Price-Cap is after all Just a New-Price

Healthcare financing systems world over are grappling with a complex set of economic and ethical challenges. The introduction of penalties, fines, and price caps has become standard policy tools to address some of these difficulties. The assumption is that creating such deterrence around decisions will modulate the behaviour of various players in the desired manner. The aspect of modulating the behaviour of key agents in an economic system towards desired directions has been the point of some analysis. The fundamental hypothesis is that when the regulators impose penalties or negative consequences on a particular way of doing the things, there would be an immediate effect on that individual behaviour and actors will strictly follow the pronouncement. The actual behaviours, in fact, observed suggest that imposing adverse consequences or limiting the behaviours may not last long and in fact, their impact will be temporary.  Keeping rest of the eco-system unchanged around these decisions, such interventions lead to actions and decisions that may not conform to the desired behaviour.

Non-compliance of National Pharmaceuticals Pricing Authority (NPPA) order on pricing cap of cardiac stents suggest that any manufacturer or institution or person not complying with the ceiling price shall be liable to deposit the overcharged amount along with interest thereon under the provisions of the Drugs (Prices Control) Order, 2013 read with Essential Commodities Act, 1955. The ceiling price fixed as specified in the order shall be maintained for a period of one year from the date of this notification unless revised by another gazette notification. The severity of the fine and its behavioural implications are debatable.

Any analysis and implications of any economic regulations will need a detailed and complete specification of market forces. In the marketplace, there are demand and supply forces at work, and several agents engage in making decisions. Price-cap, after all, will be just a new price in the marketplace. Each such intervention needs an ecosystem to establish its enduring impact, as there are several drivers at work. Of course, the severity of punishment, which creates the fear factor, would be crucial, but besides a fear factor, the effectiveness of measure also depends on several of these forces at play. 

The promulgated regulation is more associated with profiteering behaviour than creating a stimulus for ethical practices. The introduction of price caps alters the perception of people regarding the environment in which they operate. The penalty imposed in the order may alter the perception in the following way: (a) Provider side perception: The hospitals were charging for the cost of operation in a particular way, and in future, they will do that activity in the same manner. For providers, the deviation may have a cost (regarding reduced image and goodwill).  Maintaining their image has a price, and they do not mind paying this price. (b) Patients side perception: The way the information about the stents have been played and the tag that higher priced stents are better, patients’ perception may suggest that what is provided is justified. This social interaction of provider-patient and norms surrounding their relations may have limitations on bringing down the overall costs.

There is a need to address the fundamental problem – the problem of defining the output and creating a stimulus for appropriate pathways and protocols. Since the aspects of care and its delivery remain loosely defined, these can be molded in any manner at various levels. There is no guilt or shame (depending on the degree of internalization of the social norm) that can be attached to the act of buying a service at will. Since various parameters of the decision remain unchanged; its effectiveness will be debatable. The price cap affects just one parameter in the whole process of decision making. And just to reduce their preferred level of deviation in this regard, one would be free to change other parameters of the game.

Donor Funding to Domestic Budgetary Support Transition of National AIDS Control Programme in India

The National AIDS Control Programme (NACP) of India for its fourth phase had budgeted a resource envelope of Rs 143 billion ($2.70 billion) for a period of 5 years from 2012 to 2017. The resource envelope of NACP in India has been dominated by donor support over several of its phases. The donor funding provided support particularly over three phases of NACP of the programme to create capacity to ensure effective implementation of the programme. During first three phases of planning of NACP the funding gaps were sufficiently large and within the mandate of MDGs various donor partners supported the programme. 

Even though the projections of US based National Intelligence Council issuing a controversial projection that India would have 25 million HIV (about 5% of adult population) by 2010 (HIV/AIDS: India's Many Epidemics by Jon Cohen published in Science 23 April 2004), it did not discourage developing strong links with the international community. On this the then Health Minister Shatrughan Sinha publicly criticized U.S. Ambassador Robert Blackwill and Microsoft CEO Bill Gates for referencing the figures, saying, “I fail to understand how people holding such important positions can stand on our soil and say that India will have 25 million sufferers of AIDS by 2010.” As contrary to this the estimated number of people living with HIV/AIDS in 2011 was 2.08 million and not 25 million.

The resource envelope of NACP funds remained dominated by donor support over its three phases of programme implementation. However, since 2010 many donors started adjusting their allocations globally to encourage transition away from reliance on external resources, especially countries where the national economy could potentially support a greater share of HIV funding. DFID, USAID, Gates Foundation and Global Fund started strategizing using this approach.

