ECONOMIC principles always predicted ‘moral hazard’ and ‘market failure’ in healthcare markets necessitating a special treatment for healthcare in any welfare-driven economic analysis. In contrast to other commodity markets, a main point of difference is the inbuilt and systematic uncertainties in the incidence of disease and informational inequality related to the efficacy of medical treatment. This led Kenneth J. Arrow to believe in ‘specific differentia of medical care as the object of normative economics’.¹

Arrow, in his seminal paper ‘Uncertainty and the Welfare Economics of Medical Care’ published in the American Economic Review in 1963, strongly emphasized that privatization or marketization of medical care cannot deal with systemic uncertainties characterized by moral, ethical and psychosocial issues in the medical care market.² Given such complexities, most of the developed nations, more specifically European and East Asian countries, carefully crafted various socio-political institutions to deal with the situation and maximized the benefits of medical care for their population instead of maximizing profits for medical care providers. The National Health Service in the United Kingdom and Australia, social health insurance schemes in Japan, Germany and France, are some examples.

In contrast, India is one of the most privatized healthcare markets in the world with approximately 60% of all healthcare and more than 70% of the total financing of healthcare coming from the private sector. Accordingly, the private sector plays a dominant role in India’s health system, be it medical education, human resources for health, service delivery or healthcare financing. The private health sector not only shares a bulk of the healthcare market in all the domains but also their market share has increased over the years in all the segments.³ The private healthcare industry in India was valued at US $100 billion in 2015 and is projected to swell-up to US $280 billion by 2020.⁴

This article aims to asses if the private sector is capable of delivering on four basic issues (largely interrelated), which have dominated the recent debates on India’s health system. These are: (i) equitable access; (ii) financial risk protection; (iii) quality of healthcare; and (iv) access to health insurance. However, before discussing these thematic issues, an overview of the types and diversity of the private health sector in India would be useful.

 

The private sector in India is not a monolithic entity. Private healthcare providers consist of highly heterogeneous categories ranging from individual medical practitioners with or without adequate qualifications and training to big corporate multi speciality hospitals. As much as 62% of the private healthcare providers are in the informal sector and a large proportion of them are unqualified individual professionals. Of the approximately million informal sector healthcare enterprises, 72% are own-account-establishments, which are household run businesses without hiring a worker on a regular basis.⁵ Their needs, perceptions and services are very different to both the large medical establishments and within that the corporate sector. The sixth economic census conducted in the year 2013-14, indicated that there were approximately 983 thousand establishments engaged in human health and social work activities. Of these, approximately 20% are owned directly by government or public sector undertakings. Approximately 68% of all establishments are sole proprietary entities and just 1% are private partnerships and companies (see Figure 1). Again, the private proprietorship is very diverse, varying from establishments owned by medical specialists, professionals with adequate qualifications, to quacks and unregistered healthcare providers. NSS 2011-12 indicates that more than 24% of medical practitioners had inadequate or no medical training.⁶ Although most private healthcare enterprises operate for profit, many non-profit organizations also exist (4-5%), avowing religious and charitable motivations.

 

For-profit private health providers usually have a strong profit motivation and they indulge in overt price competition, product differentiation and advertising in order to establish trust with patients. Also, healthcare markets provide them ample incentives to use medical knowledge either to promote a particular brand of medicines/care or link any follow-up treatments by building networks with pharmaceutical companies and providers of medical diagnostics. They use brand names to attract patients and resort to a discriminatory pricing system depending on the paying capacity of patients. Most big private hospitals per se offer services not too different from those of a hotel, with a profit motive, driving an increased (and often unnecessary) supply of medical care.⁷ Using price discrimination, brand hospitals often resort to collective monopoly power. Given the low price elasticity of demand for most medical goods and services, this enables profit maximization.

The reason to recall the varied nature of the private sector is to mainly assess if these characteristics and behaviour are helpful in addressing health system challenges to achieve universal health coverage in India. Coming back to the four basic issues as put forth earlier, a brief discussion is presented below.

 

Equity in access to healthcare has been a major concern in India. Poor and other less advantaged population groups in India not only have lower access to healthcare but also reporting of ailments is far lower when compared to the better off population. According to the NSS 2014 data, more than one-fifth of all ailing populations among the poorest 20% either self-medicate or completely forego treatment. The proportion of untreated ailments has remained largely constant over the last two decades, meaning that the considerable expansion of the healthcare market, public and private, has failed to reach the poorest. This is not a question of public-private divide. Both (public and private) can fail if equity is not inbuilt in the healthcare delivery system and a higher emphasis is accorded to economic efficiency over allocative efficiency.

