Health Insurance Sector of India

OCIAL SECURITY FOR MEDICAL EMERGENCIES IS NOT NEW TO THE INDIAN ETHOS.It is a common practice for villagers to take a ‘piruvu’ (a collection) to support a house-hold with a sick patient. However, health insurance, as we know it today, was intro-duced only in 1912 when the first Insurance Act was passed (Devadasan 2004). Thecurrent version of the Insurance Act was introduced in 1938. Since then there waslittle change till 1972 when the insurance industry was nationalized and 107 privateinsurance companies were brought under the umbrella of the General Insurance Cor-poration (GIC). Private and foreign entrepreneurs were allowed to enter the marketwith the enactment of the Insurance Regulatory and Development Act (IRDA) in 1999.

The penetration of health insurance in India has been low. It is estimated that onlyabout 3% to 5% of Indians are covered under any form of health insurance. In termsof the market share, the size of the commercial insurance is barely 1% of the totalhealth spending in the country. The Indian health insurance scenario is a mix of manda-tory social health insurance (SHI), voluntary private health insurance and commu-nity-based health insurance (CBHI). Health insurance is thus really a minor player inthe health ecosystem.

Social Health Insurance

Universal coverage has two dimensions: health care coverage (adequate health care)and population coverage (health care for all) and, coupled with the societal values thatunderpin it, leaves essentially two financing options—general taxation and SHI. The for-mer implies financing care entirely from general revenue; its viability as the singlemechanism to finance universal health coverage is necessarily limited in an environ-ment of competing demands on a severely limited tax base. The SHI is based onincome-determined contributions from mandatory membership of, in principal, theentire population with the government subsidizing the financially vulnerable sections.While the SHI is an effective risk-pooling mechanism that allocates services accordingto need and distributes the financial burden according to the ability to pay (therebyensuring equity in access), such schemes are difficult and expensive to implementwhere a majority of the workforce is unemployed or employed in the informal sector.

International experience in SHI: Factors that affect the speed of transition

Achieving universal coverage through SHI is not easy. Evidence from 8 countries withSHI schemes for which sufficient information is readily available—Austria, Belgium,Costa Rica, Germany, Israel, Japan, Republic of Korea (ROK) and Luxembourg—shows that the transition period (defined as the number of years between the firstlaw related to health insurance and the latest law enacted to implement universalcoverage) is 79 years (Austria), 118 years (Belgium), 20 years (Costa Rica), 127 years(Germany), 84 years (Israel), 36 years (Japan), 26 years (ROK) and 72 years (Luxem-bourg). These countries embarked on SHI when their economies were still underde-veloped; moreover, coverage is not necessarily a simple linear increase, as some groupsare harder to reach than others. For example, moving from 25% to 50% coveragemight take less time than moving from 50% to 75% (Carrin and James 2004).

International experience suggests the following factors impacting the speed of tran-sition to universal coverage using the SHI financing option: 1. The level of income and structure of the economy (specifically, the relative size of

Health insurance

in India

S

Financing and Delivery of Health Care Services in India 275

S E C T I O N I V

K. SUJATHA RAO

SECRETARY, NATIONAL

COMMISSION ON

MACROECONOMICS AND

HEALTH, GOVERNMENT OF

INDIA, NEW DELHI

E-MAIL:

[email protected]

the formal and informal sector) determine the feasibilityof collecting contributions as well as the amounts thatmay be raised through SHI schemes.

2. Distribution of the population and infrastructure deter-

mine the capacity of SHI schemes to deliver the benefitpackage.

3. The administrative structure and solidarity in a countrydetermine its ability to actually implement SHI and withlegitimacy.

In India, its large rural and informal sector accounting for90% of the population, lack of cohesion and solidarity, andpoor institutional capacity to organize them etc. will be con-stricting factors for the upscaling of the SHI in the near ormedium term. The experience with collecting income tax pre-dicts problems in assessing incomes and collecting premiumsfrom small, unregistered firms, unorganized industries and therural sector. The consumer redressal mechanism may also notfunction effectively because of the large illiterate population.The SHI is therefore likely to be restricted to the employedpopulation and largely in urban areas, where collection of pre-mium is easier and administrative costs minimal (Annexure).

The existing mandatory health insurance schemes in India—the Employees’ State Insurance Scheme (ESIS) and the Cen-tral Government Health Scheme (CGHS)—were first startedas pilot projects in 1948 and 1954, respectively in the con-text of achieving universal coverage via the SHI. Table 1summarizes the provisions under these schemes.

Employees’ State Insurance Scheme (ESIS)

Enacted in 1948, the Employees’ State Insurance (ESI) Act wasthe first major legislation on social security in India. The schemeapplies to power-using factories employing 10 persons or more,and non-power and other specified establishments employing20 persons or more, with employees earnings up to Rs 7500per month being covered, along with their dependants. Thecurrent coverage stands at 84 lakh employees and 353 lakhbeneficiaries across 22 States and Union Territories (expect-edly, the membership is higher for more industrialized States).

