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Role of Private Sector in Public Health

Posted in Finance Articles, Total Reads: 2868 , Published on March 26, 2013

“There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits” –Milton Friedman

Present day Indian businesses are taking this corporate responsibility to a next level, to do best to the stake holders while making profits; one such businesses is health care Industry. Many hospitals today are focusing on the creating shared value- positive social impact on society and return on investment. One such hospital is Narayana Hrudayalaya, Bengaluru a part of Narayana Hrudayalaya group of hospitals.


It was founded by Dr. Devi Shetty in 2001 in Bengaluru, under the guidance of Asian Heart Foundation, Kolkata. He believes, “Charity is not scalable. If you give something free, you will run out of money”. The hospitals group is based on this concept and it provides health care facilities at a nominal cost, especially the cardiac surgeries, and still making profits. On an average a heart surgery in this hospital would cost $2000 a similar surgery would cost 2-10 times of the cost in many other hospitals.

It is able to break even based on the simple premise that works in other industries too: Economies of Scale. The cost per operation is a number game, larger the number of operations lower is the cost per operation. The hospital, Bengaluru division, has 1000 beds and performs 50 major heart surgeries every day. Medicines used for the surgery are generic medicines, which are cheaper than branded ones, which reduces the commission costs and other overhead costs to the agents of pharmaceutical companies. It performs about 12% of the heart surgeries in India, so the companies selling them machinery would have covered 12% of market share;this force the machinery companies to sell it to the hospital at reasonable prices. The machines are used more number of times, in more number of surgeries, than in usual hospitals making return on investment higher.

The hospital entered into a joint venture with TriMedx, subsidiary of largest non-profit health system in USA, to increase the life of MRI scan and other costly equipment with their joint expertise. Increasing the life of the machinery means it would result in higher return on investment.

In addition to cardiac surgery facilities the hospital also performs other surgeries like bone marrow transplant, neurosurgery etc. and provides other facilities like tele radiology and free telemedicine. Other than Bengaluru the group of hospitals is present in other cities like Hyderabad, Jaipur and Kolkata. It aims to increase the number of beds to 30,000 in next 5 years and become one of the largest healthcare players in India.

The hospital started a Comprehensive Health Scheme in collaboration with Biocon aiming at poor people in a few of the districts of Karnataka.Beneficiaries have medical cover to common illness and surgical cover. Beneficiaries have to pay an amount of Rs.165 to Rs.280 per head per annum and about 80,000 people are insured, which implies that the members contribute an amount of Rs.1.32 to Rs.2.24 crores per year and the gross value of claims under this scheme is less than Rs.50 Lakhs. Thus, this scheme aims to be a self-sustainable scheme in future. This group of hospitals, stand as an example to many other hospitals in proving that profits can be earned even while caring about the poor.

“Poor people in isolation are weak but together they are very strong” based on this premise a joint venture by Narayana Hrudayalaya and Karnataka State Co-operation department was started for poor farmers of Karnataka. It is a self-funded scheme where Rs.210 per beneficiary is deposited every year. In addition to this hospital there are a network of other private hospitals too where the beneficiary can avail the necessary health facilities. It is a cashless scheme in which government will be transferring the money to the hospital directly.

A total of 458 private hospitals are in the list of the network hospitals and 805 surgeries are covered under this scheme. In the year 2012-2013 about 29.46 lakh members enrolled, making it a total of 245.3 lakh members enrolled till date. In 2012-2013 the contribution by members was Rs.57.83 crores and by government was Rs.42.83 Crores. The ratio of contribution by members and bythe government is showing an increasing trend year on year. If this trend continues, in future, this scheme too can aim to become self-sustainable.Many private hospitals are willing to be part of the scheme to increase the occupancy in hospital and thereby reduce the cost of treatment (Economies of Scale).

The success of this, public-private partnership, scheme has encouraged other states like Andhra Pradesh and Tamilnadu to follow it. Similar schemes were started under the name “Rajeev Aarogyasri” in Andhra Pradesh and “Chief Minister’s Comprehensive Health Insurance Scheme” in Tamil Nadu. These schemes make sure the hospitals are not losing on their profits and at the same time are not charging too high on government, as first, these schemes increase occupancy and thereby reduce the cost per head and second, the poor are funding a part of their needs.

As it is difficult for government to provide all the surgical facilities in all its hospitals the cooperation extended by private sector is also an important factor in the success of these schemes. These schemes prove how important role private hospitals are playing in helping the government to provide health facilities to the public and how these public-private partnerships are resulting in a win-win situation to both the parties.

This article has been authored by Aneesha K from IIM A.

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