In the past, poor countries looked to the West for advances in medical knowledge. It’s time now the West started looking to countries such as India and China for innovations in healthcare delivery, feel management and business thinkers Vijay Govindarajan and Ravi Ramamurti. Their latest book, Reverse Innovation in Health Care: How to Make Value-Based Delivery Work (Harvard Business Review Press) discusses, among others, how countries such as India are transforming healthcare with unique business models that blend the social and commercial. Govindarajan is Coxe Distinguished Professor at Tuck School, Dartmouth College and a former Marvin Bower Fellow at Harvard Business School, while Ramamurti is University Distinguished Professor of International Business and Director, Center for Emerging Markets at Northeastern University. BusinessLine spoke to the thinkers to know more about the book. Excerpts:


vijay govindarajan


Why reverse innovation, and why in healthcare?

Rich countries are strong in health care technology, drug discovery, developing new medical devices, and so on, but they have not paid attention to the efficiency and cost in the delivery of health care. In poor countries like India, on the other hand, because of the shortage of medical resources, the large population, and limited ability of people to pay, value has always been much more important.

In hospitals such as Aravind Eye Care System or Narayana Health, patients get world-class care for 1-3 per cent of the US prices. While lower labour cost is one of the reasons for low prices in India, our research shows that it is by no means the whole explanation. In fact, most of the explanation lies in innovative processes that these hospitals have adopted to provide quality health care at ultra-affordable prices (including, in many cases, free of charge).


Therefore, as rich countries move towards value-based care, they can benefit from adopting healthcare delivery innovations pioneered by poor countries like India. This is what we mean by “reverse innovation.” Radical ideas for improving health care in rich countries are unlikely to come from within those countries, because they all suffer from similar problems of high cost and calcified systems. Reverse innovation is a much more promising approach to fixing their health care problems.

There is an argument that it was greed and not lack of ideas that pulled down healthcare in the US. Is that the case?

Greed may have played a part but the main reason that US health care is in a mess is perverse incentives. The US system is a “fee-for-service” system, which means health care organizations get paid for each service they provide, regardless of what those services do for the patient. This has led to an over-provision of services, leading to waste and medical complications from unnecessary care. By some estimates, 30-40 per cent of all care received by patients in the US may be unnecessary.

The US is trying to move towards a system that encourages health care organis ations to focus more on value and medical outcomes rather than volume of patients and procedures. For instance, under value-based care, health care organizations would be paid a bundled price to take care of all tests, procedures, and medicines to treat a particular condition, such as hip replacement or heart bypass surgery, rather than a fee for individual services.

The organisation will have to find a way to treat the patient successfully within that bundled price or eat the resulting losses. This would put pressure on the organization to look at the patient’s problem holistically and to resolve it in a cost-effective way. Interestingly, the exemplar hospitals we studied in India routinely quote a bundled price for their services.

How does value-based healthcare become profitable in the West? One can understand how that works in the Third world.

Under value-based care, providers can’t make money unless they are efficient. If a patient receives poor care and needs corrective treatment, the cost has to be borne by the health care provider. Similarly, if its costs are too high, it will not be able to make a profit, given the bundled price. In other words, value-based care will force US providers to streamline their processes and lower costs. Those that don’t will lose business and may have to shut down. This is the normal winnowing process that in other industries allows only the fittest firms to survive. US health care needs the same medicine!

Most of your exemplars are in tertiary care. Even in countries like America, primary care lacks policy attention and private investor interest. Have you found any striking examples of reverse innovation in primary care?

Many start-ups are innovating in the primary care space too. One such company we studied is Iora Health, whose strategy is to double down on primary care, i.e. to make sure its customers are healthy rather than treat them when they get sick. The company spends twice the average on primary care — about 8 per cent of total health care spending versus 4 per cent for the industry as a whole — but saves 15-20 per cent on downstream spending on secondary and tertiary care by avoiding unnecessary tests, procedures, and hospital or ER visits.

The key to Iora Health’s strategy is to assign every patient a “health coach,” who is not a medical professional but keeps in close touch with the patient, monitors his or her health, and works even to improve their diet, lifestyle, and exercise habits. These health coaches help doctors, nurses, and other specialists at Iora keep patients healthy in the long run, saving patients from unnecessary hospitalisations and saving Iora (and the US economy) a lot of money.

In Canada, where healthcare is part of the social welfare fabric, people seem to be enjoying better coverage and quality healthcare. Why the US has failed to replicate this neighbour’s model?

Canada has a “single-payer” system, that is, the government provides health care for everyone, funded by general taxation. In the US, the government provides health care only for the elderly (Medicare) or the very poor (Medicaid), while about half the population is covered by private plans offered by different insurance companies. The single-payer system has allowed Canada, for instance, to negotiate lower drug prices with pharmaceutical companies and operate with lower administrative costs than the US.

In the Canadian system, patients sometimes have to wait in a queue to get non-emergency care, but costs are much lower and everyone in the country is covered. In the US, costs are much higher and 10-15 per cent of the population has no insurance coverage (many more are underinsured and face high co-payments and deductibles). US policymakers, especially Republicans, have rejected Canadian-style single-payer systems on ideological grounds, because it is viewed as “socialised medicine.”


Your concept of a social heart and business brain is interesting. But how does one strike a balance here?

Our main point is that you don’t need to strike a balance between the two because it is possible to have more of both. Many NGOs have a social heart, but because they lack a business brain, their operations are hard to scale up. As Dr Devi Shetty told us, “charity is not scalable,” and charity or government handouts is what NGOs often rely on to grow. On the other hand, if you only have a business brain and therefore target only well-to-do patients, you forego the volume that comes from serving the masses, which raises your unit costs and lowers your margins.

It may also lower quality, because your physicians get less practice and see a narrower range of medical conditions. Having a social heart also encourages breakthrough innovations by the rank-and-file, because everyone understands that a penny saved is a penny that can be used to care for more poor people.

This is an inspiring mission. As a result, the organisation with both a social heart and a business mind can be more profitable than one with only one of these traits. For instance, Aravind Eye Care System, which is the world’s largest eye hospital and since inception has treated two free (or heavily subsidised) patients for every paying patient, is one of the most profitable hospitals in the world, because it also has a business brain and is very disciplined about costs and investments. When your price is zero (free care), you watch every expense like a hawk, while if your patients are well-to-do and you can charge them a high price, why would you bother to become an ultra-low cost provider?

How do you see the role of governments in ensuring affordable healthcare?

Government can play a critical role in providing affordable health care in three important ways. First, Government can support social programs geared to prevention by educating people about healthy life styles. Second, Governement can enter into Public-Private Partnerships and hand over the running of Government-owned hospitals to the private providers like Narayana Health to show the way. Third, Government can start micro-insurance schemes that provide access to health care for the poor.

Will value-based healthcare be beneficial for the insurance companies?

Absolutely. Under value-based health care, health insurance premiums will go down. That implies that insurance companies are worse off. However, health care costs will go down a lot more due to delivery innovations. So, the overall profits for insurance companies will be the same, might even be higher!