Insurance has to grow alongside as the healthcare sector grows. Viren Prasad Shetty, Narayana Health

So, what should we start with – the big picture, specifics on regulatory intervention or where Narayana Health is moving?
Viren Prasad Shetty: It is always an exciting time in our business. The Supreme Court’s suggestion on capping rates is an impractical suggestion, but the anger is real. The opacity in the pricing structure is real. The impression that a lot of people have that healthcare is expensive is real. Some of these can be addressed, some of these simply cannot be addressed. If you look at healthcare costs going up in this country, that is simply a factor of more and more treatments being available.

The reason why people are finding it unaffordable is that you cannot expect people to pay out of pocket for a lot of things in healthcare. So, there are solutions that the industry is willing to propose, but without getting into draconian things like price fixing for everything.

In the past also, regulatory intervention has happened and that has affected Narayana Hrudayalaya’s profitability quite a bit. I remember this happened pre-COVID when there was a cap on cardiac or heart health care. If there is a regulatory intervention, do you think it will be difficult to implement, but this in a sense will also have implications in terms of the price cap?
Viren Prasad Shetty: See, the question is what is the price cap meant to achieve? If you fix on the output side and you do not address anything on the input side, the cost remaining the same, the price to the customer will just flow to another dimension. So, what is the larger goal? Is the larger goal to make healthcare more affordable, then price cap does not achieve it because what happens right now in a dynamic pricing situation where you have multiple price points for multiple classes of people.

You have very poor people below the poverty line who are getting treatment at Ayushman rates. You have government employees who are getting treated at CGHS rates. You have people who are paying out of pocket, getting treated at general ward, semi-private, private, deluxe, super deluxe, all those rates. You fix one flat rate, what will happen? You will end up paying more. If you are a rich fellow, you are paying less. So, then the poor person is subsidising the rich person, that is not practical either.

Let us now change gears and talk about the big picture. For the healthcare sector, the big picture is that growth has been exponential. Expansion has been exponential. Health insurance is now the mainstay. But given that we have seen such a massive expansion and especially in tier II cities, cities outside metro, could we be suddenly staring at a situation of more supply and less demand?
Viren Prasad Shetty: No, more supply, less demand will not exist because the demand for health care is effectively infinite. As many as doctors and nurses and hospitals that are there in this country, it is still a very small fraction. And a lot of times, you get into trouble when you consider all beds as the same. You said 15 beds per 10,000, but not all beds are the same. If you look at organised, accredited hospitals that comply with standard accepted norms and say that you have NABH classification, those do not even account for 10% of the total beds in any city. Most of them are unorganised and in the nursing homes. So, it is not all the same. So, oversupply, if you look at the large numbers, may seem adequate supply, but that is not really the case. We still have a long way to go. There still needs to be an incredible number, not just beds, but medical equipment and doctors and nurses in places where you can get treated even in the largest cities, forget about tier II and tier III towns. There is a long runway of growth and demand, but for affordability, you can no longer expect people to pay out of pocket. Just like no one is paying for an apartment out of pocket, no one is paying for their cars out of pocket, they are taking loans and EMIs. For healthcare, you need insurance and insurance also has to grow as the healthcare sector grows. But herein some would say the sector is getting brutally comparative and with the advent of PE players now and with most of the hospital stocks having gone public or having ambitions to go public, suddenly there is a strong focus on profitability, cutting the corners, kicking in terms of efficiency. Could that come at the cost of compromise in terms of healthcare?
Viren Prasad Shetty: Those are two different things. Brutal competition enforces price correction, right? The thing about a drive for profitability invariably happens when there is a constraint on a number of competitions you have allowed. So, any regulation that makes it harder for people to make money in an industry will strengthen the hand of the incumbents.

People are already there, anyway, they have the buildings, so they will continue doing as they do and they would be very happy to see that no new people are entering the sector. You want the price to go down, you want it to be more consumer friendly, you allow as many people that want to open up hospitals to come in. Profit is a natural function of how much is available for you. At the exact point at which you make it too high, then it is more attractive for more people to come in. If it becomes too less, then no one else comes in; that is how a modern market economy is supposed to function.

So, when you say that, oh, hospitals are charging a lot; oh, the profit is very high, remember hospitals are charging a lot because it costs a lot to deliver. The profit is high, but that only exists in the balance sheet. The return on capital in our industry is very low. The payback period for every single hospital bed that you put in, the cost of land, cost of equipment, cost of all the doctors is extremely high. So, you are taking money, but you are making less money than what you did if you just left it in the bank. So, these things also need to be put into consideration.

This is the following sense which we get from when we speak to folks who are involved with policymaking that look at the EBITDA margins of hospitals. From Apollo Hospital to Fortis to Max Healthcare to NH, margins have exploded and they are making more money and that needs to be checked. Is that true?
Viren Prasad Shetty: How much money is a sector allowed to make? Any percent, EBITDA margin of 40%, we do not even know what is clear and it is not that the money is going anywhere. All the money that the healthcare sector makes goes into building more hospitals, goes into acquiring more doctors, into adding more medical equipment. You want a healthy, sustainable, vibrant business that attracts much more inbound investment from all the top private equity investors across the world, you want a healthy IPO market, so all doctors will say, yes, I do not just want to work for someone, I want to go and build my own institution and provide competition for the existing players. All that money gets reinvested. It goes right back into the country. It gets paid out in taxes. It goes out in salary to the doctors and nurses.

So, it is not just about the money, it just does not disappear into a black hole in this industry. It gets reinvested completely into building more beds and addressing the needs of our country. You want a strong and healthy balance sheet for all the healthcare players. And the minute too much money comes in, that is when everyone says, okay, now let us go and build and add extra because I believe I can do it for less. So, as with Yatharth and with NH and see the thing is that not every healthcare group is entirely concerned with absolute value extraction. Very few of them are. Most of them are looking for growth, they are looking for volumes, they are looking for treating more patients, for looking at the mass market opportunity that exists in this country.

The perception will always be there with a few people who end up with very complex surgery and end up paying a lot of money and they feel that this is not something that they were well prepared for. It can be addressed. Hospitals can do a lot more towards giving estimates upfront and to counsel the patient and say that, see, this is something, it is very complex, this procedure you are about to get, this is how much it is going to cost. So, with enough education, people then feel that, fine, it is my choice that I want to get treated and pay this amount of money for that or not. If not, there are other hospital groups you can go to.