The benefit package is quite comprehensive in its coverageof health-related expenses, going beyond the cost of medicalcare to include cash benefits (sickness, maternity, permanentdisablement of self and dependant) as well as other benefitssuch as funeral expenses and rehabilitation allowance. How-ever, the actual package of benefits available is determined moreby the type of facility accessed rather than the type of cover.Medical care comprises outpatient care, hospitalization orspecialist treatment as well as services of the Indian systems ofmedicines. These services are provided through a network ofESIS facilities, public care centres, non-governmental organi-zations (NGOs) and empanelled private practitioners.

Corresponding to these arrangements, a variety of pay-ment mechanisms are employed from salaries for ESIS staffto capitation fees for private doctors. The ESIS is financed bya three-way contribution from employers, employees andthe State Government. Between 1993–94 and 1997–98, theincome of the scheme grew substantially (largely due toincreases in contributions which now account for 80% ofthe ESIS income) while medical benefits have actually fallen(from about 50% to less than 30% of the expenditures) and,as a result, the net excess transferred to the ESI fund went up

276 Financing and Delivery of Health Care Services in India

SECTION IV Health insurance in India

The IRDA was passed in December 1999 by Parliament. The Act allows

for the entry of private sector entities in the Indian insurance sector,

including health insurance, and envisages the creation of a regulatory

authority. The IRDA is supposed to protect the interests of the policy-

holders, promote efficiency in the conduct of insurance, regulate the

rates and terms and conditions of the policies offered by insurers and

direct the maintenance of solvency margins.

The IRDA provides sufficient protection for capital and solvency margins.

There is an entry requirement of a minimum capital of Rs 100 crore. Then

there is a minimum lower bound of Rs 50 crore for the solvency margin

along with a requirement of 20% of net premiums or 30% of the average

of net incurred claims in the 3 preceding years. The IRDA has wide powers

for accounting and auditing insurers. The Insurance Act does not allow

the insurers to undertake additional business that is not directly linked

to insurance. It discusses the liquidation of a company but does not talk

of a Guarantee fund.

The IRDA specifies a code of conduct for the insurance agents and also

allows for a Tariff Advisory Committee to oversee premium rates,

insurance plans and to prevent discrimination. However, there is no

specific clause for the consumer, who has to use the CPA of 1986 to

redress any complaints. The IRDA does not have much to say about the

relationship between the insurer and the provider.

Though the Tariff Advisory Committee can make recommendations the

IRDA also does not have much to say about rating the premium. The

IRDA does not also specify the benefit packages. It however allows for

the entry of re-insurers in the market. Its main two functions are

maintaining market standards, and overseeing solvency and financial

regulations.

Conclusion: The legislation concerning health insurance in India is fairly

comprehensive even in comparison to a model set of regulations when

focusing on auditing, financial controls, investment guidelines and

licensing regulations. There is much less regulatory focus on the

consumer of insurance products and the overall goals of health policy

in the form of regulation that curbs risk selection, protects consumers,

promotes HMOs, etc. It also cannot involve in the relationship between

insurers and providers (which comes under the MRTP Act) or the

expansion of ESIS (which is the ESIS Act).

In India health insurance is not given much importance. The IRDA itself

contains no reference whatsoever to the health sector or to health

insurance. Nor is health mentioned in the nearly 175 pages of the

Insurance Act of 1938. This broadly reflects the policy environment in

India, where health insurance continues to be neglected. Even in GOI’s

report on Insurance reforms (1994), there was precisely one reference

to health insurance.

Source: Mahal A. Assessing private health insurance in India: Potential impacts and regulatory

issues. Economic and Political Weekly 2002:559–71.

The Insurance Regulatory and Development

Act (IRDA) 1999

Box 1

from 14% to 30%. Significantly, the cost of administering thescheme has been steadily increasing as a proportion of expen-diture on the revenue account.

Central Government Health Scheme (CGHS)

Established in 1954, the CGHS covers employees and retireesof the Central Government, and certain autonomous, semi-autonomous and semi-government organizations. It also cov-ers Members of Parliament, governors, accredited journalistsand members of the general public in some specified areas.The families of the employees are also covered under thescheme. Total beneficiaries stand at 43 lakh (10.4 lakh cardholders, 2003) across 24 cities with membership in Delhi beingthe highest. Benefits under the scheme include medical careat all levels and home visits/care as well as free medicinesand diagnostic services. These services are provided throughpublic facilities (including CGHS-exclusive allopathic, ayurvedic,homeopathic and unani dispensaries) with some specializedtreatment (with reimbursement ceilings) being permissibleat private facilities. Of the total expenditure, about a third isspent on wages and salaries of the CGHS staff (Table 2) andFigure 1.

Table 2 highlights three important points: (i) that 18% ofthe health department’s budget is spent on less than 0.5% ofthe population; (ii) that most of the expenditure is met by theCentral Government as only 12% is the share of contributions.

