Private hospitals in India fear 'armageddon' if costs are standardised

India's top court, responding to a public interest litigation filed by an NGO, has given the government a month to fix standard rates for different medical procedures. Private healthcare heads now fear an 'armageddon' if rates similar to Central Government Health Scheme (CGHS) are mandated to be applied to procedures in private hospitals.

Viren Shetty, Executive Vice Chairman at Narayana Health, said: "The difference between CGHS and private hospital rates can range from 20% to 60%. Applying CGHS rates to all services would be an 'Armageddon' for private healthcare."

India's Supreme Court has raised its concern over the wide variation in medical treatment costs between government and private healthcare facilities. It has asserted that citizens of India have a fundamental right to healthcare, and the centre cannot evade its responsibility in ensuring this right.

The court highlighted the stark contrast in prices, citing an example of cataract surgery, which costs around ₹10,000 in a government hospital but can range from ₹30,000 to ₹1,40,000 in a private facility. This is despite healthcare costs in India being considerably lower than in other parts of the world.

Underlining the industry caters to people across the spectrum, Shetty of Narayana Health said there was a need to evaluate rates amid rising healthcare costs.

Bino Pathiparampil from Elara Securities also feels all listed private hospitals are likely to be impacted if this mandate is followed. "Everything cannot be priced at the same level when it comes to healthcare," Pathiparampil told CNBC-TV18.

Financial services company Macquarie has presented a cautionary perspective, suggesting that cash-paying patients in private hospitals currently bear a considerably higher financial burden compared to those covered by CGHS.

The CGHS rates are 40-50% lower for medical procedures, so Macquarie said the move could result in a substantial drop in profits for private healthcare providers.

Private hospitals, particularly those with lower Average Revenue Per Occupied Bed (ARPOBs) and a higher proportion of cash-paying patients, may face bigger challenges if CGHS rates are mandated.

The industry, as a whole, is closely monitoring the government's response to these directives.

According to Axis Securities, the implementation of the Clinical Establishment Act 2010 (CEA) poses significant difficulties.

A plausible outcome could involve the Central Government proposing to the Supreme Court the formation of a committee comprising representatives from different state governments. However, building consensus among diverse stakeholders is anticipated to be a time-consuming process, possibly extending over several months if not years, the brokerage said.

This uncertainty is expected to cast a shadow over the hospital sector until clarity emerges.

Jefferies, in its analysis, said that the litigation surrounding the standardisation issue is still at an early stage.

Contrary to foreseeing any near-term adverse outcomes, the firm added that the price weakness in the sector gives a potential buying opportunity.

Jefferies highlighted that adverse news flows are not uncommon for the sector and have historically not always translated into tangible effects.

CLSA acknowledged the Supreme Court's directive for standardising rates as a negative development for private hospitals, acknowledging the inherent difficulties in implementation.

Despite the challenges, CLSA retained an 'outperform' rating on Apollo Hospital, setting a target price of ₹7,000.

The court has asked the central Government to set standard procedure rates within a month. A failure to comply may result in the court considering the implementation of standardised rates as prescribed in the CGHS.

The complexity of determining procedure rates, as suggested by the Clinical Establishment Rules 2012, requires collaboration between the Central government and state governments.

In the event of standardised rates being implemented, insurance companies are anticipated to align their reimbursement rates accordingly.

It remains to be seen how the government will address these concerns and whether a standardised approach to medical treatment costs will be implemented. The outcome could have far-reaching implications for both healthcare providers and the citizens of India seeking affordable and standardised healthcare services.