Why Indian healthcare pricing strategy warrants a fix

By Arunima Rajan

Healthcare activists, policymakers and academicians weigh in on pricing reforms required in the sector.

The Economic Survey 2021 states, “A large proportion of deaths in India manifesting due to poor quality of healthcare is likely to reflect that the quality of treatment in the private sector may not be significantly better than that in the public sector.”

This is despite the exorbitant prices levied by the private players. The private healthcare providers are free to do this, thanks to the poor quality of  services offered in the public health sector, and owing to the lack of a pricing policy in the country.

The fault lines in the Indian healthcare system have become too apparent in the last one and a half years. Reforms are underway in the system-- the stride toward the achievement of Universal Health Coverage for its 1.4 billion population, the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (ABPMJAY), for instance -- but, the Centre’s expenditure on healthcare still remains around 1.8% (FY2021) of the GDP as per the Economic Survey 2021, significantly lower than that of other countries. It is no surprise India ranks 179 of 189 countries in prioritisation of health in government budgets. The meteoric growth of private healthcare providers and their arbitrary pricing are direct results of this scenario.

Why do we need healthcare pricing reforms?

"The Indian healthcare sector is entirely unregulated and lacks ethics in practice; this leads to a supply-induced demand market for healthcare, essentially a public good," says Ravi Duggal, a public health activist.

The emergency faced by Indians during the second wave of the COVID-19 is a clear indication that the country needs pricing reforms in the healthcare sector. However, healthcare pricing has always been a tricky issue as there are two extremes in our healthcare sector. On the one hand, basic healthcare requirements are going unmet for millions of India's poor, and on the other hand, frugal innovation is driving many advances in making healthcare accessible, affordable and even used by the developed nations.

A robust healthcare pricing strategy will have to account for various costs -- infrastructure, manpower, equipment and its maintenance, overhead expenses -- and will be influenced by the plethora of services provided at a facility.

“The private health sector, especially hospitals, have no defined pricing/cost parameters and hence they charge based on what their clients can afford or what insurance is willing to pay. While the more prominent private hospitals may have a price list, it has little meaning when practice is unregulated and results in unnecessary procedures, interventions, diagnostics etc., to rake in higher revenues," explains Duggal after highlighting that India’s pricing policy regulating the pharma sector also disintegrated with its elevation to a global player, exporting more than 55% of the total production.

In India, healthcare providers play a huge role in determining care patterns. Activists like Duggal think the current way of paying for healthcare services leads to suboptimal outcomes and unnecessary spending.

Duggal claims that the smaller private hospitals are still humane and are sensitive to patient circumstances. More prominent private hospitals, whose bed occupancy and revenues are dependent on insurance-backed patients or medical tourism patients, still try to maximise their revenues, often through malpractice. "This drives up the cost of care for most patients, and even with cashless insurance coverage, they end up shelling out huge sums out of pocket due to unethical functioning of such hospitals."

Pricing of drugs

Low drug prices are now history in India. The high cost has a direct correlation with drug prices. The earlier drug price control regime reined in the drug prices and kept them affordable, but now, many experts think prices are more or less similar to other countries.

"Civil society actions continue to put pressure for price regulation, and hence certain anti-cancer drugs or devices like stents have had a leash on their prices, but the present government is least concerned about regulating drug prices, and this is a matter of concern, and we have seen this play out during the COVID-19 pandemic where many drugs became even more expensive because of the absence of adequate regulation," says Duggal.

Designing a healthcare pricing strategy

"Lack of access to a credible government health system drives the cost in the healthcare sector," says Dr. Rajesh Kumar, Executive Director of State Health Systems Resource Centre, National Health Mission, Department of Health & Family Welfare, Govt of Punjab, Chandigarh. He believes that the lack of government regulation -- implementation of Clinical Establishment Act (CEA), for instance -- is a significant factor that can control pricing.

