By Dakshita Das and Srinath Sridharan
Towards universal health insurance: India witnessed a significant change in the insurance sector once the Insurance Act was amended in 2015, paving the way for the growth of health insurance companies. Health insurance sector in India continues to be dominated by employee benefits in the organised sector. Despite the efforts of National Health Protection Mission, there exists a significant need to increase insurance penetration among the rural and geriatric population, with healthcare still largely financed through out-of-pocket expenditure.
As per the IRDAI annual handbook 2018-19, the number of people covered under health insurance is 47.20 crore. While Ayushman Bharat-PMJAY covers 40% of Indian population, 20% is covered under ESIS, commercial health insurance and other health financing scheme. There is, however, the missing middle population of about 40% who are perhaps driven to poverty in the absence of awareness or affordability of health insurance cover.
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History of insurance sector
In India, insurance has a long history. The ancient writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra) refer to the pooling of resources to be re-distributed in times of calamities such as fire, floods, epidemics and famine. Bottomry, a system of merchant insurance in which a ship is used as security against a loan to finance a voyage, was also a known practice in Ancient India. The need to have a security against unforeseen events was therefore known and practiced.
However, insurance as we see now in India has drawn heavily from other countries, England in particular. Post-independence, the Insurance Amendment Act of 1950 abolished principal agencies. However, there were a large number of insurance companies, the level of competition was high and had allegations of unfair trade practices. The government of India, therefore, decided to nationalise insurance business.
An Ordinance was issued on January 19 1956, nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian and 16 non-Indian insurers as well as 75 provident societies — 245 Indian and foreign insurers in all. The LIC had monopoly till late 1990s until the insurance sector was reopened for the private sector.
The turn of the millennium saw the advent of modern insurance coming to the country. The IRDA regulates the sector. The process of reopening of the sector began in early 1990s and the last decade witnessed substantial reforms. The number of players increased, and so are the of products and services. Critically, fintech has entered the sector as a choice of the millennials, and more service upgradation and product development are expected as an outcome.
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International experience in healthcare reforms
China had implemented a national healthcare reform plan to address the needs of its population through a three-tier system for rural, townships and urban areas. The first and second tier systems are meant for the rural areas and the townships with low incomes. The reform initiative includes an insurance benefit package for those seeking care and changing the way doctors at the township, urban and rural levels are paid. The outpatient expenses are covered by medical savings account, a pooling system for each citizen until it is exhausted, and after which outpatient expenses are paid out of pocket. There exist some takeaways for India.
As one of the early adopters of health insurance, the US is an interesting consumer market to study. For a capitalist industry model in a large democracy, the US health system has multiple divergent healthcare systems with an insurance sector that is both federally influenced and regulated per state. The United States healthcare system and health insurance framework over time have become complex and expensive and the healthcare system has regulations that increase costs and decrease competition. These contribute to higher costs and higher health insurance premiums which have grown faster than wage increases over the years.
Armed forces personnel have access to a well-oiled government-run healthcare service. Citizens over 65 years of age are covered by Medicare, which is a federally funded insurance-based system. Those who are employed in the formal sector may potentially have access to employer-driven health insurance coverage. Those who are economically weaker bear the brunt with using the state-run Medicaid system. While it is partially federally funded, the extent of citizen eligibility is influenced by the state in which (s)he lives. This system is tougher in terms of income thresholds and hence does not offer coverage to a large number of people.
The Obamacare reforms brought an additional option for those without any coverage; this option of insuring through federal and state insurance marketplaces allowed citizens to avoid high premiums that was the norm for individually-negotiated private insurance, by sharing risks across the insured in a bulk-purchase arrangement. In spite of these reforms, almost a sixth of the American citizens between the ages 18 and 64 years have no insurance coverage at all.
To summarise, the model of US healthcare and health insurance is a risky one for the Indian market due to it being:
- an expensive and complicated health insurance,
- not equitably priced,
- a monopolistic (and heavily lobby-based) pharma industry,
- a highly-profitable litigation industry, and
- high fees of doctors.
