A case for regulation

Overcharging by hospitals has reached alarming proportions

A study by the Maharashtra Food and Drug Authority, reported by this newspaper last week, provided some disturbing information. It examined invoices from 12 major hospitals in Mumbai and found that basic medical supplies for heart patients were dangerously overpriced. The most startling fact was that balloon and guiding catheters, which are used for angioplasties, were sold by hospitals at over five times the landed price. In one example, a balloon catheter, which was imported at a price of Rs 4,220, was bought by a hospital at Rs 7,950, and sold at Rs 22,000. In the process, the hospital made a startling profit margin. 

The government should always be careful about meddling in the market system, and in prices. But health services are always an imperfectly functioning market; they depend upon an inability of patients to shop around at a time of medical emergency. There are also enormous information asymmetries between the provider and the patient — the provider always knows more — although the assumptions of perfect competition require common knowledge about underlying prices and the services on offer. Naturally, therefore, there is a solid case for some intervention even in the private sector, as long as it is with a light touch and carefully designed. In the recent past, the National Pharmaceutical Pricing Authority stepped in and capped the price of cardiac stents which were being sold by hospitals at similar margins and mark-ups. Price caps in general may not be the best form of intervention, as they do not allow enough flexibility over time. But unless some other form of regulatory action is forthcoming, health care companies will almost certainly be faced with more and more price caps if they persist with these rates. 

Alternative mechanisms exist. Transparency is one such. If hospitals believe the market permits them to make a certain profit margin, they should do so by charging in those areas of the bill where the patient can clearly see that they are being charged for the services of the hospital. Hospitals might resist this. Customs duties on imported medical equipment have been reduced in the new goods and services tax, or the GST, regime. This might encourage hospitals to continue to shift their charges away from the correct section on their bills. Perhaps the tax implications of this need investigation. One solution, being tried in West Bengal, is to produce a list of suggested charges for standard procedures and equipment, so that patients at least have a sense of the degree to which they are being “overcharged”, and can raise it with the hospitals directly. This increase in information for consumers can help the market work more efficiently. 

Competition and consumer protection legislation provide another road to check this rampant malpractice by hospitals. The Competition Commission can certainly inquire into whether these prices being charged to patients are being fixed in collusion between hospitals in a certain geographic area, such as Mumbai. And past judgments show that the courts consider the Consumer Protection Act, 1986, as applying to health care services that charge a “fee”. If necessary, that Act should be amended to ensure that the definition of a “fee” includes hospitals that are hiding their charges for their services by inflating the cost of supplies. In any case, this is a clear case for regulatory intervention.