Standardisation of hospital rates may face implementation challenges as well as possible long-term repercussions for the country’s healthcare infrastructure, according to Citi Research.
Hospital stocks are down 10–13% over the past week after the Supreme Court expressed displeasure at the Union government's inaction to standardise the rate for hospital services.
The top court had observed last week that it would consider accepting a petitioner's request with regard to the adoption of the Central Government Health Scheme rates as an interim measure if the government does not come out with a concrete proposal by the next date of hearing.
The government’s response over the Supreme Court directive is still awaited and uncertainty over this may remain an overhang in the near term, Citi said in a March 6 note. "While we await the government’s response on the SC's directive, we believe that it's difficult to standardise the rates for the hospitals services due to multiple variables and complexities involved."
Price standardisation in hospitals also carries with it the risk of jeopardising private investments in the sector that are critical to address the supply-side challenges, it said.
Previously, similar regulations have been met with challenges and had to be diluted, according to the research firm.
"However, the correction offers a long-term buying opportunity, given the structural growth opportunity and high return on capital employed," Citi said. It remains constructive on Apollo Hospitals Enterprise Ltd. and Max Healthcare Institute Ltd.
Multiple Variables, Complexities
Hospitals' cost structure is complex and a function of several variables. Keeping aside the costs in different states, cost structures of hospitals even within a city differ a lot, depending on rentals, quality and experience of doctors, quality of consumables and equipment, and many other services.
Many standalone hospitals, hospitals being run by trusts and a few hospitals within a large chain often operate at a thin margin and may face the risk of losses in case of standardisation of rates.
Efficiencies of the management, standard practices, investments into clinical talent, tech and infra are the critical factors that determine hospitals' profitability but are inconsistent across the hospitals.
The lack of any scientific pricing benchmark that captures all these aspects, standardisation appears a challenging task.
Standalone hospitals may become unviable.
Long Drawn-Out Process
Citi said the key question that the investors have at this point is what could be the government's course of action.
Though everyone awaits clarity on the government's proposed action, there is a possibility that the government may form a committee to address the court directive. The committee may need to work with states and various stakeholders to arrive at a formula to standardise the rates. This may be a long-drawn-out process again, given the complexities involved, the note said.
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