Apollo Hospitals: Insurance and Superhospital Strategy

Overview of Apollo's Strategic Context

Apollo Hospitals is a leading private healthcare provider in India. The healthcare system in India is oriented toward private enterprise, as the government provides very little care — a gap that is matched with poor health outcomes for much of the population. Most health spending occurs on an out-of-pocket basis, with only 15% of the population using health insurance to cover their costs. Within this environment, Apollo Group has emerged to win a substantial share of the private hospital market. Future growth depends on rising incomes that will increase demand, as well as improvements to the insurance system that would bring more Indians — particularly the rising middle class — into the healthcare system. Apollo is examining two strategic options for enhancing its revenues: establishing a health insurance scheme and differentiating through the creation of super specialty hospitals.

Insurance Scheme: Competitive Forces and Resources

There are two competitive advantages to the insurance scheme. The first is that an insurance company is structured like a casino — the house always wins. There is inherently 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 healthcare system. As the only company with its own insurance arm and locations around the country, Apollo would be an appealing option in a market where a high level of vertical integration is critical to fostering high-quality, reliable care. The insurance industry is favorable in India because Apollo enjoys high bargaining power over both buyers and suppliers, given its competitive position in a relatively immature market. There is relatively low competitive intensity, and the main competitor and substitute — public healthcare — 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 access to partners with those resources, to launch an insurance business. Such a business would be difficult for competitors to match, so there is a definite resource advantage to this strategy. The main resource that is lacking — and it is a significant one — is adequate actuarial data. Insurance companies rely on probabilities to determine their pricing, and this data is not complete in India (Investopedia, 2014). A new insurance business would only have access to whatever data is publicly available and internally generated, which is far less than what an insurance company in the United States might draw upon. As a result, insurance could easily be mispriced, causing Apollo to take a loss on the product. An insurance scheme is therefore something Apollo should undertake only if it genuinely believes it has the data to support accurate pricing. As for cultural factors, most Indians who would be in the market for insurance are relatively Westernized and would likely understand the concept. That said, without a strong history of purchasing insurance, some consumers might remain skeptical.

Super Specialty Hospitals: Competitive Forces and Resources

The super specialty hospital option implies a pursuit not only of dominance in specific medical fields within India, but also of the medical tourism market. In that arena, India would be competing with Singapore, Malaysia, Thailand, several Gulf States, and other countries capable of delivering a similar cost-quality dynamic. This means lower bargaining power over buyers than in the domestic insurance market. Bargaining power over suppliers, however, remains favorable for Apollo because of its size. Competing against other countries introduces some increase in the intensity of rivalry, but high-end medical solutions have fewer reasonable substitutes. Overall, the competitive forces are somewhat more challenging for the superhospital option due to regional competition.

The resource-based view, however, favors this option. Apollo benefits from employing low-cost labor — as do many competing countries — but it also employs thousands of Indian doctors who trained overseas. The return of foreign-trained physicians is one of the most distinctive resources Apollo can leverage, and few countries can match this advantage. With its size and financial strength, Apollo is able to offer technology and working conditions comparable to those in Western countries. Under the resource-based view, there is significant opportunity for Apollo in medical tourism, provided the company can continue to attract back Indian doctors currently working abroad. Culturally, this option also fits well because Apollo would not be attempting to change Indians' consumption habits regarding healthcare; rather, it would be pursuing a greater share of the global market for high-end medical care.

Pricing and Cost Factors

Apollo must carefully examine the cost and pricing variables associated with each option. Launching an insurance scheme carries substantial upfront costs, but the model pays back relatively quickly. The company would need a line of credit and reliable actuarial tables. Fixed costs include office space and technology, which are comparatively inexpensive. The fixed costs associated with super specialty hospitals are considerably higher, involving construction or expansion of existing facilities. Additional personnel would need to be hired, and though the investment would be depreciated over time, the payback period would be significantly longer.

Pricing strategy will differ considerably between the two options. The superhospital option requires competitive pricing, but this presents a challenge because the company is delivering a premium service and must cover high fixed costs. The prices dictated by the market may not be sufficient to cover those costs — figures Apollo will need to model carefully. The insurance scheme is different in that the primary costs are incurred upfront, in the form of initial technology investment and the dedication of substantial working capital. Insurance pricing would be based on actuarial figures, but there is room for penetration pricing (ET, 2014). This would allow Apollo to build market share quickly. As it acquires insurance customers, those individuals would also become future hospital patients, creating a compounding revenue advantage.

The pricing environment for insurance would be monopolistically competitive, though only barely. The health insurance market in India is not large, and there are relatively few major players. The competing insurers would nonetheless differentiate on the basis of rates and coverage plans. Apollo could therefore pursue penetration pricing to build both the overall market and its own share within it. The superhospital option operates in a more clearly monopolistically competitive environment, with competition coming from multiple countries each offering different comparative advantages. Apollo would need to leverage its established brand in the Indian market and its access to foreign-trained talent to attract patients who have considerable choice in where they seek treatment. In either scenario, Apollo retains the freedom to pursue its optimal pricing strategy. For a broader framework on how competitive forces shape these pricing decisions, see Porter's (2008) foundational article in the Harvard Business Review.

References

ET. (2014). Definition of pricing strategies. Economic Times. Retrieved November 23, 2014, from http://economictimes.indiatimes.com/definition/pricing-strategies

Investopedia. (2014). Actuarial analysis. Investopedia. Retrieved November 23, 2014, from http://www.investopedia.com/terms/a/actuarialanalysis.asp

Jurevicius, O. (2013). Resource-based view. Strategic Management Insight. Retrieved November 23, 2014, from http://www.strategicmanagementinsight.com/topics/resource-based-view.html

Moffatt, M. (2014). Price elasticity of demand. About.com. Retrieved November 23, 2014, from

Porter, M. (2008). The five competitive forces that shape strategy. Harvard Business Review. Retrieved November 23, 2014, from https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy