Can healthcare costs in India come down further?

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When you can’t tax the rich, tax the less well-off. This is exactly what the Karnataka government did by notifying all hospitals to collect 8% luxury tax from every patient in an intensive care unit (ICU).

Lying on an ICU bed fighting for one’s life is not a luxury by any stretch. But the room is air-conditioned and, technically, any ‘bed’ that is air-conditioned has to pay luxury tax. Unfortunately, the government did not do its homework, since it’s a regulatory requirement in India to run an ICU with air-conditioning.

Policymakers must understand that taxing healthcare only hurts poor patients. In Budget 2011, one learnt about a 5% service tax on healthcare. What it meant was that a patient, who most likely sells his assets and comes up with Rs 1 lakh for a heart operation, is expected to write another cheque for Rs 5,000 as a penalty for being born in a country that does not take care of him. Fortunately, the medical community raised its voice calling the service tax on healthcare a ‘misery tax’ and the government withdrew it.

Traditionally, a household electricity tariff is only Rs 4.50 per unit, while industries pay just Rs 5.50 per unit. Hospitals paid Rs 7.20 per unit. Hospitals were classified along with shopping malls and cinemas under the entertainment sector. The Association of Healthcare Providers (India) made a representation to the Karnataka government and convinced it that hospitals are not in the business of entertainment. The electricity tariff was reduced to Rs 6 per unit.

If the private sector is fleecing patients, why do we need them? Nearly 70 years after Independence, our government never increased the budgetary allocation for health to more than 1.1%. This is worse than most sub-Saharan countries. The US spends 18%, France 12%, most Asian countries about 5% on healthcare.

In India, 47% of rural citizens and 37% of urban ones borrow money or sell assets to pay medical bills. Medical cost is one of the most common reasons for rural bankruptcy. The private sector is only trying to fill the vacuum created by the government service.

No other country can offer quality healthcare at the same costs as India. A surgery conducted in Kolkata 26 years ago could cost Rs 1.50 lakh. Today, the same surgery costs less than a lakh. This climbdown in costs is not due to technology, it is due to market forces and compassion.

Can healthcare costs in India come down further? Yes, provided the government stops looking at poor patients as a source of revenue. Look at drug prices. A patient wants to buy a life-saving antibiotic and pays Rs 1,000 of which Rs 250 goes to the government as various taxes.

Similarly, when a patient pays Rs 1,000 for any service in the hospital, Rs 250 goes back to the government in the form of various taxes. Until the government stops looking at the patients as a source of income, cost of healthcare in India cannot come down further.

India needs approximately three million new beds. With 1% of budgetary allocation in healthcare, there are no plans to add those beds. If the private sector needs to build those beds, especially in Tier 2-3 cities, there should be major incentives.

Income-tax exemption for hospitals as an incentive won’t reduce healthcare costs for patients, but will only benefit the promoters. But reducing the input cost by bringing down taxes will directly reduce the cost of healthcare. The government should rationalise the taxes on patients and divert the entire tax collection to an autonomous body that can build 500 new government medical, nursing and paramedical colleges in backward districts of India, especially in the northeast.

Youngsters from poor families should be trained to become doctors, nurses and technicians free of cost. After graduation, when they start earning, tuition fees can be paid back with modest interest in small instalments over 10-20 years to the autonomous body that funded their education. This will make the entire project self-sustaining.

The 21st-century economy will be driven by the health sector. The global healthcare industry is the second largest at $7.4 trillion, and is the only industry that is creating jobs today. With the right policies on medical education, India’s health sector can emerge as the leading healthcare provider for the world. It can also emerge as the world’s largest employer, making India the first country in the world to dissociate healthcare from affluence.


This piece was first published in the Print Version of The Economic Times newspaper on February 20, 2016