Healthcare | Should governments regulate private hospitals?

Representational image/Reuters.

In July, the Competition Commission of India (CCI) released its report on the pricing practices of 12 corporate hospitals. Though not surprising that these hospital chains were overcharging patients, what drew peoples’ attention was that for the first time an audit of sorts was carried by an arm of the government with powers to penalise ‘wrongful’ gains.

It was a report long overdue, and so welcomed by citizens struggling with the issue of exploitative prices without accountability to outcomes or ethical considerations. This then raises the issue whether it is time for government to regulate the pricing of services charged by private hospitals with the attendant question of should it, and can it.

Theory For Government Intervention

Asymmetry of information that creates an unequal power structure between care providers and patients is a typical characteristic of the health sector, providing a compelling argument for government intervention. It is basic economics that tells us that perfect competition and markets can only function when there are certain conditions such as perfect knowledge between suppliers and buyers, and no barriers to entry among others. Therefore, says economic theory, since health is not amenable to the fair allocation of resources between competing interests, it quickly slips into exploitation and exclusivity, unless controlled. This then sets the stage for the entry of the State.

Pricing Of Services And State Intervention

There are three ways in which pricing of health services are arrived at — administered as in Japan, negotiated as in those countries with social insurance, or markets forces influenced by the capacity to pay.

Where the government owns the hospitals and/or is the monopoly purchaser of all health services such as in Japan or largely in the United Kingdom, prices are fixed for every item and procedure, leaving no scope or incentives for care providers to overcharge or provide excessive or unnecessary services. So, while in Japan, private players provide all services at administered prices as per the schedule of benefits that is available with all citizens, in the UK too the GP, a private practitioner, provides comprehensive primary healthcare services as per a contract to serve a defined population a package of services at prices negotiated with government.

Free For All

The situation gets complex when the health markets have no regulations, government oversight is weak, or non-existent, and providers have the freedom to practice and charge in any manner. In such situations, making profits and increasing incomes is the bottom line. Prices in such a fee for service environment are then calibrated by the purchasing capacity of the clientele — out of pocket or through third party — either way being inflationary.

Even so, in certain situations, and depending on the acute vulnerability and desperation of patients, the private sector can become intensely exploitative as we witnessed during the Delta phase of the pandemic in 2021, when patients are estimated to have spent huge amounts out of pocket within that short period.

The revenue centres for private hospitals are diagnostics — mainly high end and pharmacy sales — drugs, and consumables. Most resort to differential pricing, often charging double the amounts for every drug, consumable or procedure in the ICU, providing the incentive to increase ICU admissions. We saw that too during the COVID-19 pandemic.

Two Ways To Intervene

Governments intervene in health markets in two ways — through financial instruments such as purchasing power and incentives and disincentives, impacting demand and supply side behaviour, and through a set of laws, rules, regulations and guidelines. The mode of payment such as fee for service, reimbursement, third-party payment, capitation fees, co-payments, and so on, influence both the health seeking behaviour and provisioning of services.

For example, providing subsidies or higher reimbursement amounts for a particular procedure by government or an insurance agency can result in more of those services being performed by the doctors. We saw this in the phenomenal increase in hysterectomies when the government sponsored insurance programme provided reimbursements for the procedure. While cost containment is attempted by reimbursing only on basis of package rates, this has not been successful as the hospital managements and providers always find ways to game it by taking advantage of the patients’ vulnerability, and lack of adequate information.

Clinical Establishment Act of 2010

Given the above, governments have considered other means such as regulations to control provider behaviour. While the United States, European countries, etc. all have a plethora of regulations to check unethical or exploitative practices, India has been laggard. The first and only attempt of the Union and some state governments has been the Clinical Establishment Act of 2010 that requires providers to register themselves and provide information of what services are being offered, and at what price. Barely 11 states have enacted these regulations, and only one or two attempted to enforce it.

The utter incapability and incompetence of the government to enforce its own laws is on account of two factors. One, the pressure of the medical profession resisting any form of regulation, and oversight. Two, the lack of a supervisory system manned by well-trained personnel, and capacity to inspect, investigate, and identify deliberate wrongdoing from genuine errors.

Thoughtful, Not Mindless, Regulation

While it is necessary for the government to build its regulatory capacity, there is also an equally urgent need to build an effective grievance redress system that India sorely lacks. The system of justice, be it the courts, the Medical Council of India, or consumer protection agencies, are plagued with inordinate delays, ridiculously low penalties, and multiple avenues of relief available, making a mockery of grievance redress.

With such lackadaisical enforcement of even mild punishment, disciplining of care providers and institutions to be accountable is a challenge. With rapid increases in costs, increasing complaints of maltreatment, wrong diagnosis, negligence or medical errors, safety is emerging as a major issue. The government nor courts can any longer be mute spectators, and need to intervene in health markets in a decisive and firm manner to protect patients from care providers who resort to predatory behaviours.

The bottom line, however, is that though the medical industry needs to be regulated, worse can be the cure through the unleashing of a mindless ‘inspector raj’ driven less by the keenness to protect patient interests, and more by rent seeking. So even while the governments need to bring in laws, they also need to build a culture of supportive, respectful, and facilitating supervisory styles. This would require the inspectors/officials to be trained, and also made accountable for unacceptably overbearing or arrogant behaviour.

Building value-based and non-adversarial work environments in the health sector is critical since all stakeholders have in the ultimate analysis one primary goal — the benefit of the patients, and their well-being as all are dependent on each other, and cannot do without the other.

K Sujatha Rao is former Union Health Secretary. Views are personal, and do not represent the stand of this publication.