Supreme Court’s Directive for Private Hospital Rate Regulation: Key Considerations and Challenges
In response to a Public Interest Litigation (PIL) highlighting the high and variable procedure rates in private hospitals, the Supreme Court of India has directed the central government to find ways to regulate these rates. The Court cited the example of cataract surgeries, which cost around ₹10,000 in government hospitals but can range from ₹30,000 to ₹1,40,000 in private facilities.
The Court’s directive is rooted in Rule 9 of the Clinical Establishments (Registration and Regulation) Act, 2010, which requires hospitals to charge rates within the range determined by the Central Government in consultation with State Governments. As an interim measure, the Court ruled that the Central Government Health Scheme rates should be used until appropriate regulations are established.
While the problem of high and variable hospital rates is acknowledged, experts emphasize the complexity of the issue and propose alternative solutions. In an unregulated market-driven scenario, healthcare providers may focus on profit maximization through higher prices and overprovision of care. One potential solution, known as “yardstick competition,” involves setting benchmark prices based on market observations. However, this approach poses challenges in India due to diverse patient profiles, unreliable price data, and weak regulatory frameworks.
Relying solely on competition from government hospitals is insufficient due to long wait times, perceived service quality issues, and patient information gaps. Consequently, the risk of supplier-induced demand persists.
Experts emphasize the need for benchmark pricing to determine appropriate rates. Standard Treatment Guidelines (STGs) can help establish relevant clinical needs, the nature and extent of care, and the costs of total inputs required. STGs address confounders that account for varying levels of care for various hospital procedures while ensuring clinical autonomy to respond to individual needs. Consequently, it enables valuing healthcare resources consumed for the precise cost of multiple procedures.
Given limited regulatory capacity, STG formulation and adoption require that providers’ revenues are tied to fewer payers. Providers must rely on reimbursements from pooled payments, covering most of the population with low out-of-pocket (OOP) payment levels. With government support, payers and providers could agree on pricing that provides a reasonable and sustainable surplus over and above the input costs. However, this would be hindered if providers could access markets with OOP payments as an alternative or add-on to reimbursement payments.
Several countries have accomplished this feat through coordinated healthcare purchasing reforms, highlighting that pricing issues are health systems challenges rather than law-and-order problems. In India, over half the total health expenditure is OOP. The other half comes from a multitude of publicly and privately pooled resources. The private sector is predominantly composed of small-scale providers. Even if rates are standardized, their implementation will be uncertain. Enforcement mechanisms for adherence to prescribed rates remain unclear, raising questions about the feasibility of such regulatory measures.
Experts also caution against command-and-control regulations through pecuniary measures such as price caps. While these measures may influence actors’ behavior in the short term, their effects are temporary without addressing underlying problems. The suggested measures face enormous enforcement challenges, as evidenced by the weak implementation of the Clinical Establishment Act in many states and union territories.
A comprehensive health financing reform strategy informed by robust and ongoing research on appropriate processes for formulating and adopting STGs is essential. Without such a strategy, actual pricing can be manipulated and justified in any manner. For example, hospitals with lower average revenue per bed can push their rates higher by appealing to their better care quality. Without STGs, it will be nearly impossible to verify such claims objectively.
The Pradhan Mantri Jan Arogya Yojana and the Department of Health Research have made significant strides in developing STGs for common conditions and adopting a comprehensive costing framework. Efforts are also ongoing to create an Indian version of Diagnostics-Related Groups (DRGs). Although the insurance industry initiated STGs for hospitals in 2010, progress was hindered by a lack of representative and accurate costing data due to limited participation from private hospitals.
This Supreme Court judgment presents an opportunity to create effective processes to solve a major health system problem. Rate standardization policies must be feasible, easily implementable, and follow established price discovery practices. Future efforts must build on previous and ongoing health financing reforms, address anticipated challenges, and ensure broader stakeholder participation.
