Parthasarathi Shome: Supply constraints for private sector healthcare

Govt measures to increase accessibility for the poor have not worked because they do not reflect market or field realities

Supply of healthcare in India is among the lowest in the world on a per capita basis. This is especially so as we go down the income scale, at the bottom of which there is little availability of hospitals or even health centres, doctors, nurses, or surgical and laboratory equipment. For example, World Health Organization (WHO) guidelines recommend 3.5 hospital beds per 1,000 population. While the global average is 2.3 beds per 1,000 population, India is at 0.7 beds per 1,000 population.

Successive governments have introduced measures that they supposedly believed would raise supply of healthcare and accessibility for the poor, the fondest demarcated by the number of hospital beds or distance of location from urban centres. Such incentives have not worked because they do not reflect market or field realities. The incentive criteria keep changing through various Budgets as if such changes are backed by survey-based micro-information, which does not exist in actuality. And there is little practice of meaningful impact assessment of changing government expenditure policies in order to redirect policies towards a more rational path. India, thus, remains backward among fellow nations in terms of design, application, regulation and assessment of government policy, including healthcare.

The bottom line is that it is lamentable how little the government has been able to empower the daily wager in terms of nutrition, healthcare or marketable education. I mean not the poor by using official indices, but the daily wager for whom it is a miracle that he - and increasingly she - makes do at the end of the day and for whom there is a trite regional idiom, "din ani, din khai". I would say they comprise two-thirds of our population or 800 million.

Under the circumstances, the least the government can do is to get out of the way of the private sector, where it is experimenting with innovative frameworks to provide socio-economic welfare. Focusing on healthcare, I recently read about a solution-oriented model being followed by a private Indian group where patients are charged reflecting their ability-to-pay. This has enabled a three-tier charging system giving access to the poor of the same quality healthcare as the richer households. Another model comprises a small investment by an organisation combined with a somewhat larger government contribution, while the primary reliance is on private donations. This model has enabled almost half a million prosthetic limbs to be fitted across the globe by a single Indian organisation. These are good examples of existence and survival sometimes with, but mainly despite, government. The government should increasingly enable more of such worthy private sector models by cutting out bureaucratic hurdles that have tended to thwart widespread progress.

For that to happen, the government should recognise the special features that characterise the healthcare industry. It typically has high setup costs, followed by high operational costs, reflecting the need for high-skilled manpower, expensive equipment often embedding imported medical technology that usually has around seven-year investment cycles, medicines and consumables. Such characteristics, in turn, render it prohibitive for most Indians to avail high-quality healthcare.

A gap in domestic manufacturing obliges hospitals to import major medical equipment, such as MRI, CT scan, linear accelerators and others. Hospitals pay a countervailing duty (CD) of 12 per cent on imports that is equivalent to the central government's domestic excise. Similarly, a special additional duty (SAD) of four per cent is imposed to achieve comparability with the state-level value-added tax (VAT). Thus, it is understandable that these two taxes have to be paid. However, customs duty on imported equipment is additionally imposed at 7.5 per cent to 10 per cent. This is typically couched in the old argument of protecting "infant" industry, though, in reality, it is an easy means of collecting revenue, a practice increasingly rare in emerging economies.

In addition, recalling continuing exchange rate depreciation of the rupee, the cost of imported equipment has escalated. And note that, with exchange rate depreciation, all three above-mentioned duties also rise in terms of the rupee, posing additional net cost to the healthcare sector as long as they cannot pass on the full burden to patients. By contrast, equipment required for hydro projects, equipment for setting up planetariums, solar energy equipment and research equipment are exempt from customs duty.

Again, the Reserve Bank of India (RBI) encourages banks to extend long-term loans to the infrastructure sector with flexible structuring to absorb potential contingencies. Public infrastructure projects can raise loans at lower interest rates (150-200 basis points) than that of commercial projects and have repayment periods of 10-25 years as against five-seven years for commercial projects. The government has not yet accorded infrastructure status to hospitals. On the whole, therefore, healthcare cannot be said to be a preferred sector.

A recent decision of mine to move to Bengaluru reflects its attractiveness of year-long pleasant weather that I experienced during countless visits I made during my membership in the Karnataka Tax Reforms Commission 15 years back. But it also reflects the availability of an excellent healthcare network offered by various private sector groups, whose existence I became familiar with while criss-crossing the state at that time. Hence, I possess a natural interest in the conditions under which this sector is functioning here.

In Karnataka, electricity rates for hospitals are slightly higher than for heavy industries. Hospitals are charged Rs 6.4 to Rs 6.9 a unit, whereas it is Rs 5.75 to Rs 6.15 a unit for industries, workshops and research and development (R&D) centres. There are variations across states. For example, in Rajasthan and Gujarat, all commercial consumers are charged based on connected load. Hospitals, due to the high-end equipment installed, invariably fall in the highest bracket and tend to pay high tariffs.

Yet hospitals are prescribed to provide treatment under the Employee State Insurance (ESI) and central and various state government health insurance schemes at regulated rates prescribed by the central and the state governments. The rationale for those rates remains to be explained; hence, they appear to be anomalous and inconsistent. They are revised at infrequent and unpredictable intervals without justification through appropriate analysis. An example for pricing anomaly is the Central Government Health Scheme (CGHS) prices for single-valve and double-valve replacement. CGHS Bangalore recommends Rs 1,19,157 for a single-valve replacement and Rs 60,950 for double-valve replacement.

Karnataka recently launched a health insurance scheme for above-poverty-line (APL) households. The scheme, known as Rajiv Arogyabhagya (RAB), covers 449 medical procedures at the same base package rates as that of the below-poverty-line (BPL) insurance scheme, Vajpayee Arogyashree (VAS). With little effective cost sharing for reducing input costs while creating a price cap by stipulating provision of health insurance to APL households at BPL rates, a financial burden is being created for hospitals and their operations. In addition, irregular and delayed payments by government are straining their cash flow. In the Bengaluru region, CGHS has pending payments - above 30 days - of close to Rs 0.7 crore and, in the Kolkata region, it has pending payables of close to Rs 1 crore.

To conclude, without meaningful collaboration from government, catching up with WHO guidelines is unlikely to occur in India's healthcare. But the paradox is that the first step is for government at every level to effectively eradicate bottlenecks and constraints placed along the way of growth of the private healthcare sector.