375 million. That is how many people live below the poverty line in India, the most of any nation. That is also a full 35 percent of the population. And that is an attractive segment to target for boosting the bottom lines of healthcare firms.
It may seem like one of those statements does not belong with the others. But they are all true. What follows, using concepts introduced by C. K. Prahalad in
The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, is a discussion of how a business can successfully offer price-performance and simultaneously educate its consumers to achieve scale, creating a virtuous cycle enabling provision of sustainable healthcare to individuals at the bottom of the pyramid (BOP). In this context, two Indian healthcare businesses focused on serving the country’s BOP—Medicine Shoppe and Arogya Raksha Yojana—are analyzed, including the challenges they face and potential solutions.
India is particularly fertile ground for exploring this topic, as its healthcare expenditure, at 0.9 percent of GDP, is among the world’s lowest. Further, although millions of dollars are donated annually to non-profit healthcare organizations, only truly self-sustainable, for-profit models will succeed long-term and on a larger scale.
India’s BOP and Healthcare Today
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| Biocare pharmacy in India |
The BOP, while representing a small market for developed countries such as the United States, (98 percent of the population has an income per capita over $3,000/year), is a large segment in India (only 5 percent with incomes at that level). Most of those composing India’s BOP, who make less than $2/day, have severely limited or no access to healthcare due to their inability to pay, insufficient government investment, and the concentration of healthcare resources in urban areas, far from the rural regions where most of the BOP resides. This situation is examined more closely using a “4 Ps Framework” comprising the four main healthcare stakeholders: providers (i.e., hospitals, groups, and institutions), physicians, payors, and patients.
Providers. India faces a severe shortage of healthcare infrastructure, with 0.7 beds per 1,000 people, compared to 3.3 globally and 1.5 for all low-income countries combined. And India’s private sector represents 93 percent of hospitals and 64 percent of beds. Almost entirely unregulated, the private sector has a wide range of quality, costs, and geographic distribution. Yet a World Bank study shows that nearly 80 percent of poor patients prefer private clinics, suggesting the gross inadequacy of public healthcare. Though the Indian pharmaceutical industry ranks fourth globally, with $10 billion in revenues and the ability to satisfy 70 percent of the country’s demand, it continues to leave the BOP underserved. Almost seven out of ten medicines in rural India are substandard or counterfeit, with generic drugs too expensive for the BOP. New patent-protection legislation has motivated multinational pharmaceutical firms to focus on high-end patients, while Indian firms are increasingly targeting semi-urban and rural segments. The benefits of this development for the BOP remain to be seen.
Physicians. By most counts, India has a shortage of physicians and other medical professionals, with only 1 doctor per 1,000 inhabitants, compared to an average of 1.5 globally. And of course India’s physicians are concentrated in urban areas, with some estimates placing the ratio of doctors-to-population in cities at six times that of rural regions. This has led to unqualified rural medical practitioners (RMPs) managing up to 70 percent of rural patients. Licensing is not much of a selection criterion in a country where over 50 percent of patients buy medicines without consulting any kind of professional. Due to these circumstances, a baby born in the poorest 20 percent of the population is 2.5 times more likely to die during infancy than one in the richest 20 percent, and four times more likely in childhood. Adults do not fare much better, with poor individuals facing double the mortality rate of their peers.
Payors. Low public investment in Indian healthcare is compounded because state funds are frequently used for salaries, leaving little money for drugs, supplies, operations, and maintenance. This contributes to a higher level of private-sector spending; at 4.2 percent of GDP, India is among the top twenty countries on this dimension. Indian employers pay for 9 percent of healthcare spending, and insurance for up to 10 percent, leaving 82 percent from personal funds, precluding the BOP from accessing most services. And it is a dark two-way street: in a given year, about one third of all hospitalized Indians may fall into poverty due to medical costs.
Patients. Despite the focus of government spending on curative care, the public sector funds almost all preventative treatment, placing high priority on reproductive/child health and diseases such as TB, HIV/AIDS, and malaria. Yet the country’s poorest 20 percent receive only 10 percent of the net public subsidy from public clinics. Public financing clearly favors those who have less need for it, though this disparity is generally absent within urban areas.
Creating a Virtuous Cycle In
The Fortune at the Bottom of the Pyramid, C. K. Prahalad argues that the lowest income stratum of society can be a profitable segment, not only because of their sheer number (four billion globally), but more importantly due to the Purchasing Power Parity (PPP) adjusted GDP that they aggregate. But to tap this potential it is necessary to create both the capacity and desire to consume within the segment. Prahalad suggests twelve key principles for achieving this, but the focus here will be on three of these: (1) price-performance; (2) education of consumers; (3) scale.
An attractive price-performance proposition is necessary to ensure affordability of any offering developed for the BOP. This is especially important for the poorest segment, which has limited disposable income and typically no savings on which to draw.
