CHAPTER – I

NATURE AND SCOPE OF THE STUDY

INTRODUCTION
Health is wealth is a saying of great importance. From
economic point of view health is considered both as a means of
development as well as a consequence. As had been very aptly
stated “any society should consider that a high quality of life and
I dare say happiness of people, which can only be obtained
through a sufficient level of health, is not only a basic pre-
requisite to development effort”1. Hence various systems are in
existence and several programmes are formulated in order to see
that health of individuals is properly taken care of.
Health programmes cannot be related unilaterally to either
the economic or social spheres as they influence both and are
influenced by both2. In other words, the inter relationship
between socio-economic development and health is seen in the
health consequences of socio-economic development, such as
health problems araising out of population growth, urbanization,
industrialization and environmental hazards. Maintenance of
health activities at a relatively high level is justified also on
economic grounds . If sound health ,on one hand ,is a by –
product of socio-economic development of the quality of human
1.Kraivixen, Tharsis (The Then prime Minister of Tamilnadu)
1977. Inaugural Address 30th WHO Regional Conference of
S.E.Asia, Bangkok, Thailand, August 2-8
2.Kumaraswami,Dr,T.M.1993 Problems in Public Health
Planning, The Hindu sep 28 p17

1
sources of a country and therefore of the pace and content of
socio-economic development .Hence health needs and health
programes necessarily form an interacting part of national
development .Economic planning also now-a-days is oriented
towards social goals with economic development as a means and
not an end1.
Getting professional help for treatment of ill health is a
must. Since most of the health problems need the kind of
treatment and specialized care which normally extends beyond
the nature of services that might be available in a patient’s home,
the present day society looks very much for these services in the
hospitals. Hospital is a place where human illness is defined or
diagnosed and treated for, whereby restoration of health and
wellbeing is made for those deprived of it temporarily. It is a
place where such persons have access to centralized facilities for
diagnosis and cure whereby the treatment becomes more
increased from 33% in 1970 , 40% in 1992 and 45% in 1993.
Growth of health services with its medical and paramedical
professionals has also been a significant contributory towards this
trend.
Though hospitals as it exist today is a modern phenomenon
, history has recorded the existence of hospitals with all facilities
a kin to a modern hospitial as early as 4000B.C in Egypt1. In
India also during more or less the same period the theoretical
base of ayurvedic system of medicine had been laid and had been
followed effectively2.Hospitals in the form in which we know
1.Ibid

2
Table 1.1
STRUCTURE OF PRODUCTION IN INDIA – SECTORWISE
(1970-73)

In percentage
SECTOR 1970 a 1992 a 1993 b
Agriculture 45 33 31
Industry 22 27 24
Of which 15 17 20
manufacturing
Service 33 40 45
Total 100 100 100

Source: World Development Report

a.Quoted in ‘The Hindu’ June 21, 1994
b.Quoted in ‘The Hindu’ July 2, 1993

today did not exist even in the early decades of this century . In
those days medical practitioners visited the patients and treated
them for their illness .The diagnostic tools and techniques were
very simple and hardy . A steady raise in demand for the
services of the practitioners shifted the visiting part form the
practitioners to the patients . Over a period of time such simple
practitioner-patient relationship was replaced by organized and
co-ordinated provision of medical knowlage that , one person
simply cannot master the whole field today . More over,the
intellectual challenge also attract physicians to specialize , not to
mention higher fees and easier working condition1.

3
1.Huss,carol ann,1973 school of economics , Delhi university ,
NewDelhi p.32
2.Ibid,p.34
By specialization is meant, the concentration of
knowledge in onr area of medicine or part of human anatomy
like, paediatrics, obstertrics and gynaecology, radiology,
orthopaedics, cardiology, neurology etc. By expansion is meant
the medical practitioner is assisted by paramedical people,
nursing assistants and other such functional assistance shared by
a number of persons. These reflect greater division of labour
efficiency and economy in utilization of costly health related
equipments and skills.
Hence an economical organization for providing health
care involving such specialization and function emerged and the
solo physician method gave way to group medical practice. By
group medical practice is meant “ a formal association of three or
more physicians providing services in more than one medical
field or speciality with income from medical practice pooled and
redistributed to the numbers according to some pre-arranged
plan”1.
This rather lose organization of practitioners has now
become still more formal with the advent of hospitals, where
comprehensive medical care involving may fields of
specialization and various facilities are owned and provided
under one roof. In effect today, three broad categories of
institutions exist in rendering health care facilities:

4
1.Roberts, Markley,1964, Trends in Organisation of health
services : The private sector, University of Michigan, AnnAbhor,
p.27.
a) The solo physician where individual physicians
maintain offices for consultation capital investment
in equipments etc. is limited either purposely or due
to lack of finance. Diagnostic services are obtained
from outside agencies, chiefly paramedical
entrepreneurs who provide such services
independently.
b) Group practice, where a small group of medical and
paramedical personal share facilities and also share
responsibilities for providing comprehensive health
care to patients.
c) Hospitals, which are multi service and multi
specialization institutions characterised by formal
organization.
The main differences between the first two categories and
the third one are:
i. In hospitals doctors get salaries rather than fees for
services and in case of others
ii. The doctors designated as the family doctor in the
earlier two case becomes a doctor, meaning any
doctor occupying that position in the hospital
iii. What was rendered as a personalized service
becomes a mere professional service. As aptly stated

5
 by an eminent sociologist, “The medical group
(meaning a hospital name) can hold its patients
1.Goldstein, Mareus, S, 1948 Journal of American Medical
Association vol.136. March 27.p.53

largely by impersonal and technical method – it can be

attractive because it is cheap and because it has
successfully cured perceived disorders. Independent
practice can hold its patients largely by personal
methods –it is conveniently available in the
neighbourhood much the way the small grocery store is
more conveniently available that the super market, and
it readily allows the patient to develop a personal
commitment to the practitioner”1. It was opined even at
that time that “raising income and raising standards of
living will tend to maintain and to support independent
medical practice by private solo physicians inspite of
the economy and efficiency of group practice.
Nevertheless, increasing reliance on specialists,
paramedical personnel and expensive medical
equipment too expensive for solo practitioners – will
hasten the trend to group practice oriented towards
hospitals”2.
Mention may also be made of a fourth system named
“nursing homes”. This is an institution where specialized service,
oriented towards nursing supervision is provided, with periodical
checkup by physicians. In other wards the constant and regular

6
1.Friedson,Elion.1961. The organisation of medical practice and
patient behaviour, American Journal of Public Health vol.51.no.1
Jan p.60
2.Roberts, Markley,op.cit
attention of medical practitioners is not a necessity but constant
assistant and supervision of nursing staff is needed. The old and
infirm and those affected with prolonged illness are taken care of
here. Today all the four categories of providers use the names
interchangeably. The solo physician or group practitioners call
themselves or their institutions as hospitals, hospitals are named
nursing homes and nursing homes as clinics or hospitals, so on
and so forth. Thus we find the transformation of the organisations
providing health care. Today in India we find all the categories of
organisations in the health care delivery system or the health
industry1.
There has also been a market shift in the orientation of
hospitals. While in the later part of the nineteenth century,
hospital which primarily involved itself in care for the need for
charitable purposes, the hospitals goals today have considerably
evolved in response to changes in philosophy, scientific
knowledge and perceptions of the varied services. The emerging
trends in health care have been listed in the famous Coggeshall
Report in the USA2, which can as well be applicable here, they
1.The Government of India had amended the Industrial
Development Bank of India Act by incorporating hospital as an
‘industry’ for advancing loans-‘The Economic times’ – April, 9.
1987 p IV.

7
2.Coggeshal Dr.Lowell.T.1965 Planning for medical programmes
through Education – report to Association of American medical
colleges, Evanston I 11,p. 128
are scientific advances, population charge, increasing individual
health expectations, increasing effective demand for health care,
increasing specializations in medical practice and equipment,
increasing use of team approach to health care need for
increasing number of physicians and health personnel, expanding
role of Government and raising costs.
Whatsoever may be the purpose of a hospital, the
importance of hospital to a society rests on the three basic
function – care of patients, extention of knowledge regarding
management and prevention of diseases and education of health
personnel.

B) HEALTH SCENARIO IN INDIA

The health scenario in the country can be looked in to from
three angles - those who provide the service, the type of service
provided and the health situation in the country.
Under Article 246 clause 3 of the Constitution of India,
hospitals have been enumerated in List 11, in the seventh
schedule, referred to as the state list. Hence health in general and
hospitals in particular are administered by the State Government
and the Central Government restricts itself to providing finance
under various schemes, the administration and the execution of
which is taken up by the State Government. But unlike UK which
has its National Health Service and other such countries, health

8
care is not the exclusive domain of the government. In India
health care delivery is taken care of broadly by three types of
institutions a) the Government b)Charity institutions promoted by
individual and institutional trusts mainly for philanthrophy and c)
the private sector. Institutions organized under any of these three
types are found in any of the fourth system mentioned earlier like
for example the Government run hospitals as well as dispensaries
which are manned by single doctors with minimal assistance,
there are multi bedded speciality hospitals and also medium and
small size hospitals run by philanthrophic institutions : there is
wide proliferation of privately run also and group practices – the
poly-clinics as well as large hospitals.
The types of public health services provided could be
classified into three namely, primary health care, secondary care,
the tertiary care.
A) PRIMARY HEALTH CARE
The services falling under this category involves
preventive medicine, immunization and diagnosis of simple and
uncomplicated illness. Simple illness is taken care of and if
further analysis and diagnosis services are required, the patient is
referred to the next appropriate centre – hence also called referral
centres. Being nodal points they have also been entrusted with
excusting immunization programmes and creating health
awareness and also participate in family planning programme.
The primary health centres (PHC’s) are responsible for these
functions. The concept of PHC’s was conceived by Sir Joseph
Bhore who headed the health survey and planning committee,

9
which in its report(1946), a document of unrivalled clarity has
analysed in great detail the problems of health delivery to a large
and predominantly rural population1. It had advocated a
decentralized service, based with in the local community and
involving the people in their own health care. Though the concept
had not been accepted in full an attempt was made at creating
village level facilities, with restricted hinterland, catering to the
needs of nearby areas. As of march 1990 ther were 20,531 PHC’s
and 1,30,391 sub centres2 none existed before 1951.
B) SECONDARY HEALTH CARE
These are established normally at the district head quarters
which are fully provided with equipments facilities and
specialists for diagnosis and treatment.
C) TERTIARY HEALTH CARE
They are large sized multi-bedded multi-speciality
institutions concentrating on curative care with state of art
technology and also imparting health education, through medical
colleges.
Though this classification might be applicable only to the
government institutions, the functional classification is not
always very strictly followed. For example for practical
expediency in most cases the city based tertiary hospitals render
primary health care services as well. The other two classes of
institutions namely, philanthrophic and private, render all types
1.Antia N.H 1985 An Alternative strategy for Health care
Economic and political weekly. Vol XX. No 51&52.de 21-28,
p.225.

10
2.Government of India 1992 India-1991- A reference manual.
Ministry of information and broadcasting, NewDelhi- p.236.
services, with the only exception that private initiative in solely
primary health care that too at the village level ranges from very
limited to nil.
In this context it can be mentioned in passing that the most
important criticism as far as the Indian health care delivery
system is the rural-urban bias. Many experts have decried this
tendency for health care services both in public and in the private
sectors, to concentrate heavily in the urban ans semi-urban
centres neglecting the rural areas. As aptly summed up “of the
4215 Government hospitals in the country only 822 are located in
villages. In other words 81% of all the Government hospitals are
in cities catering to where only 25% of the population live, while
the remaining 75% living in villages must makeup with only
19% of the public hea1th facilities1.
The rural-urban bias is further exacerbated by the
Government allocation to health. Of the total allocation for health
and family planning only 40% goes to rural areas. When
matching allocation by some state governments and local bodies
are also taken into account, in the end villages get only 16% of
the total public allocation for health care2. As against this Asian
average for primary and public health care was 44%3.
1.Sharma,Kalpana, 1993, Another face of India, The Hindu,
Aug.22, p.18.
2.Sharma, Kalpana 1993 Unhealthy Trends in health care, The
Hindu, June 28, p.14

11
3.Griffin, Charles, C 1992 Health care in Asia

The third angle, logically ending up in the question would

be the results of the services provided by all these institutions and
systems which should be good health. In other words, the
healthiness of the society would reflect the efficiency of the
functioning of the entire system.
Asia : A comparative study of cost and financing World Bank
Regional and Sectoral studies, IBRD,Washington.DC p.492.
Table 1.2
HEALTH INDICATORS OF HEALTH SITUATION IN INDIA,
CHINA, SRILANKA AND PAKISTAN (1960-92)
INDIA CHINA SRILANKA PAKISTAN
1960 1981 1992 1960 1981 1992 1970 1992 1970 1992
Life Expectancy 43 52 61 41 67 69 - 72 - -
(in Years)
Infant Mortality 165 121 79 165 49 31 53 18 142 95
(per 1000 live
birth)
Crude birth rate 44 35 29 39 21 - - 21 - 40
(per 1000
Population)
Crude death rate 22 13 10 24 8 - - 6 - 10
(per 1000
Population)
Source:
a. World Development Report 1983 quoted inEconomic and
political weekly, vol XX de 22-28 1985 p.1938

12
b. World Development Report 1993 quoted in The Hindu july 2
1993.
Difficulties in measuring health araise primarily for two
reasons, ill health, the elimination of which determines the health
condition, occurs in varying dimensions, like varying severity of
problems or disability wich might be physical or mental
impairment etc. Secondly helath status is a value laden concept1.
Hence, in order to measure and hereby assess the effectiveness
and efficiency of the health care delivery, certain health status
indicators have been developed. The indicators developed by
WHO2 is being widely applied by all the nations not only to
assess their own status but also comparative assessment with that
of other countries. These indicators are: life expectancy at birth,
crude birth rate, crude death rate, infant mortality rate, percentage
of GDP/GNP spent on health and ratios between i) population
and doctors/dentists ii) population and nurses and iii)population
and hospitals and beds.
Table 1.2 shows some important health indicators with
reference to India and a few neighbouring countries. With regard
to India all figures indicate that when compared to 1960 there had
been considerable improvement in health status sine all the
indicators show an improvement. The infant mortality rate had
gone from 173 per 1000 in 1960 to 79 in 1992. Average life
expectancy at birth had gone up from 43 years in 1960 to 52
years in1981 and 61 years in1992. Crude birth rate had gone
down from 44 in 1960 to 35 in 1981 and 29 in 1992. Crude death
1.Kumaraswami Dr. T.M. 1994 Economics of Health care, the

13
hindu, jan18 p.d.2 1981. Health for all series No4. WHO Geneva
p.23.
rate per 1000 population had gone down from 22 in 1960 to 13 in
1981 and to 10 in 1992. these indicate a fairly efficient
performance of the health services. But when compared with
China and Srilanka two countries which started their
development processes in almost the same period at that of India,
the performance could be stated to have not been up to the mark.
In fact Srilanka had been able to achieve a health status
comparable with that of any of the developed nations.
Table 1.3
GROWTH IN NUMBER OF HOSPITAL AND BEDS FOR
THE PERIOD FROM 1951-89
Year No.Of Hospitals Beds
(In Nos) (.000)
1951 2694 117
1956 3307 157
1961 3094 230
1966 3727 304
1971 3858 359
1976 5025 487
1981 6804 569
1986 8067 695
1989 10172 750
Source: Directorate General of Health services, Ministry of
Health and Family Welfare, Government of India, NewDelhi,
1991.

Yet another pointer towards efficiency in health sector is

the development of health infrastructure. Table 1.3 shows the

14
growth in number of hospitals and number of beds in all sectors
from 1951 to1989. There had been a three fold increase in the
number of hospitals upto 1986 and 3.78 times increase of
hospitals upto1989 which works out to an average 9.8% annual
growth rate. The number of hospital beds show a size fold
increase from 1951 to 1986 which show an annual growth rate of
22.8%.
Table 1.4
HEALTH INFRASTRUCTURE AVAILABILITY
1950-51 1988-89
No.of Hospitals 2717 10172
No.of Dispensaries 6891 28304
No.of hospitals 31 78
Per lakh population
No.of registered 16.5 48.2
Doctors per lakh
population
Source: Centre for Monitoring India Economy(CMIE), basic
statistics relating to Indian Economy, vol.I, All India, August,
1992.

Table 1.4 shows the position of health infrastructure

indicators in two times frames 19850-51 and 1988-89. All the
indicators point that there had been improvement with respect to
all the aspects. The number of hospital beds per lakh population
had increased by more than 2.5 times from 31 in 1950-51 to 78 in
1988-89 and the number of registered doctors per lakh population
has increased from 16.5 in 1950-51 to 48.2 in 1988-89 which is a

15
three fold increase. It is these improvements in the helath
infrastructure which had reflected in the improved health status.
As in the case of health status in terms of health
infrastructure also India’s performance is not considered upto the
mark when compared with that of neighbouring countries,
especially China and Srilanka. In mid eighties the population per
hospital bed in India was 1489 as compared to 368 in Srilanka
and 465 in China1. Another factor which discounts this
achievement is the widespread regional disparities. Table 1.5
shows the first three and the last three in the ranking of states
with regard to health status and their respective indicators
whereas states like Kerala which ranks first in all respect
Haryana, Punjab, Karnataka and Maharashtra show better than all
India average in some of the aspects. States like MP,UP, Bihar,
Orissa and Assam show much lower than average status. Thus
the regional health status reveals more of what all India average
conceals.
An important factor which determines the health status is
the availability of resources. Finance and manpower are the chief
resources which goes to build up the health infrastructure.
1.UNDP 1990, Human Development report, Oxford University
Press, Newyork.p.113.

Table 1.5
RANKING OF STATES IN HEALTH STATUS FRST THREE
AND LAST THREE

16
 Life expectancy Infant mortality Crude death rate
(1981-1986) (1988-90) (1988-90)
First three
Kerala 67.6 22 6.1
Harayana 60.6 - -
Karnataka 60.6 - -
Punjab - 61 8.1
Maharashtra - 62 8.0
Last three
Madhya 52.4 116 13.2
Pradesh
Assam 52.4 - -
Uttra Pradesh 49.1 113 -
orissa - 122 12.2
Bihar - - 11.8
All India 55 79 10
Average
Source:CMIE : Basic statistics relating to Indian Economy vol.II
– states, September 1992

Yet another indicator of health status is the percentage of

GDP/GNP spent on health. The World Bank’s estimates place the
expenditure (both public and private) incurred in India in 1987 at
4.3% of the GNP. This was higher than the regional average
(East Asian) of 3.1% as well as the figure of 4% recorded by
China and 2.3% reported in Srilanka. However an important fact
that need to be noted is that estimates regarding total expenditure
on health in India vary considerable since a large proportion of

17
expenditure on health is incurred in the private sector for which
there are very few reliable estimate2 implying that even this
amount may be understand.
Another source of information on investment and
expenditure on health sector is the Government allocation out of
plan funds. There had been a rapid expansion of the physical
infrastructure in health sector over the plan periods which is
evident from Tables 1.3 and 1.4 which period covers from the
first to the sixth plan periods. In 1983 the goal for achieving
health fro All by 2000 A.D was accepted and the National Health
policy adopted in the seventh plan reiterated it. The Eighth plan
had given great deal of I,portance to the social sectors which
include health education, food and nutition, employment,
generation etc. Table 1.6 shows the plan investments, health
sectors allocation and the percentage of health allocation to total

1.Griffin, Charles.op.cit
2.Prabhu,K,Seetha 1993 social sector Expendtures and Human
Development, Reserve Bank of India, may, p.19.
plan investments. When the allocations and investments made for
health care in the first, Sixth and Seventh plans are compared it is
found that it has increased by 30 times (from Rs 65.2 Crore to Rs
1821 crore) during the Sixth plan and more than 50 times ( to Rs
3393 crore) during the Seventh plan. But it is also found that
even though there had been quantum increase in the amount
spent, the priority had come down from 3.3% of the total
allocation during the First plan to 1.9% in the Fifth plan to 1.67%

18
in the Sixth plan period and slightly higher at 1.88% in the
seventh plan period. In the Eighth Plan, while the level of
investment in health is expected to be maintained.
Table 1.6
PLAN OUTLAY ON HEALTH AND PERCENTAGE OF HEALTH
OUTLAY TO TOTAL OUTLAY DURING FIRST TO EIGHT PLAN
PERIODS
Plan Total Outlay Health Outlay % in Total
(Rs. Crore) (Rs. Crore)
I 51-56 1960 65.20 3.3
II 56-61 4672 140.80 3.0
III 61-66 8576.50 225.90 2.6
Annual 66-69 6625.40 140.20 2.1
plan
IV 69-74 15798.80 335.50 2.1
V 74-79 39426.20 760.80 1.9
VI 80-85 10929.00 1821.10 1.67
VII 85-90 180000.00 3392.80 1.88
Source: directorate General of Health Statistics, Ministry of
Health and Family Welfare, Government of India, New Delhi.
It has however, been proposed to give an added boost to
allocation for family welfare and water supply and sanitation,
which would constitute 1.5% and 3.8% respectively of the total
outlay compared to 0.3% and 1.2% during the third plan1.
The other important resources which is all the more
important in health sector is the human resource. Human resource
in the health sector in India shows a mixed picture. India has the
third largest medical manpower in the world. There are about
four lakh doctors registered with the medical council of India. If
the institutionally trained and qualified doctors of the Indian

19
system of medicines are also taken into account the doctor
population ratio would be 1:750 which is equal to or better than
only advanced economies2. There are 134 recognised medical
colleges in the country with another 40 colleges yet to be
3
recognized as of 1992. according to the medical council of
India, the Indian medical educational setup produces around
13,000 doctors every year. The increase in number of doctors had
improved the doctor population ratio.
Considerably, from 1:5750 in 1952 to 1:2412 in 1993 1
what is curious is that the WHO in the fourteenth World Health
Assembly held in Mexico had alerted several countries of the
problem of unemployed physicians which in India numbers
around 40,000 as of 19862. Hence it is clear that we have
1.Ibid p.16
2.Kumaraswami Dr.T.M 1993 need Based medical manpower
Development, the Hindu Jan12 p.17
3.Ibid.,
adequate number of professional medical practitioners. But it
should also be noted that regional disparities exist in this respect
also. Table 1.7 shows the first three and the last three state in
ranking with regard to the doctor population ratio. As it could be
seen the variation ranges between 1:935 and 1:15880.
While this is the position with regard to doctors on the
other hand the number of registered nurses in 1981 was 1,50,400
which increased to 1,60,886 in 1983, 2,07,400 in 1986 and
2,19,300 in 19873. This growth is considered to be very slow.
The registered nurses per lakh population was 21 in 1981 which

20
rose to 27 in 1986 and remained the same in 19874. This
considered to be far below ant standards.
Table 1.7
DOCTOR POPULATION RATIO FOR STATES IN INDIA
FIRST THREE AND LAST THREE IN RANKING
FIRST THREE
GOA - 1:935
PONDICHERRY - 1:1229
CHANDIGARH - 1;1512
LAST THREE
UTTAR PRADESH - 1:15880
ANDHRA PRADESH - 1:13151
ASSAM - 1:11879
Source: Directorate General of Health Statistics, Ministry of
Health and Family Welfare, Government of India, New Delhi.

