Injurious to health: Capping hospital profit margins is counter-productive

On the face of it, the Delhi government’s proposal to limit hospitals’ profits margins on drugs, consumables and devices appears to be a sensible way to protect consumers from the venality of the medical industry. The policy, recommended by a nine-member panel set up by Chief Minister Arvind Kejriwal in December last year, proposes to cap prices at 50 per cent of the procurement price or manufacturing cost, whichever is lower, and covers a range of “package” prices for various procedures. These recommendations can be seen as a reaction to the public outrage following the death of a child last year from dengue in a private hospital that charged Rs 1.6 million, the bulk of it involving enormous mark-ups on drugs and such items as surgical gloves and syringes. The state government’s desire to be perceived as responsive to its electorate is understandable, but capping hospital profits is the wrong solution of a deep-seated malaise.

First, it is unclear how costs can be computed with accuracy. Will the retail price be the benchmark when it involves a margin that the manufacturer is unlikely to divulge? Computing a “fair procurement cost” will be equally tough for the same reason. So the basis of the 50 per cent limit can be open to endless interpretation and, possibly, litigation. Second, an administered price on medical procedures also ignores factors such as the reputation of the medical practitioner, the quality of the facilities and so on. Reputed specialists could well exit to other jurisdictions if their expertise is subject to an administered price, and hospitals will resort to alternative means to reap profits (such as setting up supply subsidiaries). The third is the question of monitoring hospitals to ensure they follow these pricing norms. The state clearly lacks the wherewithal to do so. The dengue tragedy came to light only because the father of the deceased filed an official complaint and the extent of the corruption was extreme. Fourth, in terms of business law, price caps may not pass scrutiny. The cap on stent prices imposed by the Centre last year has become the subject of tensions with US trade representatives — since the order will limit access for stents made in the US — and it is possible that this will extend to the Delhi government’s policies too.

It is, however, hard to ignore the fact that hospitals, especially private ones, have developed a reputation for avarice that belies their so-called commitment to “social service”, which granted them access to free or subsidised state land. The issue certainly needs to be addressed head-on. Private hospitals’ ability to overcharge consumers with impunity is mostly the result of acutely inadequate state government investment in health care. Delhi is one of India’s affluent states but has about 2.71 beds per 1,000 people, a little over half the World Health Organization’s recommendation of 5 beds per 1,000 people. It is such a public health care deficit that is the breeding ground for an exploitative private sector. The most effective way to cap super-profits is to create an alternative choice of efficient and reasonably priced public sector hospitals. Merely capping hospitals’ profit margins amounts to playing to the gallery.