 

The World Health Report 2010 emphasizes that promoting equity in healthcare may conflict with economic efficiency. For example, locating services in populated areas maybe more efficient economically but reaching the rural poor may require locating services closer to their habitations.⁸ The private healthcare market is more concerned about economic efficiency compared to allocative efficiency. However, providing subsidized or free healthcare through public facilities may not always guarantee that the benefits actually reach the poor if there are insufficient safeguards against leakages of subsidy to the richer population. Benefit incidence analysis of public subsidies on healthcare indicates that a disproportionately large share of government subsidies available through public facilities are cornered by the richer population.⁹ The NSS 2014 data reflects that more than 57% and 11% of the outpatient care among the poorest 20% population was sought from private doctors and private hospitals respectively. For inpatient care, 47% of hospitalization among the poorest was in private hospitals (Table 1).

In contrast, private healthcare providers do not provide any subsidized healthcare to the poor. In all likelihood, private healthcare markets indulge in product differentiation resulting in lower quality healthcare to the poor and those with low paying capacity. This is reflected by the fact that an overwhelmingly large proportion of the poor population depend on local level quacks and often unqualified practitioners for their healthcare needs. Even for complicated inpatient care, the poor are mostly admitted to the mushrooming low quality nursing homes or poorly equipped private hospitals/beds.

 

Financial risk protection implies all ailing persons should be able to avail healthcare without facing any financial hardships. WHO (2010) notes that universal health coverage cannot be achieved if people suffer financial hardship or are deterred from using services because they have to pay out-of-pocket at the point of use of medical care. In fact, the idea of financial risk protection and equity go hand in hand. A recent study notes that in India, as many as 45 million house-holds faced catastrophic healthcare expenditure and 55 million persons were pushed into poverty in the year 2011-12, mainly because they had to pay for healthcare out of pocket expense. Also, both these numbers have swelled up over the years. The corresponding numbers were 36 million and 53 million respectively in 2004-05.¹⁰

 

One of the main reasons for an increase in the financial burden of healthcare on Indian households was the phenomenal increase in the price charged by private providers. The per episode average price in private hospitals was four times higher (approximately Rs 26000) compared to that in public hospitals in 2014.¹¹ It is understandable that treatment in public hospitals are highly subsidized and a large part of the cost is borne by the government. However, the important point to be noted is that the ratio of private to public cost of treatment for households has doubled during the period of 1995-2004. A comparison of the last three surveys of the NSS on health (1995-96, 2004 and 2014) reflects that average per episode price of treatment was about two times higher in private hospitals compared to public ones in 1995-96, a figure that increased four times in 2014. A similar increase is also witnessed in outpatient care although at a slower rate. This is despite the fact that per treated episode, government subsidy in real terms has been more or less constant over the years. Clearly, private health providers either have not been able to control the cost of production or their profit margins have substantially increased over the years.

 

Protecting poor households from financial hardship on account of healthcare is of paramount importance in a country like India. Any prepayment mechanisms such as tax based financing of healthcare, risk sharing mechanisms like health insurance, including social health insurance, publicly funded insurance schemes and private health insurance, are considered solutions to avoid such financial hardships. However, even prepayment mechanisms may not produce desired results if the mechanisms are not embedded in the principle of equity. For instance, if a tax based subsidy mechanism allows significant leakage of subsidy to the rich and better-off population, the poor will still remain unaddressed. Similarly, if insurance schemes are designed with a large proportion of co-payments (formal or informal), co-insurance or deductible, it may discourage the poor to participate in the schemes. Escalating healthcare costs in private markets only adds to the existing financial burden on the poor.

 

The quality of healthcare refers to two different counts: first, the level of competence with which an examination and/or treatment protocol is implemented. Second, the quality of the personnel, provider attitudes towards patients, overall ambience and the degree of attention that a patient receives.¹² While most of the large multi-speciality hospitals in India would claim to have high standards on both these counts, there is, on the other side, extensive literature summarizing the poor quality of healthcare existing within the private sector in India.¹³

There is no denying that the public sector too has failed to provide quality healthcare to a large section of the population, particularly to those residing in rural areas and smaller towns and cities. This is the reason why patients, both rich and poor, tend to favour the private sector over the free/subsidized services provided by the public sector, despite the fact that the quality of care in the private sector may be no better. For instance, primary healthcare is overwhelmingly dominated by individual medical practitioners, of whom a significant number are substandard, untrained, unqualified and with despicably poor infrastructure. This represents a typical case of product differentiation in private markets where the private sector makes poor and low quality healthcare available in ambulatory segments at low profit margins and compete with existing public sector network of PHCs and CHCs.

