Scouting For The Ideal Business Model

Corporatisation of the healthcare industry has spawned new strategies of expansion, finds Rita Dutta

The year was 2005, and the Escort Heart Institute and Research Centre (EHIRC) was bought by Fortis Healthcare for over Rs 600 crore, an unprecedented amount for which an Indian hospital was ever acquired. That was the beginning. Since then, the Ranbaxy-promoted Fortis Healthcare has been on an aggressive acquiring spree; it bought Bangalore's Mallya Hospital and in the pipeline are acquisition projects in Kolkata, Hyderabad and Mumbai.

As opposed to the Merger and Acquisition (M&A) model, Apollo Cliniqs, a part of Apollo Health and Lifestyle Limited (AHLL), is spreading its tentacles through Franchising. Originating in 2002, and having established a network of 50 clinics across the country, and one in Doha, it has ambitious plans to have 250 clinics within a few years' time through Franchising.

Max Healthcare, which forayed into healthcare in 2002, with a slew of primary and secondary centres and then built a tertiary care centre Max Devki Heart and Vascular Institute at Saket, is fortifying its position through Greenfield projects in the northern part of the country. On the other hand, Wockhardt Hospitals, which has witnessed 40 percent annual growth in the last fiscal, is dabbling with three models: Joint Venture (JV), M&As and Greenfield projects.

"The concept of building successful business models took root only after the corporatisation of healthcare with the Apollo Group getting listed" - Anil Kamath Senior Vice President, Business Development and Hospitals, Wockhardt Group, Mumbai

How do healthcare providers select the business strategy that becomes their ticket to success? For an answer, let us look at the genesis of business models in healthcare. Prior to the 80s was an era of “trust” hospitals, which were built with donations from philanthropists and focused on providing healthcare facilities in line with the needs of the population. “The concept of building successful business models took root only after the corporatisation of healthcare with the Apollo Hospitals Group getting listed,” feels Anil Kamath, Senior Vice President, Business Development and Hospitals, Wockhardt Group, Mumbai. That was 1979.

Today, the Apollo Hospitals Growth has spawned a slew of successful business models for healthcare, be it Operations Management, JVs or Franchising. So, what is a business model? A business model is the mechanism by which a business intends to generate revenue and profits. It involves both strategy and implementation.

With growth and profit being high on the radar of most corporate healthcare groups, penetrating the market through an array of business models is a thrust area. A closer look at these models will give us an insight into each one of them.

Mergers & Acquisitions

In a merger, two or more separate organisations come together to constitute one legal entity. Acquiring control of an organisation, either in a hostile or friendly manner is called acquisition. As a business model, they are jointly referred as M&A.

Benefits: What drives a healthcare provider to choose M&A is faster capturing of the market, immediate brand recognition, faster Return on Investment (ROI) and better growth trajectory. Speaking about the acquisition of a strategic stake in a 100-bed hospital in Nagpur, Vishal Bali, CEO, Wockhardt Hospitals, says, “We have been able to revive a sick hospital in Nagpur without spending on the building infrastructure. After the turnaround, we are already planning to add 100 more beds to that hospital in eight months' time.”

Fortis Healthcare is also upbeat about this model. To achieve its target of a web of 25 to 30 hospitals by 2009, the group is clearly inclined towards acquisition. “M&A is the conduit for growth of hospitals which want to grow at a galloping pace. With 250 beds in Mohali and 325 beds in Escorts, we have become number one in cardiac care,” says Dr Alok Roy, VP, Operation, Fortis Hospital, Noida.

So also the Reliance Group, which consolidated its position in the healthcare industry by acquiring a strategic stake in the incomplete Dr Mandke Heart Hospital and christening it Kokilaben Dhirubhai Ambani Hospital. The hospital project was hamstrung financially after its founder Dr Nitu Mandke's sudden demise.

Apart from being a mode of expansion, M&As are also expected to become a social phenomenon. “The new standards of care ushered in by corporate hospitals will lead smaller hospitals and nursing homes to merge with larger entities for offering better service,” predicts Sudip Dasgupta, Chief Financial Officer, Max Healthcare, New Delhi.

With corporate groups on the prowl for M&As, the question on everybody's lips is will the deals meet the fate of the hospital-related M&As of the 90s in the US, which collapsed? Allaying fears, Head, Health Care Services, Reliance, Mumbai, Dr Vikram JS Chhatwal explains, “M&As in the US were born out of a crisis, where small players were compelled to close shop due to the saturation of the healthcare market. This is not the case with India, where the market is still growing and may take another 50 years to saturate.”

