Kerala's charitable trust hospitals: When bigger isn't better

Strategies for Kerala's charitable trust hospitals – Part 4

In my previous articles, I described why most charitable trust hospitals make the huge mistake of significantly increasing their infrastructure in a short period of time.

There are several reasons that drive charitable trust hospitals to make this mistake. Some of them are outlined below:

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

Trying to save on construction costs

Let us examine the third reason: the need to reduce construction costs.

One of the most common mistakes made by charitable trust hospitals is building far more than their immediate requirement to save on construction costs.

Let us take the example of a 600-bed charitable trust hospital that is doing well and is the largest hospital in its catchment area.

Assume that the hospital is running at full capacity and is planning to increase its bed strength by putting up a new block.

Somehow, most of these charitable trust hospitals decide to put up a big block far larger than their immediate requirement.

In this example, the management would initially plan for a new 400-bed block and end up building a new 600-bed block.

Reasons for building more capacity than required

Why does this happen when the actual demand is for a 150-bed block, which would take care of the requirements for the next few years?

I think there are several reasons for this.

The first is that the architect/design consultants convince the hospital management that building a big block is cheaper than building several small blocks in terms of construction cost per square foot. This makes the 400-bed block look like a better option.

Additionally, the management decides it is better to do all the needed construction for the next 20 years in one shot rather than repeat this difficult process every few years.

They then ask their doctors and operations team to propose how many additional outpatient (OP) rooms, inpatient (IP) rooms, IP wards, emergency beds, ICUs, operation theatres, pharmacies, labs, etc., would be needed by the hospital over the next 20 years.

These would be incorporated into the new block with the understanding that there would not be any more new construction in the next 20 years after this new block is built.

Naturally, the doctors and operations team plan for the maximum possible scenario and come up with the requirements for a 600-bed block instead of the initial 400-bed block.

This makes the architect/design consultants very happy as they will be paid more for a bigger block. They will support the need for a bigger block by pointing out how the cost per square foot will be less compared to the 400-bed block.

Loan burden

The hospital will end up constructing the 600-bed block by taking huge term loans, as it will not have enough surplus to fund such a large building. They would have only had the money to put up a new 150-bed block.

Having a capacity of 1,200 beds will mean that the annual capacity utilization of the charitable trust hospital goes down drastically, reducing its profits even further. This, combined with the huge term loan, can result in the hospital going into loss.

This will force the charitable trust hospital to increase prices, leading to reduced volumes and increasing losses.

(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