November 30, 2005

Health care India South Asia,


Private Healthcare in India is opening up the demand for quality health services has led to the Government to create Private Initiatives to allow the private sector to participate

By Melvin J. Howard

Healthcare is the responsibility of the Indian central and state governments. Until a decade ago healthcare services were provided only by government and charity hospitals. These service providers have been overwhelmed by the cost and demand. The demand for quality services has increased tremendously during this past decade primarily because India's economy has been strong and the middle class (people with more discretionary money) is growing quickly. People with discretionary money are demanding timely and quality services. Private hospitals and clinics have been established to meet the new demand. Rapid growth is being experienced in this exploding market.

The potential

The marginal presence of the government in healthcare leaves the door open for alternative suppliers. India spends about 0.7 per cent of its Gross Domestic Product on public health against an average of 0.9 per cent of GDP for low-income countries. The world average is 3.2 per cent of GDP. Financial distress seems to be the dominant theme in any discussion on the state of government finances, and with dramatic changes unlikely in the foreseeable future, private healthcare organizations are bound to grow. Other than the cold fact of marginal presence in healthcare delivery, government centres are anyway not the people's choice. Whenever possible, patients seem to opt for private healthcare providers. The unmet demand for good healthcare in India coupled with the growing opportunities to raise resources through the capital market set off a few hospital projects in the last decade.

Implication of health insurance

The low level of health coverage in India suggests that insurance companies have enormous potential. The success of insurance companies will hinge on keeping a tight leash on the cost of healthcare delivery. Such a tight check is likely to propel corporate hospitals towards more efficient functioning. By their ability to command or distribute big business, insurance companies are likely to have the clout to nudge hospitals into running a tight operation.

As the experience in the US shows, the growing importance of insurance or Health Maintenance Organizations (HMOs) does not necessarily guarantee a system free from trouble. These organizations seem to create a unique set of problems. But what appears almost certain is that the advent of private health insurance will insure corporate hospitals work towards greater efficiency.

Private initiatives and policy options: recent health system


Experience in India


Social Service Area, Administrative Staff College of India, Hyderabad, India

In the recent past the impact of structural adjustment in the Indian health care sector has been felt in the reduction in central grants to States for public health and disease control programmes. This falling share of central grants has had a more pronounced impact on the poorer states, which have found it more difficult to raise local resources to compensate for this loss of revenue. With the continued pace of reforms, the like­lihood of increasing State expenditure on the health care sector is limited in the future. As a result, a number of notable trends are appearing in the Indian health care sector. These include an increasing investment by non-resident Indians (NRIs) in the hospital industry, leading to a spurt in corporatization in the States of their original domicile and an increasing participation by multinational companies in diagnostics aiming to capture the potential of the Indian health insurance market. The policy responses to these private initiatives are reflected in measures comprising strategies to attract private sector participation and management inputs into primary health care centres (PHCs), privatization or semi-privatization of public health facilities such as non-clinical services in public hospitals, innovating ways to finance public health facilities through non­budgetary measures, and tax incentives by the State governments to encourage private sector investment in the health sector. Bearing in mind the vital importance of such market forces and policy responses in shaping the future health care scenario in India, this paper examines in detail both of these aspects and their implications for the Indian health care sector. The analysis indicates that despite the promising newly emerg­ing atmosphere, there are limits to market forces; appropriate refinement in the role of government should be attempted to avoid undesirable consequences of rising costs, increasing inequity and consumer exploi­tation. This may require opening the health insurance market to multinational companies, the proper chan­nelling of tax incentives to set up medical institutions in backward areas, and reinforcing appropriate regulatory mechanisms.

Market forces

One of the most significant trends emerging in the wake of liberalization is the new vigour of the entry of corporate hos­pitals and multinationals in the health care scenario. The

reason for this new tempo is the potential that India offers to NRIs and multinationals. With the current ratio of population to all types of beds being 1300: 1, it has been estimated that there is a huge demand–supply gap which may require nearly 3.6 million beds to overcome it.6,ii Taking into account the requirements of primary and secondary health care, the short­fall is estimated to be around 2.9 million beds. In tertiary health care, the gap may be somewhere around 20% of the above total, which amounts to some 0.58 million. With investment costs per bed per year (including land, building, equipment, support system and medical consumables) ranging from Rs 0.7 million to Rs 3.5 million depending upon the nature of specialty, the resource requirements are enormous. Further, from a survey conducted by the Confederation of Private Sector Initiatives in Health Care, it is estimated that against a requirement of 60 000 super-specialty beds each year, only 3000 multi-specialty beds are being planned in India, which may cost around Rs 7200 million over the next 3 years.