The sum total of all sources of funding to finance various components of the programme refers to as the resource envelope. In India the NACP programme had following components of resource envelope:

Direct Budgetary Support (DBS): The Government's financial allocations to the Central plan for financing requirements of NACP. The Planning Commission/Niti Ayog aggregates and puts forward the demand by various administrative Ministries in a consolidated form to the Finance Ministry for the budgetary support required from the Government. This demand is vetted and then approved by the Finance Ministry. In the context of HIV/AIDS, budgetary support for NACP also includes funds allocated under NRHM for meeting expenditures for Establishment, Blood Safety, Condom Promotion and STD.

External Aid Component (EAC): This includes funds received from GFATM grants (various rounds), pooled funds comprising from the World Bank, DFID, USAID, Bilateral and UNDP. These funds are routed through the government treasury system. This component of resource envelope is pool fund that provides funds to GOI with the objective of facilitating faster disbursement. 

Extra-budgetary Support (EBS): This refers to financial assistance from various Development Partners and such as World Bank, DFID, USAID, GFATM, Gates Foundation grants to NGO. EBS funds are directly provided by donor agencies to various implementing agencies to support technical assistance and some components of the programme.

India started developing implementation plan for NCAP IV phase in 2011 and embarked on strategic plan for better integration of services and various components expected to bring in economies of scale and state level share of funding. Also around that time the fiscal position of the government had considerably improved with real GDP growth touching 10 per cent.  The government had also come with a promise to increase allocations to the health sector. Government’s resolve to increase allocations to health sector, declining prices of ARV medications and reducing the burden, high prevention focus of earlier phases leading to lesser burden, and past success stories and policy level interventions from government and judiciary creating higher ownership paved the way for increasing domestic budgetary support to the programme.

The government budgetary support increased from 9 percent during NACP II to 75 percent of total resources during NACP IV as can be seen from the following graph. The EAC component decreased from high of 91 percent to 24 percent of total budget during NAVP IV.

Government Budgetary Support NACP in India (%)  

Our paper entitled "Donor Funding to Domestic Budgetary Support Transition of National AIDS Control Programme (NACP) in India" coauthored with Dr K Sudhakar discusses the implications of this decision in terms of whether the budget promises were held and whether the integration challenge delivered the results. The paper discusses the way forward and suggests higher ownership of the programme should be instituted at the state level, particularly after financial devolution and speeding up the pace of integration to ensure it becoming a part of general health system.

Bhat, Ramesh and Sudhakar, K, Donor Funding to Domestic Budgetary Support
Transition of National AIDS Control Programme (NACP) in India (February 26, 2017). Indian Institute of Management Udaipur Research Paper Series No. 2012-2171274. Available at SSRN: https://ssrn.com/abstract=2924228

Health Care Financing in India: Policy Dilemmas

Health Care Financing approaches in India have remained lopsided focusing on demand side interventions and purchasing from the private sector for acute illnesses requiring hospitalization. Policy dilemmas are: (a) how healthcare financing mechanisms can address the issue of supply side, (b) what institutional and administrative mechanisms should be instituted to strengthen the private sector engagement and (c) what should be the healthcare financing mechanisms to address primary care challenge.

India has adopted a health care financing (HCF) system that provides financial protection to a small percent of the population. The population groups that benefit from such protection are typically government employees, formal sector employees with regular jobs and adequate incomes (through ESIS), and the population that is the below-poverty threshold (through RSBY and other GHISs). A significant part of the population, particularly in low-income groups, continues to lack access to minimally adequate health services. Health care financing policies in India has tended to widen rather than reducing the gulf between privileged and underprivileged and between rural and urban populations.


As regards to HCF policies, the case of government health insurance implementation and health policy planning in India is of particular interest. It illustrates several dilemmas. One, the policies have created a significant dependence on the unregulated private sector. Indian health care delivery and financing patterns reflect major influences and preference towards private healthcare sector. The interaction and engagement with private sector happen through a decentralized administration from the centre to states level, and that too through a highly fragmented responsibility system. It is possible that the evolution of health care financing mechanisms in India will follow, for better or worse, the general experience of the countries having a high dependence on private sector along with the policy dilemmas imposed by aspects of Indian geography, socio-economic situation, and the political economy. Some of the predictable implications are the serious moral hazard from both provider side and consumer side. So the HCF dilemma we face is what should be the structure of institutional mechanism and administrative processes that should be instituted to strengthen the private sector engagement.


