Kerala's charitable trust hospitals: Expand too fast at your own peril

Strategies for Kerala's charitable trust hospitals – Part 4

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

Here are some of the several reasons that drive the charitable trust hospitals to make this mistake:

• The belief that the hospital is full, and 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 hospital staff efficiency will improve with a single new block rather than the existing multiple smaller blocks

Is there a need to compete in size?

Let us examine the second reason - the need to compete in size with new/existing competitor hospitals.

One of the most common mistakes made by charitable trust hospitals is comparing themselves to new competitor hospitals.

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 a new competitor hospital of 700 beds has been announced nearby, directly competing with the charitable trust hospital.

Most of the successful charitable trust hospitals’ management feel the need to ensure that they retain their No.1 position in the face of such competition and would immediately plan to expand their capacity to 900 beds.

Pitfalls of rapid expansion 

There are several issues with this expansion plan.

The first issue is that the 700-bed plan for the new competitor hospital will normally be in two phases: Phase 1 will be 350 beds and Phase 2 will be an additional 350 beds.

So, only after Phase 2 will the competitor hospital become bigger than the charitable trust hospital – till that time the charitable trust hospital will maintain its Number 1 position.

The second issue is that the charitable trust hospital will need to take a significant term loan to fund the expansion, resulting in a huge EMI payment per month, which eats into the free cashflow of the hospital.

The third issue is that the current demand for the charitable trust hospital may be sufficient for 650 to 700 beds – putting up 900 beds will mean that the annual capacity utilisation of the Charitable Trust Hospital goes down, reducing its profits even further, and can result in the hospital going into loss.

This will force the charitable trust hospital to increase prices, which will lead to reduced volumes and thereby incur losses.

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