HCG is fighting the govt to keep cancer drugs costly…

Having spent over three decades practising Oncology in the US and India, Dr BS Ajaikumar is hardly one for the limelight. Just last month, however, Dr Ajaikumar, chairman and CEO of Healthcare Global Enterprises (HCG), India’s largest private chain of cancer hospitals, found himself the villain of the piece on social media.

He was branded “morally bankrupt” for challenging a government price control order in court. An unpopular move, given that the government order is expected to benefit 22 lakh cancer patients in the country and lead to annual savings in the ballpark of Rs 800 crore ($114 million) for the affected people.

Dr Ajaikumar, though, isn’t fazed by the criticism. “My patients know what I am. I am fighting this case based on principles. If I cared about optics, I wouldn’t have come this far,” he says candidly, seated in his plush corporate office in Bengaluru. Indeed, his opposition to the government order aside, it is hard to see the man as an antagonist. On the walk to his conference room, for example, it’s impossible to miss the pictures of cancer patients served by HCG that hang on a thread within one of the various many cabins.

“I came to India with a vision—to make cancer care accessible,” he says, matter-of-factly. Bengaluru-headquartered HCG, which he founded in 1998, now has 26 centres across the country. Each year, the chain provides advanced cancer care to 75,000 new patients and 500,000 follow up cases.

Yet, as we sit across from each other, it’s clear to both of us that Dr Ajaikumar is decidedly unpopular with the masses. Here’s why: In a bid to help cancer patients reeling under high treatment costs, the National Pharmaceutical Pricing Authority (NPPA), India’s apex pharmaceutical pricing authority, capped the trade margins of 42 non-scheduled cancer drugs at 30% on 27 February. This brought down the retail prices of many brands of cancer medication by up to 87%. This came into effect on 8 March.

February’s price-capping is in addition to 57 cancer drugs that were already under price control as scheduled formulations. All told, this accounts for some 517 brands whose prices have been capped. After the latest order, while 73 are priced above Rs 10,000, the vast majority—434 brands—are priced below Rs 10,000. A single 60mg injection of the drug cabazitaxel under the brand name Arbaz, for example, has seen its price slashed 73.85%—from Rs 48,000 to Rs 12,552. This is the order that HCG has challenged.

But if Dr Ajaikumar claims to be about cancer access, and the price-capping is seemingly pro-access, then what explains the HCG head’s opposition? The answer lies in the dual roles that Dr Ajaikumar plays. As a doctor, he knows better than anyone the struggles of cancer patients. However, as a CEO, he is wary of the long-term implications—the order will affect single-specialty hospitals like his adversely. Government and multispecialty hospitals providing cancer care will not bear the brunt of the decision. The price control order will also leave the margins of manufacturers or importers untouched.  

The efficacy of price control is also unclear. While the government has made similar moves in the past, Narayana Health (NH), a multispecialty hospital The Ken spoke to said it is hard to tell if price control has benefitted patients in the past as their input costs remained the same and it has merely shifted the margin from one bucket to another. Similarly, some hospitals had already raised their procedure prices in anticipation of the recent price control measures for cancer drugs.

Ultimately, price control measures will prevent hospitals from cross-subsidising treatment to benefit the poor, hospitals argue. “This is another instance of the poor subsidising the rich by bad policy,” says Viren Shetty, COO of NH. The question then is, who really benefits?

Bearing the brunt

When HCG challenged the NPPA’s decision in the Karnataka High Court, the point of contention was clear—HCG stated that the regulator “usurped jurisdiction illegally under the garb (of) public healthcare and interest”. The NPPA fixes prices of drugs that fall under the National List of Essential Medicines (NLEM). So far, around 1,000 drugs have been brought under the purview of price control through the NLEM. Non-scheduled drugs, meanwhile, are allowed an increase of up to 10% in prices every year.

The important thing to note with this order though, is that this price-capping is based on the price at the first point of sale—what stockists buy it for. As such, manufacturers aren’t affected, nor are stockists. HCG’s cancer drugs come from major pharmaceutical companies like Dr Reddy’s, Intas Pharmaceuticals Ltd and Fresenius Kabi, explains Dr Ajaikumar. “They are not bothered as margins of manufacturers and importers are untouched,” he says.

“This is another instance of the poor subsidising the rich by bad policy.”

Viren Shetty, COO of NH

Hospitals, however, are a different matter. Dr Ajaikumar explains this by drawing a flowchart on a piece of paper. “For the entire distribution channel, between the manufacturer, the retailer, and the patient, the government wants to cap the trade margin at 30%. That means we have to give the drugs to patients with a 20% margin.”

He cannot cross-subsidise the poor if this is the case, he says. HCG became a public company in 2016. According to its annual report on the BSE website, it had total revenues of Rs 603 crore ($86.35 million) in the year ended March 2018. Crucially, the hospital draws 20-25% of its revenue from medical oncology, an area that will be drastically impacted by the government order. Medical oncology deals with prevention, diagnosis and treatment protocols in cancer care such as chemotherapy, immunotherapy, etc.

HCG’s dependence on medical oncology revenues means that it is more heavily impacted than most other hospitals. Medical oncology contributes to a third of the revenue of single-specialty hospitals offering only cancer care, says one Bengaluru-based oncologist who was formerly with HCG and did not want to be named.

But not all of them are as reliant on medical oncology. At Bengaluru’s Cytecare Hospital, a standalone centre dedicated to oncology, for example, medical oncology isn’t a major contributor to revenue. This means the price control measures won’t impact it as badly.

