Your biggest financial enemy: Know it well!

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Most of the readers of AI Post are either young or middle-aged people, who are tech savvy and use smartphones extensively. If you are one the them, today’s article is dedicated to you.

We all know that inflation is the biggest enemy which we face in our financial life. Interstingly, inflation can be different for different sectors. For example in telecom, instead of inflation, it is deflation as call rates keeps on dropping. For groceries, it is in the range of 6-8% for last 20 years. Do you know the worst of them? It is not one but two. It is Medical Inflation (14% annual) & Education Inflation (10% annual). In some ways, they are related as well (we will explain it later). The problem is that no one can escape medical inflation as our human bodies are bound to grow old and catch diseases. The question is not “if” it will happen but “when” it will happen. You are ace reader of AI Post, you should be prepared and not caught unaware.

In this article, we will discuss trends in medical inflation, role of private insurers and medical colleges, and how badly it can impact us in future. Of course we have a solution as well and it is not just buying insurance. We are stock advisor and not insurance advisor, but we continue to encourage our readers for their overall well-being even if it is not linked to our core business activity.

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How much is Medical Inflation?

Medical Inflation or Healthcare Inflation is the rate at which cost of medical services goes up every year. Different bodies put a different rate for medical inflation in India. HDFC Ergo reports around 20% while global tracking agency Willis Towers Watson (WTW) puts India’s medical inflation at 11.5% annually. Various financial planners take medical inflation as 12-14% annually. It is safe to assume at least 14% medical inflation for India considering rising cost of healthcare. Whatever you choose, the baseline is very clear that even equity returns or most mutual funds will sweat to match medical inflation. Fixed deposits or any debt instruments don’t even stand a chance to compete with it.

Worldwide Medical Inflation in Percentage

Country201620172018 (Expected)
India10.5%11.3%11.3%
United Kingdom5.0%5.0%6.0%
Singapore7.6%7.6%9.2%
Australia6.7%6.6%7.1%
Brazil17.8%16.8%14.4%
UAE12.5%12.0%10.5%
USA6.2%6.0%6.5%
Canada12.3%12.3%12.3%
Source: Willis Towers Watson (WTW) 2018 Global Medical Trends Survey Report

Simple surgeries like cataract which costed ₹15,000 in 2010 will easily cost ₹40,000 today. Inflation is more severe for complex but common procedures like Angioplasty, which can cost ₹2.5 Lakhs and more depending upon the complexities involved. For complicated and uncommon treatments, cost goes sky-high in tens of lakhs primarily due to limited number of hospital which are able to treat them.

Medicine cost is also not very far behind. Herceptin, one of the most effective drug for breast cancer, costs ₹75,000 for each 440mg vial. Most cancer patients will need 10-15 vials of Herceptin for complete recovery. Glivec, used in treating multiple forms of cancer will cost around ₹1.25 lakhs for one month dose. Then there are various additional charges like ICU which is around ₹10,000 per day. Anesthesia is a must for every surgery which will incur extra visit charges for anesthetic doctor.

 Why is Medical Inflation so high?

There are a number of reasons for medical inflation:

  • High Inflation: India is a fast growing country and general inflation is around 7-8% per year. This pushes cost for everything involved into medical treatment like medical equipment, real estate, transport, power and other utilities.
  • Brain Drain: Specialist or super-specialist often leave India and practice abroad. It is very common for doctors to pursue higher studies or specialization from foreign colleges and as a result, they settle abroad. This puts pressure on availability of specialists in India. With such a massive population, we don’t have enough specialists to serve. Whatever we have are tied to private hospitals and they charge a premium for their service. Unfortunately, most AIIMS or similar government medical college graduates go and settle aboard leaving India to private college graduate doctors.
  • Costly Medical College Fees: These days doing MBBS from a private college can cost ₹25-50 lakhs in five years. This is published fee. For donation cases, it can go into crores. Government colleges are very cheap but seats are very limited, so most doctors have to graduate from private colleges. Worst, even after MBBS, it is not enough and almost everyone has to purse higher studies these days. This pushes overall cost for a doctor in crores. Naturally, this doctor has to go after money to recover his cost. This means higher consultation fees for neighbourhood clinics. These days typical out-patient treatment (domiciliary) is ₹200-600 per visit. Excluding taxes, it is mostly in excess of 60-70% of patient’s overall bill.
  • Expanding Middle Class:  Post globalization and resulting economic boom has given more money in the hands of India’s middle class. As depicted from below graph, middle class with more than $20k income per year has expanded from 1% to 12% from 1995 -2015. It will further grow to 20% by 2025.