Growing NRI investment in the hospital industry

Realizing the need, the potential for profit and from a desire to develop the States of their original domicile, many NRIs from the USA and UK have taken interest in the develop­ment of health care diagnostics or super-specialty hospitals in their hometowns. Between August 1991 and August 1997, the Foreign Investment Promotion Board (FIPB) approved foreign direct investment (FDI) proposals worth US$100 million (about Rs 3600 million) in the Indian health care sector.7 The major chunk of this FDI (Rs 1160 million) goes to Delhi,iii helping in the development of a super-specialty hospital and diagnostic centres. Other places in the country to benefit from this NRI investment include Guntur in Andhra Pradesh, Bhuwaneshwar in Orissa (Rs 30 million), Calcutta in West Bengal (Rs 80 million) and Bangalore in Karnataka (Rs 0.6 million).iv These investments in States other than Delhi are mostly focused on diagnostic centres and bring with them high-tech care, advanced medical technology and trained Indian medical manpower. This is partly halting and revers­ing the brain-drain of medical personnel.


Corporatization of the hospital industry

Health care is thus emerging as a blue-chip industry and in recent years has attracted the investment of both domestic and foreign companies. Unlike the earlier image of the private sector, which mainly focused on nursing homes and polyclinics, the new market orientation is towards super­specialty care.8 In this regard, although the pioneering efforts were made way back in 1983 by a group known as Apollo,v a number of other companies have now entered the market. Notable among the latter include successful domestic and foreign companies like CDR, Wockhardt, Medinova, Duncan, Ispat, Escorts, Mediciti, Kamineni, Parkway, Jardine, Nicholas and Sedgwick.9,10 The entry of so many such companies has added towards corporatization of the health­care industry with a focus on high profit-margin, super­specialty and diagnostic care. Mostly these companies have expanded their network in India’s major metropolitan towns.

Private initiatives and policy options in India                                                                               

Increasing participation by multinationals

Given the rising cost of health care in the last 5 years,vi the foreign companies are aiming to capture the potential of the health insurance market for nearly 135 million people in the upper-middle income segment of the population who can afford private health care. Against an estimated potential health insurance market of between Rs 6500–275 000 million, the present annual health insurance premium market by the General Insurance Corporation and its subsidiaries is merely Rs 1000 million, covering just 1.6 million people. In view of the possible opening of the market to multinationals, many foreign companies have already taken preliminary steps, such as setting up their representative offices or entering into ties with Indian companies.vii These companies aim to devise health insurance schemes suited to the Indian situation, to improve coverage by incorporating payments for general physicians (GP), medical tests and specialist charges, and containing costs through appropriate controlling systems.


Besides health insurance, the high-tech, medical, electronic equipment industry has been the other area to attract invest­ment by multinationals following liberalization. This is due to the high-tech nature of modern diagnostics, which is based largely on foreign technology having a high obsolescence rate of around 5 years and thus high replacement needs. In general, a reduction on import duties on individual com­ponents, and high rates of import duties (up to 31–37%) on high-tech finished products (like CT scanners), have together encouraged multinationals to assemble the imported components in India. Consequently, of total imports of medical equipment (Rs 4500 million), more than half (Rs 2800 million) comprise locally assembled medical electronics (like X-ray, ultrasound, CT scanners, patient monitoring equipment, etc.), with the remainder constituting other electronic medical products (like sterilizers, endoscope accessories etc.).

Policy measures

In the last 1 or 2 years a number of State governments have become increasingly aware of the possibility of introducing policy measures that could enhance resource availability to the health care sector either through economic or insti­tutional reforms. These include policy initiatives to attract private sector participation and management inputs into

running PHCs, the privatization or semi-privatization of public sector health facilities, innovative non-tax measures to finance public health facilities, and tax incentive measures to attract private sector investment in health care. Some of the State governments have even initiated moves to reorganize their health directorates into public sector undertakings.viii More often, however, this has been done with the assistance and insistence of the World Bank. In this section we do not intend to go into this aspect of reorganization but rather focus on the other above-mentioned measures.

