Lessons From India in Organizational Innovation- A Tale of Two He

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NELLCO NELLCO Legal Scholarship Repository Duke Law School Faculty Scholarship Series Duke Law School 10-1-2008 Lessons From India in Organizational Innovation: A Tale of Two Heart Hospitals Barak D. Richman Duke University School of Law, richman@law.duke.edu Krishna Udayakumar Duke University Medical Center, ku@duke.edu Will Mitchell Duke University Fuqua School of Business, will.mitchell@duke.edu Kevin Schulman Duke University School of Medicine, kevin.schulman@duke.edu Recommended Cita
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  NELLCO NELLCO Legal Scholarship Repository  Duke Law School Faculty Scholarship SeriesDuke Law School10-1-2008 Lessons From India in Organizational Innovation: A Tale of Two Heart Hospitals Barak D. Richman  Duke University School of Law  , richman@law.duke.edu Krishna Udayakumar  Duke University Medical Center   , ku@duke.edu  Will Mitchell  Duke University Fuqua School of Business  , will.mitchell@duke.edu Kevin Schulman  Duke University School of Medicine  , kevin.schulman@duke.edu This Article is brought to you for free and open access by the Duke Law School at NELLCO Legal Scholarship Repository. It has been accepted forinclusion in Duke Law School Faculty Scholarship Series by an authorized administrator of NELLCO Legal Scholarship Repository. For moreinformation, please contacttracy.thompson@nellco.org. Recommended Citation Richman, Barak D.; Udayakumar, Krishna; Mitchell, Will; and Schulman, Kevin, Lessons From India in Organizational Innovation: A Tale of Two Heart Hospitals (2008).  Duke Law School Faculty Scholarship Series. Paper 154.http://lsr.nellco.org/duke_fs/154  Lessons From India InOrganizational Innovation: ATale Of Two Heart Hospitals Howorganizationalinnovation can reform healthcare, and (moreimportant)whyit hasn’t. byBarak D. Richman, Krishna Udayakumar, Will Mitchell, and Kevin A.Schulman ABSTRACT: Recent discussions in health reform circles have pinned great hopes on theprospect of innovation as the solution to the high-cost, inadequate-quality U.S. health sys- tem. But U.S. health care institutions—insurers, providers, and specialists—have cededleadership in innovation to Indian hospitals such as Care Hospital in Hyderabad and theFortis Hospitals around New Delhi, which have U.S.-trained doctors and can perform openheart surgery for $6,000 (compared to $100,000 in the United States). The Indian successis a window into America’s stalemate with inflating costs and stagnant innovation. [ Health Affairs 27, no. 5 (2008): 1260–1270; 10.1377/hlthaff.27.5.1260] A sign in the fortis escorts heart institute andResearchCentrein New Delhi encapsulates the starkest difference between Indian hospi-tals and their U.S. counterparts: to celebrate “Heart Month,” Fortis an-nounced a “10% discount on PTCA (Angioplasty) & CABG (Bypass Surgery).” 1 The recent rise of India’s middle class has meant the emergence of several mil-lion new health care consumers looking to opt out of India’s free public hospitalsand instead pay for private health care services. Accordingly, India has seen a riseof private hospitals catering to these consumers in the emerging cash-pay marketforhospitalcare.CareHospitalfacilitiesaroundHyderabad,thenetworkofFortisHospitals around New Delhi, and many other private hospitals are targeting the300 million Indians who count themselves among the nation’s middle class.India presents a stark contrast to the United States. The nation’s entire healthsectorisestimatedtobe$20billioninsize(comparedto$2.3trillionintheUnited States), with more than 80 percent coming from private resources. Fewer than 14 1 26 0 Se p t e m be r/Octobe r 2008 I n n o v a t i o n A b r o a d DOI 10.1377/hlthaff.27.5.1260 ©2008 Project HOPE–The People-to-People Health Foundation, Inc. BarakRichman(barak.richman@duke.edu)isaprofessoroflawattheDukeUniversitySchoolofLawinDurham,NorthCarolina.KrishnaUdayakumarisanassistantprofessorofmedicineatDukeUniversityMedicalCenter.WillMitchellistheJ.RexFuquaProfessorofInternationalManagementatDukeUniversity’sFuquaSchoolofBusiness.KevinSchulmanisaprofessorofmedicineattheDukeUniversitySchoolofMedicineandaprofessorofbusinessadministrationatDukeUniversity’sFuquaSchoolofBusiness.  percentofIndianspurchasehealthinsurance,andwithanationalpercapitagrossdomestic product (GDP) of US$820, Indian hospitals understand that their ser-vices have to meet the middle-class family budget, even for major surgery. Thus,Fortis Hospitals charges $6,000 for open-heart surgery. Care Hospital chargesslightly less. Narayana Hrudayalaya (NH) Heart Hospital in Bangalore, a charita-blehospital,chargesjustover$2,000. 