There is no official statistics of the para medical personnel

since there is no registering authority.
This is the health scenario of the country – a case of mal-
distribution of resources and also an imbalance in priorities. Mal-
distribution as evidenced by the wide spread regional disparities
and imbalance in priorities as evidented services as against the
vast rural based preventive service – of which references was
made earlier, as well as too much of importance of medical
personnel as against auxiliary personnel. As correctly observed, a
health plan is necessarily unique to the country to which it
relates. Health planning is most effective when it is part of

21
overall planning considering local circumstances and priorities.
The problem of health planning is one of balancing the health
requirements of the population fully and effectively against the
available public resources and the development of the other
sectors of the economy or of providing the highest standard of
health compatible with the economic development of the country
without discrimination of any kind1.
To say the least the Government of India has miserably
failed in this regard. There is neither balanced distribution of
resources and services proper use of infrastructure facilities to
providing health care in the public sector, nor are there any
proper plans for development, regulation or control to the private
sector. The National Health Policy Document (1989)
acknowledges these when it observes, presently despite the
constraint of resources there is disproportionate emphasis on
curative centres- dispensaries, hospitals, institutions of specialist
treatment – the large majority of which are located in urban areas
of the coutry.1.
B) THE STATE OF PUBLIC HEALTH CARE FACILITIES IN
INDIA
Two questions which may be addressed in this regard are
the condition of the public health care facilities and its causes.
Inspite of large investments in various facilities for providing
health care and incurring huge amount as recurring expenses for
running the facilities for providing expenses for running the
facilities, the actual situation is highlywanting in many respects.
A visit to any of the common words in any district hospital

22
anywhere in the country will leave one with a permanent sense of
nausea. Hygiene water a luxury, that they are always soiled, pigs,
rats and dogs of ten cohabitate with the patients and their
hopeless relatives in the words. Under these circumstances it is
not surprising that only the desperate utilize the facilities
available in the Government Hospitals. Even the most ordinary
person if he can afford, goes to the private hospital. The loss of
faith is widespread and deep1. An eminent person, not less in
stature but the Lok Sabha Speaker in commenting on the
conditions of the public hospitals, was perhaps being mild when
speaking of the condition in the out-patient department of the
prestigious AIIMS (NewDelhi) said that evena healthy visitor
would fall sick2.
1.Government of India National Health policy, Lok Sabha
Secretariat 1989 (Third Revised ed) p.40.
The chief causes for this state of affairs has been aptly
summarized, borne out of a study3 in a metropolitan public
hospital (KNM, Bombay) which could as well be extended to any
large public hospital in India. Although the study has implacable
lack of application of management skills and techniques in
general , some specific findings are:
1. Specilisation leading to functional autonomy without
adequate improvement of administrative service which
remain highly bureaucratized.
2. conflicts between clinical and administrative departments.
3. problems arising out of physical layout- of words and
deparments widely spread and in a zig – zag manner due to

23
 improper term planning and ‘ad-hoc development
programmes.
4. Eventhough public hospitals are well equipped with all
modern techniques and equipments, they are afflicted with
problems classified as non utilization, under utilization and
misuse of equipments araising out of a) relevance and
feasibility not properly determined b) lack of trained and
technical personnel to properly handle and use c) lack of
inter departmental utilization of equipment resulting in
1.George, Zaibunisa, 1992 Why this decline Government
sponsored Health Care?, The Hindu, Jan 28.p.17
2.1986 The morbid State of Public Hospitals, The Hindu, Nov
27.p.8
3.Yesudian C.A.K 1982 Managing public hospitals, economic
times, jan23.p.10
duplication d) lack of maintenance e) lack of proper
manpower planning and management and f) poorly organized
kitchen services.
The inevitable consequence of the above is the very poor
quality of services which is considered to be an important factor
explaining the poor utilization of infrastructure facilities provided
at public cost. For example a study by the NCAER 1 found that
the basic rural health facilities created by PHC’s remained largely
unutilized due to the utter inadequancy in providing health care.
Infact in 1990, the PHC’s accounted for only 8.2% and 5.8% of
all cases treated in rural and urban areas respectively.

24
 One of the main reasons for this state of affairs had been
the inadequancy of finance. As referred to earlier finance for
public health facilities comes from the budget allocations, which
is decided upon annually, based on the plan allocations. On the
basis of the recommendations of WHO, that Government should
spend atleast 5% of GDP on health sector in order to provide
decent health care to most of the population, the Indian Council
for Social Science Research-Indian Council of Medical Research
(ICSSR-ICMR) group has suggested that the health sector should
receive 6% of the GNP and that bulk of the expenditure needs to
be incurred by the public sector2. Whereas World Bank estimates

1.National Council of Applied Economic Research (NCAER)

1992. Household Survey of medical care, NewDelhi p.63
2.Prahu K.S op.cit.p.8.
place the expenditure on health incurred (both by public and
private sectors). In India in 1987 at 4.3 of the GNP and the share
of Government expenditure had been only 1.6% of the GNP1.
This means that the share of the public sector is not considerable.
A distressing feature with regard to Government spending
on health is that, there has been a decline not only in the share of
health expenditure in absolute terms but also in real per capita
terms. A study 2 on trends in state spending on health and related
fields (Health, medical, public health, water supply and
sanitation) on a comparison of real per capita expenditure
between 1974-75 and 1991-92with respect of 15 states (covering
about 80% of India) shows that “ the rate of growth in real per

25
capita health expenditure showed a massive decline in all the
states (covered under the study). Within the first sub period 1974-
75 and 1984-85 the growth rates were positive with all states
registering a growth of around 5% to 80%. This situation
changed considerably during the second sub period, 1985-86 to
1991-92. With as many as six states recording negative rates of
growth, which were AP(7.2% to 2.8%), Rajasthan (8.9 to 0.8%) ,
U.P (10.3% to 2.4%) and West Bengal (5.0 to 2.1%) others
recorded a growth rare of 3% to 4%.
The decline in the share as well as real and per capital
expenditure on the past of the government combined with the
growing health care needs of the ever increasing population has
1.Griffin, Charles C.op.cit
2.Prahbu K.S. op.cit., pp.22,23.
ended up in the private sector filling up the gap to the extent
possible. As rightly stated exchangers are under stress by the
pressing demands for huge funds for creating more well equipped
hospitals. Further, speedy advancement and innovations in
medical sciences and technology force the hospitals to go for
expensive and reliable treatment systems1a. Thus it has been
accepted now that professional and financial support will be
required to formulate and implement a comprehensive healthcare
system.
B. Private Sector in Health Care:
There has been mounting evidence towards increasing
share of private sector in health care delivery as evidenced by
trends in expenditure in the public and private health care

26
facilities. Central government health statistics put the average
rate of growth of private hospitals at a higher 17% in the eighties
wile that of government facilities grew by just 2%1.
‘The World Bank estimates place the share of public expenditure
in 19872. A NCAER survey based on over 18000 household in
the country estimated that in 1990 29$ of the household
expenditure was incurred on government doctors and 55% on
private practitioners in both rural and urban areas 3. It has been
established that given on option to choose between public and
1a.Ojha.k.c, 1987. A multi faceted scheme for corporate
hospitals. Economic Times, April 9.P.IV

private health facilities there is a market preference to wards

private facilities. A study of 110 selected urban slums in five
cities (since cities generally have a well developed health system
under both the sectors)- Kanpur (u.p), Rajkot(Gujarat),
Madansting (Megalaya), Bhawanipatna (Orissa) and
Kumbakonam (Tamilnadu) by the operations research group in
1988 illustrates this point. For example in Kanpur while 83.9% of
the slum population can access a government facility within one
kilometer, 71.1% went to private clinics. In Rajkot despite 90%
of the slum population being similarly located 58.5% went to
private doctors4.
Hence despite the government’s commitment to provide
cheap and good quality health care to people the fact remains that
over 10% of the population turns to private sector for routine

27
illness. Even though the private sector had been laminating in the
health care ever since 1940 what is new is its expansion in
hospital care. According to the national sample survey of 1987,
until early 1980’s the government had considerable influence in
the health sector. Because 60% of hospital beds were in public
hospitals. But now the private sector has as many if not more
beds, then the public sector and 75% of all doctors2.

