it is less than 2%. Clearly he has hit
the right formulae.

The group raised $90 million last year through private equity. The money would be used for
setting up four more "health cities" under construction around India. Over the next five years, Dr.
Shetty's company plans to take the number of total hospital beds to 30,000 from about 3,000,
which would make it by far the largest private-hospital group in India.

This model offers business insights to other hospitals in India and worldwide which are struggling
with the soaring cost of equipments and other costs.

"Japanese companies reinvented the process of making cars. That's what we're doing in health
care," Dr. Shetty says. "What health care needs is process innovation, not product innovation."

Now he is eyeing presence in Cayman Islands, where he plans to set-up a 2,000-bed general
hospital, which is an hour's plane ride from Miami. Pricing would be half of what it is in US and Dr.
Shetty hopes to attract Americans who are either uninsured or need surgery their plans don't
cover.

He has got international endorsement for his business model as well. Jack Lewin, chief executive
of the American College of Cardiology, who visited Dr. Shetty's hospital sometime back, says Dr.
Shetty has used high volumes to improve quality. As some studies also show that quality rises at
hospitals that perform more surgeries for the simple reason that doctors get more experience.
And at Narayana, says Dr. Lewin, the large number of patients allows individual doctors to focus
on one or two niche cardiac surgeries. For example, Colin John, a Narayana surgeon 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.

It’s just not that. Success rate at Narayana is as good as those of other hospitals abroad. It
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. Even this is not a ‘fair’
comparison as Narayana doesn't adjust its mortality rate to reflect patients' ages and other
illnesses, in what is known as a risk-adjusted mortality rate. India's National Accreditation Board
for Hospitals & Healthcare Providers asks hospitals to provide their mortality rates for surgery,
without risk adjustment.

Dr. Lewin believes Dr. Shetty's success rates would look even better if he adjusted for risk,
because his patients often lack access to even basic health care and suffer from more advanced
cardiac disease when they finally come in for surgery.

The inspiration to do something like this happened to Dr. Shetty in 1989. After training in cardiac
surgery at Guy's Hospital in London, Dr. Shetty came to India and joined Birla heart hospital in
Kolkatta as its first director.

Though he performed the first neonatal heart surgery in the country on a 9-day-old baby, he also
confronted the reality that almost none of the patients who came to him could pay the $2,400 cost
of open-heart surgery. After hearing the price they would just disappear
At that time, Mother Teresa had a heart attack, and Dr. Shetty operated on her. Later on he
became her personal physician. And then he came across a profound statement of hers, "Hands
that serve are more sacred than lips that pray." This statement inspired him enough and still
adorns the wall of his office, of course with Mother Teresa picture.

Dr. Shetty set about on his mission duly helped by his father-in-law, who ran a construction
company, who financed and helped build the hospital in Bangalore, his wife hometown. The
dream was realised in 2001 and hospital came into being. A giant statue of a many-headed deity
-- representing gods in the Hindu pantheon -- stands in the center of the lobby.

Since then quality and cost efficiency has been a relentless pursuit for him. For example, how he
slashed cost of sourcing sutures. Four years ago, the sutures would have been bought from a
Johnson & Johnson subsidiary, now they are made by a Mumbai company, Centennial Surgical
Suture Ltd. His bill earlier being $100,000 and growing by 10% is now cut by half.

As he says, "In health care you can't do one big thing and reduce the price, we have to do 1,000
small things."

He is trying to reduce cost for medical equipment as well. Chinese makers have brought good
quality, cheaper machines but don't yet have adequate local support for regular maintenance. So
Narayana still buys equipment from General Electric Co. He pays $60,000 for echocardiography
machines, and $750,000 for cardiac catheterisation labs. But he is set on reducing these costs.

Till than, Dr. Shetty takes more out of each machine by using them upto 20 times a day,
compared to four times usage in a typical U.S. hospital.

There is, however, no compromise on the salaries paid to surgeons. They are paid at the going
rate between $110,000 and $240,000 annually, depending on experience. Dr. Shetty himself was
paid almost $500,000 last year, according to the group's audited financial statements.

But here too, Dr. Shetty drives efficiency. Surgeons at Narayana perform two or three procedures
a day, six days a week. They typically work 60 to 70 hours a week, they say. Residents work the
same number of hours. In comparison, surgeons in the U.S. typically perform one or two
surgeries a day, five days a week, operating fewer than 60 hours. Dr. Shetty says doctor fatigue
isn't an issue at all, as generally, surgeons take breaks after three or four hours in surgery.

While doing this, he has not lost sight of his other vision of making healthcare affordable for really
needy people. Like one morning, Dr. Shetty operated on an 11-year-old boy whose father is a
sugarcane worker. The boy was born with a congenital heart defect. Boy’s father says he can't
pay for the surgery, but the cost is covered by a farmers' insurance plan that Dr. Shetty began
several years ago in partnership with the government of Karnataka.

Nearly one third of the hospital's patients are enrolled in this insurance plan, which costs $3 a
year per person and reimburses the hospital $1,200 for each cardiac surgery. That is about $300
below the hospital's break-even cost of $1,500 per surgery. The hospital makes up the difference
by charging $2,400 to the 40% of its patients in the general ward who aren't enrolled in the plan.
An additional 30% who opt for private or semi-private rooms pay as much as $5,000.

It seems Mother Teresa is continuously blessing her personal physician and must be contented to
see that what she said is being practiced diligently by Dr. Shetty and it still adorns the wall of his
office. While other private sector hospitals in India and the world can take a leaf out of Narayana
Hrudayalaya chapter to take their business to greater heights