The flurry of M&As has raised concerns about the possible illegalities involved in some deals. “Some trustees of charitable hospitals have sold their hospitals to corporate groups, which is illegal as the government gives discount on land to build a trust hospital only,” avers an expert.

Hurdles: M&A is often billed as a “complex” strategy to implement, not because of the cumbersome paperwork, but because of post-merger integration. “Post-merger integration is very critical to the success of a deal and entails tackling a host of issues like clash of cultures and professional standards, conflict of clinical and professional standards, salary differences and sorting out manpower-related issues between the partners. And often layoffs,” says Kamath. Definitely a Herculean task!

M&A is fraught with challenges mainly in the service industry, as the deal directly affects people. “M&As require special management skills, which everybody does not possess,” contends Kamath. M&A can lead to a lot of upheaval in the initial stages and if not properly executed can destroy value and prove to be a losing asset. Despite the best people management skills, most acquisitions witness the senior management (mainly the CEOs) leaving, as there is redundancy of designation and responsibility. Delaying the process of integration can also sabotage projects.

Demerits: It is not surprising that an estimated 70 percent of M&As fail or fall short of expectation. And merging often turns out to be a short-term growth strategy as partners often go divergent ways at a point when they feel that they have attained knowledge or technique for which they relied on their partner, feel experts.

Contrary to popular belief and despite the rage, Dr Chhatwal feels that there is not much scope for the Acquisition model to grow in India at this stage, as there are not enough existing healthcare facilities that can be purchased.

The Way Forward: Fortis' Dr Roy has a different take: There are enough projects to acquire, he emphasises. Asked about the difficulty in sewing mergers, he says, “Mergers are like marriages, which may be difficult, but it does not stop one from marrying. Like marriage, where one should not constantly find faults with the partner, one needs to work out ways to make mergers work.”

De-risking: The first step to de-risk M&A is to conduct due diligence, which implies gathering of information in order to assist the parties involved in decision-making and risk-analyses. Typically, due diligence involves the review of numerous aspects like: organisation structure, financial statements, past and pending litigation, contracts, employment records, operating procedures and policies, government regulations, licenses, property and tax records. Apart from due diligence, experts suggest that the integrating facilities need to emphasise effective and prolong communication, weigh each others' ideology and wavelength and have a growth plan ready. They need also to focus on orientation of employees, address fears and concerns of employees, identify the core team, chart out their career growth and avoid redundancy.

Joint Ventures

In a JV, two or more organisations can establish a programme or start a new organisation together and jointly administer it, while still maintaining their own organisational autonomy. Whether it is the first successful JV in healthcare between the Apollo Hospitals Group and Parkway Group Healthcare PTE Ltd to build Apollo Gleneagles Hospital in Kolkata or between the Wockhardt Hospitals and Kamineni Group to run two hospitals (one with 150 beds and another 250 beds) in Hyderabad or the recent one between the Asian Heart Institute (AHI) and the Parkway Group to build a new hospital in Mumbai, JVs have become the order of the day.

"The advantages in terms of economics for JV imply faster learning curve and risk sharing by both the partners" - Joshua Goh Vice President, International Operations, Parkway Group,Singapore

Merits: In a JV, groups come together to create a unique synergy to capitalise on their core strengths. “The advantages in terms of economics imply faster learning curve and risk sharing by both the partners,” says Joshua Goh, Vice President, International Operations, Parkway Group, Singapore. The Parkway Group runs seven hospitals through JVs in China, Brunei, UK and Malaysia.

Hurdles: Trouble begins when two groups do not see eye to eye or perceive the other group as a window of entry to an unknown domain.

In 2002, a JV between the GP Goenka-owned Duncan Group and the Parkway Group to launch a 270-bed Duncan Gleneagles Hospital fell through when differences between the two groups' vision surfaced. The deal was annulled and the Duncan Group moved away by selling its stake to the Apollo Group, which subsequently built Apollo Gleneagles Hospital in collaboration with the Parkway Group.

De-risking: “In JVs, partners should spend substantial time evaluating each other's perspectives and values. One should not necessarily look only into the commercial aspects of the deal, but also the compatibility index and transparency of the partner,” says Goh.

