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Article:Cost Rationalization: Medical Devices or Entire Healthcare Value Chain

June, 2017

Ajay Jindal, CFO, BPL Medical Technologies, explains why the focus should be on reducing costs in the entire healthcare delivery chain rather than just medical devices   

India today faces the challenge of providing quality healthcare at affordable costs and making it accessible to the masses. With under penetrated insurance system and rising costs of healthcare this task is not an easy one for the government.

Medical devices sector forms an important pillar in providing quality healthcare. We still depend greatly on imports to cater to the needs of this sector which has seen double digit growth in the past few years. The ‘Make in India’ campaign by the current government coupled with 100% FDI in this sector are steps in the right direction towards achieving affordable healthcare. Further, the government also needs to provide preferential treatment for domestic production through a dedicated body which reviews duties and taxes from time to time and encourages participation of domestic content in government tenders. Moreover, being an R&D intensive sector the government should promote domestic innovation and provide R&D incentives to boost domestic production.

In India, cardiovascular diseases (CVD) are known to be the leading cause of mortality, with a quarter of all deaths in 2015 attributed to these types of diseases. According to recent reports, standardized CVD death rate for India stands at 272 per 100,000 of the population.

The objective behind the recent decision of price capping of stents by government is to kill exorbitant trade margins charged in the entire supply chain from the time a stent is manufactured till it is consumed.

This recent move by the government has gained mixed bag of reactions from various stakeholders involved but is a huge benefit to the patient which has been the primary objective of this decision. This will lead to procedures which have become routine such as angioplasties, to move beyond Tier-1 and Tier-2 cities to more rural parts of the countries thereby making them more accessible and reducing the overall burden of CVD. This would also encourage domestic manufacturing by MNCs of such devices to bring cost efficiencies. This in turn would lead to job creation and skill development across the industry. India is a market which cannot be ignored by any large player today given the large volumes we consume and every organization should understand that business viability in India comes with volumes.

The number of stents sold in the market is growing at the rate of approximately 20% and roughly 4.75 lakhs stents were consumed in 2015. With the recent price cap it is expected that overall cost of angioplasty procedures would go down leading to more number of procedures and stent consumption.

Now, if one views this in line with recently launched National Health Policy 2017 whereby the government has pledged to increase the healthcare expenditure from current 1.15% to 2.5% by 2025, this would mean there would be huge focus on public spend in healthcare across delivery, devices and pharma. While the government is planning to increase the expenditure, it is very important to control the overall cost of healthcare delivery.

Overall healthcare industry including delivery, medical devices and pharmaceuticals need a watchdog along with an action plan to reduce healthcare costs across the value chain in the country.  

Unless, the government focuses on the entire delivery chain the purpose would not be served in the long run. For example, if stent prices are reduced and in turn the room charges and procedure costs is increased, the overall cost for the patient remains the same.

If we look at the flipside, medical devices constitute lowest portion of the overall healthcare market. Also, not all devices have scope of price reduction and therefore the government should be careful in selecting the list of devices where price control could be possibly brought in. Otherwise, we would lead to solution of reversal of medical tourism with Indian patients flying to other nation to seek quality and latest technology of healthcare services available. That would be a pity considering we have the finest of medical practitioners available in our country.

To reduce overall healthcare costs, significant efforts and focus needs to go towards reducing overall healthcare delivery, medicines and pathology costs. Innovative delivery models need to emerge to reduce costs and at the same time increase quality. Pathology has seen innovation in business models in the past whereby hub and spoke was introduced to bring down the cost of various tests. Digitization could be a game-changer which could bring the next disruption leading to reduction in costs especially in CT and MR.

Another adverse impact of this decision, especially for the medical devices industry would be that it would discourage R&D in India. Since most of these devices are imported, majority of R&D takes place outside India. Price cap on devices would make the sector less attractive from an investment and an Indian entrepreneur’s perspective. He would not be left with enough margins to invest back into R&D as compared to MNC who have global operations and bandwidth to invest into R&D.

India, considering its huge patient base provides a great opportunity for frugal innovation in the devices sector which is currently not tapped to its full potential. If this R&D potential is fully leveraged and Make in India becomes a reality for this sector, this would automatically lead to reduction in costs thereby reducing overall cost of delivery.

To end, we have come a long way but have a long journey ahead of us to reform various aspects of healthcare sector to enable “Swastha Bharat” and be a role model for other developing countries.

The opinions expressed in the article are the author’s own.