Healthcare financing is one of the most important tools that defines the responsiveness of a health system and its capacity to ensure equity. Healthcare financing ensures equity by providing access to healthcare and financial risk protection. Healthcare financing in most countries is a mix of tax-based financing, social health insurance (employment based), pre-payment (through private insurance), fees at point of service, donor financed like in the case of many Sub Saharan countries, and private healthcare expenditure (out of pocket expenditure).
In the case of India, healthcare financing is largely out of pocket. Its health expenditure is among the lowest, at 3.54 percent of the Gross Domestic Product (GDP). Of this, the share of public expenditure is about 1.3 percent of the GDP, indicating that most of the healthcare spending in India is out of pocket expenditure.
An efficient health insurance market reduces the ‘out of pocket’ healthcare expense burden on individuals, in case of a catastrophic event, which can otherwise push households into poverty. In India, the ‘out-of-pocket’ expense on healthcare is a high 62 percent of the total healthcare expense. Of this, private insurance pre-payment is a low single digit. In recent times, the role of private health insurance has increased. Under the Ayushman Bharat- Pradhan Mantri Jan Arogya Yojana, a flagship program of the Government of India, the government acts as the purchaser while private insurance companies and healthcare providers act as suppliers. For a large part, the AB-PMJAY program follows a trust-based model where states fund healthcare through trusts they have created. With PMJAY and with the government acting as the purchaser, there is potential to increase the traction of private health insurance amongst middle class, who are otherwise not covered under PMJAY.
Furthermore, given the limited state capacity to deliver healthcare, an effective health insurance market is imperative to improving the supply and creating a demand for good quality, affordable healthcare. This was one of the incentives for the government to open up the insurance sector to private participation in the year 2000 and to place an insurance regulator for supervision. The Insurance Regulatory and Development Authority of India (IRDAI) which came into being as a result of privatization was handed the dual role of developing as well as regulating the sector.
Two decades later, however, there is still enough scope to improve the private health insurance market in India,in terms of both the length and breadth of insurance coverage. Commercial health insurance is headlined by under-penetration, covering only around 12 percent of the population. This in turn has stunted product innovation, as health insurance in India continues to focus narrowly on hospitalization expenses (In-patient care) instead of the broader spectrum that also includes preventive healthcare and out-patient costs.
A huge part of the problem is the unmet need to build and strengthen a regulatory structure in the healthcare sector, the lack of which is currently impeding the way private insurance market is working in the country. Currently, health insurance products come not just with a narrow focus, but also withcertain caveats that make the product construct complex to understand. This in turn compounds market failure owing to information asymmetry and the likelihood ofa supplier induced demand. The growing instances of market failure in commercial health insurance can be evidenced through health risk selection (cream skimming), shallow coverage, high administrative costs and low burning ratios (claims ratios) (Health System For A New India: Building Blocks, Niti Aayog, 2019).
To enhance the efficiency of private health insurance and increase its penetration, it is important to identify and address challenges in commercial health insurance. Some of these challenges include narrow product construct, high distribution costs, poor claims experience, pricing, and grievance redressal.
It is against this backdrop that this paper charts out the evolution of retail health financing and reviews the role of the Insurance Regulatory and Development Authority of India through the important lenses of product development, product pricing, public disclosures and grievance redressal.
The objective of this paper is to capture challenges in this space that need to be addressed to increase transparency, predictability, and comfort. In writing about the key aspects of regulation in health insurance, this paper has relied on several experts from the industry, consultants and regulatory officials who have tracked this space closely. The paper comprises a brief about IRDAI and five chapters around the key aspects of retail health insurance, namely, product construct, pricing, public disclosures, public grievance and the role of third-party administrators (TPAs) in health insurance. Each chapter tries to capture the present construct, challenges, and opportunities that lie to improve retail health insurance in India. The paper can be accessed here.