Ensuring cost efficiencies in capital intensive departments

Maintaining cost efficiencies within capital intensive department is a must for any hospital to achieve economies of scale. The panel discussion on ‘Ensuring cost efficiencies within capital intensive units’ brought to light strategies that facilitate hospitals to to make capital intensive departments such as radiology, OTs, ICUs, pathologies etc., highly productive while maintaining highest quality standards.

The panel comprised, Dr Bhavin Jankharia, Partner and Consultant at Picture (moderator), Dr Vidur Mahajan, Executive Director, Mahajan Imaging; Dr Biren Chauhan, Group Centre Head, Sunshine Global Hospitals and Dr Sandeep Chatrath, Regional CEO, Andhra Pradesh and Telengana, Apollo Hospitals.

Dr Jankharia fabricated this discussion into a highly interactive session, wherein both panelists and audience shared their experiences, challenges and solutions that can bring in economies of scaleto hospitals while doing ethical business and ensuring the best of healthcare services to their patients.

He began the discussion by talking about a Bob Dylan song, For the times, they are a changin.. and said that in times where the healthcare sector is changing with a major role of technology to drive diagnostics, it is important for the administrator, radiologists and other professional associated with clinical diagnostics be ready to adapt to this change. On that note, he presented a slide that highlighted tall points for the session that revolved around capex, deferring costs at purchase, Jugaad, commoditisation value, profitability, high capex and healthcare outcomes.

Dr Jankharia first asked Dr Mahajan to name few radiology equipment that consume the highest capex margins. Dr Mahajan replied, “MRI and PetCT are one of the highest capex consuming equipment. Apollo Delhi has an MRI worth Rs 35 crores. CT and X-rays are of a diverse nature. One can get a CT for less than a crore and you can get a CT for million and a half dollar. Then comes X-ray machine, mammography, ultrasound etc.”

L-R: Dr Biren Chauhan, Dr Sandeep Chatrath and Dr Vidur Mahajan

Dr Chatrath then spoke on the non-radiology equipment that is capital intensive. He said that oncology equipment is one of the highest capital intensive segment, especially when it comes to linear accelerator. He also informed that Apollo is installing its first Proton in Asia which is worth around Rs 750 crore beating the Tata Group as well.

Clinical laboratories within hospitals are another capital intensive segment, as it has high-end automated analysers which are again of very high cost. Dr Chatrath urged the audience to plan the capex before making a purchase decision. He shared his perspective on capex planning and technology and equipment deployment at a hospital. He said planning of high capex items play a crucial role in capex management and maintaining economies of scale. It is also important to take decisions on high capex items at the right time.

Dr Jankharia then asked Dr Mahajan to talk about the highest capex consuming equipment that he fears to invest in. Dr Mahajan at once replied saying mammography. This led the panel to discuss on the subject of being competitive in the market which costs hospitals to invest in extremely high-end state-of-the-art equipment that they may not be required.

“A state-of-the-art mammography may cost around Rs 1.5 to 2 crores and on an average the best centre in the country would not do more than 10-15 scans per day. So even if you charge an approximate price of Rs 4500 for a scan, there is no way that you will ever go break even on that investment,” maintained Dr Jankharia.

Dr Biren talked about the investment made on EP study machines and radio frequency (RF) ablators and how these capital intensive equipment impact their capex. “So, the bottom line is that healthcare providers invest in some unviable equipment thinking that this might add value to their business or it may perhaps provide a future payoff”, added Dr Jankharia.

This also led to the audience sharing their pain points in terms of investment in high-end equipment. Sameer Mehta, Director, Mehta’s Hospitals shared, “The bigger concern is the cost per unit procedure for a lot of equipment, be it an imaging equipment or a robotic cyber knife or the new da Vinci. This cost seems to be going up in the future and not coming down.”

Vijay Agarwal from Sakra Hospital pointed out saying, “The most worrisome part is when your purchased decisions on high-end equipment is based on the recommendations of your star consultant without understanding the output of the equipment. Moreover, it’s saddening to know that these consultants use it for marketing purpose.” This point attracted a lot of applause from the congregation as it brought out an important aspect that hospital administrator usually ignores.

The discussion then led to the understanding of challenges in deferring costs at purchase. Adoption of digital technologies and how they impact the capex were also discussed. Dr Jankharia in this conversation cited the example of IBM Watson. He informed that AI is supposed to reduce cost and bring down the number of people involved in the process. However, in IBM’s case, it requires more and more number of people to operate and learn. So that brings us to the realisation that currently, everything that is supposed to be helping us bring the cost down is actually not helping the healthcare sector in the way it has to be.

One of the delegates attending the conference suggested that planning on capex and equipment investment should be ideally done in sync with the procurement department, the finance department and clinicians, which is ignored most of the time.

Dr Mahajan then shared his thought on how hospitals can save money at the time of purchase. “Before we make a purchase decision, it is important to jot down when do we expect the ROI”. He said, “Try to atleast get a cash flow breakeven or build a deferral.”

Key Takeaways

  • Planning of high capex items plays a crucial role
  • Capitalise on the annual maintenance contract and comprehensive maintenance contract
  • Asset efficiency, operational efficiency from the financial structure, the surplus or the profit approximation and financial profit per operating cost are significant components to look for
  • Planning on equipment investment should be done in sync with the procurement department, the finance department and the clinicians

Dr Biren added that earlier hospitals off setted the cost incurred in procuring high-end equipment by way of increasing price of service provided. However, these days, hospitals even in a tier II and III cities have around 60 per cent of the revenue coming from credit business which is governed by the insurance companies. Moreover, the government is constantly looking for reducing healthcare cost to patients. Therefore, raising price for healthcare services is not an option any more and the only way is to efficiently manage the  costs.

He further cited the example of how Sunshine Hospitals achieved cost efficiencies while doing preventive maintenance and calibration of equipment. Earlier, the function used to be outsourced. Nevertheless, last year they opted for a government notified laboratory. The laboratory prepared a calibrator for us based on which we calibrated our equipment and the impact our maintenance cost was reduced by 70 per cent,” he informed.

Well, this strategy really brought economies of scale to Sunshine Hospitals in Gujarat. Moving forward, some more examples and strategies were shared. Other topics discussed during the session were related to how hospitals can capitalise on the annual maintenance contract and comprehensive maintenance contract, how to manoeuvre the impact of GST, rising import duty etc., to bring in cost efficiencies, can leasing and rental make any difference to profitability in the long run and more.

Dr Chatrath further said, “We have to look at asset efficiency, operational efficiency from the financial structure, the surplus or the profit approximation and financial profit per operating cost. All these components are very crucial for capex planning and management. This will help us to achieve cost efficiencies. Moreover, volumes makes the difference. It helps to become profitable and sustainable in the long run.”

At the end,  Dr Jankharia summed up the discussion by saying, “It is necessary to strategise the way forward to achieve cost efficiencies to eventually gain profitability. Moreover, it is important to also go ethical in our dealings.”