But even if an attractive price-performance proposition exists, it is necessary to educate the population about the long-term advantages of investing in prevention and saving longer-term to cover more serious medical conditions. Psychological barriers to such thinking are prevalent in India. Waisbord found that Indians tended to seek TB-related care once they perceived risk among their families and community; other studies have shown correlations between disease-specific education and diagnosis of that illness. In rural India, ignorance concerning the benefits of basic hygiene contributes to the higher mortality rates caused by preventable diseases such as diarrhea. Despite government efforts, access to improved sanitation stood at 22 percent for rural households. Beyond infrastructure-related issues, many Indians do not see sanitation as a necessity, with studies showing that the most efficient creation of demand for hygienic conditions occurs when children are educated about and involved in the cause. Yet a major barrier to investment in health and hygiene is unlikely to vanish any time soon: 82 percent of BOP household incomes goes toward basic needs such as food and energy.
If a healthcare initiative fails to educate consumers, it also fails to gain the scale necessary to achieve profitability under low price points. Achieving economies of scale is the critical factor in sustaining most BOP-focused business models because it allows dispersion of fixed costs among a large number of transactions and can reduce variable costs.
The inability to make progress on these three interrelated factors—price-performance, education, and scale—has created a vicious cycle related to providing healthcare to India’s BOP. Yet strategic, mutually reinforcing solutions in each domain can convert the vicious cycle into a virtuous one.
The Virtuous Cycle in Action In-country research reveals two firms approaching BOP-related healthcare in India: Medicine Shoppe and Arogya Raksha Yojana (ARY).
Medicine Shoppe, a subsidiary of Cardinal Health and the largest franchisor of independent pharmacies in the United States, entered India in 1999, recently opening its one hundredth store in the country. Recently it diversified from its core focus on urban pharmacies to rural locations. Specifically, four Medicine Shoppe pharmacies were established on the rural outskirts of major cities, targeting families earning no more than $100/month. The easily accessible stores are located in areas without hospitals or nursing homes, and offer free on-site consultations with doctors whose prescriptions can only be filled on-site, driving traffic and revenues. Medicine Shoppe has thus created an attractive price-performance proposition for the BOP through free physician expertise and competitively priced generic drugs. Marketing is conducted efficiently, using community leaders’ endorsements, along with pamphlets and loyalty cards; such education is driven by the price-performance, as well. And these two factors enhance the scale of the operation, generating high per-pharmacy revenues that must cover the physicians’ Rs. 15,000-20,000/month salaries.
Medicine Shoppe’s main challenge, in fact, is attracting and retaining physicians. A secondary challenge is attracting customers, despite the marketing efforts, and improving compliance, especially with preventive measures. The latter may be addressed in part by public-private partnerships, wherein the government uses Medicine Shoppe pharmacies as dispensing or service locations for preventive health initiatives. At the time of this writing, Medicine Shoppe planned to expand to fifty locations, but the concept’s sustainability was yet to be determined.
Arogya Raksha Yojana (ARY) was launched in February 2005, a collaboration between the Biocon Foundation (an Indian pharmaceutical firm), ICICI Lombard General Insurance, and Narayana Hrudayalaya Hospital. ARY offers micro-health insurance promoting access to over sixteen hundred types of surgeries at twenty-five hospitals, along with clinic consultations and discounted drugs and labs, for annual premiums of Rs. 120-180/person. ARY negotiates volume discounts with hospitals, and all settlements are made directly between ARY, the hospital, and ICICI.
On top of the price-performance proposition, ARY has relied heavily on education, given the foreignness of insurance to BOP households. The foundation hosts health camps on the benefits of insurance, pointing out how its absence often forces family to sell all income sources in the face of major illness. Like Medicine Shoppes, ARY also relies on community members to serve as its advocates, enlisting three thousand locals to educate their communities in its first year. Biocon social workers also use flipcharts to educate women and children on basic hygiene, and the firm helps communities build public toilets.
Scale is of course critical to ARY’s sustainability. ARY had enrolled sixty thousand as of March 2007, but requires five times that number to become sustainable and offer more comprehensive coverage. Beyond acquisition of new members, retention of existing ones is a major issue, as customers tend not to renew if they have not used their insurance, and many ask for their premiums back, according to a Biocon representative. Overall renewal rates are below 50 percent, compared to 70 percent for traditional insurance firms. ARY is experimenting with measures (e.g., installment payment plans) to improve acquisition and retention.
It is clear from these examples that the private sector can play a major role in improving the BOP’s healthcare. But private players will only focus on this segment if it is profitable. Businesses serving the BOP can drive profitability through mutually reinforcing price-performance propositions, education initiatives, and achievement of economies of scale, as Medicine Shoppes and ARY have attempted. Beyond these three pillars, future research could address innovative approaches to psychological healthcare-related barriers, alternative payment/financing structures, and public-private partnerships. But in general, BOP-related healthcare must remain a top priority.