1.Chengappa, Raj et al 1993 medical mal practice Docs in the

Docks, India today June 30.P.98
2.Griftin, op.cit
3.NCAER, op.cit
4.Sharma, Kalpana, 1993, Health Choice people make, The
Hindu June 29.P.8

The distinction between public and private sectors in

health care delivery systems has attained significance on
considerations of quality and efficiency. Inadequate
infrastructural facilities and poor quality of services in the public
sector coupled with large investment made by the private sector
in health care in recent years have contributed to the raising
importance of private health care service in India3. apart from
ideological differences in favour of one sector or the other there
need be no objections to the existence of health care delivery
system in the private sector. In fact the must obvious justification
for the existence of private sector hospitals is the Appling
shortage of hospital facilities that currently exists in the country 4.

28
One should also look into the fact whether the public sector alone
will be in a position to cope up with the changes that takes place
in the health care delivery system. On the one hand the
emergence of chronic ailments like hypertension, stroke, heart
diseases cancer etc, would make greater demands in terms of
specialized medical personnel sophisticated equipments more
expensive facilities extended hospitalization and costly drugs. On
the other hand declining government investments and reduced
subsides would mean that slowly more and amore people having
to bear the full cost of their medical expenditure.
1. Ibid., June 28, 1993
2. Duggal, Ravi 1993, Health care service and financing in India-
a report for the health financing review mission of World Bank,
foundation for Research in community health Bombay (P.87)
3. Prabhu.K.S. op.cit. P.9
4. Wayluka,Raj.G. 1970, New Blood for Tired Hospitals Harvard
Business Review. Sep-Oct.P.23

B. The case for private initiative in health care delivery in

India:
The private sector increases the options for expanding
access to health services when this sector is encouraged.
Expansion of non governmental health services can reduce the
administrative and fiscal burden on the government and broaden
consumer’s options. For some types of health care, especially
simple curative care, none-government services may be more
efficient then those of the government, providing comparable or

29
better quality services at lower unit costs1. Moreover competition
from non-government sector can also encourage improved
efficiency in government services. In fact one of the main causes
for the inefficiency of the government hospital mechanism has
been attributed to the heavy turnout at the out patient departments
of the large public hospitals in the cities, due to the break down
of the referral system because of the failure of the municipal
clinics and dispensaries and PHC’s to treat minor illness. Not
surprisingly, public hospitals are strained beyond their capacity.
There are too many patients, too little space, inadequate resources
and shortage of staff2.
Many experts one of the opinion that the private sector has
a key role to play in health care and should be encouraged to
make its contribution so that the burden of
1.Panikor P.G.K.1986. Financing Health Care in China, -
Implications of some recent development economic and political
weekly Vol XXI no.16, April.P.706.
2. Sharma, Kalpana, 1993, June 23 op.cit.

the government is reduced1. since the government also has not

come out with any policy towards restriction in the growth of
private sector in health care delivery, this sector has come to stay,
and is likely to take a major share in the health care delivery
system in India.

B. Regulation of Private Health Care Sector

30
 Private sector in health is not without its share of
limitations. Criticisms have been leveled against this sector
mainly on the following grounds (1) characteristics of merits
good and externalities (2) efficiency and control and (3) cost of
treatment.

1. Unlike other goods or services health is considered to

posses the characteristics of “merit goods” and
“externalities” by merit goods is meant that health
authorities are considered to have better knowledge of the
services to be consumed especially relating to what and
how much of the services are to be consumed rather than
the consumer himself. The consumer on the other hand
either due to lack of knowledge and/or awareness or due to
insufficient income or personal resources or for a number
of other reasons may not come forward to consumer such
1.Gopalani Dr.C. 1987 President, Nutrition Foundation of India,
in his prof K.S.Sanjivi, Endowment Lectures at Voluntary Health
services, dec 26 Madras.

service. By externalities is meant that the benefits of some

of the health services accrue not only to the individual user
of such services but to the society at large. For Example,
the effect of immunization scheme against infectious
diseases. In fact non consumption would be detrimental
not only to the individual but to the whole society. Hence

31
 in many case the health services will have to be provided
merely because access to such services cannot be limited
to those who are willing to pay to take up such provision.
2. Though many authors have commended the private sector
health services for their efficiency as compared with that
of public sector services the fact remains that no standards
are in existence enabling comparison. In fact quality is a
highly subjective one dependent on so many factors. What
is still many disturbing is that there are no agency either to
set the standards or to determine the adherence of these
institutions to basic standards of efficiency in services of
professionally qualified medical men whose attendance
and care is the fulcrum around which the entire patient
needs are determine and met. By personal services is
meant other facilities like the timeliness and quickness
with which the services required, cleanliness and other
such. Environment related service, nursing assistance ers.
With regards to the former, the patient or their kith and kin
are not competent to judge or assess the professional
competent of the doctor except in a very broad and general
manner. Hence such assessment can be made only be
equally are more professionally competent personnel. At
the crux is the contentious issue of actions. An aggrieved
patient has four avenues for justice in the present system
the medical councils, the civil courts the criminal courts
and finally the consumer. Disputes redressal commission.
Normally any complaint of negligence or malpractice is

32
 referred to the ethics committee of the medical council of
India for its findings, on the basis of which finally the
complaints is acted upon. The council has power only to
revoke or suspend a doctors license for an unethical or
rugtigent act. But it could not grant monetary
compensation to the patients. Even in this regard, it is
alleged that, the council has never been effective. Its ethics
committee is dominated by doctors and the bias is apparent
in many state councils. On an average hardly a handful of
doctors have their licenses revoked or suspended every
year1. According to an activist of the voluntary health
association of India, the council, never had the teeth
muscle, backbone or heart to deal with cases of
malpractice2.
1.Chengappa, Raj, et al, op.cit.p.98.
2.Shiva,Dr,Mira,1993, Head Public policy Division, voluntary
Health Association of India, NewDelhi quoted in India Today
june 30.p.98

The patient can also move the civil or criminal court. Civil
court can be approached for damages caused and compensation.
Where as the criminal courts can be moved in case of gross
negligence resulting in permanent injury or death. But here again
the patients have to face several problems. While cases in civil
court can take upto ten years investigations itself is a long drawn
process with several stumbling blocks. The police are reluctant to
investigate such cases since doctor are powerful people and

33
hesitate to take action against people and hesitate to take action
against them1.
The fourth a venue the consumer disputes redressal
commission, has run into lots of rough weather with the Indian
medical association questioning the validity of the medical
services being brought under consumer pending in the supreme
court is yet to be resolved
It can be stated that in that in the question of negligent or
unethical practice the medical. Council of India and courts have
difference functions. The former are addressed to the medial to
enforce medical ethics punishing erring doctors-essentially a self
regulating mechanism. The court offer legal redressal and
compensation in civil cases. The consumer commission are
basically a short-circuiting of the tedious process of legal
system2.
1.Srinivasa, Sandhya 1992 should Doctors be made Accountable,
Illustrated Weekly of India june 27, July 2.p.4
1.Ibid.p.5

With regard to personal services the regulation range form

very loose to nil the only control or an excuse for it, which
currently is possible is by the local authorities like municipal
corporation, municipalities, etc, each of which have their own
legislation for registering hospitals and nursing home. But most
of these bodies claim that they have no control over the
functioning of private nursing homes, except to register them.1.