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Indian Insurance – what makes it up
Demographic factors such as an expanding middle class, young insurable population and growing awareness of the need for protection and retirement planning will potentially support the growth of Indian insurance. The insurance industry of India has now grown to encompass 58 insurance companies, including 34 non-life insurers (25 general insurers, 7 standalone health, 2 specialised insurers), and 24 life insurers. The other stakeholders include agents (individual and corporate), brokers, surveyors and third-party administrators servicing health insurance claims.
Foreign direct investment (FDI) up to 74% is allowed in insurance companies while 100% FDI is allowed in the insurance intermediaries. The total assets under management (AUM) of the life insurance sector is over Rs 48 lakh crore while the non-life insurance sector it is around Rs 3 lakh crore.
The measure of insurance penetration and density reflects the level of development of the sector. While insurance penetration is measured as the percentage of the insurance premium to GDP, insurance density is calculated as the ratio of premium (in $) to the total population (per capita premium). Insurance penetration in India is only 3.7% compared with the global average of 6%. The life insurance penetration level is only around 2.75% whereas the non-life insurance penetration is less than 1%.
Compared to advanced economies, India lags in terms of density. The global average of density is $682 compared to $74 in India; the highest density in the world is in Hong Kong with $8,863. “There are low levels of insurance penetration (life and non-life) despite numerous sources of risk such as rainfall (leading to income shocks in largely agrarian segments of the population), health shocks, and catastrophes such as floods or cyclones,” the July 2017 Household Finance Committee report of the Reserve Bank of India (RBI) pointed out.
The measure of density is the premium whereas, given the large spectrum of the Indian population, a newer ratio is required which can the measure the reach of the insurance since the larger premium players may well be distorting the commonly used prevalent ratio. The new financial inclusion index launched recently is a positive step in the right direction.
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Health insurance space
Health insurance sector in India is one of the major contributors to growth of general insurance industry. It alone accounts for around 29% of total general insurance premium income earned in India. India’s tryst with health insurance programme goes back to the late 1940s and early 1950s when the civil servants (Central Government Health Scheme) and formal sector workers (Employees State Insurance Scheme) were enrolled into a contributory, but heavily subsidised health insurance programmes.
As a consequence of the liberalisation of the economy since the early 1990s, the government opened up insurance industry for the private sector (including health insurance) in 1999. This development threw open the possibility for higher income groups to access quality care from private tertiary care facilities. The first health policy in India was Mediclaim policy. The advent of private insurers in India saw the introduction of many innovative products like family floater plans, critical illness plans, hospital cash and top-up policies.
In the past five years, India has witnessed a plethora of new initiatives, both by the central government and some state governments also entering the bandwagon of health insurance. One of the reasons for initiating such programs may be traced to the commitment of the governments in India to scale up public spending in healthcare. Health insurance in India typically pays for only inpatient hospitalisation and for treatment at hospitals in India. Outpatient services are not payable under health policies in India.
Make in India
Thanks to the digital framework policy of the Union government, the availability of internet access across India has been growing well and quick. This could help push digital-healthcare ideas forward. The government initiatives to encourage domestic production of healthcare equipment will help reduce the cost of healthcare access. In addition, the adoption of online-pharmacies and secondary-digital-marketplace of healthcare service providers have been proven by their steadily increasing usage.
In September 2018, the Union government launched Ayushman Bharat Yojana. This National Health Protection Mission was initiated to provide healthcare insurance coverage for secondary and tertiary care hospitalisation. It is expected to benefit nearly half a billion people. The mission, through its Pradhan Mantri Jan Arogya Yojana (PMJAY) initiative, established 150,000 health and wellness centres (HWCs) and provides health insurance coverage to nearly 500 million people or 40% of the country’s population. This is roughly equivalent of the entire population of the European Union.
In its first year of implementation, Ayushman Bharat was accessed by 3.9 million Indians who have taken advantage of cashless treatment, resulting in a savings of $1.6 billion for the beneficiaries.