India adopts a sort of free-market system in health care. We have minimum regulations in health care that have promoted the concept of medical specialization rather than creating a network of primary care physicians. Primary care has taken the back seat. Given this, there does not exist appropriate mechanisms for ensuring early detection of health risks. We allow health risks to aggravate and then it fills the demand for specialists. There are no appropriate referrals because of the kind of incentives we have developed in the health sector. Providers through medical associations assume a dominant position. The professional barriers have been huge by not allowing alternative forms of health care provision.


The health care financing policies focus on developing demand side by promoting insurance and purchasing from the private sector. The approach has neglected policies to improve the supply side of health. The most parameters of health infrastructure such as doctor-population ratio, hospital-beds to population ratio, etc. remain quite unfavorable. What should be the appropriate policies that help in improving the supply of medical infrastructure, promote the development of medical resources in the right areas, change health care delivery methods? Inequitable distribution of services hampers achieving the health goal. Heavy dependence on the private sector for health care may also lead to weak public control if the process of engagement is not steered carefully.


With the advent of GHIS focusing on BPL population and covering only hospitalization needs, the system has gradually drifted towards emphasizing expensive, overspecialized care. The lack of investments in primary care and also on public health precludes a referral system and addressing health risks at an early stage. The issues of coordination of primary care and GHIS focusing on only hospitalization remain weak as the institutions and administrations in government handling the GHIS and general health remain administratively separated. Further, the lack of coordination between and within programmes compounds the issues.


India should find the real foundation of rationalization of HCF policy, particularly engaging with the private sector. India has far lesser health resources than other emerging nations, and we face a real risk of India becoming a place of unnecessary procedures, waste, costs and maldistribution of medical care provision. The consequences of this may be severe, particularly when unmet needs of a large segment of the population remain high.


It is perhaps time to initiate in-depth examination of anticipated implications of market-based health care financing approaches we follow today. The way HCF mechanisms are approached, with significant absence of the role of institutions in their implementation and increasingly over-engagement with the private sector and the design of health care provisioning with a weak and fragmented government control, we need to look into challenges seriously. Many countries have greater insights into experimentation, integration of primary care and learning on various HCF issues, and there is a repository of information, ideas and innovations available to us today. However, following any particular approach is always consequential, but never more so than in the case of examining options for HCF in India today.

Arrow's World of Uncertainty and the Welfare Economics of Medical Care

Accepted for publication in letter section of EPW

Prof Kenneth Arrow passed away on 21 February 2017. His research delved into some complex economic and ethical issues facing health sector. No professor teaching a course on health finance or health insurance can ignore the seminal work of Prof Arrow "Uncertainty and the Welfare Economics of Medical Care," published in American Economic Review, December 1963, 53(5), pp. 941-973. This paper is a classic and the most cited paper. This paper was one of the first readings of the course on health insurance which I offered at IIM Ahmedabad during 2014-16.

One of the issues the economists throughout have been dealing with is the problem of allocation of resources. Following the first optimality theorem (popularly known as the Pareto criterion) an allocation of resources is "optimal" if one can not rearrange things in a way that make any other better off without putting at least one person worse off. Further, the economic theory suggests that if some underlying assumptions of perfect competition and consumer having full knowledge are true, then the free market will produce an efficient allocation of resources. The consumer supremacy ensures that they are in commanding position subject to their budget constraints.

While the free market concept is celebrated for its optimal outcomes for which Arrow laid down its prerequisites explaining it in mathematical terms. Arrow challenged the concept of consumer sovereignty (whether the consumer has the knowledge and decision-making ability to make buying choices) in medical markets. Arrow first time provided a detailed explanation on why medical markets do not fit the conceptual framework of the free market. The “uncertainty” principle explained in the paper referred to the basic and fundamental problem in medical care. This is stated beautifully in the paper, as

“unless you have knowledge as much about your health condition as your doctor, you can't evaluate the quality of advice he or she gives you.”

Following this the concept of "information asymmetry" became the most popular concept in medical care and health insurance. In 1963, this was the most definitive answer to those who believed that markets are capable of validating the quality of hospitals or insurance plans.

Following this, the paper makes the most important point about consumer ignorance in medical markets. What we now know as "information asymmetry" and "principal-agent" relationship in medical markets, doctors has information, which the patient buys and physicians decide on behalf of patients. In economics terms, this is a failure of consumer sovereignty.

Arrow's paper also makes one important point that if one thinks what we are producing is not desirable; one can fix this by redistribution of wealth. Regulating the market is not the solution. Arrow describes this as the "second optimality theorem." However, he realizes that this may at times be politically a difficult proposition in free market situation. Towards this we need to take role of social institutions more seriously to handle the possible optimality-gap in medical markets. The paper argues:

"In the presence of market failure, society will, to some extent at least, recognize the gap, and non market institutions will arise attempting to bridge it."