Similarly, it’s business as usual for Tata Memorial Hospital in Mumbai. While the cancer care hospital caters to 75,000 new patients every year—out of a total of 4.7 lakh new cases detected across the country annually—it will remain unaffected. The hospital receives aid from the Department of Atomic Energy, allowing it to procure drugs at heavily subsidised rates. Dr Shripad Banavali, head of medical oncology at Tata Memorial Hospital, told The Ken that since the hospital procures drugs at 60-70% lesser than the MRP, the price cap has no real bearing on its patients, who are already getting drugs at a subsidised rate.

Fortis Healthcare Limited, a chain of multispecialty hospitals, refused to comment when The Ken reached out. “It’s too early to comment on this. We shall wait and see the impact on revenue,” the hospital said over email.

Who benefits?

Bengaluru-based NH is not nearly as lucky. Despite being a multi-specialty hospital, it boasts the Mazumdar Shaw Cancer Centre—one of the biggest oncology wings among multispecialty hospitals. NH, however, was already preparing for this sort of scenario. Shetty says that the hospital had sensed the government was moving in the direction of fixing trade margins and prepared for it by raising procedure charges and pre-emptively capping medicine margins at 30% last year. Shetty, though, remained tight-lipped on the specifics of the increase in procedure pricing.

As such, while those undergoing chemotherapy would benefit from the order, patients undergoing surgery will end up paying more as the price of procedures may spike to make up for the lost margins on price-capped cancer drugs.

NH’s pre-emptive measures were the result of similar moves by the government in the past. In 2017, for instance, the government capped the prices of cardiac stents and knee implants. Once again, a move aimed at improving affordability and access to healthcare. However, this ultimately failed to deliver on its stated aims as hospitals raised the rates of procedures to make up for the revenue they were made to forego.

This side effect—raised procedure rates on account of price control—has led to a situation where the people the government was hoping to protect are hurt the most. NH, for example, says that it used to have high medicine margins (mostly borne by rich people) to cross-subsidise the cost of surgery (a huge burden for poorer patients). It was easier to spread their high costs over large volumes of outpatients who pay relatively smaller amounts in the pharmacy lab or clinic. This would ensure that the few patients who needed high-cost surgeries wouldn’t have to bear the true cost of procedures, including the massive overheads involved.

“What did the government achieve through the price control? Hospitals will find a way to make up [for it] or circumvent the order.”

Dr BS Ajaikumar, Chairman, HCG

“The ones who are bearing these increased costs are cash-paying inpatients—who are sicker and facing a huge financial burden anyway (lower and middle-class patients pay cash, rich patients have insurance). In a perverse way, this policy has led to the poor subsidising the rich,” Shetty says. This has played out similarly with price control measures in the past as well, he explains. “Outpatients who benefitted the most from price control in the past are the healthier and relatively better off population,” Shetty told The Ken.   

It’s a similar story at HCG. HCG has a philanthropic arm—HCG Foundation—which raises funds from the general public, philanthropists and employees to help economically marginalised cancer patients. However, this only goes so far. “HCG Hospital absorbs a lot of costs. The Foundation cannot reimburse 100% of the costs. If we need to bring down charges, we need to provide cross-subsidy, and with price control on margins, we cannot,” he says. The foundation, according to HCG, pays for the treatment of 3,000 needy patients each year.

Dr Ajaikumar recalls the case of a terminally ill cancer patient from Mandya, Karnataka. The patient needed 18 courses of immunotherapy, amounting to a total cost of Rs 20 lakh ($28,650). The patient, a farmer by profession, wanted to sell his land. Through HCG Foundation, however, the bulk of his treatment cost was met. Dr Ajaikumar says this will no longer be possible with the clampdown on drug margins. “What did the government achieve through the price control?” he asks. “Hospitals will find a way to make up [for it] or circumvent the order.”

The way forward

As things stand, HCG is still awaiting a judgement from the Karnataka High Court. “Our hospitals have a doctor-patient ratio of 1:3. There are more than 400 oncologists across centres, and 80 of them work in Bengaluru alone. It is not easy to sustain operations,” Ajaikumar says. He says that hospitals like his, which came to India with a vision, will be forced to shift focus to other countries instead. Centres in Vietnam, the Middle East or Africa are more enticing, he says, since the return on investment for hospitals in India is not even 6%.

Dr Ajaikumar paints a grim scenario if HCG loses the case in court. Not only will HCG’s ability to cross-subsidise patients be affected, but it will also have an impact on the wider cancer care ecosystem. Affluent patients will abuse the system and patients who should be encouraged to take private insurance won’t. “The government should focus on universal health care. No government in the world has prospered by bringing in price controls,” he says.

He also questions the government’s intent. For instance, HCG runs a think tank called Antardhwani, which explores alternative crops for tobacco farmers to grow. “I treat oral cancer patients and yet I am working with farmers to explore alternative crops for them to grow. I am ready to go out of business if I don’t get cancer patients. But is the government ready to ban, let’s say, cigarettes?” Dr Ajaikumar.

Banning cigarettes will bring down cancer rates drastically, he says, but he understands the economics that prevent it. “It (the government) won’t ban tobacco products because it earns taxes and revenue from it. If public health is the sole priority, why can’t it enforce a ban? It won’t because there’s money involved there. So let’s not pretend to hide behind the veil of public interest with such price control orders. The economics of health matter and the government knows it,” he says.

He does hold out hope though. Under the law, price control cannot be permanent, and Dr Ajaikumar hopes the government will revoke its order. “Public has been taught any cheap thing is good for you. In fact, it’s not,” he rues. While he says he hasn’t yet received any queries from shareholders, after a month-on-month study of revenue, this surgeon will soon have to decide where to wield the scalpel.

Clarification: An earlier version of this story incorrectly stated that HCG went public in 2006. This has been changed to 2016. We regret the error.

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