Kerala's charitable trust hospitals: Don't fall for the expansion trap

Strategies for Kerala's charitable trust hospitals – Part 3

In Part 2 of this article, I had described how a charitable hospital needs to only make a Profit Before Tax of Rs 30, compared to the Rs 100 needed for a comparable private for-profit hospital giving them a significant cost advantage which allows them to price much lower than comparable private for-profit hospitals – see Figure 1.

Figure 1. Pricing advantage of a charitable trust hospital

Item	Code	Private For-Profit Hospital	Charitable Trust Hospital
Revenue	A	1000	850
Patient Nos	B	10	10
Price/Patient	C=A/B	100	85
Total Cost	D	900	820
Profit Before Tax	E=A-D	100	30
Tax	F	20	0
Profit After Tax	G=E-F	80	30
Depreciation	H	20	20
Free Cash Flow	I=G+H	100	50
Renovation/ Replacement	J	50	50
Dividend	K=I-J	50	0

Infrastructure development

Looking at Figure 1, we see that the charitable hospital can charge 15% less than a comparable private for-profit hospital - Rs 85 per patient instead of Rs 100 per patient.

I had then shown that when a charitable trust hospital takes a wrong decision like increasing its infrastructure in a significant way in a short period of time, they are forced to take a huge loan (mostly term loans) resulting in a payment of principal + interest which then forces it to make a higher Profit Before Tax and increase its price to a the level of comparable private for-profit hospitals.

So why do most charitable trust hospitals feel the need to make this huge mistake of increasing their infrastructure significantly in a short period of time?

Reasons behind wrong decisions

There are several reasons that drive charitable trust hospitals to make this mistake, some of which are:

• The belief that the hospital is full, and we are turning away many patients due to lack of consulting rooms, operation theatres, IP beds etc.
• The need to compete in size with new/existing competitor hospitals
• The need to try and reduce construction costs
• The belief that a good ambience can be provided only in a new building
• The belief that the efficiency of the hospital staff will improve with a single new block rather than the existing multiple, smaller blocks

Assess the need

Let us examine the first reason - the belief that the hospital is full.

Healthcare in Kerala is a seasonal business – the maximum patients come during June and July (monsoon time) while during the other months, the number of patients are significantly lower.

Also, many patients of charitable trust hospitals today are not willing to stay in common wards – they need single rooms.

So, normally the management of a charitable trust hospital believes it is running at full capacity when it reaches 75% capacity utilisation during the peak months of June and July - all its rooms are full on many days and a significant part of its ward beds are full.

What most charitable trust hospitals do not understand is that the annual capacity utilisation of the hospital is only around 60% instead of the possible 90%.

Since the prices of charitable trust hospitals are significantly lower when compared with private for-profit hospitals most of their patients are willing to suffer a reasonable waiting time when they come to the hospital as outpatients (OP) and be admitted to wards on the first day of IP admission.

By introducing a proper booking system, so that most of the OP patients come to the hospital with a pre-booked appointment, and increasing OP hours, a charitable trust hospital can double its OP patient number and significantly increase its IP admission number utilising its existing infrastructure fully as shown in Figure 2.

Figure 2 shows that such a charitable hospital can charge 30% less than a comparable private for-profit hospital - Rs 70 per patient instead of Rs 100 per patient – and still pay its doctors and management staff more and spend more on expansion and new equipment like CT, MRI without taking loans.

Figure 2.  Improving the pricing advantage of a charitable trust hospital

Item	Code	Private For-Profit Hospital	Charitable Trust Hospital
Revenue	A	2000	1400
Patient Nos	B	20	20
Price/Patient	C=A/B	100	70
Total Cost	D	1800	1250
Profit Before Tax	E=A-D	200	150
Tax	F	40	0
Profit After Tax	G=E-F	160	150
Depreciation	H	40	20
Free Cash Flow	I=G+H	200	170
Renovation/ Replacement	J	100	100
Expansion/New Equipment	K	0	70
Dividend	L=J-K	100	0

 

I will examine the other reasons for wrong decisions being taken by charitable trust hospitals in my subsequent articles.

(To be continued) 

The author is the founder and CEO of Results Consulting Group. He is a recognized thought leader on helping entrepreneurs build and implement significant and lasting competitive edges in India and the GCC. The views expressed are personal. email: [email protected], website: www.we-deliver-results.com