34
 Hence in the absence of any fool proof regulatory
mechanisms, it could be stated that there is no way of
establishing the superiority of the efficiency of private health care
services excepts on the basis of general opinions.
3.The third criticism leveled against private sector relates
to cost of treatment. The inevitable consequence of the effects of
varied growth and development in health care delivery
techniques is that it has considerably contributed to the many fold
increase in the price in the form of charges to be paid by the users
of health care. As was mentioned earlier, some of the important
factors which had resulted in changed trends in health care were
scientific advances, population change, increasing health
expectations, increasing effective demand for health care,
increasing specialization in medical practice, increasing use of
tea m approach to health care need for increasing number of
physician, need for increasing number of health personnel and as
a result of all these raising charges.
It is common knowledge that today even for simple
ailment the patient has to undergo a minimum of a combination
1.Ibid. p.4
of two or three tests. Pathological or laboratory tests, X-rays
ECG etc depending upon the nature of illness. Apart from these
other indirect costs like waiting time (loss of potential earnings)
traveling cost etc. are also to be incurred. The net effect is that
the patient ends up paying large amounts for health care. Even
though the implication of such high charge are many, one aspect
which stands out prominently is its impact on the users.

35
 If the entire population does not have any resource
constraint and are able to pay for there health care, there will be
no problem with reference to the health care charges. But
definitely a distinction will have to be made as between the well
off sector of the population and the not so well off ones. The
relatively large private expenditure in the context of wide spread
poverty is not considered a welcome development. Since health
expenditure in private house holds are in the nature of inevitable
expenses incurred on disease control, they imply a poor health
status of the population. What is more worrisome however is the
fact that expenditure at lower levels of income group are
probably diverted from essential consumption to disease control,
further strengthening the nexus between poverty, under
nourishment and illness1. When more and more poorer
households seek the private sector for health care the problem
becomes acute. The NCAER study points out that in1990 40 of
illness episodes in poorer house holds who attended by
Government doctors whereas the proportion was only 25% in the
1.Gil Sonya (ed.) 1986 Health status of Indian People FRCH
Bombay p.69
case of richer house holds. What is significant is that 60% of the
poorer households resorted to private sector health care which
also means that they spend a higher proportion of their income on
health, which they can ill afford. Studies have been made
establishing the link between expenditure on health and income.
The poor end up spending much larger proportion of their income
on health care than the rich. According to an analysis by Dr.

36
Anil.B.Deolalikar and Dr Prem Vashishtha, of house hold
expenditure collected by the NCAER the lower income groups
spent 24.14% of their annual income on curative health care
while the highest income groups spent only 3.4% of their annual
income2.
The causes for the higher changes in private hospitals may
be many. This study intends to take up an analysis of the cost
going into the changes as well as the modalities of the
determination of the charges.
B) STATEMENT OF THE PROBLEM
The discussion carried on so far points to the poor health
status attainment of India reflected in Crude Birth rate, Crude
Death rate and Infant mortality rate being unfavourable both in
terms of standards of attainment as well as comparatively when
compared with other nations of equal economic status like China
and Srilanka.

1.NCAER. op.cit
2.Sharma, Kalpana, June 29,1993 op.cit. p.8

This poor attainment had been due to a number of reasons

chief among them being 1)Poor infrastructure development in
terms of hospitals, beds and facilities available, reflected in the
poor bed population-ratio. 2)Mal-distribution of resources and
misplaced priorities reflected in the rural-urban bias, very low
doctor-population ratio and regional disparities in the distribution
of resources as well as fast development of high technology

37
based tertiary care 3)Inadequate financial outlays for public
sector hospitals resulting in non availability of needed facilities
poor quality of service and lack of maintenance and hygiene.
Consequent upon the deficiencies in public sector health care, the
private sector health care had started a gaining in importance.
The institutional had helped flow of capital and consequently
investment in high cost diagnostic tools and sophisticated
equipments and machineries.
The natural fall out of the above is that the costs of
treatment in private hospitals have increased many folds.
Invention and innovations as a result of research in causes
prevention and cure of diseases have brought in increasing use of
advanced techniques of diagnosis and treatment.
Ultimately all these have ended up in the very high price to
be paid as far as the patients are concerned in the form of
increased fees or charges. Very high charges for hospital services
are of concern especially if it becomes a wide spread
phenomenon in a country where the income level of a majority of
the population is considered low. This becomes all the more
pronounced due to the poor quality and non availability of timely
services from the public sector hospitals due to scarcity of
resources and infrastructure. It is in this context that the issue
relating to charge for hospital services is addressed to.
It is also important to look into the other side of the coin. It
is only common business principle that any business institution
should be able to generate sufficient revenue to meet all its
annual expenses existence of the business and also provide for

38
further contingencies, without which the continued existence of
the institution would be jeoparadised. This rule applies to any
hospital working for profit. In other word the charges made on
patients should be sufficient enough to meet the costs of varied
nature in the hospital as well as leave a profit to the owner. This
is because, unless the financial health and the operational
efficiency of the hospitals are maintained it may affect the long
run existence of such hospitals.
The issue raised in this context are
1. Whether the charges made on patients are fixed
considering accepted or recognized price determining
practices and
2. Whether appropriate cost ascertainment practices are
adopted and such appropriately determined cost are
used as a basis for fixing charges and also used for
control purpose in order to enchance efficiency.

OBJECTIVES OF THE STUDY

The study was taken up with the following specific
objectives.

39
 1. To make an overview of the factors influencing the
charges set by the hospitals and the extent and
nature of such influence.
2. To ascertain the pricing procedures and methods
followed by the study hospitals as against that of
recommended as against that of recommended
procedures and strategies.
3. a)To obtain expenditure information and
departmental data form study hospital and
b)adopting appropriate costing methods and
available information to ascertain costs of rendering
services in study hospital.
4. To develop cost ascertainment models which could
be applied with advantage to hospitals of similar
nature.

