Differential Pricing Strategies are Impossible if the Customer Can't Determine the Cost of a Service

Part Four/ Can any patient find the advertised final price of any cardiovascular or orthopedic surgery in America?

I remember responding to an opportunity in Michigan to provide clinical laboratory services for non-time critical tests at the very capable ACP accredited Clinigene lab in Bangalore. Even with recruiting the services of an insurance carrier to help decipher the bills, it was literally impossible to determine the price of an individual test. While we were easily able to price our services...we could not determine the savings because the customer could only provide a quarterly billing statements.

Every community seems to have a newsworthy story about a local who ended up with an astronomical full charge bill from the hospital that has turned over the account to an aggressive bill collection agency and is forced to declare bankruptcy.

Of course, if you are Amish, and the elders shell out over $5 million per year for your religious community's health care, you might be able to deal with the local hospital for a discount against these full charges.

The core issue is that the US healthcare consumer is shielded from the price of any procedure, as well as any information on quality that could be used to measure value. The only valid explanation for this in a free capitalistic society is that a monopoly has been created and consumers are either forced or tricked in to buying the service.

This is in stark contrast to the Indian healthcare delivery model that has adopted the practice of price discrimination (differential pricing) to target multiple segments of the Indian population. Tiered pricing allows for the provision of standard services, and also the charging of higher fees for comparable services to higher-income segments of the patient base.

This differential pricing allows the organization to provide services with minimal margins or below full cost (but above variable costs) to about 75% of the patients. There is an explicit focus on limiting fixed costs to achieve budgetary goals while maintaining quality...so price discrimination occurs primarily on capital costs and less on technology and services. Indian patients can choose to pay more to enjoy five star amenities...but the technologies used for procedures are the same for all patients.

The posh rooms allocated to IndUShealth for the international medical tourism patient are a key part of the differential pricing strategy...so every patient in the hospital can access the latest technologies.

So the Indian hospital strategy enables the the hospitals to maintain high volume and low overhead costs. These high volumes also allow healthcare professionals to keep their skills at peak levels.

Meanwhile, US hospitals were busy with $35 billion in construction projects in 2008, generally going towards entirely private rooms, with high end Hill Rom beds. The only selection available to the consumer is the five-star accommodation, and those most able to afford it are given the highest discount on the rates. Those that cant afford (and have no intention of paying for) the service are generally given carte blanche access to the premium services.

And the unlucky minority who have just enough resources to be a target for the hospital's collections agency pay the inflated accounting fiction called "the full charge."

There is simply no financial mechanism available for the US hospital to compete with their Indian counterparts via price discrimination.

American College of Surgeons Releases Statement of Support for Medical Tourism

IndUShealth standard business practices are unerringly aligned with ACS Position statements

These encouraging statements were developed by the Committee on Perioperitve Care and approved by the Board of Regents at its February 2009 meeting:

"The ACS encourages patients to seek care of the highest quality and supports their rights to select surgeons and health care institutions without restriction."
"The ACS encourages its Fellows to assist all patients in reaching informed decisions concerning medical are, whether at home or abroad."

The anticipated caveats in this statement are just as important, as the ACS is not suggesting US patients book passage without careful consideration. It is interesting to note that IndUShealth anticipated each of the concerns now expressed by the ACS early in the business planning stages of the company. These caveats are:

1. Make sure you understand the laws of the country and have legal recourse in case there is liability for an injury.
2. Choose hospitals that have met the standards of the US Joint Commission.
3. Seek care from surgeons who are certified in their specialties through a process equivalent to those established by the member boards of the American Board of Medical Specialties
4. Obtain a complete set of medical records prior to returning home and coordinate follow-up care prior to travel.
5. Understand the risks of international flights with anesthesia and surgical procedures.

The ACS is essentially stating that when a US patient feels the real or perceived need to seek surgery outside the US, that the Fellows of the ACS should be supportive. However, it is probably unreasonable for the US patient or corporate healthcare benefits executive to anticipate that the US surgeon should provide the necessary peer review, case planning, medical records and follow up coordination required for medical/surgical tourism.

Rather than taking a protectionist stance on medical/surgical tourism, I believe that a hospital and surgical staff could establish a network for international patient support. Providing access to lower cost options with an Indian hospital partner would seem to be an innovative strategy to create superior competitive advantage.

