August 31, 2017 10:00 am JST

Ritesh Kumar Singh: How not to fix health care in India

Price caps will harm both the private medical sector and patients

The Indian government is moving toward a cap on the prices of widely used medical devices to prevent overcharging by private hospitals, an important part of the national health system. But price controls are unlikely to help, and could damage the struggling health sector by reducing supplies.

After capping the prices of coronary stents in February, New Delhi followed up by reclassifying other devices as drugs, including balloon catheters, syringes, heart valves and orthopedic implants, as a step toward controlling retail prices. On Aug. 16, the retail price of orthopedic implants was cut by 65%.

Indian public hospitals charge only nominal fees. But the public health service is inefficient, understaffed and underfunded. Its problems were illustrated in mid-August at BRD Medical College Hospital, Gorakhpur, where 68 children died because of a shortage of liquid oxygen. Doctors and family members were forced to use manual pumps to try to keep children alive.

Overcrowded public hospitals serve only about one-third of households. There are long waiting lists for critical surgery, and patients need influence to jump the line. Doctors commonly ask patients to buy essential medicines and devices elsewhere because they are not available in the public sector.

These problems force many patients into private hospitals for serious treatment, including surgery. It is therefore understandable that the government wants to control the prices of medical devices to ensure that health care is as accessible as possible. However, imposing price controls is a kneejerk reaction that could have a negative impact on investment and the supply of essential medical devices and instruments. At best, it will reduce the operating margins of manufacturers, importers, distributors and hospitals.

For example, the decision to cap the retail price of coronary stents in February did not directly affect wholesale prices, but many suppliers threatened to stop manufacturing or importing stents. Similarly, in 1995, 74 drugs, such as penicillin, ranitidine and tetracycline, were included in a Drug Price Control Order. Many pharmaceutical companies gradually reduced production, which had a cascading effect on the supply of formulations made with those drugs.

The government's latest moves could force India to rely on imported medical and surgical devices, which may be of poorer quality, since price caps will make it difficult to source the latest innovations. That will hurt patients, and encourage those who can afford it to seek treatment abroad. It could also dampen the prospects of India's fast-growing medical tourism industry, which relies on the provision of good quality care at internationally competitive prices. Price caps might also induce private hospitals to raise other charges, unless New Delhi is prepared to impose price caps on every aspect of medical care.

CURING THE DISEASE The long-term solution lies in improving the quality of government-run hospitals to reduce the public's reliance on private health care. If patients opt out of unscrupulous private hospitals, those hospitals will be forced to reduce prices to boost demand.

However, this would require a significant increase in public spending on health care. The Indian government spends a mere 1.6% of gross domestic product on health care, compared with 3% in China and 4.3% in Brazil. New Delhi also needs to sort out the regulation of the industry, which is overseen by a variety of agencies ranging from the Ministry of Health and Family Welfare to the Ministry of Chemicals and Fertilizers. The fragmented supervisory framework means that there is no overarching strategy for issues related to access and quality of health care services. An umbrella regulator would help.

New Delhi should also consider widening access to the Central Government Health Scheme, which provides comprehensive medical care facilities for central government employees, pensioners and their dependents. This effective program could be opened to nongovernment employees, or supplemented by a similar scheme to which people could sign up voluntarily. Such plans give patients increased bargaining power and put a check on overcharging and other medical malpractices.

To increase competition, all hospitals should be instructed to display on their websites their charges and fees for treatment, including prices for medical devices and instruments, allowing buyers of health care services to compare costs. This would reduce the problem of information asymmetry.

The government could also ask state-owned insurance companies to negotiate prices and fees for major health care devices and procedures and make the information publicly available. That would check collusion between private hospitals and private insurance companies.

Though overcharging and profiteering by private health care providers is a serious issue, imposing price controls is a bad medicine that will have many side effects. India's medical history suggests it may also lead to a shortage of life-saving medical and surgical devices.

Ritesh Kumar Singh is a corporate economist in Mumbai and a former assistant director of the Finance Commission of India.

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