The high cost of India’s private health-care boom

India's burgeoning private health-care industry has led to a financial burden for countless families, even before treatment concludes. According to the Parliamentary Standing Committee on Health and Family Welfare's 176th Report, the average hospitalisation cost is ₹50,508 in private hospitals, compared to just ₹6,631 in government-run facilities.

Childbirth expenses in private hospitals average ₹37,630, while public facilities charge a fraction at ₹2,299. The committee has proposed 368 recommendations, including standardised package rates and mandatory pre-treatment cost estimates, with a focus on capping basic room tariffs in metropolitan private hospitals at the average rate of nearby three-star hotels.

The committee also suggests that large corporate hospitals, particularly those benefiting from medical tourism, should cross-subsidise poorer Indians and reserve beds for Ayushman Bharat-Pradhan Mantri Jan Arogya Yojana beneficiaries at regulated rates. However, there's a paradox: India seeks increased foreign investment in health care, particularly in Tier-2, Tier-3, and rural areas, while simultaneously requesting a review of foreign direct investment rules for existing hospitals' acquisition and management.

Despite the substantial capital requirements for hospitals, including land, equipment, intensive care units, digital systems, laboratories, and personnel, private hospitals address the gap left by under-resourced public institutions. Foreign investors bring capital, managerial expertise, technology, and the ability to expand hospital networks.

However, in health care, patients are not ordinary consumers; they are subject to information asymmetry, with providers possessing more knowledge than patients. Consequently, strong financial incentives may influence not just prices but also the volume of care provided. This is where private equity and venture capital in health care require closer scrutiny.

As hospitals compete for well-known specialists, sophisticated technology, and premium infrastructure, this can enhance quality but also create a high-cost ecosystem. The pressure to increase revenue can lead to higher salaries for specialists, acquisition of expensive equipment, and a focus on revenue growth, potentially impacting institutional behaviour.

While most doctors act in patients' best interests, system rewards can shape behaviour, leading to higher costs and a concerning trend known as medicalization, where lab investigations may detect abnormalities that wouldn't have caused harm, resulting in unnecessary follow-up tests. Procedures that could have been managed outpatients may be admitted, and Caesarean sections, angioplasties, intensive-care admissions, diagnostic packages, and long medication lists may become common.

These interventions must be viewed through the lens of the health system's incentive structure, with strong safeguards against unnecessary prescriptions, surgeries, investigations, and medications. The review of foreign direct investment in hospital acquisitions is justified, as domestic investors may also be profit-oriented. However, the question should be about the investment's impact on the health system.

Does it create new beds or merely acquire existing ones? Does it improve competition or lead to market concentration? Does it serve underserved districts or add another high-end facility in a metro? Greenfield investment and manufacturing should be encouraged, while acquisitions that reduce competition or increase excessive pricing should be scrutinised.

Price regulation must be approached carefully, as linking hospital room charges to nearby three-star hotel rooms may not fully solve affordability issues. Hospital rooms include nursing, infection-control, and emergency support that hotels do not. Moreover, capping one component of the bill may cause hospitals to increase charges elsewhere.

India's experience with coronary stent price regulation demonstrates that government intervention can reduce excessive mark-ups. Nonetheless, hospital care is more complex, with the total cost of an episode being more relevant than isolated caps on individual components. Package rates, transparent estimates, billing standards, and audit mechanisms are thus more useful than individual caps. Diagnosis-Related Groups (DRG) provide an established approach to such payments.