Patients are being forced to buy high-priced drugs and medical devices from hospital pharmacies. With hospitals increasingly operating as for-profit businesses, these pharmacies are an important revenue source for hospitals. In essence, the in-house pharmacy is a spatial monopoly within the premises of the hospital with the patients obliged to buy from it at prices dictated by the management.
Patients are being forced to buy high-priced drugs, medical devices, etc, from hospital pharmacies (Nagarajan 2016; Shrivastav 2015). This is because patients are in a relatively weaker position compared to hospitals. There are two main reasons for this: first, for decisions regarding their health, patients are dependent on hospital-employed doctors; and second, sometimes patients are brought in a life-and-death situation to hospitals and require immediate access to drugs and medical devices. In addition, the nearest—and sometimes the only—drugstore available to patients is the in-house hospital pharmacy. Due to these factors, hospital pharmacies have a spatial monopoly on drugs and medical devices (Centad 2010).
Moreover, hospitals can not only overcharge and force patients to buy products at their pharmacies, but can also negotiate with drug and medical device manufacturers to get lower purchasing prices. This is because hospitals buy these products in bulk, which in turn gives them more bargaining power. The competition between sellers to woo these bulk buyers also works in the hospital’s favour.
In this article, we first explore overcharging at hospital pharmacies and then examine the methods they use to get lower purchasing prices from manufacturers. We conclude with an examination of the ethical implications of such practices.
Higher Selling Prices
Since these pharmacies enjoy a spatial monopoly, setting a price higher than that charged in outside stores becomes very easy. There have been many situations where this phenomenon has been recorded.
For example, a case was brought against Fortis Escorts Hospital, Jaipur, in the District Forum for forcing a patient to buy overpriced drugs from the hospital pharmacy. The case was then taken to the state commission, Rajasthan (Gai 2016). The patient had been admitted to the intensive care unit (ICU) of the hospital. She had to be given five injections, each of which cost ₹18,990 in the hospital pharmacy. But the same injection was available at a price 30%–40% lower in other shops outside the hospital. However, the hospital forced the patient to buy them from the hospital pharmacy. The District Forum fined the hospital ₹2 lakh (Gai 2016).
Similar complaints of overcharging patients have been filed in the case of medical devices too. In a complaint regarding cardiac stents, the patient stated that they were forced to buy the stent from the hospital itself, though the hospital price for the stent was ₹95,000, whereas it was available at ₹27,000 from the distributor (Bedi 2016). Requests to either reduce the price or to allow the patient to buy from the distributor were rejected by the hospital. Hospitals find it particularly easy to overcharge for medical devices, since they are the only ones who use these devices, which gives them a monopolistic position (Bedi 2016). Both the above cases clearly show how hospitals use their position to overcharge helpless patients and force them to buy overpriced drugs.
Another complaint of overcharging was registered against Max Hospital, Delhi (Nagarajan 2016). The complainant had bought an “Emerald” brand disposable syringe from the hospital pharmacy for ₹19.5. Disposable syringes from the same brand were available at ₹10 from other shops against the printed maximum retail price (MRP) of ₹11.5. The syringe available in the hospital pharmacy had ₹19.5 printed on it as its MRP (Nagarajan 2016). The Competition Commission of India (CCI) has recommended further investigation. The complaint pointed to a possible collusion or an agreement between the hospital and the (drug) manufacturer, who printed the higher MRP on the syringe. Such kinds of agreements were also alleged in the cardiac stents case, between distributors and hospitals.
Lower Purchasing Prices
As mentioned above, the hospital’s ability to buy in bulk and the competition between sellers to woo these big buyers, works in the hospital’s favour. Hospitals often use these factors to their advantage during the tendering process. This process of acquiring drugs through tenders has been followed under the “Delhi Model” in Delhi.1 In the “Delhi Model,”2 drugs are procured for multiple hospitals and health centres through a central agency. A study by Roy Chaudhury et al (2005) found that drug procurement costs under the Delhi Model were lower than the corresponding costs from government retail outlets (Super Bazar, henceforth SB). The average difference in procurement costs between the Delhi Model and SB was 248%, with the minimum being 135% (for ranitidine 150 mg injection) and the maximum being 728% (for diazapem injection). This example, though not linked with private hospitals (and their pharmacies), illustrates the power of institutional buyers (especially hospital chains, if buying centrally) to negotiate and get lower prices for drugs and medical devices. Similarly, individual hospitals also have this bargaining power, but to a lesser degree, and this is reflected in the prices they pay. Roy Chaudhury et al (2005) also list the procurement costs of drugs when purchased through open tenders (OT) by individual government hospitals. Based on the author’s calculations, procurements costs in the case of OTs were on an average 72% lower than the costs incurred while procuring from SB, which was 248% lesser than the costs incurred under the Delhi Model.