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This has resulted in more and more people preferring treatments at private hospitals over government hospitals.

  • Poor conditions of Government Hospitals: Last year in U.P, 72 children died due to lack of oxygen in a government hospital. No wonder, nobody will dare to go to government hospitals if they have a choice. I have visited government hospitals myself and I would not trust them for a treatment. There are lack of medicines, shortage of doctors, power cuts and what not. Such pity conditions are adding dependency on private hospitals and giving them conditions to over-charge. Currently there is no restriction or regulation from government on private hospital charges. Some exception are applicable for a few treatments like knee replacement implants to a maximum of ₹1,25,000 per implant. This was imposed by government after media reported overcharging by many local doctors. On the other hand, people still trust military or railway hospitals because they are well managed despite being government hospitals. These hospitals are only available to ex-employees hence proving limited relief to overall population.

Where is it going in future?

Medical inflation is going to stay at 12-15% territory for next two decades or so, which is going to be massive with compounding effect. Unless Government intervenes into hospital business and actively regulates, overcharging will remain an issue. Smaller private hospitals are a spot of bother even for insurance companies as well since many small hospitals indulge in unethical practice of overcharging and it gets passed to insurance providers. By now, top-notch hospitals in India like Apollo or Max or Kokilaben are having facilities that are truly world-class. So the quality of treatment in India has certainly improved a lot, if you have money.

Since medical cost is increasing but income levels will not rise in same proportions, in the future, more people will be bound to take medical insurance to protect themselves. Situation should become similar to western world where having an insurance is a basic necessity.

Private hospitals in reality are businesses where owners want more money year on year. We, as investors are also part of the system since we also expect more earnings from stocks like Apollo Hospitals, Alkem Labs or Sun Pharma. This may put pressure on company management to indulge in unfair practices. Many such cases have happened abroad like the famous case of Valeant Pharmaceuticals Inc.

How to prepare ourselves?

Often knowing the system helps to be prepared. We know that medical inflation will hit all of us at some point in time, so it is wiser to pull up socks today. The best action is to keep yourself fit to minimize medical visits and bills. There are so many other advantages of being fit other than financial. We wrote an article on this earlier, click here to read. It is highly recommended to all our “Ace Readers” to keep your BMI (Body Mass Index) under control. Don’t go by your own judgement, use any online BMI calculator to determine if you are really fit or not.

Unlike many western countries, healthcare is not free in India so here every man is for himself. Below are financial actions (arranged in the order of priority) which you must do to keep yourself prepared for any medical complications and have a peace of mind.

  1. Buy Online Medical Insurance: For a family, you can opt for family floater plans to save premium amounts. Buy insurance for two years to get some discount on premiums. Most insurance companies will ask you to undergo a medical checkup after 45. So it is smart to take it latest by 44 years of your age.
  2. Use topup or super topups: These days insurance plan comes with basic coverage of 2-6 lakhs and top up or super top up insurance of 10 or 20 lakhs at a fraction of additional cost.
  3. Use equities to fund annual premium: This is a little unique idea that I have done for funding my annual premiums. Since insurance premium also increases by 10-15% every year, I have prepared a portfolio which can generate 15-18% return year on year. So this way I can be assured of paying insurance premiums for life.
  4. Increase insurance coverage every 5 years: To keep your cover adequate in view of inflation, increase your insurance coverage every 5 years.
  5. Keep a separate medical fund: This is optional to make your medical preparation foolproof. Under this, you can create a fund to cover unseen or uncovered scenarios. This will be used in case insurance company is not paying the medical bill due to policy exclusions or pre-existing diseases etc. Some people may like to club this with emergency fund as both typically serves same purpose, but ideally it should be separate so that this fund is only used in medical emergencies. There may be a case where you used emergency fund for a non-medical emergency and suddenly you need to pay medical bill.

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