Use the private health care sector

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Business Standard, 23 March 2020

In responding to the Covid-19 epidemic, there is a need to surge the quantities of testing and health care. Most of the capacity in testing and health care in India is in the private sector. Hence, the thinking about health policy should envision how to utilise these capabilities. The right combination involves public funding and private production. This involves the complexity of addressing market failure through purchasing, and the problem of low government capability in contracting.


Testing is extremely important, when faced with a epidemic, for two reasons.

The first is building situational awareness. For decision makers, public and private, to understand the situation and to make the right decisions, the foundation of sound facts, or data, is essential. Testing is the basis of knowing what kind of actions need to be deployed when, where and how.

The second reason concerns a practical and sustained path to reducing the spread of the epidemic. Extreme lockdowns are in fashion right now. But they are not sustainable for long periods of time. The adverse impact on livelihood and lifestyle is extreme, and fatigue sets in. Particularly in a country like India, where the stock of wealth in the hands of the bottom 70 per cent of the population is low, an interruption of income is a catastrophe. The economy can hold its breath for seven days, but can it hold its breath for seven months?

If there was enough data, isolation could be focused upon narrow regions (where there is an outbreak), narrow at-risk groups such as elderly men, and upon individuals who tested positive. If credible testing data shows that the dangers are indeed high, then individuals are more likely to self-isolate, which is much better than blunt state-induced lock downs.

We are then faced with two possibilities: a strategy of low testing and blanket isolation, versus a strategy of high testing and judicious use of isolation. As the economic impact of the latter will be smaller, it is a more desirable path.

How can we get up to about 0.25 million tests/day in India? Most of the testing capacity in India is in the private sector. Whether it is the established RT-PCR test for Covid-19, or it is other innovations in testing that are now coming up, all these are fully within the capabilities of the private sector. Health policy should harness these capabilities. There is a case for public financing and private production, of testing on scale. At a price of Rs.2000 per test, an expenditure of Rs.50 crore/day buys 0.25 million tests/day. About Rs.50 crore to Rs.100 crore a day gets India up to the required magnitude of testing.

Health care

While health care is a private good, there is market failure in this field, and as Covid-19 is highly infectious, there is a large externalities problem. This creates the case for public expenditures on health care.

So far, we in India have not got a surge of health care requirements associated with Covid 19. But there is a possibility that this may come. The supportive care required for Covid-19 is not that complicated, but it does require hospitals of a certain minimum capability.

The bulk of the health care capacity in India is found in the private sector. Hence, if a surge in health care requirement comes, the private sector will be essential. The pathway for health policy, then, lies in purchasing services from the private sector.

There is a possibility of a surge of patients that exceeds the capacity of the private sector. It would be useful to analyse a hundred regions of the country, and envision how things will work out if faced with certain adverse scenarios. There is a case for creating plans for transient health care facilities which will be built, work through a peak period of requirement of a few months, and then be dismantled. The management capability for doing this is in the private sector.

There is market failure in the relationship between private health care companies and the individual. Consumer protection in India in this field has been weak. We have quacks and incompetent doctors, and we have mis-selling in the form of over-charging patients. The mechanisms of bringing in the private sector will need to be cognisant of these limitations.

Thus, when thinking about Covid-19, health policy needs to recognise that the dominant capacity in testing and health care in India lies with the private sector, and find ways to harness these capabilities. This will not be easy, because there is market failure in this field, and because the state is weak.

The ability of the state to contract with private firms

The Indian state needs to be able to contract with private firms to buy health care services, while using purchasing to alleviate market failure. However, the Indian state has low capabilities. State capacity requires the ability to perform the homeostatic functions of human resources, facilities management, finance and accounting, and contracts with the private sector. One important source of low state capacity in India is low capabilities in these four dimensions.

The Indian state is weak at each element of contracting with the private sector:

  1. To do sensible procurement,
  2. To engage in contract management for the life of the contract, and
  3. To pay people on time.

Whether it is defence procurement or PPP infrastructure, we have seen difficulties at all these three stages. Complex contracts are always incomplete contracts, and rule of law frameworks are required for renegotiation and dispute resolution. Private persons have been repeatedly burned in their dealings with the state, and some of the best firms have decided to never participate in government procurement. Officials have come to dread contracting with the private sector, which might draw the attention of the enforcement agencies.

The private sector in testing and health care suffers from certain kinds of market failure. The Indian state fumbles when contracting with the private sector. These are long standing problems, and while we may wish that they had been solved in the last 25 years, the fact is that we are now in this place. And yet, when faced with Covid-19, contracting with private persons is the need of the hour, and we must address these questions. Who is the private sector? What capabilities are at what locations? How to devise a simple framework through which purchasing will work well? How can patients, firms and officials be protected? The experience of government funded health insurance schemes such as Ayushman Bharat have created knowledge on how to engage with the private sector, which should be built upon.

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