2 Meanwhile,open-heartsurgeryataU.S.re-search hospital typically bills at more than $100,000. Despite the price difference,private Indian hospitals provide world-class service: doctors with training com-parable to that of U.S. physicians (many with medical training in the United States), the latest technology and equipment, and infection and mortality ratesthat compare to those of U.S. hospitals.Why is there such a difference in costs for services with similar outcomes? Tobe sure, lower labor costs in India play an important role. But much of the Indiansuccess can be attributed to experimenting with, developing, and constantly im-proving innovative organizational structures to provide care. At the extreme,these structures offer textbook examples of organizational innovation, and theysuggest what might be possible if the U.S. health care market were permitted toexperiment with new organizational forms. Organizational Innovation And The Health Sector Recent discussions in health reform circles have pinned great hopes on theprospect of innovation as the solution to the high-cost, inadequate-quality U.S.health system. Clay Christensen, using the template from his popular The Innova-tor’s Dilemma, has helped spark the optimism by encouraging “disruptive innova-tion” to transform the U.S. health sector. 3 This model of change has entrants chal-lenging industry leaders with low-cost technologies that, over time, achievesimilar or better performance than the existing standard. As these entrants sup-plant incumbents, they force market participants—and often the market struc-ture itself—to undergo organizational change, and this transformation createsvalue for both innovators and consumers.Accordingly, much of the literature on organizational innovation looks to en-trants, rather than incumbents, to drive innovation and to catalyze incumbentfirms to respond. 4 Most innovation-intensive industries thus regularly undergomajor changes, including wholesale cycling of industry leadership. 5 But the U.S.health sector has been strikingly ossified, with the same industry leaders (aca-demic hospitals and university medical centers) that led a generation or more agocontinuing to hold leadership status today. Disruptive innovation is fueled by en-trants,yettheU.S.healthcaremarkethasmanagedtoeitherexcludeorcripplere-alistic challenges posed by newcomers with innovative organizational forms.In this paper we explore the organizational innovations that have emerged in In-dian hospitals out of India’s competitive and more open marketplace, and we dis-cuss features ofthe U.S. regulatory environmentthatimpede similar innovation. H e a r t H o s p i t a l s I n I n d i a H E A LT H A F FA I RS ~ Vo l u m e 2 7, N u m b e r 5 1 26 1  Indian Innovations India is a landofstark contrasts, with a heterogeneous health care delivery sys-temand1.2billionpeoplewhoexhibitvasthealthdisparities.Forexample,India’slowestwealth quintilehasa mortality ratefor childrenunder agefivethatisthreetimes that of the highest wealth quintile, and a measles immunization rate of lessthan half. 6 Similar disparities exist in the quality of health care offered by India’shospitals. While India’s public hospitals have struggled, the private health sectorhas seen an explosion of interest concurrent with the country’s economic growth.Two-thirds of Indian households rely on private medical care, a preference thatappears tocutacross classes, andevenrural andparamedic care are dominatedbythe private sector. 7 Although India’s elite institutions now rival top Western hos-pitals in quality (and have attracted a sizable number of Western patients, whilegarnering much media attention), these private systems were designedfor andaregearedtothehealthneedsofIndia’smiddleclass—andthustargettheIndianmid-dle-class budget—with the public sector serving as a safety-net provider. 8 This isnot a system designed for equity, but it is one in which world-class capacity hasdeveloped in a short period in the private sector.Toexplore how India’s health-sector innovations have achievedsuch high qual-ity, high volume, and affordability, we focus on its heart hospitals and other pri-vatehospitalsthatspecializeinopen-heartsurgeryandangioplasty.Heartdiseaseis one of the most common illnesses in India, with approximately 2.4 million peo-ple needing heart surgery every year, and heart hospitals such as Care Hospital inHyderabad and the Fortis Hospitals in New Delhi now perform large volumes of procedures at high success rates. 9 We examined these hospitals as leaders in thisgrowth, seeking to extract lessons both for U.S. hospitals and for policymakers.Thesehospitalsillustratehow Indianhealth careprovidershavefocusedona par-ticular high-demand service, built a large capacity to provide that service at an af-fordable cost, and developed assorted organizational innovations to support itsbusiness model. n Managementstructureofhospitals. Many of the leading innovative healthcare organizations in India are led by dynamic physician-executives. For example,across its more than ten hospitals, Care Hospital develops physician leadership ateach facility with a “servant leadership” model that empowers physician-led initia-tives. Likewise, physicians and senior administrators at Fortis view themselves as acollaborative leadership partnership. This model enables “owner-operator” innova-tionsthatareagileandpatient-focused.Also within hospital management teams are managers with experience in In-dia’s burgeoning hotel industry. The application of management routines and ca-pabilities from the hotel industry helps Fortis and other hospitals manage patientcare in the context of customers’ experiences and patients’ expectations. This re-flects a much more focused customer/patient approach than that at many U.S. 1 26 2 Se p t e m be r/Octobe r 2008 I n n o v a t i o n A b r o a d
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