Apollo Hospitals Case Research Paper

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Apollo Economics

Apollo Hospitals is a healthcare provider in India. The healthcare system in India is oriented towards private enterprise, as government provides very little care, something that is matched with atrocious health outcomes. Most health spending is on an out-of-pocket basis, with only 15% of the people using health insurance to cover their costs. Within this milieu, Apollo Group emerged to win a substantial share of the private hospital market. Growth now depended on rising incomes that would increase demand, but also on improvements to the insurance system that would bring more Indians, in particular the rising middle class, into the health care system. Apollo is examining a couple of different options with respect to enhancing its revenues. The first such option is to establish an insurance system and the second is to differentiate via the creation of super specialty hospitals.

There are two competitive advantages to the insurance scheme. The first is that the insurance company is like a casino -- the house always wins. So inherently there is profit to be had in the insurance industry, as long as there is enough data to develop accurate actuarial tables. The main benefit of an insurance scheme is that it will enlarge the size of the market, bringing more middle class Indians into the health system. As the only company with its own insurance, and having locations around the country, Apollo would be an appealing option in a country where a high level of vertical integration was critical to fostering high-quality, reliable care. The insurance industry is favorable in India, because there is high bargaining power over both buyers and suppliers, given Apollo's competitive position in the immaturity of the market. There is relatively low competitive intensity and the main competitor/substitute, public health care, is in poor shape.

The resource-based view of strategy holds that companies with superior resources tend to enjoy superior performance (Jurevicius, 2013). Apollo appears to have the financial resources, or at least the access to partners with those resources, to start an insurance business. An insurance business would be something that its competitors are unable or unlikely to match, so there is definitely a resource advantage to this strategy. The main resource that is lacking -- and it's a big one -- is adequate actuarial data. Insurance companies rely on probabilities to determine their pricing, and the reality is that this data is not complete in India (Investopedia, 2014). A new insurance business would only have access to whatever data is available publicly, and internally. This is far less than what an insurance company in the United States might have. Thus, insurance could very easily by mispriced, resulting in Apollo taking a loss on the product. An insurance scheme is something Apollo should only undertake if it genuinely feels that it has the data to support accurate pricing. As for cultural elements, most Indians who would be in the market for insurance are more Westernized, and would probably understand the concept. That said, without a major history of buying insurance, some might well be skeptical of the idea.

The other option, the superhospitals, implies a pursuit not only of dominance in specific fields in India, but a pursuit of the medical tourism market. In that, however, India will be competing with Singapore, Malaysia, Thailand, some of the Gulf States, and other countries that have the ability to deliver a similar cost-quality dynamic. Thus, there is going to be lower bargaining power over buyers. Bargaining power of suppliers remains favorable for Apollo because of its size. The company would be competing against other countries, which implies some increase in the intensity of rivalry, but high-end medical solutions have fewer reasonable substitutes. Overall, however, the forces are a little bit more challenging for the superhospital option because of competition throughout the region.

The resource-based view, however, favors this option. Apollo has the benefit of employing low cost labor, same as many other countries, but it also employs thousands of Indian doctors who trained overseas. Having foreign-trained doctors returning home is one of the main resources Apollo can offer. Few countries can match this advantage of India. With its size and wealth, Apollo will be able to offer technology and working conditions that are equivalent to those in the West. Thus, under the resource-based view, there is significant opportunity for Apollo in medical tourism, if the company can continue to attract back Indian doctors working overseas. Culturally, this option fits as well because Apollo would not be trying to change the consumption habits of Indians with respect to health care; it would be pursuing a greater share of the global market for high-end medical care.

Pricing/Cost Factors

Apollo has to look at the different cost variables, and pricing variables.

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Starting an insurance scheme is expensive, but it pays back quickly. All the company needs is a line of credit, and good actuarial tables. Fixed costs are cheap office space and technology. The fixed costs associated with the superhospitals are considerably higher, as they involve building/expanding existing facilities, which will be expensive. More personnel will also need to be hired, and even though the investment will be depreciated, payback will take longer as well.

Pricing strategy will be quite different for each of these options. The superhospital option will require competitive pricing, but that will be a challenge because the company is providing a premium service and needs to cover high fixed costs. The pricing dictated by the market might not be enough to cover these costs, so those are numbers that Apollo will need to crunch. The insurance scheme is different, in that the costs are up front, in terms of initial technology investment and the dedication of crores in working capital. The insurance will be priced based on the actuarial figures, but there is room for penetration pricing here (ET, 2014). This would allow the company to build market share quickly. As it captures insurance customers, those would become future customers for the hospitals as well.

The pricing environment for insurance would be monopolistic competition, but barely. The insurance market in India is not very big and there are not very many major players. Still, the different health insurance companies would be competing on the basis of their rates and coverage plans. Apollo can therefore choose to use penetration pricing in order to build the market and build its share within the market. The superhospital option is very much monopolistically competitive market, with competition coming from a number of countries each with different comparative advantages. Apollo would need to find a way to leverage its advantages -- established brand in the Indian market and access to talent -- to attract customers who otherwise have a lot of choice in where they want to get their procedures done. In either case, Apollo has the freedom to pursue the optimal pricing strategy.

It is also worth considering the elasticity of the different prices, and these might have an impact on which strategy is better. There are different elasticity factors, the most important being price and income, along with cross-price elasticities. Major procedures tend to have low price elasticity of demand because they save lives -- if the person can pay, they will get the procedure, regardless of what the price is (Moffatt, 2014). Apollo would compete in India, for example, on the basis of having lower transportation costs and accommodation costs -- a consumer in Bombay is less likely to travel overseas for healthcare if quality of care is available locally, even if the local price is a little bit higher.

Income elasticities are also relevant, because the more money Indians have, the more health insurance they will demand. The health insurance consumer, in a monopolistically competitive market, is apt to have a high price elasticity of demand all other factors (like coverage) being equal. Cross-price elasticities matter, too, at least with the superhospital/medical tourism option. The total cost of a procedure is whatever Apollo charge, plus transport, accommodation and incidentals. As such, the cost of those other things will affect demand for health care at Apollo -- Apollo has no control over those other costs but it is the total cost that determines the buying decision.

A final factor to consider is the role that externalities might play, in particular those that might cause market failure. Remember that in a perfectly competitive market there is no profit, so a little bit of market failure is a good thing for the company. Insurance markets are always in a state of failure as the insurance company leverages information asymmetry to earn its profits -- it always knows more than the customer about what the risks are and what a procedure will cost. There are still asymmetries in the superhospital option - most people know little about the cost of health care - but the asymmetries are not as powerful and competition brings prices much closer to the natural market equilibrium. There is still profit potential, of course, but it might….....

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