1a)Looking at the Aravind Eye Hospital, it appeared to me that there were about six distinct types of patients with different cost structures: paying screenings, paying cataract surgeries, paying other surgeries, free hospital screenings, free camp screenings, and free surgery patients. I noticed there were other revenues and cost related to donations, consulting, book writing, and other business functions and pulled those revenues and costs out. I modeled approximate revenues and costs for each class of patient. To create this model, I used the revenues and costs for 1991-1992 in Exhibit 6.
I then determined the number of patients in each class using Exhibit 5 for 1991 and Exhibit 7 for 1992 (extrapolating the results for the full year). I then allocated costs of each line of Exhibit 6 using several different methods. For stipend and staff salaries, I calculated the number of hours and cost per hour for each of the different types of workers. This breakdown is listed below: I also allocated some costs by hours occupied, and by patient to determine the cost per patient for each of the different classes. 1b)For revenues, obviously only the paying customers contributed.
I also saw that there was significant other revenue generated from donations, consulting, and other activities. I created a model for revenue per type of patient and allocated the revenues based on number of patients, number of surgeries, and costs per patient.
1c)Aravind’s business model is to operate extremely efficiently, provide much lower cost surgery than other private practices, and use those savings to subsidize free surgeries to those who cannot afford it. Aravind currently performs 8 free surgeries for every 5 paying surgeries and still has a large surplus to perform additional free surgeries or to invest in additional capacity.
Other private practices do not have this surplus to be able to subsidize free surgeries because their doctors make 3. 5 times as much for half the hours, they are not nearly as efficient in their operations, and the IOLs cost 600-700 Rs. more because they do not manufacture their own IOLs.
A quick run of the numbers shows that with higher staff and IOL costs, the standard cataract surgery practice would look more like the following model with no free surgeries provided: 2)Breaking down the different classes of patient at each of the hospitals, the financials for Madurai, Tiruneveli and Theni are as follows:
3) The Tirunelveli and Theni hospitals are not as profitable as the Madurai hospital mainly due to the differences between the paying and free surgeries. At the Madurai hospital there are 0. 71 paying surgeries for every free surgery. At Tirunelveli and Theni, those ratios are 0. 35 and 0. 32 respectively.
For the Tirunelveli and Theni hospitals to achieve results on part with the Madurai hospital, they would need to increase their ratio of paying surgery patients to free surgery patients of 0. 71 or greater. At ratio of paying to free surgery patients of 0. 20, the hospitals would only break even.
4a)The satellite hospitals are not performing as well as the Madurai hospital because they perform approximately half as many paying surgeries to free surgeries as Madurai performs. Part of this discrepancy can be explained by the change in their model at the two satellite hospitals.
At the Aravind family of hospitals, patients have a choice of whether they want to pay or not. At the satellite hospitals, they integrated the paying and free hospitals for economies of scale. The facilities on the free section are much more spacious that at Madurai. There is a central surgical facility that both free and paying sections of the hospital utilize.
In short, there is little differentiation between the free and paying hospitals. There may be many patients that would be able to pay, but choose not to because there is not significant differentiation between the free and paying sides. Secondly, there exists a significant and prevalent caste system in India.
Paying patients may find it unpalatable to share facilities and be operated on alongside the “untouchables” of Indian society. Going forward I would recommend that Aravind should work to provide further differentiation between services to engage in third degree price discrimination.
Give patients with the means to pay for their surgery a reason to self discriminate. Revamp the paying side and improve the facilities, especially the recovery rooms. Offer more amenities for paying customers and find additional services to generate incremental revenue.
Aravind also needs to actively advertise and highlight the differences in service for paying customers and try and attract new customers. 4b)For further expansion, I would recommend that Aravind should build the paying hospital first with the ability to easily expand and add a separate free hospital right alongside the paying hospital.
This will allow them to gauge the market size for paying customers to determine how many free customers they can support in the free hospital, and build the free hospital to service that volume of patients. They can then take the profits of the paying hospital to fund the capital costs of adding on the free hospital.
They need to learn their lesson from the previous satellite hospitals and build enough separation and differentiation between the two hospitals so that those able to pay for their surgery would not choose to go to the free hospital.