Moneycontrol Pro Panorama | Regulatory spotlight on hospitals

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Shares of major hospital firms extended their losses on Thursday after the Supreme Court criticised huge mark-ups on medicines and consumables dispensed by healthcare service providers. The scrutiny will be welcomed by patients, even though market participants will not like such an intervention.

Drugs and consumables generate around one-fifth of hospital firms’ revenues. A earnings margin cap on medicines, if imposed, can impact operating earnings of corporate hospitals by 1-5 percent, show calculations by market watchers. A 5 percent hit to EBITDA, while not insignificant, will not unsettle hospital firms, given their healthy earnings profile.

As market participants await the final outcome of the Supreme Court case, they should note that pricing practices of private hospitals are increasingly coming under scrutiny. In August, a parliament committee on Health & Family Welfare has recommended standardised pricing models and cost regulation to control out-of-pocket expenditure of patients.

Indeed, spiralling healthcare costs have become a major problem for everyone, including patients, hospitals and other stakeholders.

Health insurance is anticipated to insulate patients from medical contingencies. That stated, rising healthcare costs and elevated claims are undermining profitability metrics of health insurance firms as well. So much so, disagreements over prices and tariffs between hospitals and insurance firms have often led to suspension of cashless treatment for policyholders in the last two years at some hospitals or some insurers.

It is not that hospital firms are having a free ride. They spend huge amounts setting up a hospital. A hospital bed in a super specialty facility can cost up to Rs 80 lakh per bed. Land and building are acquired at market rates, and the firm has to incur sizeable losses in the initial ramp-up phase. Post the stabilisation phase, hospitals have to battle employee attrition. All this adds up to cost inflation and expensive medical bills.

Nevertheless, patients prefer private hospitals. The private sector’s share in India’s healthcare services market has risen over the last several years and it is now the major provider of healthcare services in the country, as we pointed out here and here.

The way forward now is coordinated action.

The government can help control healthcare costs by incentivising capacity creation, lowering taxes and reducing the investment required for new facilities. Proactive planning and mandatory allocation of land for healthcare facilities in new and upcoming regions will help. Additionally scaling up of training capacity for healthcare personnel can help improve supply of human resources.

As per market watchers, regulators (think IRDAI) and industry stakeholders have formed committees to frame guidelines for hospital pricing policies.

Additionally, there is a growing belief that the government, in consultation with industry stakeholders, will try to enforce standardised pricing practices. Such measures did not disrupt expansion of the industry in the past–price caps on stents and implants are a case in point, say market watchers at Jefferies India. But with the reliance of the Indian public on private healthcare services rising by the day, there is a pressing need for the government and stakeholders to find a holistic solution to the sector’s problem of high costs –both for providers and patients.

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