REVIEW OF LITERATURE
Studies in health care delivery system in India are in its
infancy and that too in the areas of pricing and costing are very
scarce with reference to private sector hospitals. An extensive
search of literature revealed that many of the studies taken up in

40
the area of hospital management and administration related to the
effectiveness of rural health programmes, financial, outlay for
public sector health, utilization and management of health
services by sections of population grouped on the basis of
area(rural, urban etc) income levels (poor, middle, income etc).
All the studies and findings which were considered relevant are
reviewed here. The aspects which were considered relevant are
utilization of services of Government hospitals demand for and
nature of demand for health services and Government health
services, studies on cost analysis and method adopted.
1.A study based on Narangawal date and had found that of the
total funds available with Government health centres upto 75%
were consumed in salaries1.
2.A study by Operation Research Group2 had brought out the
nature of health care treatment preferred by the sample studied
covering seven states and had concluded that the demand for
various sources of health services differs from state to state and
within state from rural and urban areas. According to this and
other related studies, the dependence on public health
centres/Government hospitals was a maximum of 69% in rural
Gujarat with the balance utilizing the services of private doctors.
1.Khan, M.E, Prasad.C.V.S., 1981. Health Financing In India.
ICSSR.
2.ORG, Baroda, 1982
The demand for private doctors was found to be 66% of the total
in Bihar in 1977 and 52% in 1982, 31% in HP, 34% in Kearala,
30% in Rajasthan, 58% in Andhra Pradesh and 78% in Uttar

41
Pradesh in 1982. The study also enlists the reasons for lesser
preference for public health services which includes in
accessibility, non availability of doctors when needed and that of
medicines, unpleasant behaviour of doctors and staff and long
waiting time.
3.A study by Yesudian had been made with an objective of
inter alia, finding the type of health centres approached by
different social class and the kind of health services receives by
them, to know their opinion and their perceptions. The findings
of this study inter alia were a)while the high and middle classes
mainly utilized private health services for all health needs the low
and very low classes mostly went to public health centres for all
health needs and the availability of free services was the main
criteria for choosing a health centre by the latter b)medical
expenditure increased with the raise of social class position.
4. Dyal Chand in an experimental study had taken the
question of among others the willingness and ability to pay for
health services in the study area. He had concluded that, contrary
to popular belief 95.2 percent of parents of children had the
ability and willingness to pay for immunization services and only
4.8% did not utilize services for monetary reasons2.
1.Yesudian.C.A.K 1982 Differential utilization of Health services
in a metropolitan city ICSSR.
2.Chan Dyal, 1987, Community Financing for primary Health
care, Economic and Political weekly , Vol XXII no.24
With reference to nature a demand for hospital services
and price elasticity of demand in particular, the pioneering work

42
of eminent scholars, Feldstein, Newhouse and Phelps and others
have been drawn upon and the finding of their studies have been
used appropriately the chief among them being i)the price
elasticity of demand for hospital in patient care was found to be
general inelastic but in varying degrees. ii)patient’s price
responsiveness was more when good substitutes were found and
less with perceived seriousness of illness (A detailed discussion
of the findings is made in chapter II)

With regard to pricing method and procedure the theory

developed by David Burik1 was used as a basis and with suitable
modifications for Indian conditions a procedure which could be
followed by study, hospitals in particular was developed.

As regards study on costs and cost analysis a number of

studies have been made under the ages of erstwhile National
Institute of Health Administration and Education(NIHAE) now
functioning as National Institute of Health and Family
Welfare(NIHFW) most of these studies related to individual
hospitals and all were either Government hospitals or charity
hospitals.

Burik David 1983 Changing Role of Hospital Prices HCM

Review, Spring pp.65-70

Based on data for the year 1968-69 from, Faridabad and

Gurgoan and that for 1971-72 from Wellingdon Hospital all in

43
and around Delhi, studies were made to determine unit cost per in
patient day and that of per out patient visit for the former and in
addition to the above costs, the cost per unit of other department
like X-ray, diet, lab, services, linen, surgical operation etc, were
also ascertained. Even though several assumptions relating to
cost apportionment based on data availability were made, the
chief limitation of both these studies was that may cateories of
capital costs, maintenance, cost of the building etc and
administration costs, like telephone, electricity etc were ignored.
This was because of the reason that being Government hospitals
these expenses were not the responsibility of the health
department and hence ignored. This had been maintained as a
great limitation of the study and the resultant unit cost was
considered not to present real picture of the situation.

NIHAE,NIHAE Bulletin 1974.Vol VII No1 pp.30-33

44
CHAPTER V
SUMMARY AND CONCLUSIONS
Chapter 1
Provision of health care delivery has emerged from
individual or solo physician to group practice and to ell organized
hospital service. With all facilities available under one roof under
specialist’s care. This had been mainly due to growing
specialization and expansion of health care delivery system.
Inventions and innovations on the causes diagnoses and treatment
of illness had resulted in a very wide scope for specialization and
expansion of health services.

The health care delivery system can be classified on the

basis of ownership as government services and private healthcare
service and on the basis of type of services provided as primary,
secondary and tertiary health care. Unlike in many countries
where the health care services are either provided by the
government entirely (eg.UK, Canada) or by the private health

45
care services. Entirely (e.g. USA) in India both government and
private sector exist simultaneously in the field of provision of
health care. Even though the government had been the dominant
provider in this field of late a trend towards preference of private
health care services had been seen.

This had been mainly due to mis-allocation and mal-

distribution of resources as well as imbalance in priorities
resulting in very poor health status as revealed by various health
status indicators.

The very poor quality of services, on various counts, had

resulted in the slow emergence of private sector health care
providers. This sector offers the following advantages. The
private sector if encouraged increases the options for expanding
access to health care services. It can also the government and also
broaden consumer’s options. More over for some types of health
care, especially simple curative care, this sector had been found
to be more cost effective. There is also a possibility there
competition from private health care can encourage improved
efficiency of the government services, through in a restricted
sense. Many experts are also of the opinion that the private sector
has a key role to play in health care and should be encouraged to
make its contribution towards reduction of the burden of the
government. In the absence of any policy towards restriction or
regulation of this sector on the port of the government. It has

46
come to stay and is also likely to take a major share in the health
care delivery system in India.

Criticism on the role of private sector had been leveled on

the grounds that (1) health are is characterized by ‘merit goods’
and ‘externalities’ and hence cannot be completely left to the
domain of private sector, (2) efficiency concept in health care has
neither been standardized, nor has there been any regulation or
control mechanisms or measures to ensure of enforce quality and
efficiency in health care delivery and (3) above all cost of such
health care.

The various spheres of expansion and specialization has

ultimately ended up in the very high price to be paid by the
patients in the form of increased fees and charges.

This had been issue taken up for study namely the methods
and procedures of setting such charges and methods and
techniques of ascertaining cost of rendering such services.

Chapter 2

Any person consuming goods or services has to pay a price

for such good or services. In a free economy prices perform
specific functions like allocation of resources among the most
preferred quality and quantity, mobilization of resources for
functioning of the organization, generating profit and there by

47
competition and expansion of the market. With to hospitals apart
from the above, prices ere found to be used as a rationing device
and a method of reducing over-consumption. In order that these
functions are performed effectively, the prices ill have to be set
efficiently.

Two aspects considered important with references to

pricing of services are the factors influencing prices and the price
setting process. The unique characteristics of the factors which
are of importance are the product, characterized by spot delivery,
absence nature, with hundreds of products. High prices for
hospital services might be a reflection of higher quality, product
differentiation differences in personnel or physical service and
difference in search cost. Demand for hospital services in
characteristic by (1) generally inelastic demand though in varying
degrees for difference services, (2) the existence of agency
relationship where the professionals (doctors) decide the demand
on behalf of the patients and there by giving raise to conflicting
ethical and economic motives and (3) the price elasticity of
demand had been generally close to ‘Zero’ meaning inelasticity.

Hospital services supply measured in doctor population

ratio and bed-population ratio, both were found to be very high
implying to be infavour of health care providers. Consumer’s
characteristics influencing health care services were found to be
extending of existence of third payments in the form of health
insurance and reimbursement plans.

48
 With regards to payment methods, will direct payment to
doctors in the form of fees is for the professional services,
payment to hospitals is a comprehensive charge for several
services. Pricing of hospital services vary depending on whether
the customer pays or a third party pays. Consumers are charged
based on items of service consumed or a package charge.
Emerging third party payment system and competition is likely to
call for prices to be set based on more acceptable principles.

The prices set would be equitable both to the patients as

well as to the profit seeking hospitals if the following steps are
taken in the pricing process, namely setting pricing objectives,
selecting pricing strategies identify pricing alternatives,
assembling data and information and determine feasibility.