Kumar agrees that while defining healthcare system goals, other stakeholders like care providers and insurers may have different goals. "India does not have a comprehensive pricing policy. There is a government policy for pricing some drugs and devices, but it does not cover all drugs and devices. AB-PMJAY has the pricing for select healthcare packages for health institutions empanelled with them. CEA is yet to be passed by all states; under this Act, rules can be framed for the pricing of various services. But, most of the governments have left pricing to the market," he adds.

What do we know about the pricing strategy of providers?

"Even the prices of drugs, devices and packages fixed by the government are higher than the sum of cost of production, investment in Research & Development and a reasonable markup. The formula adopted for price fixation is irrational," adds Kumar.

"CEA should be adopted and implemented by all states with rules on price and standards. Public hospitals should be accessible and affordable. Government should be paying (from tax) for healthcare to ensure universal health coverage. A single purchaser (the government) can buy private service at rates that cover their cost and a reasonable markup. Health Technology Assessment Board should provide cost-effectiveness before new technologies are introduced. Most of the time, technology drives cost up," he adds.

Health Technology Assessments (HTA) includes quantifying whether an investments are both clinically efficient as well as cost-effective.

Alternate payment models

Shailender Kumar Hooda teaches at the Institute for Studies in Industrial Development, New Delhi. Hooda holds a PhD in Economics from Jawaharlal Nehru University. According to Hooda, he "works on the political economy of health and healthcare, health economics and policy-related issues, especially decentralisation in health, equity, financing, corporatisation and the healthcare industry."

Hooda points out that there are several ways to look at the pricing of healthcare.

"How much the public system charges for a specific treatment within the sector, at what price have they outsourced the specific service/treatment/diagnostic/ambulatory service, how do insurance companies fix prices and negotiate it with hospitals in public/private setting, how much do private sector players charge and finally, who drives/controls the pricing - whether it is the public sector, the public-private partnership (PPP), private hospitals or the medical insurance companies," he explains.

The public system provides inadequate service/care. "Several reports are suggesting that PPPs have not been able to reduce the price. Huge corporate hospitals charge an enormously high price for a specific treatment, and despite technological advancements, the price in private hospitals is only increasing over time. The charges for specialists, diagnostics and beds are increasing,” Hooda adds.

“In one way, insurance can set the price low and negotiate it with the hospitals. Many hospitals empanelled themselves under government-funded schemes like RSBY/PMJAY but paid/reimbursed only a fraction of the hospital cost. The households paid more than half of the cost incurred in the hospitals despite them being enrolled under public or private insurance. So in effect, neither the government has regulated the healthcare pricing system nor has the insurance system, and naturally not the private hospitals themselves. The private sector is driving the cost,” Hooda says.

The way out: Promoting efficient provider-decision making

“If India allocates adequate public funds to build the public system, all pricing issues can be controlled easily,” says Hooda.

“Currently, India has adopted a mixed kind of model of financing and provisioning, where different players provide different types of care. The primary/secondary care must be taken care of within the public system. This is important because more than 63% of the out-of-pocket (OOP) payment paid by the households is outpatient care that is not covered under any insurance,” he adds.

“High-end services can be opened up for the private sector, and the government can extend protection for those who can pay for such services. The government must force the private sector to offer (hospital) services at PMJAY price to all (even if someone is not covered) since they (hospitals) have empanelled themselves under it,” Hooda suggests.

“Price regulation is necessary. There are some examples of government intervention, though a little late, during COVID-19 time, of controlling the price of testing/treatment at least in some cities/states. The new emerging technology is going to affect the care as well as cost in a big way. Digital things will help in reducing the consultancy fee and diagnostic charge hopefully. The private sector, however, entering into it differently, in my opinion, over time, will end up identifying the patients for private hospitals where the cost of care would be high.

"At present, over four crore patients are hospitalised in a year, but technology will drive the number up. So hospitals will be getting more patients in the times to come, and more households will contribute to their profit kitty. There is no direct answer to whether it will reduce the hospital's price and improve the overall health of the population," concludes Hooda.