Compared to drugs, in the case of medical devices, hospitals have more bargaining power as they are the only users and sellers. They use their monopolistic position to get lower prices, which is reflected in the differences in the prices offered by hospitals and distributors. Like in the complaint regarding cardiac stents, the difference between distributor (₹27,000) and hospital prices (₹95,000) was ₹68,000 (Bedi 2016), which is more than 250% of what the distributor offered to the patient. In fact, hospitals’ margins in stents can go up to 654% while distributors’ margins go up by 200% only (Nagarajan 2017). The biggest jump in stent prices seems to happen at the hospital level.
Hospital Pharmacies as Retail Shops
From the previous sections, it is possible to conclude that hospitals get drugs and medical devices at a lower price from manufacturers (as shown in the Delhi Model and stent cases) and then sell them at a high price to patients (as shown in complaints by patients to consumer forums, etc). This in turn gives them big margins. This seems to be becoming an additional stream of revenue for hospitals. A Centad report on the Indian pharmaceutical industry also reiterated this conclusion (2010: 70).
The pharmacy department is said to contribute more than 30% to hospital revenues with profit margins going up to 25%–30% for drugs3 and medical devices (Shukla 2009). In essence, these pharmacies have transformed into in-house retail shops for hospitals.
However, this retail shop behaves more like a shop located inside an airport or a multiplex. The complaint regarding syringes being sold at the hospital at the higher MRP printed on them parallels a similar situation where water bottles are sold in airports or multiplexes by shops on the premises at higher MRPs (Niyogi 2014). Here, hospitals can be compared to the airport or multiplex; hospital pharmacies the shops on their premises; the drugs and medical devices can be compared to the things being sold in those shops (water bottles, etc); and the patients can be compared to the passengers or customers visiting the airport or multiplex.
Here, patients, like passengers, become a captive audience. This transformation not only reduces patients to passengers or customers, but also removes all the urgency associated with the life-and-death situation of a patient. This urgent situation rather becomes a characteristic of the helpless customer, which is to be ultimately exploited by the seller. It also reduces the importance of life-saving drugs and medical devices to mere products being sold in any retail shop.
In addition, the decision to purchase is made by the doctor, who in turn is also a hospital employee. So, hospitals not only have a retail shop, but also have several purchase decision-makers on their payroll. It has also been reported that many hospitals maintain a tight control over their employees, with corporates and big hospitals taking the lead (IMS 2014). Prescription tracking, penalising doctors for non-compliance (IMS 2014), and instructing nurses to refuse products bought from outside pharmacies (Shrivastav 2015) are some of the tools used by these hospitals to control staff. Here, doctors and medical staff act like the retailer’s employed (and controlled) salesforce recommending use of the retailer’s products only.4
This transformation is being paid for by helpless patients. Regulatory authorities have tried to curb this practice of overcharging by hospitals. After an incident where a hospital was ransacked in Pune when it forced a patient to buy expensive drugs from its pharmacy, the Maharashtra Food and Drug Administration (FDA) released a circular asking hospitals to allow patients to buy medicines from outside stores also (Shrivastav 2016). The Delhi government, in 2014, issued a similar advisory notice for private hospitals (PTI 2014).
In addition, many drugs and now stents are being brought under price control measures by the government. But these price control measures are still not being monitored adequately as not many states have established a separate price monitoring cell. Another law which seeks to control these prices is the Clinical Establishments (Registration and Regulation) Act (2010) which has provisions for setting rates of different treatment procedures. However, not many states have adopted this act (Arunachal Pradesh, Himachal Pradesh, Mizoram, and Sikkim).
All these price control measures have been met by severe opposition on the part of the private sector in healthcare (hospitals, doctors, pharma companies, etc). And this is perhaps one of the reasons that these measures have not been adopted at state government levels. Therefore, governments need to step up to protect the helpless patients.
1 The “Delhi Model” is a joint initiative of World Health Organization (WHO), the Government of Delhi, and the Delhi Society for Promotion of Rational Use of Drugs (DSPRUD).
2 As data for private hospitals is not available, the Delhi Model is taken as an example to show the negotiating power of hospitals. The purchasing prices for private hospitals might be higher than the present case, as private hospitals buy smaller quantities and also tend to demand branded products.
3 An example of huge margins, in the case of drugs, are “Branded Generic” drugs which are promoted by retailers and hospitals themselves and have a profit margin of 150%–300% (Kotwani 2013).
4 But it is not that all the doctors can be controlled by the hospital. Some of the consultants and specialists who have good amount of experience and/or are well known can dictate “their own prescription behavior, beyond the hospital’s control” (IMS 2014).
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— (2017): “Profit on Stents Ranges from 270% to 1,000%,” Times of India, 17 January, http://timesofindia.indiatimes.com/india/profit-on-stents-ranges-from-27... 56610294.cms.
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