Price control risk could be game changer for healthcare sector

The March quarter’s financial results should give a glimpse of the impact of price controls on coronary stents, which should give an idea of the price sensitivity in the healthcare business

Graphic by Subrata Jana/Mint
Graphic by Subrata Jana/Mint

How far will the government go to secure the healthcare needs of its citizens? The answer to this question may have far-reaching implications for the private healthcare sector and by extension its investors. The best-case scenario is that private healthcare providers—mainly hospitals and allied services such as diagnostics—continue doing business as they are, with the government co-opting them for public health services and reimbursing them.

The worst-case scenario is one where the government decides to impose price controls on services and attempts to provide affordable healthcare by fiat.

Consider the recently released National Health Policy 2017, which was accompanied by a separate document titled Situation Analysis. One part is about private healthcare. It says the government has invested for 25 years, to create a positive economic climate for the sector. This includes measures such as lower direct taxes, higher depreciation on medical equipment, duty exemptions for life-saving equipment, preferential and subsidized allocation of land, and 100% FDI (foreign direct investment), which has brought in $2 billion worth of investments.

It is time to pay back, the report says, and while the industry brings in revenue and provides jobs, there is a need for the “government to actively shape the growth of this sector so as to ensure that it is aligned to national health policy goals, especially with regard to equity, access and financial protection”. It goes on to say that the private sector has to fulfil its mandatory obligations, although not specifying what they are.

This appears no less than a suggestion for some form of control on the price of healthcare. Now, drugs that are in the essential list are already under price control. But other parts of the sector are not covered. The recent price control imposed on coronary stents, however, did see some overlap on the hospital sector. Not only did the government cap the price of stents but it also warned hospitals to display the price of stents in the bill, and sought to ensure that hospitals did not inflate the bill under other heads. Indirectly, this amounted to oversight over the total cost.

Of course, the public was resolutely behind the move. One could argue, as one hospital chief did, that when the rich pay for premium procedures, it allows hospitals to provide affordable care to others. This argument is not new but how does one monitor this. And, what about those who cannot afford the cost of even these basic procedures. The government is concerned about them.

The Situation Analysis report says healthcare spending pushes more than 63 million people, by one estimate, into poverty annually. In 2011-12, share of out-of-pocket healthcare expenditure to monthly household income was 6.9% in rural areas and 5.5% in urban areas. Schemes to provide health insurance to the very needy have been introduced but have their own share of problems.

The actual policy does not talk about price control but mentions that strategic purchasing from private firms will be used to supplement public healthcare. The focus is on keeping costs low. The policy says: “Policy proposes a responsive and strong regulatory framework to guide purchasing of care from non-government sector so that challenges of quality of care, cost escalations and impediments to equity are addressed effectively.”

The need to co-opt the private sector is understandable. The government proposes to increase its own spending on healthcare from 1.15% to 2.5% by 2025. The situation analysis cites global data to say that a country has to spend 5-6% of GDP on health, a majority of it by the government, to meet basic healthcare needs. We will be nowhere near that target even by 2025.

That’s where the private sector comes in. Now, in the longer run, this can be a huge opportunity as it expands the market size because the government is funding healthcare. But the government faces a budgetary constraint. The risk is that the government mandates hospitals to provide healthcare services, at a price set by the government. In the stent episode, the government had used the landed cost of stents as an input to determine the price.

What if this approach is taken across the board? Hospitals may protest but public sentiment will be resolutely behind them. The stent episode saw some grumbling but hospitals have implemented it. They don’t want to antagonize the government. Don’t forget that the government believes that demonetization actually helped it win state elections. If black money can arouse so much ire, tackling the tangible problem of unaffordable healthcare, will get more public support. There is a political drive to this initiative too. Providing healthcare assurance to all and reducing out-of-pocket spending was one of the main points in the ruling party’s election manifesto in 2014. It will need something to show as action taken in 2019.

That the government intends to co-opt the private sector for healthcare services is very clear. What form it takes will determine the impact on companies. At this point, investors can only wait and watch, and take a cautious approach when investing in healthcare stocks. Among healthcare companies, the listed universe has expanded in recent years, as more hospitals and diagnostics firms have got listed. Cardiac care comprises a major part of the income of most multi-speciality hospitals.

The March quarter’s financial results should give a glimpse of the impact of price controls on coronary stents. That should give an idea of the price sensitivity in the healthcare business.

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