To hedge risks, Goh suggests that before the deal is sewn, one should always work out an exit option, if things go wrong. “One can never predict the future. So, it is always good to have an exit option, like a pre-nuptial agreement which partners sign before a marriage is solemnised. That saves one from bitterness and legal hassle,” he says, adding that the Parkway Group still shares a cordial relationship with the Duncan Group as they had worked out an agreement of exit.

Besides sharing the same wavelength, the groups should have no vested interests. In a 50:50 equity partnership, the groups must possess equal financial muscle. “Relations Management between the groups is extremely significant in a JV,” Kamath contends, adding, “It is important that the two groups grow together rather than individually.” It is equally important that the roles of two groups are clearly delineated, without leaving any room for ambiguity.

"It is important that the stakeholders have a clear vision, mission, goal and objectives and undertake a decision analysis matrix to analyse all possible outcomes of their investments" - Dr S K Biswas VP, Duncan Group, Kolkata

According to Dr S K Biswas, VP, Duncan Group, Kolkata, “It is important that the stakeholders have a clear vision, mission, goal and objectives and undertake a decision analysis matrix to analyse all possible outcomes of their investments.”

Greenfield Projects

Merits: The strength of this model is that a group is able to implement its vision and develops core competence. The new entrants are mainly toying with this model, be it Columbia Asia, Max Healthcare or the Duncan Group. Whether it is Dr Max Clinics, Implants or Max Hospital, Gurgaon slated to be commissioned in 2007, Max Healthcare has chosen this model for its future projects.

" We believe a strong base of Greenfield projects is important to set the core standards before embarking on acquisitions" - Sudip Dasgupta Chief Financial Officer, Max Healthcare, New Delhi

“We are new in healthcare. We believe a strong base of Greenfield projects is important to set the core standards before embarking on acquisitions. It makes integration of the alien entities easier and ensures that quality protocols are maintained,” Max's Dasgupta explains.

Columbia Asia, which has one hospital in Hebbal, Bangalore, is rolling out two more hospitals in the garden city, one in the south and another in the west of the city, both to be commissioned by the end of 2007. It is also exploring Greenfield projects in other cities. The Duncan Group is also trying to re-enter healthcare through the Greenfield project route.

Demerits: The preferred model of growth, until a few years back, this is slowly losing its sheen. The entry barriers for this model are financial muscle power, initial lack of core competence and hurdles in building a focused and motivated team. A 100-bed secondary care hospital involves a cost of Rs 35 crore to 40 crore and a 150-200 bed tertiary care hospital is built at a cost of Rs 85 crore to Rs 150 crore.

Though the Wockhardt Group has chalked out Greenfield projects in Bangalore (400 beds), Kolkata (250 beds), Mumbai (300 beds) and Delhi (250-300 beds), Bali dubs it a very difficult model. “Despite being present in the healthcare market for the last 17 years, we still consider Greenfield projects very challenging. Besides financial strength, one needs to create an ambience which attracts the right clinical talent.”

After pumping money to build the hospital, one has to dole out additional investment of Rs 3 crore to Rs 5 crore a year to sustain the model. “The high investments do not qualify this model to be a doctor-driven one,” says Kamath. Additionally, there is an uncertainty of Return On Investment (ROI) and breakeven can take anywhere between three to five years. “In 90 percent of Greenfield projects, there is cost and time over-run,” maintains Dr KC Ojha, Managing Director, Hospic, Mumbai.

Why Groups Still Go For It: When asked why they are bullish on the Greenfield project route, where the entry barriers are high, Dr Nandakumar Jairam, Chairman, Columbia Asia Hospital, Bangalore, says, “Our hospital at Hebbal and the upcoming ones are replicas of our parent hospitals in Malaysia. This model has been tried and tasted in Malaysia, an emerging Asian market.” According to Dr Chhatwal, one can overcome the hurdles in Greenfield projects by proper planning, which is the key to reducing exorbitant cost over-runs and delays. “If one rightly identifies loopholes like lack of Erection Procurement Commissioning (EPC) and poor financial planning, Greenfield project is the best mode for growth,” he holds.

Operations Management

This is a new trend, where one group runs the hospital belonging to another. This happens when there is a new entry in the market without domain expertise, to revive a sick organisation or to ramp up the profit margin.

For instance, Fortis is managing Jeewan Mala Hospital and Jessa Ram Hospital in New Delhi and Apollo is managing hospitals in Ludhiana, Ranchi, Pune, Indore and Agra.