Managing Hospitals Designed to Compete on Quality and Cost

Part Three/Fragmenting care to optimize reimbursement does not generally enhance the customer/patient experience

The growth of India's consumer market is worthy of careful study, such as can be found in McKinsey & Company's Bird of Gold report. In general the Indian middle class is currently about the size of the entire US population, and will grow to 583 million by 2025. Indian hospitals have targeted the healthcare needs and budget of this sector. They have focused on high-demand services, such as cardiovascular surgery, and built a large capacity to provide high quality service at an affordable cost. The organizational innovations that keep these costs competitive in India are also quite attractive to the US purchaser of healthcare services.

This is a much different approach than the US healthcare system, where the byzantine reimbursement schemes require hospitals to vacillate between mutually exclusive goals of healthcare being a right, or a privilege. Healthcare is sometimes a right when two heart lung transplants are performed on an illegal immigrant, and sometimes a privilege when hospitals begin to collect the charges for a procedure that a patient had no way of finding out what it was going to cost.

The Indian hospitals recruit managers with complementary experience in the hotel industry, so patient care can be managed in the context of the customer's experiences and expectations. In contrast, the US hospital is built around the financial models required to maximize reimbursement for services...which many times bear little resemblance to what is necessary for the practice of medicine.

The result of the customer approach is that when an IndUShealth patient visits an Indian hospital, they are completely surprised by the level of personalized care, in contrast to their previous US hospital experiences.

Disruptive Innovation Requires New Entrants

Part Two

Early in the formation of IndUShealth, we were contacted by Clay Christensen of Harvard Business School to explore the dynamics of how our new model of global healthcare/medical tourism may be serving as a catalyst for disruptive innovation for the US healthcare system.

As explained in his popular The Innovators Dilemma, the disruptive innovation theory is that innovation-intensive industries regularly undergo major changes and cycling of industry leadership. New entrants challenge industry leaders with low-cost technologies to achieve better performance, and force the incumbents to undergo organizational change.

The US healthcare system has been remarkably resistant to innovation, with the same industry leaders from a generation ago in generally the same, moribund position. Disruptive innovation requires new entrants, and the US healthcare market has managed to neutralize challenges presented by any newcomers.

Rather than focus on any frustrating attempts to try and integrate the innovations from Indian hospitals in to the US healthcare system, it seemed much easier to extract the US patient from the inefficient high cost system and place them in an environment where they are welcome.

Patients who are motivated by pain and financial distress routinely think outside the US healthcare box...and are rewarded with superior healthcare value in India.

An Analysis of Organizational Innovation in Indian Hospitals: why they can deliver the best medical tourism value in the world

Part One

Once again, another President begins the process of 'reforming' the US healthcare system. This drama has played out over and over again for decades...with healthcare emerging as an enormous drain on current American productivity. Swaddled in the protective monopoly of the medical industrial complex, innovation from the US healthcare system has stagnated and costs have soared.

Do we remember the amusement shown for the first six Honda employees that opened shop in Los Angeles in 1959? Honda is now the largest engine manufacture in the world and has surpassed Chrysler in vehicle sales here in the US.

Seeing that the healthcare industry has generally adopted the assembly line methods of Henry Ford, it is not much of a stretch to imagine the parallel destinies of industries who have internalized the belief that they have no global competitive threats.

For the first time, the US healthcare system is now faced with global competition.

And while the headlines read "US-trained physician performs $100,000 heart surgery for $16,000 in New Delhi," there are few details as to how these hospitals provide the highest medical outcomes for the lowest cost in the world.

In their excellent report Lessons From India in Organizational Innovation: A Tale of Two Heart Hospitals, Barak D. Richman, Krishna Udayakumar, Will Mitchell and Kevin Schulman published in Health Affairs, Vol. 27, Nov. 5, 2008 use the examples of two IndUShealth network hospitals, Fortis Hospitals in New Delhi and Narayana Hrudayalaya Heart Hospital in Bangalore, to highlight the divergent trajectories of innovation between the US and India.

There is a lot more going on here than low labor costs. I would like to highlight these textbook examples of innovation throughout the following posts, and explore why they can't be duplicated in the US.