Developing the arguments on consumer ignorance in the medical markets, the paper delves into the concept of "marketability.” In 1963 some implications of buying and selling of goods and services and their costs and benefits relevant to the decision were not evident. These have to do with what we now know is “externalities” that deals with the costs and benefits of one's decision to purchase or sell impose on others who are not a party to the transaction. The famous example that is quoted in the class is immunization. Failing to get vaccinated increases risk for others. Because other will not pay for these risks, the government action is required.

Much of the contents of this paper have now become standard to describe the peculiarities of medicine and medical markets. The paper illustrates the differences between how doctors compare with other entities. Because of the fundamental failure of consumer sovereignty and imperfect marketability of information in these markets, this paper articulates the need for professional ethics.

The other uncertainty Arrow discusses "product uncertainty” of medical care as compared to other commodities. One of the insights I got, which I frequently use in my discussions in class, is that we face information problem in all products/services we buy. The only difference is that in other commodities/services we gain knowledge through experience. Medical conditions experienced give only one chance and the ways they are treated have consequences. In medical markets, the experience of consumers cannot solve the product uncertainty problem.

To address the quality uncertainty in the medical markets, licensing of health care providers is most preferred form of non-market intervention. However, there are always tradeoffs in this. Arrow highlights the kind of trade-offs and distortions which the licensing can introduce. The licensing system can bring rigidities in production of medical services, for example, about what tasks doctors can perform and nurses can not. Many health systems having human resources constraints are grappling with this challenge.

Arrow discusses why it is hard to provide health care in rural areas. To provide medical care, there is some required minimum size and because of that resources are "indivisible.” Because of this if there are a few patients, the average cost becomes prohibitively high.

The paper develops one important argument while discussing uncertainty of the effects of treatment. It is understandable that the way the patient views his/her treatment and its effects are going to be different from his physician's. This is because of the differences in knowledge and perspective. Under this condition what should be the best way to compensate the providers and Arrow proposes doctors should be paid only for outcomes/results, and not for effort or based on inputs. This is one of the ways to align the provider's incentive with the patient's well-being. Health systems across the globe are struggling with this idea as such arrangements require a lot of hard work to get implemented as outcomes/results are hard to measure. Instead, we have a system that relies on trust by the patient and social obligation by the physician which is so fragile that often it gets challenged.

Price Cap Order, Profit Disorder

Health care system, in general, is an imperfect world. We face notorious difficulties in measuring health care inputs and their associated outcomes at all levels of health care. Drawing conclusions about the interventions, their use and whether the healthcare inputs and outcomes give value for money is a major challenge. The recent NPPA order ((F.No. 19(837)/2016/Div.II/DP/NPPA, dated 02 Feb 2017) of fixing a ceiling on stent prices based on the contention that margins were exorbitant and irrational, an act of vulgar profiteering at various levels including the hospitals and cardiology clinics, raise a variety of economic and ethical arguments in the health financing sphere. Interestingly the order further states that the levels of margins indicate a “failed market system” where asymmetry of information has resulted in unethical practices. We are, may be, seeing one of the first crisis to be followed by much more such situations in future.

The hospital associations have contended that the margins charged are justified at their end as they are required to invest in capital assets to ensure a smooth running of operations. There are apprehensions that this will not work, and also put the consumers at a lot of inconveniences. The NPPA has argued that since hospitals are not doing any value addition, they must not be allowed to put any top-up margins and disassociate themselves from such practices. The NPPA order brings one of the central rallying cries in the health sector to a center stage. It brings forth, the debate about the influence of “business” on health care and the question of medical ethics. At most times, such discussions can become frustrating and controversial. But the positive side of this discussion being stated in clear terms is to give an explicit recognition to the fact that medicine and business are now connected, and there is something wrong. Asserting these linkages are inescapable because they are more visible now and at times turn to be uncomfortable to many stakeholders in the health system. The economic and ethical dilemmas are so pervasive; we cannot remain on sidelines any longer. I think this discussion will pave the way to argue about what kind of system we want in future.

