In its recent decision, IRDAI has made it mandatory for health and non-life insurance companies to offer to the general public a standard basic health insurance product with well-defined features. This customer-friendly product is targeted mainly at the lower-middle and middle-middle income households who can afford to pay a premium, but not the hospitalisation expenses that can potentially push them in financial stress. This decision is consistent with the recommendations made in Niti Aayog’s recent report. One of its recommendations calls for “harnessing the power of commercial and private health insurance” as a short-term action for improving risk pooling in the health sector.
While the report gets the diagnosis right to assess the problems facing India’s current health system in selected areas, some recommendations are a little worrying. In the field of risk-pooling, for example, the report is spot-on in making contextual observations of severe fiscal constraints, high level of labour informality and high level of out-of-pocket (OOP) spending. It is right in suggesting that growth in risk pooling will need to come from pooling OOP spending from the informal non-poor. However, where the report falls short is in not giving convincing reasons as to why the informal non-poor cannot be brought under Pradhan Mantri Jan Arogya Yojana (PM-JAY)—a scheme that offers free hospitalisation benefits to nearly 110 million poor and vulnerable households. And why this pathway cannot feed into whatever long term risk-pooling strategy the country may choose to achieve Universal Health Coverage.
It’s not difficult to understand why the report recommends commercial insurance instead of PM-JAY for the informal non-poor. One, healthcare being a state responsibility, it is states’ prerogative (and, not of the centre) to decide whether or not to extend PM-JAY to the informal non-poor. Two, difficult fiscal situation will constrain the government’s ability to contribute towards bringing the informal non-poor under PM-JAY. Three, the inclusion of the informal non-poor in PM-JAY would lead to fragmentation of risk pool by states. To see how significant are these reasons, let’s examine each of these in some detail.
Centre’s role in extending PM-JAY to the non-poor? Healthcare being a state subject, the centre can partake in it by contributing financially (and technically) through centrally sponsored schemes such as PM-JAY. In the absence of any financial contribution, the only way the centre can promote risk pooling among the informal non-poor is through a national level policy decision. And the centre has two options in the shorter-term: to promote a standard basic insurance product offered by commercial insurers (recommended option in the report) or expanding Employees’ State Insurance which is also contributory social insurance. However, given the voluntary nature of enrolment in both the options, the government will need to give some financial incentives to ensure its significant uptake. If the government is to get involved in providing financial incentives, it may as well cover them through PM-JAY rather than through commercial insurance. This leads to the question of how much government funding would it entail, and how burdensome would it be, given in the current fiscal situation.
How much fiscal space is needed to extend PM-JAY? The government indeed has limited fiscal space, especially during the current phase of the economic slowdown. However, a small financial contribution by the centre and states could help expand PM-JAY to the informal non-poor as a bulk of the funding would come as contributions by the insured themselves. Back-of-the-envelope calculations suggest that government contributions need not be burdensome. To demonstrate this, supposing PM-JAY is thrown open to the general public, and it succeeds in covering 200 million (non-poor) individuals. With an average claims amount of Rs20,000 (it is nearly Rs14,600 under PM-JAY as per government data) and a hospitalisation rate of 5%, total claims bill would come to Rs20,000 crores. If 70% (or Rs14,000 crores) of this is contributed by the insured themselves, the balance 30% could be shared equally by the centre and the states. This would require the centre to provide Rs3,000 crores (less than 5% of the health ministry’s budget!) and remaining Rs3,000 crores will be shared collectively by the 33 states/UTs that have rolled out PM-JAY. And the contribution per insured per annum would be Rs700 only or Rs3,500 for a family of five, which is three to five times lower than the premium currently charged by commercial insurers for a shallow cover of Rs500,000. Indeed, low average claims are one of the hallmarks of PM-JAY, and the non-poor too should benefit from it.
Some states, such as Karnataka and Uttarakhand, have already extended insurance to their entire population using funds from their budgets. Other states, notably Himachal, Kerala, Maharashtra and Punjab, have covered populations beyond those included in the 2011 Socio-Economic Caste Census survey.
Will it lead to serious fragmentation? The fragmentation issue is not a matter of real concern as risk pools under PM-JAY are already fragmented by states. Bringing the informal non-poor under its fold will only increase the size of this pool. Further, many states have large enough population to derive benefits of large risk pools. On the other hand, if commercial insurers cover the informal non-poor, some fragmentation of risk pools by insurers will still happen.
The informal non-poor would stand to benefit from all the advantages that PM-JAY is known for: cost containment due to larger pool and affordable package rates improved access as a result of a larger network of care providers, the advantage of portability, strong IT system and so forth. In order to make it attractive for people who will pay to join the scheme, it should be possible to introduce superior non-clinical facilities to create differentiation. Inclusion of the informal non-poor would strengthen PM-JAY.
Does this mean that commercial health insurers will play a limited role? PM-JAY only covers standard hospital care. Although some states have used commercial insurers, the real “meat” is in providing additional cover and tapping the higher end market.
To conclude, it is imperative to improve the pooling of health risks in the country. Growth in risk pooling will need to come from the pooling of OOP spending by the informal non-poor. The pathway chosen for improving risk pooling is no less critical as it will create dependencies over time, and will have serious cost implications. There are apparent advantages of expanding PM-JAY to include the informal non-poor.-Financial Express