Health inflation: Should India also subsidise pharmacy costs?

January 15, 2020 4:30 AM

The NCAER-India International Centre Mid-Year Review 2019-20 had pointed out that miscellaneous inflation was the biggest contributor to overall retail inflation in the first half (H1) of 2019-20 (40.7%).

Health inflation, pharmacy, Ayushman Bharat, subsidise pharmacy, NCAER, NSS, rural health inflation, CPI health inflation, Pharmaceutical Benefits SchemeHealth inflation is important because expenditure on health comprises a significant part of total household expenditure.

By Bornali Bhandari & Ajaya K Sahu

Analysing rising health inflation points to price rise in medicines, which form a significant share of medical expenditure of households. This raises the question, whether India should subsidise medicine costs of households?

The NCAER-India International Centre Mid-Year Review 2019-20 had pointed out that miscellaneous inflation was the biggest contributor to overall retail inflation in the first half (H1) of 2019-20 (40.7%). Within miscellaneous items, the health sub-category had the largest weight (25.1% and 16.3% in rural and urban areas, respectively). Health inflation contributed 40.2% and 26.9% of miscellaneous inflation in rural and urban areas, respectively. The component health has a weightage of 5.89% in the overall CPI; 6.83% in rural CPI and 4.81% in urban CPI.

Health inflation is important because expenditure on health comprises a significant part of total household expenditure. According to the National Sample Survey (NSS) 71st and 75th rounds, it was 12.49% and 8.14% in 2014 and 2017-18, respectively. The share of household health expenditure showed a downward trend between the two periods. Within health expenditure, the share of in-patient (lives in hospital while in treatment) was 36.7% and out-patient (seeks medical treatment without staying in hospital) health expenditure was 63.3% in 2017-18. This ratio was similar to 2014. Rural health inflation had averaged around 5.2% between April 2015 and September 2018, but experienced a steep rise in October 2018 (7.8%). It averaged around 9.3% between the period October 2018 and September 2019, before falling sharply to 6.1% in October 2019. The increase in rural health inflation for only one year is quite puzzling, and demands more research.

The overall health inflation mirrored the movements of rural health inflation. Looking at the components of overall CPI health inflation, we find that hospital and nursing home charges and medicines (non-institutional) experienced the highest rates of inflation in 2018-19 H2 (see graphic).
Plus, the 75th round of NSO data shows that medicines formed 70.3% of medical expenditure in non-hospitalisation cases. Out-patient health expenditure forms the majority of health expenditure and within that expenditure on medicine forms the lion’s share of expenditure. Further, given the continued rise in inflation of that component, shouldn’t medical insurance programmes also cover medicine costs in cases of out-patient healthcare?

The Medicaid programme in the US provides coverage for outpatient prescription drugs to all categorically eligible individuals and most other enrollees within their state Medicaid programmes. Australia has the Pharmaceutical Benefits Scheme. Since the second component of the flagship scheme of the central government, Pradhan Mantri Jan Arogya Yojana Ayushman Bharat, covers hospitalisation costs, perhaps state governments may envisage subsidising pharmacy costs of out-patient treatment via direct benefits transfer for a targeted population.

Bhandari is senior fellow and Sahu is senior research analyst at NCAER. Views are personal

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