Within the overall system, hospital market has its challenges, and it is important to understand the characteristic of this market in the background of debate on the cap on pricing. One of the characteristics on which the markets are typified is whether they are contestable. Contestable markets are one that has no exist/entry barriers. If in that market prices increase much beyond the average price level (and generate excess profits), potential rivals will enter the market to exploit this situation. The existing players will respond by bringing down the prices appropriate to yield normal profits. The perfect contestability will make it sure that even a single player can exhibit competitive behavior. Hospital care markets are not perfectly contestable as there are huge sunk costs creating huge barriers for exit and entry. It is difficult to find a suitable buyer of assets of hospitals once it is discovered the hospital is not doing well. Compounded with this is the fact that decision to use a particular input is decided by the doctor and not the patient leading to a situation of information asymmetry between doctors and patients leading to a situation of supplier-induced demand. Many of unpredictable implications of hospital practices may be traced to these problems. For example, hospital practices are replete with assertions that fee for service increases discretion and unnecessary clinical interventions. Given the contestability issues even having a large number of players, the competition will not necessarily lead to efficiencies and good practices. In private health care settings, in particular, the ability to pay takes precedence over the need and hospital pricing policies give dominance to business interests over health care. We have yet to experience the prescription of generic drugs, rather than the prescription of prescribing of expensive branded ones, with no significant benefit in patient outcomes. The response from regulators is inevitable in such situations. One of the typical responses from the regulatory toolbox is being following the dictum of “illegalization of dubious pricing” policies of providers.

However, one also needs to understand that here we are dealing with a situation where we have no data based on which one can make informed choices. Our costing systems are not good enough to help understand the relationship between inputs, activities/processes, and outcomes, in treatment pathways. There is no cost data available on such pathways. When hospital associations make a point that cardiac stents need a delivery mechanism to be implanted within the body and that the delivery mechanism and its ecosystem require capital investments, one wonders why these costs should be clubbed with the cost of stents. The detailed activity-based costing of hospitals is not in place, and one has no idea how much does an intervention costs. The cost information we have is related to functions such as salary, rent, etc., but it is not possible to find opportunity cost, for example, of an episode of hospitalization. Making this argument that stent prices are in fact within a bundled price of procedure and components weakens the argument. It reflects poorly on highly reputed hospitals as not having an appropriate costing system in place. It is high time for these institutions to invest in some basic infrastructure of financial management and understand their costs and present their arguments cogently. In recent times, most of the private and corporate hospitals have invested in hospital management information systems (HIMS) to manage patient care, finance, billing, medical records, and insurance clients. It is surprising that amidst such an IT infrastructure these hospitals fail to implement data collection mechanisms for calculating costs of treatment.

Some have argued that insurance companies pay for these procedures and the insurance providers routinely produce price data. It is important to understand that the price data produced by insurance companies are negotiated prices and may have little bearing on the real costs. The insurance prices data are many times bundled prices, and one does not know the cost of various components of the service.  We confront another challenge of not knowing the real outcome of various procedures, and there is no effort in place to capture this data. Often the outcomes are proxied with the process and the kind of stents used. This is certainly not the correct approach. The outcomes measurements should be based on the enhancement in duration and quality of patient's life or methods propagated by Prof Michael Porter on outcome measurement. In the private hospitals, there are huge gaps in capturing this information. Even if one captures some basic information such as readmission rates, it measures an important component of quality. The other point, which we also need to be confronted, is the high variation in costs and clinical activities across facilities in the country. Those working in the health sector recognize this fact, and there is little consensus on what is the best practice. In many situations, doctors do have good insights into the input-outcome relationships, particularly what is desirable and what is not desirable; however, they tend to ignore such knowledge because of perverse incentives. Doctors in many hospitals work based on “revenue target” approach, due to organizational pressures or third party paying system, thus creating moral hazard situations. Hospitals also work in highly fragmented markets and the same is true with their procurement side. This fragmentation increases costs, as one does not get an advantage of economies of scale.

The current debate also raise a wide variety of ethical arguments about health care financing; chiefly (a) what is the role of health and its distribution in society in advancing universal health coverage? (b) what is the role of access to or utilization of health care in maintaining or improving the desired level and distribution of health among members of society? and (c) what is the role of public and private financing in ensuring ethically justified access to and utilization of health care by members of society? The health care financing experience around the globe may have something to contribute to the development of the ethical foundations of health care system. For example, it is important that our policy deliberates on instituting systems that focus on ensuring “just” distribution of health care resources and strengthening the effort through good economic analysis of health care financing issues, health care provider incentives, health insurance markets and deliberating on the role of public and private financing in health care.

Indian health system needs to be ready to solve many crises to overcome in trying to create a healthy society for its inhabitants. As some say that the first crisis is always the crisis of not having a vision.

Ramesh Bhat

23 February 2017