ICRA: Despite the regulatory headwinds, healthcare sector outlook remains stable

Aayushman Bharat - Pradhan Mantri Jan Aarogya Yojna, Business, ICRA, Survey

The hospital sector’s performance has been falling in the last two years due to several regulatory restrictions, including demonetisation, the cap on prices of stents and knee implants by the National Pharmaceutical Pricing Authority (NPPA), stiff regulatory action by certain states and the implementation of the Goods and Services Tax (GST).

In the latest order, issued on March 8, 2019, the NPPA put a cap of 30% on the trade margin earned on 390 drugs that are primarily used for treatment of cancer.  The price cap led to a reduction of up to ~87% in the prices of the anti-cancer drugs. The current order by NPPA adds on to the list of products already placed under price restrictions. Most of the cancer-related drugs are high-value medicines and are sold directly through the hospital chains, oncology being one of the highest-value-added specialty for hospitals due to the increasing incidence of cancer-related ailments. Nonetheless, several oncology drugs are still out of the purview of the price cap.

Says Shubham Jain, Group Head and Vice President – Corporate Sector Ratings, ICRA, “The regulatory environment continues to be the overarching challenge for the hospital sector and the recent NPPA order reinforces this view. The wide-ranging regulatory restrictions from multiple authorities have suppressed the margins of the players.  However, hospitals’ decision on re-pricing of service/product component of packages and usage of different drugs is expected to correct the lopsided pharma component margins (wherever present) and partly negate the impact of the current NPPA order.”

The Aayushman Bharat – Pradhan Mantri Jan Aarogya Yojna (AB-PMJAY) was announced in February 2018 and was formally launched in September 2018. Only ~2.4 crore e-cards have been issued out of a target population of ~50 crore and it faces several challenges in effective implementation. Several of the large private hospital chains have not empaneled under the scheme, primarily because of the low package rates. Additionally, while states like Odisha, Telangana and Delhi have not participated in the PMJAY till date, some like West Bengal and Chhattisgarh have already pulled out of the same. The scheme, however, holds promise to provide much-needed healthcare coverage to the marginalised sections of society given the low insurance penetration in the country and large out-of-pocket expenses on healthcare. ICRA continues to believe that the introduction of the AB-PMJAY is likely to improve the occupancies at implementing hospitals albeit with lower profit margins.