Measures to attract private sector inputs in PHCs and privatization

Owing to scarcity of resources, the existing public health system has been unable to provide care to all. At present as many as 135 million Indians do not have access to health ser­vices.15 Despite the Bhore Committee’s recommendations in 1946 of the provision of one health centre for every 20 000 people, the country currently has one PHC per 31 000 popu­lation.15,16 Even the existing public health facilities run with abysmally low resources; presently, an average Indian PHC has as its budget only Rs 1 per capita for drugs. Thus, appar­ently prompted by the desire to increase access for more people, some of the State governments have recently favoured an increasing participation of the private sector in running the existing public health facilities.17,18


In this regard two distinct strategies with differing impli­cations have been adopted. One strategy has been to attract direct private investment purely on a philanthropic basis while maintaining the bureaucratic management of the exist­ing health care facility. Expenditure by the private companies falls under charitable purposes and can be claimed for exemp­tion from taxation; beyond this, there is no benefit to the private parties. This strategy has been adopted in Tamil Nadu where the State government has called for private sector par­ticipation by inviting private investment in public health-care infrastructure and improvement. To expedite this process a special division has been created in the State’s department of health and family welfare for the promotion of private sector participation in public health. The emphasis has been laid on the adoption by the private sector of PHCs, district and taluk hospitals and other government-run medical facilities to improve the facilities provided. The State has sought private participation in the form of construction work, maintenance and provision of equipment, with the government providing the staff, medicines and management. Tamil Nadu has 1420 PHCs, many of which are not housed in their own buildings, and there is inadequate maintenance even at the level of taluk and district hospitals.ix The privatization strategy will there­fore help in raising resources for maintenance purposes. As many as 100 PHCs in the State will be maintained through various private companies and industrial houses under the PHC participation scheme.x


Thus the efforts of Tamil Nadu State are geared towards pooling public and private resources for social purposes, and impose more social obligations on industry. The success of such pilot projects depends upon the continual good profit­ability of companies participating in the scheme and good mixing of two different work cultures, namely, public and private.


Another strategy has been to increase private sector partici­pation by handing over the management of public sector facil­ities to a private party working on a not-for-profit basis, with core funding coming from the government. Such a move has been made by the State of Maharashtra. The State govern­ment appointed a committee in July 1997 whose recommen­dations were available in October the same year. The committee suggested some 30 guidelines for considering the transfer of a PHC to those registered private NGOs that are capable of providing such services in remote and hilly areas. The emphasis of these guidelines is on the capabilities of the private organizations and the functions to be performed by such parties after the takeover, and the amount and method of grants to be received by these organizations. According to the committee, it should be ascertained that the concerned NGO has the requisite manpower, expertise in providing basic health services in remote and hilly areas, vehicles and capacity to provide specialized extension services and medical aid in cases where patients need to be referred. Generally these private agencies will have the right to retain the existing staff or to effect changes in the workforce while adhering to laid-down government norms. In either case, the agency will receive wage expenses for its employees from the government. The agency taking over the PHCs shall also be responsible for providing residential quarters for its staff, training, miscellaneous repairs and surrounding sanitation. The above-mentioned strategies to increase private sector participation in public health facilities have a common objec­tive: to make the private sector a partner to shoulder social responsibility with the government. However, the success of any of the approaches will depend upon considerations in their implementation. In the first strategy, attracting private investment on a philanthropic basis, the main considerations would be continued profitability of the company, its geo­graphical location, screening of companies based on their past record of social responsibility, the extent of financial responsibility shouldered by the company and applicability of the tax deduction clause for the company expenditure. The incentive for the company would be the tax deduction from its profit taxation. However, this kind of support would depend upon its future profitability. With fluctuations in trading activities, the market situation may sometimes lead a company to retrench its funds from the social responsibility. In anticipation of this, there should be an alternative arrange­ment by which the government can invite further, alternative private sector participation without causing undue delay in providing the requisite care in the local area.


In the case of the second strategy, involving private sector management in public health facilities, the crucial consider­ations would be procedures for the effective delegation of powers within the existing bureaucratic framework and mechanisms of coordination between lower level (PHC) and upper level (district) authorities. The performance following the private sector adoption of a PHC would still depend crucially upon the cooperation of bureaucracy in various ways. In the absence of clear autonomy in hiring personnel, wage fixation and rate fixation, while taking into account the affordability of poorer people in the area, the chances for success of such collaboration between public and private sectors may be slim. This kind of autonomy may require modification of rules and procedures, which may be a time­consuming process and political interference may slow it down further.

Innovative non-tax financing

Some Indian States have initiated some innovative financing measures to mobilize private resources for the public health­care delivery system. For instance, Kerala and Rajasthan have set up committees, known as the hospital development committee (Kerala) or medicare relief society (Rajasthan). These are entrusted with all the funds, which include user charges, visiting fees, outpatient fees etc. These committees have their own bank account and can decide upon the allo­cation of funds .xiii Another innovative method initiated by Himachal Pradesh is a scheme called ‘Vikas Me Jan Sahyog’ (Peoples’ participation in development). This scheme envis­ages 20% of funds being contributed by the people and the remaining 80% coming from the State government. The scheme covers the construction of hospitals, sub-centres and ayurvedic hospitals in a specific area. Likewise, in Kerala an innovative measure of raising resources for cancer control was initiated by involving the community in a unique way. For instance, it was announced by the State that 25% of the total collections from Indira Vikas Patra would be earmarked for early detection and prevention of cancer. This resulted in an enormous positive response from the public, and instead of a planned collection of Rs 100–120 million under the scheme, Rs 760 million was collected. In fact, 25% of this collection, earmarked for a cancer control and early detection pro­gramme, was equivalent to nearly 10 years of the sanctioned budget.




