November 1, 2013

Vijay Govindarajan is a professor of international business at Tuck School of Business, Dartmouth College. Ravi Ramamurti is a professor at Northeastern University and director of its Center for Emerging Markets. They are co-authors of the article “Delivering World-Class Healthcare Affordably,” in the current issue of Harvard Business Review.

No matter how the fight over Obamacare shakes out, the biggest challenge facing U.S. health care will remain reducing costs while improving quality of care and access for patients. The experience of a few innovative Indian hospitals may point the way forward.

India’s health-care system as a whole has many problems, but our research has uncovered nine private hospitals that provide quality health care at a fraction of U.S. prices. Most of these hospitals are accredited by the U.S.-based Joint Commission International or its Indian equivalent, the National Accreditation Board for Hospitals & Healthcare Providers. At a hospital where the procedure is performed, a patient would pay $120 for cataract surgery, $250 for a caesarean-section delivery, $2,000 for a knee or hip replacement, $2,000 for an angioplasty, $2,900 for cancer radiation treatment and $3,200 for open-heart surgery — 5 percent to 10 percent of U.S. prices. These private hospitals deliver medical outcomes comparable to that of good U.S. hospitals, as measured by medical complication rates or post-treatment survival rates. Furthermore, they’re profitable.

Even if Indian hospitals paid U.S.-level salaries for all health-care staff, which are as much as 20 times higher, their prices would be one-fifth of U.S. levels. That is because these nine hospitals are super-efficient at using resources — doctors, equipment and facilities — and because they work incessantly to improve every process. Their services have to be affordable because their patients are poor and typically pay 60 percent of their medical costs out of pocket.

How do the Indian hospitals do it? They have innovated in three areas, and for each of these, U.S. hospitals would do well to follow their example.

The first innovation is using a hub-and-spoke design, with hub hospitals located in major cities and spoke hospitals in rural areas. This strategy concentrates the best equipment and expertise within the hub, with telecommunication links that allow hub specialists to serve spoke patients remotely. Since these specialists perform a high number of specific procedures, they quickly develop skills that improve quality. By contrast, hospitals in the United States are uncoordinated, duplicating specialized care without enough volume in most of them to make procedures affordable. Even when hospitals consolidate, the motive is often to gain pricing power over insurance companies rather than to lower costs.

The second innovation is task shifting, or the transfer of responsibility for routine tasks to lower-skilled workers. This leaves doctors free to focus on complicated medical procedures. Several hospitals have created a tier of paramedic workers with two years of training after high school to perform routine medical jobs. As a result, surgeons, for example, are able to perform two to three times as many surgeries as their U.S. counterparts. Compare that with the United States, where hospitals reduce costs by laying off support staff and shifting mundane tasks such as billing and transcription to doctors, who are overqualified for those duties.

Finally, the Indian hospitals save money through old-fashioned frugality. They shepherd resources by building hospitals at a fraction of the cost spent in the United States, replacing imported devices with local equivalents costing a fraction of the price or, for example, sterilizing and reusing clamps for open-heart surgery that are routinely discarded after one use in the United States. In contrast to the American fee-for-service model, they often pay their doctors a fixed salary. One hospital sends a daily message to all doctors with the previous day’s financial results, encouraging them to consider the cost-effectiveness of their medical choices. In contrast, U.S. hospitals often resemble luxury hotels, with much wasted space and underutilized equipment. Their doctors, and sometimes even their chief financial officers, are unaware of how much procedures cost.

How realistic is it that U.S. hospitals will adopt the Indian model? U.S. hospitals are constrained by regulations and norms unlike those in India. Nevertheless, some progressive U.S. hospitals are adopting some of the practices of our Indian exemplars, and more should follow their example.

It is time to move beyond the myth that U.S. health care is costly because it is of exceptional quality. Better outcomes at lower costs have been established in many other countries. The Indian experience shows that costs can be dramatically reduced and access can be expanded even as quality is improved. U.S. hospitals should prepare for this new world. And in so doing they should study and embrace innovations from all corners of the globe.