Why are Indian health insurance notorious for poor claims ratio

If you have been admitted to a hospital in India, then you know that dealing with insurance claims can delay your stay long after the treatment is over. Indian health insurance is notorious for a poor claims ratio, and “hidden” clauses that can result in partial coverage or sometimes denial of coverage. Improving regulation is an obvious fix to the problem. However, deeper reform requires aligning the incentives of patients, doctors and insurance companies, so that quality health care is provided at competitive prices. This may require new approaches and potentially new business models.

Difficulties in providing health insurance
A basic illustration can help one understand the challenges of health insurance provision. Imagine that there is only one procedure covered by an insurance firm and it costs Rs 100. The firm insures 10 people, charging a premium of Rs 11 each. This means they have an amount of Rs 110. Let’s assume that only one person will fall ill. The firm pays Rs 100 when they get hospitalised and keeps the remaining Rs 10 to cover its own costs.

This calculation goes awry if more than one person falls ill or if the procedure costs more than Rs 100. This can happen for several reasons. There may be an unforeseen health catastrophe such as Covid-19, where the number of people falling ill shoots up unexpectedly. People may neglect early signs of their illness, not get check-ups as frequently as they should, or may demand more expensive care than necessary. The more healthy people may drop out of the pool and stop paying premiums, reducing the collective amount. Doctors and hospitals might also be incentivised to provide relatively expensive procedures, especially when they know that the insurance firm will bear the cost. As a consequence, the firm may scrounge on paying claims, or deny coverage altogether.

This simple example shows the number of things that can break down. There are incentive issues caused by “hidden information” in all transactions. The insurance firm cannot know if the level of care provided by the hospital is proportionate to the underlying condition. It has few levers to cross-check the decisions of either the customer or the hospital. The patient does not know if the hospital has overcharged or if the insurance company is misbehaving. The hospital and insurance company do not know if the patient neglected her health and could have come in earlier. In an environment where there is, often legitimate, mistrust between all stakeholders, it is no surprise that the results are sub-optimal.

Encouraging fair play
According to a 2018 paper, Fair Play in Indian Health Insurance, deficiencies in regulation, weak enforcement, and poor grievance redress procedures lead to a lack of fair play in the health insurance system. These are an obvious fix to improve the working of health insurance firms and need to be taken up by the Insurance Regulatory Development Authority of India (IRDAI).

The deeper solution needs mechanisms that will align the incentives of all stakeholders in the system. Some potential solutions are as follows.

First, insurance companies could incentivise regular check-ups for their customers to save expensive hospitalisations later. However, experience suggests that customers are often not willing to undergo tests, and fear the potential increase in premium if the check-up reveals an adverse condition. Mandatory check-ups before access to insurance, especially for older customers, may be difficult to operationalise but offer a possible solution to keep costs low and also provide less intrusive healthcare.

Second, the design of protocols for health procedures may establish standards of care that hospitals should follow. This will allow insurance firms to evaluate whether the hospital is charging appropriately. Improving fair play in the medical establishment is as important as fixing the problems of health insurance.

Another model used across the world is combining health care with insurance. This is known as the Managed Care model. In this model, insurance firms and health care providers form a network through which preventive care is emphasised. An example of such a model is the Kaiser Permanente in the United States. Establishing institutional frameworks where potential patients are given preventive care such that fewer of them need hospitalisation will not only cut costs but also provide a better quality of life. Here, the incentive of the health care provider is aligned with that of the patient. The more hospitalisations that can be prevented, the better it is for everyone. This model has not yet taken root in India. In fact, only in January 2024, did one of the first such initiatives Narayana Health Insurance Limited, a subsidiary of Narayana Hrudayalaya, receive a license to operate as an insurance company. The early experiences of this initiative may help set up managed-care alternatives in India. The Indian market has some way to go before it can provide quality health care at competitive prices. ThePrint