Merits: An organisation takes up Operations Management (OM) for another group to enhance its brand value and achieve quick market penetration. “The organisation that is run benefits more than the organisation which runs it,” says Dr Vivek Desai, Managing Director, HOSMAC. The risk is always transferred to the hospital which owns the infrastructure.

OM is catching up fast with trust hospitals too. Mumbai-based Lilavati Hospital has inked a deal to manage Pandya Hospital in Kenya and there is a buzz that Mumbai-based trust hospital PD Hinduja Hospital will soon manage Mumbai's Bhatia Hospital. Refusing to comment on Hinduja Hospital's plans, Anupam Verma, Director, Administration, PD Hinduja Hospital, however says, “An ideal trust hospital tries to sustain itself and does not necessarily function with profit motive in mind. OM can become the expansion model for trust hospitals, which do not necessarily expand geographically.” This model works on both gross revenue model and profit-sharing basis. According to Hosmac's Dr Desai, the first model is better as one makes the OM group also responsible for the profit.

How does a group decide on OM? Anil Maini, President, Corporate Development, Indraprastha Apollo Hospitals, New Delhi, says, “We agree for OM in places where we do not have any market presence. We would not accept OM projects in cities like Chennai and Hyderabad, where we already have our hospitals.” However, according to Wockhardt's Kamath, “It does not matter whether one has a presence in that city or not. It's a matter of understanding the market, its needs and the segment that one wishes to address. What matters is your ability and competence to manage growth.”

Demerits: According to experts, this might not prove to be a good model for the group which owns the hospital in the long run of the business cycle, as there is always loss of revenue.

Franchising

In this model, the franchiser lends its brand name, implements management principles, designs the building, selects manpower, plans equipment and markets the franchisee product against a certain percentage of the revenue.

"Franchising has worked for us and implies a low investment on our part coupled with local knowledge that we gain" - Ratan Jalan CEO, AHLL

Merits: The advantage is that the franchiser gets quick market penetration while conserving capital, also exploiting entrepreneurial potential offered by the individual franchisees. Apollo Cliniqs, a part of Apollo Health and Lifestyle Limited (AHLL), is the pioneer in Franchising in healthcare, charging five percent of the revenue as its fees. It endeavours to capture a substantial chunk of the Rs 26,000 crore primary healthcare market. According to Confederation of India Industry (CII) estimates, 17 per cent of world business is through Franchising, while in India it is less than three per cent. “Franchising has worked for us and implies a low investment on our part coupled with local knowledge that we gain,” says Ratan Jalan, CEO, AHLL.

Demerits: For some, like the Parkway Group and Max Healthcare, Franchising is a complete taboo, as there is no control over the franchisees, which affects business negatively. “In B2C business, we need to be present ourselves (as opposed to franchising) to ensure quality. After all, it is a question of our brand name,” Max's Dasgupta avers.

Jalan admits that some of the Apollo Cliniqs have received mixed response as some franchisees have shown less commitment and have handed over the reins of the business to somebody in the family. “We are thinking of an exit option for them,” he concedes.

Undeterred by the hiccups, AHLL is also planning to experiment in Franchising in secondary care with a 150-200 bed hospital with the brand name First Med. “Apollo hospitals are typically big multi-specialty hospitals. Hence, we would not run the secondary care hospitals with our brand name,” Jalan explains. A pilot First Med is operational in Chennai, though not by franchisee model but owned by the Apollo Group. “We have not earmarked any definite timing to come out with First Med hospitals by franchisee concept,” Jalan informs.

De-risking: Experts caution that Franchising model should not be perceived merely a cash cow and one needs to be careful while choosing the franchisees.

Public Private Partnerships

"We will spend Rs 30 crore to build a 150-bed hospital in an empty building spread over an area of 1,10,000 square ft" - Niranjan Hiranandani Chairman, Hiranandani Group, Mumbai

PPP is a system in which a government service or private business venture is funded and operated through a partnership of government and one or more private sector companies. Hiranandani Healthcare Pvt Ltd (HHPL), a company promoted by the Hiranandani Group, has recently signed an agreement with Navi Mumbai Municipal Corporation (NMMC) in a PPP to create a tertiary care hospital in Navi Mumbai. “We will spend Rs 30 crore to build a 150-bed hospital in an empty building spread over an area of 1,10,000 square ft,” says Niranjan Hiranandani, Chairman, Hiranandani Group. The NMMC runs a 150-bed hospital in the same building.

