Dr Krishna Reddy Nallamalla

Private healthcare has been evolving over the last few decades, in response to the growing unmet health needs of Indians. Private clinics were the first private movers to begin consulting services. Nursing homes were started largely by private doctors with their own investments. Doctors retained the freedom to charge patients as per the latter’s capacity to pay. Over time, groups of doctors with different specialty expertise started coming together to set up small single or multispecialty hospitals with pooled investments from themselves, their friends, and relatives.

Economic liberalization in India was initiated in 1991 with the goal of making the economy more market and service oriented and expanding the role of private and foreign investment. The public listing of Apollo Hospitals ushered in the advent of corporate hospitals to the country. At the turn of the 21st century, we witnessed a flurry of private equity investments in Indian healthcare on the premise of a huge demand-supply gap, rising aspirations of the Indian population, and the potential of medical tourism owing to the availability of high-quality, low-cost services. Doctor-promoted single or multi-specialty hospitals were seen as perfect potential beneficiaries of these investments.

The lure of growing their hospitals from single specialty into multi-specialty hospital or from single hospital to multi-hospital chains was irresistible to many doctor-led enterprises. Medical entrepreneurs were used to some surplus money from operations, but the concept of valuations based on profit multiples was fairly new to them. Medical professionals got exposed to concepts ofmanagement sciences in general and in business management in particular. Private equity fund managers started adding value to existing operations by driving efficiency.

Private equity funds have their own life cycle (usually ranging between 5 to 7 years) and return expectations. They come with a set of business ethics driven by maximization of returns before the end of the fund life cycle. Given the short life cycles, they start pushing for mergers and acquisitions to achieve rapid inorganic growth. They introduce marketing concepts around case conversions (number of consults to tests, admissions or procedures), case selection (preference to low-risk cases over high-risk cases for capped payments), case mix (high value private insurance and self-paying patients versus low value public health insurance and social health insurance beneficiaries), referral fee practices, strategic business units or service lines among others. To attract high-income patients, more investments are deployed in the hospitality components of the hospital. While a hospital bed with all essential infrastructure can be created for Rs.10 lakhs, the growing competition on star-rating of hospitals has pushed the capital cost per bed to as high as Rs.100 lakhs.

Private equity funded corporate hospitals have been able to improve the infrastructural and quality standards, thereby generating market competition to improve the infrastructure. Not only could these hospitals gradually arresttrich Indians going overseas for medical treatment, but could also start attracting patients from abroad. The ability to afford cutting edge technology ensured that people have access to modern medical technology advances. These hospitals introduced the importance of professional management of hospitals in order to drive quality and efficiency.

Over time, several unintended negative consequences of private equity funded corporate hospitals started being recognized. As these hospitals started attracting the best medical talent, the rest of healthcare facilities were being deprived of supply-constrained health professionals. Medical professionals started convergingto major cities. Reputed public teaching hospitals suffered the migration of best medical talent thereby depriving them of good teachers.

As the capital cost per bed increased ten times, the prices of services kept increasing,furthered by the absence of any effective regulation. The marketing practices adopted by these hospitals introduced the culture of referral fee into India’s health systems. It not only added to the cost of care, but alsocorrupted the hitherto noble profession of medicine. Given the prevalence of fee-per-service system, it led to increasing use of unnecessary tests, admissions, and procedures, of which some evenhad the potential to harm the patients. Over years, these practices became a common knowledge amongst people, thereby eroding the trust and confidence they had developed in these hospitals.

System-level corrections are gradually taking place over the last few years.The launch of  the Pradhan Mantri Jan Aarogya Yojana (PMJAY), increasing the beneficiary pool under the Employee State Insurance, and the double-digit growth being witnessed in private health insurance are slowly pushing Indian health systems towards universal health coverage (UHC)—an important goal as per the National Health Policy, 2017. As the payer system gets consolidated, there will likely be a correction in pricing mechanisms, transparency and accountability in services, and improvement in the quality of services. Rapidly evolving digital health technology based online service models are further disrupting pricing and referrals. With ready access to unlimited health information (albeit both right and wrong information) on the web and through social media, the information asymmetry between patients and providers is diminishing, thereby putting the providers on guard.

Access to low-cost, long-term capital will alleviate the negative consequences of high-cost, short-term private equity capital. The recent announcement of the creation of Development Financing Institutions (DFI) to support infrastructure development can address the issue if healthcare is given priority in accessing finances from DFI, especially to create infrastructure in small cities and towns. At the same time, strengthening the public healthcare system will offer credible market competition to private healthcare. A scientific approach to the design of benefit packages that are viable as per the cost structures under various insurance schemes, will negate the cherry-picking behavior of private providers. Interoperable electronic health record systems will enable payers to move towards value-based strategic purchasing.

In summary, in the times to come we may witness significant changes in the way private healthcare is funded and operates, given the various national and state-level health reforms, disruptions resulting from digital health technologies, and the decreasing information asymmetry. It is very important that people regain the trust and the confidence in their health system, be it public or private, for it to be effective in securing people’s health.

Dr Krishna Reddy Nallamalla
President, InOrder
Regional Director, South Asia, ACCESS Health International

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