In the light of the COVID-19 pandemic, the government announced an increase in the budget for‘health and well-being by a whopping 137% in the financial year 2021-22. Finance Minister Nirmala Sitharaman announced the allocation of Rs 2.23 lakh crore compared with the previous year’s budget of Rs 94,000 crore. In this, the allocation under Ayushman Bharat or the Pradhan Mantri Jan Arogya Yojana (PMJAY) that aims to provide universal healthcare has more than doubled from Rs.3,100 crore in 2020-21 to Rs 6,400 in 2021-22.
Recently, Prime Minister Narendra Modi announced the Pradhan Mantri Atmanirbhar Bharat Yojana to strengthen the healthcare system in India. As such, the progress on sustainable development goals is steady for a nation with 1.3 billion people. But there are significant challenges in the healthcare value chain, including gaps in healthcare infrastructure, a divergence between rural and urban geographies, an acute shortage of skilled workers and inadequate public funding. Moreover, everything cannot be covered by the state and lifestyle diseases are on the rise as is home care which requires a more prudent approach to managing household finances to take care of a health management requirement.
Universal health insurance needs robust infrastructure
The goal of universal health coverage (UHC) is to ensure that all people obtain the health services they need without suffering financial hardship when paying for them. This requires a strong, efficient, well-run health system; a system for financing health services; access to essential medicines and technologies; and a sufficient capacity of well-trained, motivated health workers.
For universal health coverage to become a reality, it is important to expedite steps beyond infrastructural interventions to include water, sanitation, nutrition and a healthy lifestyle. The challenge is also to incentivise wellness-seeking behaviour. An encouraging aspect of India’s commitment to UHC has been the active and participatory role of the government. From Poshan Abhiyaan, which aims at eliminating malnutrition, to the Prime Minister’s call for a Fit India Movement, new emphasis has been given to multi-stakeholder engagements.
For a sustainable universal health coverage model, maintaining a balanced trade-off between cost, quality and access to healthcare services is critical. A collaborative approach aligning patients, payers and providers, along with innovative partnerships, will hasten efforts to mitigate risks, drive impact, forge stronger social returns and achieve sustainable UHC targets. UHC in India will remain a dream, especially for the poor, unless the primary healthcare system is boosted coupled with insurance products to take care of any imminent requirements.
UHC will need healthcare financing and human resources to provide financial protection to the underprivileged by covering their medicine, diagnostics, and health consultation costs. Health insurance as a way of financing the UHC imperatives becomes critical as we have a large young population. As our demographics ages, we need to understand how the health risks change over time and how the associated risk-mitigation costs shift.
For a strong universal health insurance idea to stand a chance of success, we need to pursue a public policy that embraces genuine healthcare reform:
- Saving lives: To simplify our health care system to be effective with processes and to be enabled with digital-healthcare to extend reach to nook and corner of the country.
- Affordability: To rein in the continual rise in health care costs that are cannibalising private and public budgets.
- Improving quality: To eliminate profitability as the only focus of health care services providers, especially when it impacts clinical-decision-making towards profitability-measures.
Without healthcare reforms, improvement in health insurance sector will only be marginal. The health insurance sector has issues of irregular distribution of health business, low level of consumer awareness, product and pricing innovation shortfalls, delays and consumer-challenges in claims processing. As a layer towards transparency, health insurance sector should make its cost structure and opt-in services clear to public stakeholders.
Currently, the concept of health insurance is opaque as too many hidden layers of costs are perceived to be buffered. Also the other aspect that would be critical would be how the tie-ups between corporate hospital chains and insurance companies play out, especially as common beneficial owners emerge between these two sectors.
Learnings from the examples cited in this paper also showcase that simply trying to solve for only the sectoral business-model problem will not help in building a larger health insurance ideology. The entire constituents, especially the healthcare system has to work for effective and impactful health insurance. To enable this, the entire ecosystem industries have to be encouraged, and yet carefully-watched-over.
(Dakshita Das is a civil servant. Srinath Sridharan is an independent markets commentator and visiting fellow, Observer Research Foundation. Views expressed are personal.)
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Srinath Sridharan is a strategic counsel with 25 years experience with leading corporates across diverse sectors including automobiles, e-commerce, advertising and financial services. He understands and ideates on intersection of finance, digital, contextual-finance, consumer, mobility, Urban transformation, and ESG. Actively engaged across growth policy conversations and public policy issues.