National Health Protection Scheme – What does the future hold for Indian Medical Technology companies?

The implications of NHPS for Indian medical technology companies that supply their product offerings like medical consumables and implants to hospitals should be understood around two key areas.

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The National Health Protection Scheme (NHPS) launched by the central government is being referred to as the world’s largest health insurance plan. The plan envisages covering 10 crore poor and vulnerable families, which amount to approximately 50 crore beneficiaries. The coverage amount has been set at INR 5 lakh per family per year for secondary and tertiary care hospitalisation. This amount is significantly higher than the cover provided by other central or state government schemes. Over a period, the scheme is expected to subsume the existing central scheme, Rashtriya Swasthya Bima Yojana (RSBY), as well as many state insurance schemes.

The implications of NHPS for Indian medical technology companies that supply their product offerings like medical consumables and implants to hospitals should be understood around two key areas. First, the incremental demand or volume impact that the scheme is likely to create both for hospitals and, by extension, for medical technology companies supplying to such hospitals. Second, the advantages the scheme is likely to offer to medical technology players who have low cost products and deep penetration in hospitals that rely significantly on scheme patients.

Let us first understand the outlook related to demand growth. There are three key factors that are likely to impact incremental demand. These are increased population coverage, enhanced cover amount per family (and correspondingly more attractive service pricing for healthcare procedures) and procedural ease.

  1. Increased Population Coverage: The RSBY, the predecessor of NHPS, is estimated to have been rolled out to approximately 36 Mn families over a 10-year time-period against a targeted coverage of ~60 Mn families. The NHPS, on the other hand, is targeting coverage for 100 Mn families. In a conservative scenario, if the NHPS achieves ~60% of this declared target like the RSBY, even then an incremental ~24 Mn families are likely to be covered. That translates into an additional 105-110 Mn lives getting covered. The NHPS is also expected to address the lopsided demand-supply gap across specific geographies like the Northern and Southern states in India as well as the gap between metros and non-metros. States such as Andhra Pradesh and Tamil Nadu running their own state health schemes have coverage of more than 65% whereas states such as J&K and UP have coverage of only 5-6%. This inequality is expected to be normalized with the roll-out of NHPS leading to a natural demand growth for hospitals, and hence for hospital suppliers.
  2. Enhanced cover amount per family: The annual cover amount of INR 5 Lakhs per family offered by the NHPS is the highest amongst all current central or state health schemes. Most state schemes offer a total annual cover amount less than INR 2.5 Lakhs. Central schemes like the RSBY provide only INR 30,000 per family per annum for most of the cases requiring hospitalization. This enhanced coverage vis-à-vis existing schemes is expected to translate into better services pricing for NHPS. If better services pricing transpires, then many private players who are often wary of government scheme patients today owing to low level of profitability on such schemes, will compete against one another to get NHPS patients. This could actually lead to overall demand growth on account of NHPS.
  3. Procedural Ease:If NHPS rollout addresses administrative and procedural aspects well, there will be a follow-on impact on increased coverage and hence demand. Firstly, free enrolment for NHPS is expected to increase participation by families vis-à-vis RSBY, which used to cost participants INR 30 to enrol. Secondly, Aadhaar and the facility for biometric authentication of beneficiaries with listed health providers and the state health society could ensure smooth enrolment and verification process, thus making the process of availing of healthcare services faster. Faster and easier process could attract more families as well as entice hospitals to take part in the plan. And finally, low awareness on how to use the card and carelessness on part of many households in keeping the card safely had historically led to low utilization for schemes such as the RSBY. At times, hospitals or insurance companies could not process requests due to unavailability of data. Online-based Aadhaar system is expected to be the solution to these problems. Not much detail has been made available on the roll-out plan for NHPS though and this could be the key for determining success or failure of the program.

Given the play-out of the above factors, one can expect a natural demand growth in hospitals through the NHPS channel and correspondingly a larger demand base for medical technology companies to cater to. Now, the other factor that will decide implications for Indian medical technology companies is their cost effectiveness and the strength of their existing relationships in scheme-driven hospitals.

  1. Cost effectiveness: Like all public schemes in India, the NHPS is also expected to offer flat package fees for procedures such as CABG or TPCA. Flat ceiling prices for packages imply that hospitals vie for the most cost-effective medical suppliers as lower input costs on devices and consumables directly translate into higher margins for the hospitals on procedures. In a scenario such as this, the medical technology player who has the lowest manufacturing and operational costs is likely to be a winner in the long-term as lower costs will enable such suppliers to offer competitive prices.
  2. Relationships: Indian medical technology players have generally been very strong in the scheme market as against the private market where the levels of brand consciousness and MNC allegiance have been historically higher. The NHPS roll-out is likely to have a larger impact in the lower tier towns where private hospitals have more reliance on scheme patients and where domestic players are already more deeply entrenched, compared to MNC competition. One would therefore expect domestic players to leverage their existing penetration and relationship in this segment of the market and grow stronger.
    In summary, the NHPS roll-out is likely to lead to larger addressable demand for domestic medical technology companies. However, their ability to tap that opportunity will be contingent on their cost effectiveness and their go-to-market model. Manufacturing companies insourcing a larger proportion of manufacturing activities will have healthier gross margin profile compared to trading companies or assemblers who only carry out select activities of the manufacturing value chain in their plants. This strategic choice on full-fledged in-house manufacturing as against trading will directly impact the ability of these companies to compete on a low-price model, critical for all schemes including the NHPS. Additionally, these companies need to be smart about prioritizing market segment choices that are likely to see greater demand inflection due to NHPS roll-out. Overall, we should expect some shake-up of the medical technology space over the next few years with the emergence of leaders that could have the operating model and cost competitiveness to not only address the scheme demand in India but of several other price-sensit

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