The model works on a cross-subsidy format wherein the super-speciality hospital will cross-subsidise 10 percent of the beds and resources for those cases referred from the NMMC. “What motivated us to take up this PPP was growth of our brand,” says Niranjan.

"There has to be a national agenda for promoting PPP. The government must have the will and a clear thought process on what they want from the private parties" - Vishal Bali CEO, Wockhardt Hospitals

Kolkata-based Advance Medicare & Research Institute (AMRI) and Escorts Heart Hospital in Chattisgarh are also successful examples of PPPs. However, not every group's attempt of PPP has borne fruit. A proposed PPP between Wockhardt Hospitals and the government of Maharashtra to run GT Hospital in Mumbai did not materialise. This was even after the MoU was inked.

Merits: With shrinking government expenditure in public healthcare, PPP is extolled for increasing the accessibility and affordability of advanced healthcare to the common masses. The private party gains by enhancing its brand value. Dr Chhatwal believes in harnessing the untapped potential of PPP. “PPP holds a world of promise. We have not explored PPP to make it a sustainable model,” he says. Agrees Executive Director of EHIRC, Dr Naresh Trehan, “PPP should be our priority.”

Demerits: The profit margins are not too high, as a certain percentage of free beds are to be given to poor patients. Then, there are problems of government control on profit margin. The private parties are sometimes wary whether the project will take shape after a change of government.

The Way Forward: To overcome problems of government control in PPP, Niranjan says, “The administration of a PPP hospital should be in the hands of the private party and not the government. One should form an advisory board with representatives from the government to overlook matters.”

To power PPPs, Wockhardt's Bali, who is also a member of CII's national task force on healthcare says, “There has to be a national agenda for promoting PPP. The government must have the will and a clear thought process on what they want from the private parties. Then, they should leave it to us to see whether it is acceptable to us or not. We have already had meetings with the government on making PPP a national agenda.” Despite Wockhardt's first brush with failure in PPP, Bali claims he is open to it, if the right opportunities knock.

Hub and Spoke Model

This is not exactly a business model, but definitely a strategy of expansion. One can implement hub and spoke also through JVs or Greenfield projects. This model is used to leverage a group's resources to penetrate areas where having a full-fledged tertiary care is not a feasible option. The spokes offer primary care and diagnostic services and the hub offers elective treatment or tertiary care. Experts say this model works more in rural or B class cities. In cities, it works only for diagnostics and OPD services.

Merit: The advantage is increased reach and quality of service to patients and enhanced market visibility. Displaying unflinching belief in this strategy, Fortis Healthcare is planning to build at least one hospital in every large city that can act as the hub for spokes distributed in and around that city.

Max Healthcare is also spreading its tentacles through this strategy. Taking the Max Balaji Hospital at Patparganj as the hub, which is presently offering services in interventional cardiology, but will become multi-specialty after phase II, in the pipeline are several spokes (Dr Max Clinics and Max Implants) for the next few years, informs Max's Dasgupta.

There are two kinds of hub and spoke model. One is where one builds the hub first and then the spokes, as Fortis Healthcare did. In the other one, the spokes are built first and then the hub, as Max Healthcare does. “Getting land to build a big hospital takes time, especially in a place like Delhi. As we got land for primary and secondary care first, we built the spokes first,” explains Dasgupta.

Demerits: The pitfall of this model is when spokes are far away from the hub, causing inconvenience to patients and their relatives.

Choice of Models

How does a hospital freeze in on the right model from the basket of choice available to it? Selection involves taking into account both external and internal environment. “One needs to assess political, economical, social, technological, environmental, and legal factors as part of external environment. And for internal environment, one needs to do a Strength Weakness Opportunity and Threat (SWOT) analysis,” says Dr Biswas. The choice also depends on the kind of hospital-trust or corporate hospital, doctor-driven or run by industrial house.

While some are particular about their model, not all are. “We are a growing enterprise, and we would like to experiment with all the models, as and when we get opportunities,” says Wockhardt's Bali. Agrees, Max's Dasgupta, “We are open to all kinds of models in the future.”

As the Sensex soars, the apt business model is thus the starting point of the right aid to the needy, the trump card to the growth of the organisation and the key to national development.

rita_dutta@rediffmail.com