In the secondary and tertiary care segments, private healthcare markets again do not present an encouraging picture. A large proportion of nursing homes and hospitals, particularly located in smaller towns and cities, do not even meet minimum infrastructural criteria as laid down. It is only a small proportion of private healthcare providers from middle to large hospitals that usually meet all expected quality norms. However, access to these facilities are limited, largely due to cost.

 

India’s history of health insurance started with employment linked health insurance viz. Employee’s State Insurance Scheme (ESIS) and Central Government Health Scheme (CGHS) that covered employees of the central and state governments and large formal sector private enterprises. With the establishment of the Insurance Regulatory and Development Authority of India (IRDAI) in 2000, the insurance sector opened up to the private sector¹⁴ enabling individuals to purchase health insurance from private markets. Further, the introduction of various government sponsored (both central as well as state government) health insurance schemes specially targeting the poor population¹⁵ further strengthened health insurance markets in India and the customization of products to suit the poor. Today, almost 50 to 60% of the poor are covered in one or other publicly funded health insurance schemes.

 

The experience of involving private insurance in India’s healthcare market has been mixed. Private health insurance companies have been unable to design acceptable products for a majority of the population. Penetration has been low because awareness about health insurance and the prohibitive cost of these products relative to the paying capacity of the general population remains poor. Today there are 29 different health insurance companies registered with IRDAI with more than 100 different products in the market. Yet, all these companies together cover only 2-3% of the total population under private individual health insurance schemes. In the year 2016-17, the number of persons covered under ‘individual business’ and ‘group business’ schemes were 3.2 and 7 crore respectively (IRDAI 2016-17).

Government sponsored health insurance schemes, however, helped the insurance companies to expand their market share. By 2016-17 more than 33.5 crore persons were covered under these schemes. The launch of the government sponsored Ayushman Bharat Yojana (ABY) in September 2018 is set to give a further fillip to the private health insurance market in India as the scheme aims to cover approximately 10 crore poor families (45 crore individuals).

Learning from the experience of earlier government sponsored health insurance schemes, the ABY has introduced various improvements in its design. For instance, under ABY all poor households identified in the socio-economic survey 2012 are automatically eligible for the scheme, not requiring a separate enrolment process. The sum assured under the scheme is five lakh rupees per family per year. The number of health conditions covered are quite comprehensive. Although these added features in ABY are positive in general, the scheme still has several shortcomings in its design. First, the eligibility is still based on a one-time census, making identification of the poor a tedious task. Second, expenditure on outpatient care, which constitutes a bulk of the financial burden on the poor, is uncovered in the scheme. Third, there is no inbuilt mechanism to check the supply side moral hazard that could escalate the overall cost of healthcare. Fourth, there is no scientific mechanism to fix premiums and prices to be paid to insurance companies and private providers respectively. Last but not least, there is no clarity on the size of the government budget earmarked for the scheme.

Many of these issues may be addressed as the scheme matures and evidence starts emerging. Meanwhile, the framework of a good information system on morbidity burden/pattern, diagnostic information, price of healthcare provisions, fixation of premium and medical treatment guidelines, needs to be developed.

 

To recapitulate, the highly diverse private sector plays a dominant role in India’s healthcare market. While a tiny (4-5%) proportion of private healthcare enterprises are engaged in philanthropic activities serving the poor, an overwhelmingly large pro-portion are profit oriented. Most private healthcare providers overtly use market mechanisms such as product differentiation, packaging, advertisements, brand names etc. to maximize their profits as well as market share. In addition, systemic imperfections in the healthcare market, such as uncertainties in the incidence of disease and asymmetry of information, provide enough incentives to private providers to indulge in the supply side moral hazards to maximize profits.

 

Equity in healthcare access and financial risk protection to households, which are crucial for achieving universal health coverage in India, cannot be addressed by private healthcare providers and insurance companies as both these issues may not always be in consonance with the norms related to economic efficiency. Despite the inability of the private sector to deliver on equity, quality and financial risk protection, the very design of ABY provides a ready platter to private healthcare providers and insurance companies to do business with the poor. Private companies obviously jumped to such a proposition in ABY as their first target is to capture market share even with the lowest profit margins just enough to meet operational costs. In all likelihood, the premium and package rates will significantly increase in the near future with increasing dependence of the scheme on private companies.