Wockhardt Raises the Bar for Surprise and Delight for the Medical Tourism Patient and Family

I have enjoyed the personal satisfaction of watching hundreds of patients leave the United States in physical pain and financial worry, and returning from our partner hospitals in India having benefited from an extraordinary medical and personal experience . As a former hospital CEO, I have marveled at how quickly the Indian healthcare system has evolved...and wondered if the US system could ever provide the same value if we could magically remove third party payers, and the other unique burdens of capitalism.

Beyond the new facilities, 128 slice CT scanners and the latest healthcare technologies, I am continually surprised by how the very simple act of listening to patients can provide unexpectedly positive returns.

The husband of one of our patients took the occasion of her cervical disc replacement visit to Bangalore to join his wife for the trip of a life time. While at the Wockhardt hospital, the staff learned that they were celebrating their wedding anniversary. Unbeknownst to the patient and her husband, the hospital team took the occasion of a previously arranged tour of the city to treat them to a surprise wedding anniversary dinner at a local restaurant...complete with music and chocolate cake.

On the surface, this seems like yet another example of one of India's premier super specialty hospitals moving the customer experience up yet another notch. But we also find that there is an important surgical recovery benefit to these surprise outings.

The Indian surgeon has a much different post-surgical goal than his US counterpart. In the US, the patient only needs to be ready for discharge from the hospital...in India, the patient must be ready for the journey back home. So Indian post-surgical physical therapy is immediate and continuous right from the surgery. Because patients are up and walking so quickly, they sometimes over estimate their abilities to transition back to normal physical activities. Sometimes a visit to the market, or a surprise wedding anniversary dinner, is all that is needed to reset the patient expectations for activities to be more in line with their physician's recommendations.

The end result of these efforts is an extraordinary healthcare experience that simply cannot be duplicated in the US.

Drug War Casts Shadow on Mexico as a Viable Medical Tourism Destination for Americans

When George Tenet, former CIA director urges his college-age son to cancel a spring-break trip to Acapulco, you know its time pay attention to the inherent risks of Mexican travel. Candace Jackson of the WSJ did a great job in her April 10, 2009 article describing the impact not only on tourism (20% of the tourist related businesses have closed in Tijuana) but also on business travel.

With an estimated 6,000 people killed last year, I think it is fair to say that this is a full scale war between the drug cartels and the Mexican government. Because of the corruption inherent in the local police forces, the Mexican military has been deployed to maintain control, especially in the border cities. Seeing the military deployed does not make for a relaxing atmosphere, regardless of the concentration of palm trees.

While most of the beheadings, kidnappings and torture is concentrated along the US border, travel in Mexico is of sufficient concern for a host of US colleges to send email to their students with a link to the US Department of State Travel Alert, and warn them not to travel to Mexico for spring break.

When Medical Tourism first emerged as a possible alternative to certain challenges in the US healthcare system, Mexico was touted as a viable option to the long flights required of other continents. The model, it seems, was to set up 'US-style' hospitals in Mexico, at a much lower cost...much as US manufactures did to access lower wages and costs of regulation.

While the actual seaside resorts may have escaped much of the drug war violence thus far, there is still the issue of how to access these comparatively safe areas directly from the US.

This concept of near-shoring in Mexico may emerge again should travel risks of the drug war subside.

Medical Tourism Outlook/Boeing Projects 1,000 Airliners worth $105B for India

Since we first began to formulate our initial business strategies for IndUShealth in 2006, we have kept a close eye on global airliner deliveries as a good indicator of economic activity around the world. Reuter's Sumeet Chaterjee did a great job of highlighting India's aerospace trends in his article Boeing to deliver $17 bln of planes to India in 5 yrs.

It was interesting to note that Boeing had not seen any reduction of orders from the airlines of India, Asia's third largest economy. As we are treated to a never ending litany of grim economic news here in the US, it is comforting to note that 50 airlines are eagerly awaiting 892 Boeing 787s.

While it is getting more expensive and time consuming to get from Raleigh to Moline, global air travel continues to expand...should you doubt this, here is a video of every airliner flight in a 24 hour period...compressed to 70 seconds.

We chose to concentrate on India for a variety of medical and business reasons. Cost effective global air travel is critical to our business model. Even during the most recent surge in jet fuel costs, we saw only a modest increase in US-India ticket prices. Currently, we are seeing special sub-thousand dollar direct flight fares return.

Of course, it is also comforting to be in the good company of 44% of the US Fortune 100 corporations that have already established operations in India.