Up and To the Right: Learning from the Healthcare IT Market in India

9/3/09

The Obama administration has allocated $19 billion in incentives for hospitals and practices that make meaningful use of electronic medical records systems, and everyone is biting their nails, waiting to find out the meaning of “meaningful.” But sitting 8,000 miles away from Washington, DC, I’m spending my summer internship focused on healthcare IT that’s measured in Rupees crores (tens of millions of rupees) instead of billions of dollars, helping Infosys define their offering for the Indian healthcare IT market.

At roughly $325 million per year, the market for healthcare IT in India is dwarfed by that in the US, which is in excess of $40 billion—more than 100 times as large. So why should you and Infosys care about this tiny market? For the same reason that IBM, Wipro, Tata Consultancy Services, Perot Systems and many local players are elbowing their way in: it’s all up and to the right set to hit $1 billion by 2014.

In this column I aim to give you a primer on one of the fastest moving and most exciting healthcare markets in the world. This is some of what I’ve learned over the last two months, by interviewing doctors, nurses, managers, and C-level executives at hospitals, payors, and third party administrators that are all betting on the Indian healthcare market.

Macro Forces Driving Growth

India has one of the lowest ratios of hospital beds to patients in the world, at 0.7 beds per 1000 people. This is less than a third of the world average of 2.6 and well below other countries such as Sri Lanka, Brazil, and China (2.9, 2.6, and 2.2 respectively).

But incomes are rising rapidly and studies show that when they do, a higher proportion is spent on healthcare. Rapid urbanization will mean a more concentrated population that can be served by larger hospitals located in metropolitan areas. A more concentrated and urban patient population is very attractive to private equity investors, who pumped $450 million into Indian hospitals in the first half of the 2008-9 fiscal year, triple the $150 million in the previous year.

As more and larger (100+ bed) hospitals are built, they will spend more on IT, typically 1-2 percent of their revenue but sometimes as high as 4 percent. The Indian market for hospital IT is projected to grow at over 25 percent per year. Taking inflation into account, this is about twice the growth rate of the US market.

Black…and Red

So everything looks up and to the right. Doctors are becoming entrepreneurs, local hospital IT firms have strapped themselves to a rocket, and those who made early bets—like Apollo Hospitals’ founder Dr. Prathap Reddy—are now quite wealthy. But like all fast moving markets, this is one where you can still get burned: In the largest Indian IPO cancellation in history, Wockhard Hospitals shelved their $150 million public offering in January 2008 after subscriptions sputtered at 20 percent. They have just agreed to sell their 10 highest grossing hospitals to another chain, Fortis, in order to meet debt obligations and keep their pharma business afloat.

Follow the Money

To better understand how the industry works, we follow the money. Patient choice drives the Indian healthcare market. The biggest driver of hospital selection is proximity during a medical emergency. The second biggest is patient preference—not insurance tie ups or price. Because insurance and price are not determining factors, the growing middle class is opting for private hospitals which they believe provide a better standard of care. But because of low doctor, nurse, and bed ratios per patient, private hospitals find themselves supply constrained.

And despite the significant growth in the sector to meet demand, hospitals remain largely unregulated. There is no single governing body that requires registration and accreditation of hospitals in India. The National Accreditation Board for Hospitals & Healthcare Providers (NABH) comes closest but is still voluntary. To date only 34 of India’s 50,000 hospitals have received NABH accreditation. The payor side is highly regulated, however. There is a strict review process that each new insurance product must undergo before it is sold on the market.

This regulatory imbalance results a power dynamic that is radically different than that in the U.S. In America, insurers are able to exact huge discounts from providers (on the order of 40 percent) in return for steering patients to them. In India, where the hospitals are already at capacity, there is little incentive to give discounts. On average, hospitals offer insurers discounts of 3 to 5 percent. This leaves payors with essentially zero leverage.

When you are highly regulated, your counterparty is not, and you have no financial leverage, you lose money. A lot of money. Health insurers in India have a net claims ratio of 1.2—in other words they are paying out 120 percent of what they are taking in. This is due to both overbilling on the part of providers (some hospitals use two billings schedules, one for patients with and one for patients without insurance) and fundamental underpricing of premiums. Premiums are underpriced because there are only a few pure-play health insurers in India, so most health insurers are standing under the umbrella of their parent company, buying time and market share while they wait out the monsoon.

And Third Party Administrators (TPAs) that handle the exchange of cash between providers and payors are the punching bag in the middle. They are caught between overbilling, unregulated providers and insurers that are bleeding money and want to delay payment. Because TPAs are paid by the volume of claims they process, not on the quality of their claims verification, they don’t look too hard at the accuracy of the claims, preferring to plug and chug. It is also worth mentioning that TPAs—because of the bidding process that set their contract terms—are usually faced with the choice of either doing a good job and losing money or doing a lousy one and breaking even.

Yet as ugly as the health insurance market is India, it’s trending up and to the right with a compound annual growth rate of 35 percent.

India and the World’s Healthcare Future

As provider regulation increases and as more IT systems are adopted, the incidence of fraud will decrease, premiums will be priced properly and TPAs will either be compensated properly or brought in-house by payors. The question of when will be answered at the sluggish pace of the Indian government. But what private equity investment and exponential growth curves can’t answer is how India and the rest of the world is going to deal with the fundamental gap in the number of health professionals (doctors, nurses, lab techs, etc.) and the rapidly increasing cost of healthcare.

Adopting healthcare IT will certainly help. The RAND Corporation estimates that if 90 percent of hospitals adopted healthcare IT over 15 years, we’d cut about 6 percent of our healthcare spending—a start but not enough. What we need is a revolution in technology and healthcare delivery and India may be where this revolution starts, out of simple necessity.

In India, only about 10 percent of people are covered by insurance and as a result almost all medical expenses are borne out of pocket. What this means is that there are powerful market forces driving the down the cost of care in India. This is in direct contrast to the US: In America firms can purchase healthcare with pre-tax dollars while individuals cannot. As a result of this tax law and history, most people receive insurance as a benefit from their employer. The result is that patients request and doctors perform excessive procedures because the costs are not as visible. Visible or not, the Bureau of Labor Statistics estimates that employer-provided health insurance reduced wages by 7.9 percent last year.

In India, this cost pressure and looser regulations give private firms the opportunity to experiment. GE Healthcare has already setup a division in India dedicated to bringing cost effective medical devices to market. “Beating heart” surgery that requires less medication and delivers faster recovery was pioneered in India by Wockhardt Hospitals (don’t hold their IPO against them). Aravind and LifeSpring Hospitals take a Toyota approach to eye surgery and deliveries, respectively, simultaneously reducing cost and increasing quality.

So as the US government grinds away to produce a health bill, it is well worth looking at and learning from India and other unlikely countries…before they learn the wrong lessons from us.

Carter Dunn is a second-year MBA student at MIT's Sloan School of Management. Follow @

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