Hospitals vs insurers: Policyholders bear the brunt of rising medical costs

The ongoing tussle between several private hospitals and insurance companies over reimbursement rates and cashless claims has again trained the spotlight on the plight of policyholders, who experts believe were at the receiving end amid soaring medical inflation. 

 

The simmering conflict came to a head last month when Niva Bupa suspended cashless services at Max Hospitals on August 16, citing unresolved reimbursement issues. Just days later, the Association of Healthcare Providers India (AHPI) advised member hospitals to suspend cashless hospitalisation for Bajaj Allianz, also flagging Care Health over similar pricing and settlement delays. The deadlock lasted eight days before partial resolutions emerged.

 

Industry veterans say such tussles are neither new nor unique to India. “Hospitals will always say that the rates are not good enough and insurers will always say it is very expensive. This is true for any country,” said a hospital executive requesting anonymity.

 

Common empanelment program: the friction point

 

At the centre of the latest flashpoint lies the common empanelment program, launched to streamline cashless access and reduce multiple contracts. According to the executive, “The common empanelment is creating friction. The smaller hospitals will get squeezed more, because they have lesser negotiating power.”

 

Common empanelment initiative by the Insurance Regulatory & Development Authority of India (Irdai) in collaboration with General Insurance Council was designed to create a unified, nationwide cashless hospital network for policyholders and hospitals.

 

It refers to a system where select hospitals are officially approved to provide cashless or insured medical treatment to policyholders. Insurance companies say that the program will be able to reduce the cost for the people.

 

Rising healthcare cost

 

At the same time, medical inflation has been complicating the matter. While insurers peg it at 14–15 per cent, hospitals argue it is in the single digits based on CPI data. The discrepancy stems from high distribution and administrative costs on the insurance side.

 

“For every ₹100 collected, insurers spend about ₹60 on healthcare and ₹40 elsewhere,” said a hospital executive, calling into question the sustainability of the model.

 

Whereas, the insurers believe medical inflation to be the result of CPI inflation and technological innovation. While, the rise in premium is caused by this medical inflation and price of consumables charged by hospitals.

 

“Post pandemic, we have seen the rate of inflation almost double that of pre-pandemic medical inflation. Further to ensure security and safety of medical staff, hospitals had added some charges like sanitation, biomedical waste disposal which were critical during pandemic. However, hospitals continue to charge them in insured patients’ bills. Further, a lot of administrative charges are added to insured patient bills, which inflate the bills. This impacts insurance costs in the long run,” an insurance executive said.

 

According to data by Policybazaar, procedure costs have steadily increased in recent years. A heart transplant increased from ₹30 lakh in 2023 to ₹34 lakh in 2024, while liver cirrhosis treatment went up from ₹21 lakh to ₹ 24 lakh.

 

But hospital executives said that they have been struggling with weak returns.

 

“Healthcare is a capex-heavy sector with a 10–15 year gestation. Even the top 100 hospitals together cannot generate profits to create more than 30,000-40,000 beds. Is this price going up because the same procedure has become more expensive, or because input costs are rising, or because more advanced therapies are being used? For instance, cataract surgeries are increasingly shifting from phacoemulsification to costlier femto-laser techniques,” the executive noted.

 

Or is it an affordability challenge?

 

Globally, India remains cost-competitive. A cardiac bypass costs $5,000-$6,000 here-- making the country the third cheapest in the world and among the top five in outcomes.

 

“The challenge is not cost alone; it’s affordability, since per capita income is under $3,000,” the executive said.

 

On the insurance side, heavy distribution spending drives up premiums. “To a consumer, medical inflation means premiums going up, not necessarily hospital bills,” the executive said, noting that 30-40 per cent of insurance collections are spent on commissions and customer acquisition.

 

Some hospital executives also suggested looking beyond traditional insurance. “Many countries are experimenting with health savings accounts. If instead of paying ₹25,000 in premiums every year, families pooled money in savings earning interest, they’d build the same financial cushion for 90 per cent of medical needs, at far lower distribution costs,” the executive said.

 

Also, according to hospitals, the promise of cashless hospitalisation often remains elusive.

 

“From the eye of the patient, common empanelment looks attractive but in the mid-run, quality providers may stay away,” the executive said. Families frequently end up paying out-of-pocket during emergencies. “Patients often just pay upfront because cashless is a very difficult task when your loved one is in pain,” he said.

 

However, according to the Irdai annual report for the financial year 2024 (FY24), the net incurred claims under health insurance for general and health insurers stood at ₹76,160 crore reporting an increase of nearly 18 per cent from last year.

 

Further, hospital experts also highlight inefficiencies that weigh heavily on the system. Hospitals lose nearly 6 per cent of turnover to unclaimed GST credits, while the costs of medical education, staff shortages in smaller towns, and continuous training of nurses further add to the bill. Patient empowerment and quality regulation could be part of the solution.

 

“Less than 10 per cent of hospitals are NABH accredited. Why shouldn’t accredited facilities get lower borrowing costs or better visibility for patients? Quality regulation and patient empowerment can do more to control costs than price caps,” said the executive.

 

Finding a common ground

 

But despite their differences, both the hospital and insurance industry believe that they need to find common ground. “Both are responsible players. They will come together to find a solution so that the customer’s affordability is not hit,” said an executive at a leading general insurer.

 

For now, however, patients remain caught between rising costs, limited hospital capacity, and insurance models and unless the two sides resolve their differences, it is the policyholder who will continue to bear the brunt.