Health City may push US system to innovate

Vijay Govindarajan and Ravi Ramamurti

There was a time when the American steel industry seemed invincible. The American automotive industry looked rock-solid. The American consumer electronics industry seemed untouchable. In every one of these cases, global competition changed the game forever. Will the same happen to healthcare in the United States?

By almost any measure, American healthcare costs are out of control but the system refuses to change. What if you could provide excellent care at ultra-low prices at a location close to the U.S.? That is what Narayana Health (NH) did in 2014 by opening a hospital in the Cayman Islands – Health City Cayman Islands (HCCI) – which was close to America but outside its regulatory ambit.

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Narayana Health’s founder, Dr. Devi Shetty, wanted to disrupt U.S. healthcare with this venture, set up in partnership with America’s largest not-for-profit hospital network, Ascension. “For the world to change, America has to change,” Shetty told us. “So it’s important that American policymakers and American think-tanks can look at a model that costs a fraction of what they pay and see that it has similarly good outcomes.”

Narayana Health brought innovative practices honed in India to HCCI to offer first-rate care for 25-40 percent of U.S. prices. To be sure, this was not as cheap as NH’s services in India, where prices were 2-5 percent of U.S. prices, but HCCI’s prices are still a whopping 60-75 percent cheaper than U.S. prices, and even at those prices it could be extremely profitable as patient volume picked up. Three years after its launch, HCCI had seen about 30,000 outpatients and over 3,500 inpatients. It had performed almost 2,000 procedures, including 759 cath-lab procedures.

Despite low prices, HCCI’s outcomes were excellent with a mortality rate of zero – true value-based care. HCCI is accredited by Joint Commission International, another endorsement for quality. Patient testimonials were equally glowing. A vascular surgeon from Massachusetts, on vacation at Cayman Islands, underwent open-heart surgery at HCCI following a heart attack. He had this to say: “I see plenty of patients post-cardiac surgery. My care and recovery [at HCCI] is as good or better than what I have seen. The model here is what the U.S. healthcare system is striving to get to.”

The Cayman facility achieved ultra-low prices by adopting many of the frugal practices transferred from India, a case of reverse innovation:

The hospital was built at a cost of $700,000 per bed, versus $2 million per bed in the U.S. Its buildings had large windows to take advantage of natural light and ventilation, saving on air-conditioning costs. It had open-bay intensive care units, which optimized physical space and required fewer nurses to be on duty.

Narayana Health leveraged relations with its suppliers in India, where it enjoyed lower prices because of volume discounts, to get similar advantages at HCCI. For instance, all FDA-approved medicines were purchased at one-10th the cost for the same medicines in the U.S. HCCI could buy equipment for one-third or half as much it would cost in the U.S.

HCCI outsourced back-office operations – human resources, accounting, finance, medical transcription, radiology – to low-cost but high-skilled employees in India.

High-performing doctors from India were transferred to HCCI. Doctors were full-time employees on fixed salary with no perverse incentives to perform unnecessary tests or procedures. Doctors at HCCI received about 70 percent of U.S. salary levels.

HCCI saved on costs through intelligent make-versus-buy decisions, for example, by making its own medical oxygen rather than importing it from the U.S. at high cost. Similarly, HCCI saved 40 percent on energy by building its own 1.2-megawatt solar farm.

The HCCI model is potentially very disruptive to U.S. healthcare. Even with zero co-pays and deductibles and free travel for the patient and a chaperone for 1-2 weeks, insurers would save a lot of money.

U.S. insurers and employers have watched HCCI with interest but so far HCCI is not one of the options available to their patients. But this is bound to change, especially as HCCI builds a track record and healthcare costs continue to soar in the U.S.

A team of American doctors that visited HCCI came away with this warning: “The Cayman Health City might be one of the disruptors that finally pushes the overly expensive U.S. system to innovate.”

We contend that U.S. healthcare providers should pay attention to HCCI for two reasons. First, they can learn from HCCI how to provide high-quality care while dramatically lowering costs. Second, they should consider opening similar near-shore facilities to treat some of their own patients and to serve as a lab for process innovations.

Bottom line: U.S. healthcare providers can afford to ignore experiments like HCCI at their own peril. Robert Pearl, CEO of Permanente Medical Group and a clinical professor of surgery at Stanford University put it well: “Ask most Americans about obtaining their healthcare outside of the United States, and they respond with disdain and negativity. In their mind, the quality and medical expertise available elsewhere is second-rate. Of course, that’s exactly what Yellow Cab thought about Uber, Kodak thought about digital photography, General Motors thought about Toyota, and Borders thought about Amazon.”

Hopefully U.S. healthcare will not underestimate the disruptive threat from new entrants.

Vijay Govindarajan is the Coxe Distinguished Professor of Management at Dartmouth’s Tuck School of Business. He is a coauthor, with Ravi Ramamurti, of Reverse Innovation in Health Care: How to Make Value-Based Delivery Work (Harvard Business Review Press, 2018). Ravi Ramamurti is the University Distinguished Professor of International Business and Strategy and the director of the Center for Emerging Markets at Northeastern’s D’Amore-McKim School of Business.

© 2018 Harvard Business Review. Distributed by The New York Times Syndicate.

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