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Exaggerated Cost Reduction

At times, the BOP proposition exaggerates the price reduction achieved, by making inappropriate comparisons. A frequently cited example is the Aravind Eye Care System, a not-for-profit organization in India dedicated to eliminating unnecessary blindness, especially among India’s rural poor. It is claimed that Aravind has reduced the cost of a cataract operation to $25 to $300, compared to the $2,500 to $3,000 one costs in the United States.52 Aravind is an excellent organization that has reduced costs through economies of scale, specialization, and process design.53 But these figures exaggerate its achievement. Comparing Aravind’s costs to costs in the United States does not by itself prove that Aravind has been particularly innovative or effective. The cost of a haircut is similarly dramatically lower in a small Indian town than in the United States, yet this does not suggest any breakthrough achievement by Indian hair salons. The cost of many products and services, especially those that are labor intensive, is much lower in poor countries simply due to the lower cost of inputs. Second, to be consistent, Aravind’s costs should be converted into dollars at PPP rates, not at financial exchange rates BOP proponents use.54 Third, several factors lead to the high health care costs in the United States, including high labor costs for medical personnel, high administrative costs due to the third-party payment system, and the high cost of malpractice insurance. Most estimates suggest medical treatment costs in India are about one-tenth of those in the United States55 Finally, Aravind is subsidized by other nonprofit and charity organizations. It receives intraocular lenses and other medical supplies at a substantial discount from a nonprofit, Aurolab, for example. Aravind draws its patients to the hospitals from eye camps that are organized and paid for by various philanthropic organizations, such as the Lions Club and the Rotary Club.

The appropriate comparison is between Aravind and a hospital in India. Private hospitals in India charge about $350 for cataract surgery, which is about what Aravind charges its patients who are not indigent.56 It is true that Aravind subsidizes poor patients— about 70 percent of the total patients—asking them to pay only $30 (and more if they can afford it). Aravind cross-subsidizes poor patients by charging higher prices to the more affluent patients. And, because they are highly dedicated to the cause, the surgeons and staff work grueling hours for pay comparable to government hospitals, which is much less than they would earn in most private hospitals. Still, retention is a problem, and a quarter of the staff defect annually to better-paying jobs in the private sector.57 All this is not to detract from recognizing Aravind as an innovative organization —overall, Aravind is clearly more efficient than a typical hospital in India—but to show that the BOP proponents exaggerate the price reductions it achieves.

 
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