In 2008, we explored the emergence of private heart hospitals in India whose outcomes rivaled those of top U.S. hospitals (low infection and readmission rates for coronary artery bypass grafting [CABG], angioplasties, and other cutting-edge procedures) at between 1/10 and 1/20 of the cost. We described how Indian hospital leaders exhibited a near-obsessive drive to offer the highest quality services at the lowest possible price. We concluded that even though India is far from a model of social justice in health care, American hospitals could learn a great deal from the organizational focus and structure of their Indian counterparts. We additionally wanted to challenge the preconceived notion in policy discussions that high health care costs were a consequence of high quality and that patients and providers could not economize without diminishing the clinical quality of care.
Nearly a decade later, we see few changes in the strategic operations or organizational strategy of U.S. hospitals. Meanwhile, Indian hospitals are expanding throughout the world, including on the U.S. doorstep, in the Cayman Islands. Why have hospital markets in India and the United States continued to diverge?
Our lessons from India still resonate. Given ongoing cost struggles in the United States, it is more important than ever to understand why U.S. hospitals have failed to provide high quality care at affordable prices. We highlight three key differences that signal changes that U.S. business and policymakers must address to match the benefits achieved abroad.
Three Key Differences: Business Strategy, Regulation, and Payment Complexity
1. Business Strategy: In India, the majority of people pay for private health care entirely out of pocket with very limited budgets. In this competitive environment, Indian heart hospitals must compete vigorously for scarce consumer dollars, driving leaders to scrutinize each element of their operations for opportunities to conserve costs. The competition for consumers is evidenced in the Indian hospitals’ focus on brand differentiation: their two leading heart hospitals, Fortis and Apollo, compete with each other the way Ford and Toyota compete for U.S. auto consumers. These hospitals also offer optional comforts in an effort to price discriminate (as Ford and Toyota charge more for cars with leather seats), with fewer ancillary amenities available for those with fewer resources. Along with the emergence of low-cost hospitals that have a mission to serve the poor, such as Narayana Health and Aravind Eye Hospitals, the Indian market reflects an overarching strategy to provide life-saving services at price points that are affordable to patients across the market.
U.S. hospitals, in contrast, have oriented their business strategy toward obtaining market leverage and exerting monopoly power in setting prices. The U.S. health care market is characterized by payers and providers maneuvering to squeeze each other financially. The most recent wave of reforms — the spread of Accountable Care Organizations — has too often merely enshrined hospital monopolies in local markets. In addition, because this leverage is accumulated to extract higher prices from insurers, not patients, providers give little thought to what consumers actually can afford. A business strategy geared toward expanding and leveraging market power in an effort to raise prices is antithetical to one that focuses on providing value to consumers.
2. Regulatory environment: One signature ingredient to Indian hospitals’ success is their ability to utilize and train unskilled personnel for key roles, a practice that innovation scholars call “de-skilling” or “right-skilling.” Women from rural villages with only rudimentary education, for example, are trained to use sophisticated equipment and manage the delivery of medical services, such as administering dialysis. Meanwhile, physicians practice at the top of their license, playing key strategic and supervisory roles, passing down knowledge and tasks to lesser-trained individuals wherever possible. Such de-skilling is a hallmark of organizational innovation. Clayton Christensen describes an evolution of business models in which the accumulation of knowledge and experience allows organizations to codify knowledge so less experienced individuals can perform tasks that previously required personnel with advanced training.
American laws prohibit U.S. hospitals from pursuing many of these de-skilling strategies. Rather than focusing on technical proficiency and quality of service, U.S. regulations codify task staffing requirements, often linked to specific educational attainment. For example, each state maintains complicated occupational licensure regimes that delimit which categories of personnel can perform which tasks. (Consider the debates over nurse practitioners writing prescriptions and the role of nurse anesthetists.) Any health care worker with responsibility for a particular task must obtain specific degrees from accredited educational institutions, pass tests administered by professional societies, and satisfy continuing educational requirements. These regulatory regimes are particularly resistant to innovators because they are maintained by the professional societies that profit from the status quo. The costliness of these licensure regimes has prompted efforts by federal agencies to limit the stranglehold that professional societies have on local marketplaces by applying antitrust law to activities of these boards. India’s heart hospitals offer a small window into how costly these regulatory regimes really are.
3. Payment system complexity: India is largely a cash pay market without third-party payment, which means that hospitals collect payments from patients much like hotels collect payments from visitors. The contrasting multi-payer environment in the United States has evolved to have many layers of overlapping and divergent payment models and rules. This complexity drives enormous overhead costs in back office functions, EMR systems, and clinical time devoted to documentation for billing and compliance purposes. While a 400-bed Indian hospital may have fewer than 20 people on its entire management team, U.S. hospital systems have constructed entire office buildings to house their billing and administrative teams.
Efforts to measure the cost of administering the U.S. health system have estimated that payment and collection services alone consume 18% of health care costs, compared with 2–3% for credit card transaction costs. In 2006, primary care physicians in the United States spent $82,975 per year on administrative costs, compared with only $22,205 in Canada. Organizational innovation in the U.S. health sector will undoubtedly require simplifying administrative and payment systems. More research is desperately needed to both understand the underlying sources of this complexity as it has evolved in the U.S. marketplace (in contrast with other multi-payer health insurance markets, such as Switzerland, which has much lower administrative costs) and to develop disruptive solutions to correct this aspect of the market.
It is disheartening that debates in the United States over health care reform ignore the most salient lessons from abroad. The debate we should have is not how to shift costs among government, employers, and individuals in the current system, but how to reduce the cost of that system to make health care services affordable. Health care spending in the United States has increased by 47% since we wrote our article and has climbed from 16.3% of GDP to a projected 18.2% of GDP this year. As the population ages, these trends toward increased health care spending are projected to continue. As Warren Buffet argued when he called medical costs “the tapeworm of American economic competitiveness,” the future of the U.S. economy rides on the nation’s ability to curtail health care spending.
U.S. hospitals could have taken action to drive costs down in the decade past. But when businesses or industries are profitable, they are refractory to change in the absence of significant market pressure. The result of this organizational inertia is the political turmoil over health care costs we now see, yet much of the national debate fails to address the lessons we learned from low-cost Indian health care solutions.
Nothing particularly complex or mysterious underlies the enormous Indian success in making health care more affordable. The problem in the United States lies in stubborn barriers that protect American hospitals from having to follow suit. We have highlighted three areas — business strategy, legal environment, and payment structure — that represent opportunities to move beyond partisan debate and to develop actionable solutions. By focusing strategy on creating value instead of acquiring market leverage and monopoly, by loosening regulation to permit creative innovation within organizations and markets, and by addressing the sources of administrative complexity, we can enable American health care providers to address what is becoming our most intractable national economic problem.