Private initiatives and policy options in India                                                                               

Tax incentive measures

A number of tax concessions have been extended to the hos­pital industry in recent years. These include both central and State level measures. At the State level, these concessions are available in the allotment of land and investment allowances for medical equipment. The Rajasthan Government, for instance, has adopted incentive measures such as the allot­ment of land for hospitals at concessional prices and subsidy for investment in medical equipment.20 In order to extend these facilities, the private enterprises have been classified into different categoriesxv which could take advantage of a reduction of 25–50% on the market price of agricultural land in rural areas and the residential land price in urban areas, up to a certain land ceiling. However, if the land allotted for medical institutional purposes is not put to use within 2 years from the date of allotment, it may be taken back by the government. Likewise, if the medical institutions were set up before 31 March 1999, the eligible health care institutions are exempted from local levy and State sales tax on medical equipment, plants and machinery imported from abroad or outside the State or purchased within the State.


Many of these incentives, as well as financial help from banks, are available to private hospitals in other States, including Andhra Pradesh and New Delhi. In return for these conces­sions, however, these corporate hospitals and diagnostic centres are required to render free outpatient and in-patient services, at least to 40% of their patients who may be identi­fied as poor and either referred by government hospitals or otherwise. The idea behind this is to cross-subsidize the poor partly through the government subsidy and partly through the higher rates charged to high-income patients by these hos­pitals. In practice, however, the hospitals do not follow this agreement. Thus, some of the branches of the Indian Medical Council (e.g. Vijayawada in Andhra Pradesh) have demanded that the government should make it mandatory for these hospitals to display a board on their premises informing patients about the free services clause. Likewise, the Council has suggested that government hospitals should refer patients identified as poor for treatment to these hospitals.

However, there remains a problem of coordination on this aspect between the private hospitals and the concerned State governments. For instance, in Delhi, the Apollo Hospital, which was recently constructed on concessional land by the government (the latter also being a partner holding a 26% share), was required to build a free outpatient ward, provide 200 free beds and free diagnostic and operation theatre facil­ities and free diets to poor patients. Despite this all being carried out by the hospital, there was some confusion; govern­ment administration also insisted on free medicine and con­sumables for poor patients, despite the absence of such a clause in the contract.22 Likewise, under the contract it was agreed that complicated heart and brain surgery would be performed free of charge for the poor by ‘Super Specialists’ at the hospital. But, due to further confusion, the government has been insisting on admitting and treating all road accident victims for free at the hospital, again a condition not men­tioned in the clause. As a consequence the excellent facilities of the outpatient and in-patient wards, operation theatres and other diagnostics have remained unutilized and the dispute remains unresolved.


At the central level, these hospitals have the advantage of the concessional duty for imports of medical equipment. At present, the import duties have been reduced to an average level of 15% for medical equipment and there is no duty on life-saving equipment.24 At the aggregate level, in value terms these imports contribute 50% of the total requirements of medical equipment in the country. This kind of import liberal­ization for health care equipment is accelerating the growth in the domestic production of medical supplies, but it is also being spurred by the affluent and consumer-oriented middle­income population, which is demanding quality health care

using hi-tech equipment.

Policy options and welfare implications

Many of the merits and problems associated with recent policy measures and market forces concerning developing countries generally, seem to be equally relevant for the Indian health care sector. The main thrust of policy in the post­liberalization period has been to encourage market forces. However, there are limits to this approach, unless appropri­ate refinement in the role of government is undertaken. In the last few years, many of the recent reforms both in developed and developing countries have been geared towards privati­zation or increasing private sector participation in public health care.26 With increasing private sector participation it is presumed that managed markets, especially in the hospital sector, will increase supply-side efficiency by increasing com­petition among providers and there will be increased trans­parency in trading or hospital business.27 Also, efficient managed markets in welfare services like health presuppose: (1) competition between suppliers; (2) definable outputs for which consumer valuation could be made; and (3) lower transaction costs compared to an existing set of costs.28 In some recent reforms some of these conditions are not satis­fied, one consequence of which has been a rise in costs. Nonetheless, it has been emphasized that the private sector can be a more efficient producer of secondary and tertiary level health care, and therefore the government budget can be balanced.