Public sector facilities, which already face policy apathy in terms of inadequate investments in infrastructure, equipment and human resources, are in no position to compete with private companies. With no meaningful referral mechanism in place, hospitalization rates are likely to increase at the cost of primary and promotive healthcare, with further implications for the overall healthcare cost and equity in healthcare services in India.

 

Footnotes:

1. Kenneth J. Arrow, ‘Uncertainty and the Welfare Economics of Medical Care’, American Economic Review 53(5), December 1963, pp. 941-973.

2. Ibid.

3. S. Selvaraj and A. Karan, ‘Deepening Health Insecurity in India: Evidence from National Sample Surveys Since 1980s’, Economic and Political Weekly 44, 2009, pp. 55-60; M. Mackintosh, A. Channon and A. Karan et. al. ‘What is the Private Sector? Understanding Private Provision in the Health Systems of Low-Income and Middle-Income Countries’, Lancet 288, 2016, pp. 596-605.

4. KPMG-FICCI, Healthcare: The Neglected GDP Driver: Need for a Paradigm Shift. KPMG-FICCI, New Delhi [Internet], 2015. Available from: http://www.kpmg.com/in/ficci.com

5. NSS 2010-11. Operational Characteristics of Unincorporated Non-agricultural Enterprises (Excluding Construction) in India, NSS 67 Round, Ministry of Statistics and Programme Implementation, Government of India. New Delhi, 2012.

6. K.D. Rao, R. Shahrawat and A. Bhatnagar, ‘Composition and Distribution of the Health Workforce in India: Estimates Based on Data from the National Sample Survey’, WHO South-East Asia Journal of Public Health 5(2), 2016, pp. 133-140.

7. M.V. Pauly, ‘The Economics of Moral Hazard’, American Economic Review 58(3), 1968, pp. 531-537.

8. World Health Organization, The World Health Report 2010 – Health Systems Financing: The Path to Universal Coverage. WHO, Geneva, 2010.

9. A. Mahal, J. Singh, F. Afridi, V. Lamba, A. Gumber and V. Selvaraju, Who Benefits from Public Health Spending in India? National Council of Applied Economic Research, New Delhi, 2002; Owen O’Donnell, E.V. Doorslaer, R.P. Rannan-Eliya, et al., ‘The Incidence of Public Spending on Health Care: Comparative Evidence from Asia’, The World Bank Economic Review 21(1), 2007, pp. 93-123.

10. Sakthivel Selvaraj, H.H. Farooqui and A. Karan, ‘Quantifying the Financial Burden of Households’ Out-of-Pocket Payments on Medicine in India: A Repeated Cross-Sectional Analysis of National Sample Survey Data, 1994-2014’, BMJ Open, 2018.

11. NSS 2014. National Sample Survey Organization, Consumption of Social Goods: Health, NSS 71st Round (Jan-July 2014). Ministry of Statistics and Programme Implementation, Government of India. New Delhi. 2015.

12. A. Mahal, ‘Potential Impacts of Regulatory Issues: Assessing Private Health Insurance in India’, Economic and Political Weekly 37(6), 2002; M.J. Roberts, W. Hsiao, P. Berman and M. Reich, Getting Health Reorms Right: A Guide to Improving Performance and Equity. Oxford University Press, NY, 2004.

13. K.S. Reddy, V. Patel, P. Jha, V.K. Paul, A.K. Shivakumar and L, Dandona, ‘Towards Achievement of Universal Health Care in India by 2020: A Call to Action’, The Lancet 377, 2011, pp. 760-768; Sujatha Rao, Do We Care: India’s Health System. Oxford University Press, New Delhi, 2017.

14. Government of India, The Insurance Regulatory and Development Authority Bill, GOI, 1999.

15. G.L. Forgia and S. Nagpal, Government Sponsored Health Insurance in India – Are You Covered? World Bank, Washington, DC, 2012.

 

References:

T. Ensor, P. Serneels, T. Lievens, ‘Public and Private Practice of Health Workers’, in A. Soucat, R. Scheffler, with T.A. Ghebreyesus (eds.), The Labour Market for Health Workers in Africa. The World Bank, Washington DC, 2013.

M.G. Field, Doctor and Patient in Soviet Russia. Harvard University Press, Cambridge, 1957.