Financial Sustainability: Ensuring Growth through Evaluation

By Johanne Chu

My name is Johanne Chu, currently a sophomore at the Wharton School of Business, University of Pennsylvania. I arrived at ICTPH on February 2, 2012 wanting hands-on experience in health care. While I had no prior experience in the area, I agreed with the members of this organization that health care is an infallible human right. I came equipped with an educational background in business and willingness to learn. With Karthik Tiruvarur (Chief Operating Officer, SughaVazhvu Healthcare) as my mentor, we quickly narrowed down project possibilities that would allow me to apply what I’ve learned but also be of use to ICTPH.

This fiscal year, ICTPH is looking into expanding its Rural Micro Health Centres (RMHCs) at a record rate and starting exciting new initiatives that will benefit its patients. To look ahead, it is vital for ICTPH to look around first to examine its financial status and capabilities. That became the basis of my project. Ultimately the project was finalized to be twofold: the first part was to understand inventory management and evaluate drug margins at the point of sales, the RMHC; the second part was to propose re-pricing for our diagnostic tests.

In evaluating profits, I wanted to see how close the ‘real’ gross profit margin was to the current estimates of ICTPH. In other words, if drugs are one of the few areas in which we make a profit, what is the breakdown of those profits? To have an in-depth understanding of every facet related to drugs, I combined literature learning, HMIS briefing, and primary documents. Firstly, I looked at the operations and studied our relationship with pharmaceutical companies and the general supply chain in our Rural Micro Health centres (RMHCs). Then, I studied the drugs in stock at every RMHC to enhance my understanding of their medical usage, their composition, their side-effects, and so forth. Thirdly, I looked at invoices for the past ten months with the pharmacist at SughaVazhvu Healthcare, Manimekalai Pichaivel, to see the breakup of all the costs related to drug orders and gauge a suitable time frame in which to obtain the data for analysis. Lastly, field visits helped me gain hands-experience with regards to the functioning of the drugs supply chain at SughaVazhvu.

To minimize bias while ensuring sufficient data, I ultimately settled for the six months time period from August 2011 to January 2012 for the above mentioned analysis. In June 2011, the business team at SughaVazhvu reoriented the stock, retracting drugs deemed too expensive or unsuitable for the populations’ needs, as driven by their evidence based care methodology. By August 2011, the updated inventory had been used for several months and the list did not go through any significant changes through the six months that followed. The period of study also observed the expansion of the RMHC network by only one unit.

The primary information used was the Drug Consumption List and the Product List. Combining the data generated the master spreadsheet – Final Drug Margins. I calculated the purchase price per unit, the MRP per strip, along with information on sourcing, to get the margin per strip and margin per unit for each drug. In addition, the profit on cost was also calculated to measure the price markup of the drugs from the purchase cost. I computed the revenue and profit earned on each drug, and after accounting for the disposed drugs’ cost, arrived at the current gross profit margin.

I hope that this part of the project would give a better idea on how to best price drugs for SughaVazhvu. The debate addressing patient affordability may attain useful pointers from my model as SughaVazhvu explores to prices below the MRP to further enhance patient experience.

Moving onto the second part addressing financial sustainability, I wanted to explore a logical and pragmatic method of setting prices for the diagnostic tests offered by SughaVazhvu Healthcare. I started by figuring out what fixed costs to account for, such as diagnostic equipment, reagents, salaries, electricity etc., I studied our enrollment process and the Rapid Risk Assessment methodology, which serve as the diagnostic test starting point for many of our patients. The HMIS records gave me an idea of diagnostic test utilization within the system. The Field Visits, as always, provided unexpected developments that proved helpful for my project.

I considered value-based pricing, psychological pricing, and target return pricing before settling on a cost-plus pricing strategy, which considered all direct, input costs to arrive at a product’s Unit Cost. I focused on the five most frequently conducted diagnostic tests: Triglycerides, Total Cholesterol, HDL, Blood Glucose (fasting), and Blood Glucose (post-prandial). I did a breakeven analysis considering all the relevant fixed costs and compared the figures to the accumulated diagnostic test counts. For the variable costs, I used the procedures for the tests and the order invoices to calculate exactly how much consumable are consumed through each test, from a single-use syringe to the reagent composition. I also visited three local diagnostic labs in and around Thanjavur to get their price lists. By calculating the averages, I calculated the markdown percentage for us versus the market.

Ultimately, I put forth two sets of proposed prices. One based on variable cost ensuring cost recovery, and the second based marking our services below the market competitive rate ensuring the prices to be 30% below the local diagnostic labs’ prices.

This project highlighted the operational and logistical details for the diagnostic laboratory and the blood movement supply chain which is maintained across the entire network of SughaVazhvu’s RMHCs.

Being a part of ICTPH for the past five weeks has been an enriching experience for me. I wish all the success for this innovative community driven business model approach of delivering healthcare to rural populations of India.

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