Indian Healthcare – Successful Business Models Dr. Rakesh Kapur

1. Indian Healthcare – Successful Business Models Dr. Rakesh Kapur

2. Contents • The Context - Indian Healthcare Industry • Understanding Business Models in Healthcare • Comparative Case Study

3. Indian Healthcare Market Growth : 15% CAGR Private Hospital Revenues 2006 – US$ 15.5 Billion 2012 – US$ 35.9 Billion Healthcare pie (2006) US$ 34.2 Billion Healthcare pie (2012) US$ 78.6 Billion

4. Indian Healthcare Market Characteristics • Understanding the healthcare market with 3P Model • Prevalence: • High prevalence, likely to be higher than reported • Change in disease profile likely to drive the prevalence higher • Significant disparity between states & socio-economic classes in prevalence • Propensity: • 3% of population slips below poverty line every year due to healthcare costs • Average cost of single hospitalization equal to > 6 months of average household income • Only 10-12% of Indian population is insured though growing at more than 35% • Provider: • Although India has 20% of global disease burden, we have 6% of beds, 8% of doctors, 8% of nurses & 1% of paramedics • Of the 13 Lakh private providers, 37% are unregistered providing little quality assurance 3P Model of healthcare market Market Characteristics Provider Prevalence Propensity

5. Consumer viewpoint Assurance Accessibility Affordability Consumer Viewpoint • Understanding consumers from the 3A model • Accessibility: • Inadequate infrastructure • High prevalence, increasing further • Regional disparity in India • Shortage of manpower • Assurance: • Unregulated and fragmented market • Lack of data or information systems • Affordability: • Inability to afford quality healthcare • Inadequate insurance penetration • Emergence of new diseases 3A Model of consumer needs

6. Why are private providers not filling the gap ? • There is considerable variation In RPB / year and EBITDA for hospitals within tier-1 cities • It is possible to achieve operating margins of 28%-30%, however, choice of business model will be an imperative for success

7. UNDERSTANDING BUSINESS MODELS

8. Understanding Business Models in Healthcare Business economics Capex per bed Revenue per bed EBIDTA Business Elements Functional Mix Specialty Mix Level of Care Services Mix Growth Model • Preventive • Therapeutic • Rehabilitative • Education • Research • AYUSH / CAM • Single Specialty • Single Disease • Multi-specialty • Select Specialty • Primary • Secondary • Tertiary • Quaternary • Pathology Laboratory • Radiological set-up • Dialysis Units • Radiotherapy Units • Laproscopy Units • Greenfield • Acquisition • Lease • Joint Venture • Congregation Target Consumer - Positioning Geographic Mix

9. Hospital’s “Business Model” OPD, though generates 5% of revenues, is responsible for 50% of IPD admissions HOSPITAL: SOURCES OF REVENUE OT rent constitutes 17% of revenues but indirectly it is responsible for 50% of hospitals revenues HOSPITAL: COST STRUCTURE (Operating Margin) Pharmacy & Consumables generate 36% of hospitals revenues * All figures are a percentage of gross revenues

10. Specialty Mix – Key to a profitable business model 200 K Neurosciences Orthopedics 30% 150 K 22% Cardiology ARPP (IPD) 100 K ~30% General Surgery 23% OBG 16% 50 K 20% 12% Pediatrics Internal Medicine 0 0% 30% 10% 20% 40% Specialty Margin ALOS (Average Length of Stay) of these specialties is an important determinant of profitability, therefore their operational management is key to driving efficiencies • Note: • Bubble size - % revenue of that specialty • % inside the bubble – specialty’s EBITDA as seen in tertiary care facilities in metro cities in India

11. Service Mix • Significant variance in service mix impacts profitability through;’ • Capital Expenditure • Revenue realization • Cost of delivery

12. Overview of Growth Models Greenfield Acquisition Lease / Joint Venture Agglomerates • Max • Manipal • Sterling • Columbia - Asia • Fortis • Wockhardt • Reliance ADAG • Apollo Hospitals • Wockhardt Hospitals • Parkway Group • Narayan Hrudayalaya • I-Ven Medicare (ICICI) • Asian Health Alliance • DM Healthcare • Long gestation period, delayed returns • High initial capital requirement • Land availability, especially in metros is a challenge • Fast ramp-up • High initial capital requirement • Revenues accumulate from day 1 • Acquiring skilled manpower along with asset limits teething issues • Constrained by availability • Low initial capital requirements • Assured revenue base from day 1 • Profit / revenue sharing limits risk • Focus on core competencies / specialties • Strategic stake (minor / majority) in small to medium hospitals across the country • Generates economies of scale through bulk purchasing, preferred services etc • Managing multiple partners requires a capable management team • Capex: High • Revenues: High • EBITDA: Delayed, High • Pay-back Period: 5-7 Years • Capex: High • Revenues: High • EBITDA: High • Pay-back Period: 5-7 Years • Capex: Low • Revenues: Low • EBITDA: Medium • Pay-back Period: 2-3 Years • Capex: High • Revenues: Medium • EBITDA: High • Pay-back Period: 3-5 Years

13. Target Consumer - Positioning Indian healthcare delivery market has seen adoption of various business models in response to the local needs and changing customer behavior Lean Differentiators Differentiator Lean Differentiator A strong brand 1 Low cost provider 2 Value Cost Leaders Niche: Super-specialty Revenue optimization 3 Stress on continuous improvement / innovation 4 Seamless service delivery 5 Niche: Nursing Homes Cost / Pricing Level

14. BUSINESS-MODEL Investment Profitability Operational Complexity Clinic/network clinics 1.00 2.00 1.00 Partnering Public-funded programs 1.00 4.00 6.00 Poly clinics 1.00 4.00 1.00 Specialty Clinics 1.00 4.00 1.00 CAM Clinics 1.00 4.00 4.00 Integrated Clinics 1.00 7.00 2.00 Preventive checks & OPD; Vaccination centres 2.00 2.00 4.00 CAM Hospitals 2.00 5.00 5.00 CAM Academic Institutes 3.00 5.00 5.00 Wellness & rejunuvation centers 3.00 7.00 2.00 Life-style & disease management centers 3.00 8.00 2.00 Multi-specialty Rehab Institute 4.00 6.00 2.00 Day care set-up 4.00 7.00 2.00 Diagnostic centres/ network clinics 4.00 8.00 5.00 Specialty hospitals (Single & Multi) 5.00 7.00 4.00 Integrated Rehab Institute 5.00 7.00 3.00 Nursing homes, Gr. Specialty hospital 5.00 8.00 4.00 Critical care set-ups 6.00 8.00 3.00 Super specialty hospital (Single/Multi) 6.00 9.00 5.00 Medical Mall: (Products & Services) 7.00 4.00 2.00 Indian Medicities 7.00 9.00 7.00 Medical Colleges 7.00 9.00 9.00 Academic medical institute 8.00 9.00 9.00 Scale: 1 to 3 4 to 6 7 to 9 Integrated medical institutes 9.00 9.00 9.00 LOW MEDIUM HIGH Evaluating Business Models Higher investment and complexity of business, leads to better profitability, if managed well

15. National Healthcare Model State Reimburses private provider based on agreed upon tariffs Ensures governance and quality of care 25% Insurance premium2 Insurance company Indicates share of funding between Centre and State Monitoring Agency Financial monitoring Viability gap1 funding in form of an annuity for setting up facilities in select non Tier 1 areas 75% Quality monitoring Centre Healthcare provider Funds operating and capital expenditure 100% Cess/ Surcharge/ Health tax Provides treatment BPL Population APL Population Stakeholders involved Out of pocket premium – 0% Out of pocket premium – 70% PUBLIC SECTOR PRIVATE SECTOR CONSUMER Electronic health cards distributed by government

16. COMPARATIVE CASE STUDY

17. Comparative Case Study – 2 Healthcare Chains Example – Chain 1 Example – Chain 2

18. Chain 1 – Feeding on the brand (Empty Calories !) EBITDA of the group has declined… …Expansions have not yielded fruit EBITDA Rs cr EBITDA Rs cr -12% Existing hospitals have been optimized to the fullest -12% Expansions have witnessed de-growth in performance

19. Chain 1 – Some key learning's from its strategy & operating model Business Model • Multi-specialty tertiary care offering the entire functional mix • Growth through JV / Lease • Mid-value, mid-price differentiator positioning Doctor engagement • Belief in Brand > Doctor • Fee for service without flexibility • Poor star retention with significant loss in revenue due to attrition • No cross- leveraging of clinical staff across locations Brand • Strong regional brand perceived to be expensive not portable in other geographies Patient experience • Lack of common measures or frequency of measurement across locations • Soft Skill Training is a localized function with no impact measurement • Lack of standardized processes for feedback collection, evaluation or action • Look & feel - a function of acquired infrastructure rather than brand identity Growth • Selection of city based on “me-too” strategy • No detailed market assessment • No clear line of sight on doctors • Operating model in Tier 2 not aligned to location dynamics • Purchase centralized for less than 20% of value

20. Chain 2 – Every new expansion has fed the brand EBITDA of the group has steadily increased despite manifold expansions… Most of the expansions have yielded positive EBITDA either in Year 1 or 2 EBITDA Rs cr Example: Expansions done in 06 EBITDA Rs cr 2006-07 2007-08 4 1 1 2 7 Existing hospitals Expansions

