The current procedure costs prescribed by the government’s cashless health insurance scheme — Pradhan Mantri Jan Arogya Yojana (PM-JAY) or Ayushman Bharat — are at times just half that private hospitals incur, according to a report by the Federation of Indian Chambers of Commerce and Industry and EY .

According to the report, a comparison of the cost of select procedures and the reimbursement tariffs offered under Ayushman Bharat shows that only 40-80 per cent of the total cost is covered by the tariff and this is lower than the variable cost (which includes cost of materials - drugs, consumables, implants, patient food, linen and clinician payout).

Package rates

While a coronary artery bypass surgery costs between ₹1.8 and ₹2 lakh, the package rate quoted in PM-JAY is ₹1.04 lakh. Similarly, for an angioplasty, PM-JAY offers a rate of ₹75,000, while the report states that private hospitals charge anything between ₹90,000 and ₹1.1 lakh. For knee replacement, PM-JAY quotes ₹92,000, while it costs anything between ₹1.85 lakh and ₹1.95 lakh for private players.

“Existing private tertiary care hospitals looking at improving capacity utilisation through empanelment with the Ayushman Bharat scheme are likely to witness a significant drop in profit margins and return on capital employed even beyond the current dismal levels if their current operating model remains unchanged,” said the report.

While private players mull optimisation of costs, the Centre is considering revising the package rates. Official sources indicate that the government will announce the rate revision only after September.

The report also said that while an additional 3.5 lakh beds will have to be added to meet the demands of PM-JAY at a total capital investment of ₹1-lakh crore, current hospital operators, even after optimisation of costs, will not be in a position to increase bed allocation by more than 25 per cent for PM-JAY patients.

Investment support

Any further increase in the allocation of beds towards Ayushman Bharat, while maintaining the performance levels will be possible through investment support such as viability gap funding, it said .

It is expected that with the allocation of only 25 per cent of capacity to PM-JAY patients, multi-speciality accredited hospitals are likely to witness a 15-25 per cent decline in average revenue per occupied bed per day, a 25-50 per cent fall in EBITDA and a 35-60 per cent drop in the Return on Capital Employed if no change is undertaken by them in their operating model.

The private healthcare sector is currently witnessing worsening performance in terms of both profitability and ROCE, the report said. In order to set that right, the report recommended that private hospitals will have to focus on driving 30 per cent plus efficiency improvement across major cost heads by redefining their business models and cost structures.

For example, hospitals have to consider supplier consolidation, look for generics drugs, practice direct buying and so on. Instead of using imported drapes and gowns, hospitals can procure local disposable or reusable gowns.