Chapter 3
Charge in hospitals for its services is generally considered
to be on the higher side mainly due to different types of input
costs going in to such costs being heavy. Analysis of costs of
hospital services is expected to be helpful in providing
information for use in setting equitable rates, for providing
efficient and effective services. Proving a basis for further
operation, and for effecting cost control measures and there by
optimize profits.

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 In order to use costing methods and render cost analysis
possible three pre requesting are considered essential namely,
sound organization, structure, good accounting system and
detailed departmental statistical data. The extent of existence and
availability of these would determine the accuracy and usefulness
of the cost analysis.

A comparison of the total costs and profits department

wise under both the methods as made and the policy options
which could be adopted is also given. Apart from the inherent
difficulties arising out of the nature of the service, impediments
in cost ascertainment in hospitals arise also due to lack of
awareness of the uses of cost information and where there was
willingness due to absence of cost information, since it was felt
that incorporating such a system would not be economical or
benefits would not be commensurate with costs. While some
hospitals did involve themselves in budgeting exercises the use
of cost as a basis of control had never been attempted.
This situation should be changed by creating and
developing awareness among the hospital administrators and
managers of the uses of cost information and cost analysis.
Chapter IV
Two cost ascertainment model had been developed using
the basis cost model which is that the total cost equals the sum of
material cost, labour cost and overheads. Cost data obtained from
the study hospital was made use of to illustrate the working of
these cost ascertainment model.

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FINDINGS
Health care delivery in India is taken care of both by the
public sector through the Government hospitals and the private
sector through charity hospitals as well as profits seeking
hospitals of varying types and scale of operation. The inability of
the government hospitals to provide the required quality and
quantum of health care, have resulted in the growth of private
sector health care delivery systems.
Inability on the part of the public hospitals to meet the
health care requirements had been attributed to 1)lack of financial
resources as evidenced by the declining share of funds for health
from out of plan allocation as well as misplaced priorities in the
form of encouraging tertiary sector health care at the cost of
primary health care 2)lack of human resources as evidenced by
the over all poor doctor-population ratio as well as widely
varying regional disparities in this ratio 3)lack of physical
resources as evidenced by a very high bed-population ratio and
the existence of wide disparities in several regions in the regard
also.
Private sector hospitals had been fast enough to bring in
the latest techniques in diagnosis and treatment of illness
resulting in huge investments in medical and diagnostic
equipments. Added to this trend the expansion and specilisation
of the medical profession have ultimately resulted in the patients
having to incur very high expenses for treatment of their
illnesses.

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 One peculiar feature of the private sector health institutions
in India is the virtual absence of any regulation or control over
their establishment functioning as well as maintenance of
standards of health care delivery.
The earlier findings are summed up below.
a) With reference to hospital services comprehensive
demand does not exist.
b) The very low price elasticity of demand loading to
situations wherby the total revenue of hospital can
be raised by increasing charges without affecting
output levels because increased price is not likely to
deter the consumption of services in anappreciable
manner and
c) Restricted supply evidenced by high doctor-
population ratios:
Given the above findings the conditions
presently existing are highly in favour of the
hospitals where by they could set the prices at
their will and the acceptance of these charges
by the consumals or payers is assumed.
Pricing objectives are set by the hospitals only in a very
broad terms that they are related to the charges only in a general
or vague form.
Hospitals follow only incremental pricing strategy with an
‘ad hoc’ increase to the existing charges periodically.
Prices mostly have been a reactionary response to changes
in expenditure levels. Information about such changes were

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obtained either from the budgets or accounting information
relating to expenses.
Hospitals are not in a position to adopt more accurate
strategies, like fair share pricing strategy, since the information
and data needed to adopt such strategies are neither collected nor
is it made available.
Hospitals adopt market objective pricing strategy aimed at
capturing specific target market and also to concentrate on select
services.
To meet the needs of patient supported by third party re-
imbursements, hospitals have started quoting package charges
covering standard services for specific surgical procedures or a
comprehensive bundle of services.
Even though according to marketing experts cost based
pricing has applications only under limited conditions. With
reference to hospital services cost is considered a better basis
than most other bases.
Overhead constituted 58% to 65% of the total cost and this
was mainly due to the impact of depreciation and maintenance
cost of heavy investment in diagnostic equipments as well as the
costs incurred for the various support services. This necessitates
the appropriation of such costs to various departments and
sections of the hospital on a suitable basis. The methods used for
such apportionment forms the costing method of the hospitals.
Among the two methods used cost apportionment it was
found that while in some of the department more accurate cost
ascertainment methods did not make any significant difference in

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the cost ascertained as between the two methods, many of the
departments costs showed significant differences. This means
that instead of adopting some simple way of determining costs,
appropriate cost ascertainment methods with greater precision
would be helpful in determining cost with better accuracy thereby
enhancing their utility, especially in decision making.
The specific decision for which such information could be
used might be 1)review of charges – subject to the policy option
allowing high profits from some services or departments so as to
compensate for low profits or losses is some other services or
department and 2)review of asset utilization or capacity
utilization.
In this instance a decision option of a reduction in the
charges of lab services up to 39%(in order to give a profit of 12%
on income) and an increase in charges of intensive care up to
47%(in order to give a profit of 6% on income).
The cost information as such available with hospitals is
highly inadequate for undertaking any meaningful analysis.
Since there is no compulsion, legal or otherwise, for the
hospitals to undertake any cost finding exercises, the hospitals do
not have any systems by which cost and other information could
be obtained.
In conclusion, it can be stated that, with reference to the
two aspects taken up for study, that is pricing and cost
ascertainment the hospital mostly follow only ‘ad-hoc’ price
setting policies in the sense, they do not set charges based on
either the cost of rendering the service or are such charges arrived

54
at in consensus with the market. Even though such a policy might
ultimately result in a profit to the hospital from the patients or
payers point of view such charges may be considered inefficient.
Trends which has already set in such as the growth or corporate
sector hospitals, hi-tech multi-speciality large hospitals etc and
emerging trends in the hospital sector like competition, third
party payment systems, third party contractual purchase of health
services and health insurance, the time has come for the hospitals
to look for a review of the present practices and bring in charges
in the price setting methods. The evolving trends are likely to
pose challenge to the management of hospitals to set their prices
or charges that would be more acceptable to the payers for
utilization of hospital services. In other words, in order to
compete in emerging market conditions, a hospital will have not
only maintain a competitive complement of physicians, services,
equipment and facilities but will also have to be in a position to
provide the services at competitive prices.
In order to maintain competitive efficiency the hospitals
will have to maintain not only professional efficiency but also its
operational efficiency by providing its services at optimal costs.
In other words the hospitals should be cost efficient.
This requires that the hospitals be cost conscious and use
cost information to optimum use, which in turn requires proper
cost ascertainment and analysis. With regard to cost
ascertainment and analysis the situation is highly wanting
specially with reference to information required for such an
analysis. The lack of awareness on the use of cost information –

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for pricing of service or for use as a base of control or as a
determinant of efficiency is striking. This is the case even with
large hospitals involving investment of several crores of rupees.
The lack of interest on the part of hospitals to provide even
available information or to identify themselves with studies of
this nature is appalling.
May statisticians and researchers in this field had decried
the non availability of information on a routine basis so as to
undertake studies relating to costs especially with reference to
private sector hospitals. From the hospitals point of view, there is
both lack of awareness on the uses of cost information as well as
lack of know-how relating to classification, collection and
discrimination of cost information. Probably in the hospitals
point of view appointing a cost accountant or creating a similar
position is unavoidable expenditure.
This study was undertaken to break this stalemate. The gap
between the informational needs or requirement and its
availability is so wide. This study intends to throw some light on
the gaps and thereby narrow the gap, but not to bridge the gap.
The broader aim is to provoke further studies of similar nature
which may bring fresh contribution to this emerging area, where
the scope for further research is enormous.

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