21. Chain 2 – Some key learnings Positioning • Super-specialty with focus on specific specialties and creation of Centres of Excellence • High-value, high-price differentiator positioning, though was dynamically altered in difficult markets Doctor engagement • Created and nurtured star doctors – differential payment model • Strong referral network • Invest in building a second line who initially feed off the brand • Designated HOD’s who had equity stake and nurtured new centers Brand • Created strong brand in metros initially and then expanded to nearby geographies thereby leveraging brand awareness • Actively invested in creating international networks • Leveraged International association to attract domestic patients Patient Experience • A common MIS with central reporting • Segregated clinical management from process management to minimize conflict • Started a post-discharge management program • Instituted SOP’s though with limited success • Lack of standardization of look & feel, constrained due its lease / JV growth model

22. Chain 2 – Some key learnings from their strategy & operating model Growth • Aim to be first mover in corporate healthcare in most Tier 2 locations • Extensive market assessment (demand and supply) before entry • Clear line of sight on doctors • Asset light model – high number of brownfields with lease rentals linked to revenue • Followed differential strategies as per maturity of facilities • Revenue enhancement through surgical & case mix optimization in its mature facilities • Enhanced utilization in newer facilities through referral network, outreach programs & raising marketing spend to > 10% • Purchase standardized & centralized for more than 50% of value • Most Tier 2 hospitals are EBITDA +ve within first 2 years of operations.

23. Annexures

24. Healthcare Business Models (Annexure – A 1) • Preventive & Diagnostic focused models

25. Healthcare Business Models (Annexure – A2) • Therapeutic focused models BUSINESS MODEL/ DELIVERY FORMATS EXAMPLE HEALTHCARE FUNCTIONS TYPES OF RESOURCES Preventive Diagnostic Therapeutic Rehabilitative Education Research Clinical Care Lab/Radiology Allied Non-clinical Support Conventional Allopath CAM Med. Intervention Surg. Clinic Single Consultant Chambers Poly clinics Apollo Clinics, Max-Clinics Specialty Clinics Cray Diabetes Management Clinic, Kaya Skin Integrated Clinics Manipal Care & Cure Clinics Day care centres Laparoscopy Units, Dialysis units (NEPHRON, USA), Endoscopy centres. Critical care centres Trauma Care Centres Nursing homes, Gr. Specialty hospital South point nursing hospital Specialty hospitals (Single & Multi) Fatima Hospital, Holy Family Super specialty hospital (Single/Multi) EHIRC, GangaRam Medicities Global Healthcare Medicity

26. Healthcare Business Models (Annexure – A3) • Multiple, Rehab, CAM & Retail focused models BUSINESS MODEL/ DELIVERY FORMATS EXAMPLE HEALTHCARE FUNCTIONS TYPES OF RESOURCES Preventive Diagnostic Therapeutic Rehabilitative Education Research Clinical Care Lab/Radiology Allied Non-clinical Support Conventional Allopath CAM Med. Intervention Surg. Integrated medical institutes Medical City Dallas hospital (Over 95 specialties, attract patients across 75 diff. countries) Academic medical institute AIIMS, PGI Medical Colleges KGMC Multi-specialty Rehab Insti. Rehabilitation Institute of Chicago Integrated Rehab Insti. Mayo Clinic, Rochester, Minn. CAM Clinics Dr. Batra Clinic, Ayurvedic clinics, Reilki Centres, AOL Centres CAM Hospitals Caritas Ayurvedic Hospital CAM Academic Institutes Vaidhyarathnam Moss, Holy Angels College of Alternative Medicines Medical Mall: (Products & Services) _

27. Emerging Opportunities (Annexure – B) Health Services Outsourcing Currently a US$3.7 Billion industry, it is likely to double in the next 6 years and provide employment to more than 300,000 personnel Telemedicine 73% of Indian population residing in rural areas provide a significant opportunity, since 80% of healthcare facilities are concentrated in urban India Medical Infrastructure An estimated US$ 69.7 Billion is likely to be invested in medical infrastructure by 2012 Pathology Labs With revenues of more than $850 Million in 2006, fuelled by technological advancements in data transfer, it could grow into a $ 2.6 Billion industry by 2012 Health Insurance With premium collected of more than US$ 700 Million in 2006, yet only 2.4% of Indian population is insured. Premiums are likely to touch $ 3.8 Billion by 2012 with an insured base of around 10% Medical Devices Currently a $ 2.1 Billion industry, it is likely to grow into a $ 4.9 Billion industry. With significant government backing, domestic contribution could increase to as much as 50% Training & Education With predicted shortage of 450,000 doctors and 1.2 Million nurses by 2012, medical & paramedical training could be a $2.2 Billion industry by 2012. Clinical Trials Clinical trials offer a huge scope for maximizing revenues for established players with a potential to grow at 25% annually into $ 900 Million by 2012