If the scheme continues in its present form, and contributionsstagnate at Rs 50 crore, the proportion of contribution will fallfurther to 5% of the total over the next five years, given the ris-ing expenditures This calls for steps to ensure that contribu-tions keep pace with expenditure, and perhaps even reducethe subsidy element; and (iii) The period 2001–04 also wit-nessed a sharp increase in inpatient expenditures. Coinciding


Health insurance in India SECTION IV

Table 1

Key features of the Employees' State Insurance Scheme (ESIS) and Central Government

Health Scheme (CGHS)

Mandatory social insurance schemes

Indicators ESIS CGHS

Types of beneficiaries Factory sector employees (and dependants) with income Employees (and dependants) of Central Government-current

less than Rs 7500 per month and retired, some autonomous and semi-government

organizations, Members of Parliament judges, freedom

fighters, journalists

Coverage About 353 lakh beneficiaries in 1998 About lakh beneficiaries in 1996

Types of benefits Medical and other health-related provided through Medical care through public facilities and restricted

ESIS facilities and partnerships private care

Premiums (financing of scheme) 4.75% of employees' wages by employers; 1.75% of Varies from Rs 15 to Rs 150 per month based on salaries

their wages by employees; 12.5% of the total expenses of the employeesMainly financed by the Central

by the State Governments Government funds

Provider payments Mainly salaries for physicians in dispensaries and referral Salaries for doctors. Treatment in private hospitals is

hospitals. Hospitals have global budget financed by reimbursed on case basis, subject to actual expenditure

ESIC through State Governments. and prescribed ceilings

Administrative costs About 21% of the revenue expenditure. For paying Direct administrative costs including travel expenditure,

wages for corporation employees, and administering office expenses, RRT 5% of the total expenditure. Part of

cash benefits, revenue recovery and implementation salaries can also be charged to administrative costs.

in new area.

Status of finances Contributions: more than 80% of the ESIS income- Contributions about 15% of the CGHS income-half of the

double the expenditure on benefits. salary expenditures.

Employees' State Insurance Scheme (ESIS)

Fig 1

CGHS expenditure 1999-2004

Source: Ministry of Health and Family Welfare, GOI

with the sharp increase in the membership among retired per-sons, this indicates the trend towards adverse selection (Fig.2).

Expenditures that cover outpatient treatment, includingmedicines for all serving and retired CGHS beneficiaries andinpatient/diagnostic services availed by retired beneficiaries,has thus grown between 12% and 25% per year over the pastfour years. A gross estimate suggests that another Rs 200 crorewould have been incurred on inpatient treatment by servingemployees. The maximum increase is seen to have occurredon professional services, i.e. reimbursement to pensioners anddirect payments to hospitals and diagnostic centres.

The CGHS is a high-cost enterprise with an inequitable spreadof service delivery and no control systems for checking mar-ket failures such as moral hazard. As can be seen from Table3, while each dispensary currently caters to an average of 3610cardholders, varying between a low of 1073 cards per dis-pensary in Bhubaneshwar to a high of 6662 cards in Pune,the average OPD attendance during 2003–04 was 14.3 OPD

visits per card per year, varying between 5.6visits in Bhopal to 28.4 visits in Bhubanesh-war. The approximate unit cost per visit comesto a high of Rs 222 in 2002–03. Similarlyinequitous is the payment structure for inpa-tient care too.

To assess the health-seeking behaviourand the trends towards utilization of healthfacilities after the CGHS opened up to over200 private hospitals for providing care atpre-negotiated rates to their members, theNCMH took up a study of the CGHS pay-ments pertaining to the reimbursements topensioners, hospitals and diagnostic centres.A sample of 1000 claims were examined fromthe total bills paid by the Pay and AccountsOffice of CGHS, Delhi, during 1999, 2003

and 2004. For 2003 and 2004, all the payments made topensioners in the randomly chosen successive months of Juneand July were taken up for the study. Results of the claimsshowed an increasing number of cases using private sectorfacilities, which has budgetary implications for the Govern-ment, particularly in view of the absence of any regulationsregarding prices and the large number of pensioners joiningthe scheme (Table 4).

The 1999 sample (July to December) comprising of 104 reim-bursement bills showed treatment being taken in governmentinstitutions in 58 of the cases. The ratio of the amount spenton government and private hospitals in 1999 was 1:1.25, or4:5. These ratios changed in 2003–04 more adversely to gov-ernment hospitals—1:12 in the 2003 sample and 1:8.5 in2004. Thus, over the 5-year period from 1999 to 2004, therewas a sharp rise in the total number of bills, the total expendi-ture on professional services and payments made to privateproviders as a proportion of all payments, with governmentproviders claiming just one-tenth of the total payment forprovision of professional services in the 2004 sample.

Private Health Insurance

Since the liberalization of the insurance industry in 2000India has been promoting private players to enter the healthinsurance sector. With the enactment of the IRDA, the indus-try now has a regulatory framework to protect the interests ofpolicy holders. This was followed by another landmark deci-sion in 2001 establishing Third Party Administrators (TPAs) tofacilitate speedier expansion by providing an administra-tive–intermediary structure to the insurance industry. Thereare, at present, 12 general insurance companies and 25 TPAs.The total number of insurance holders is reported to be 112lakh with almost 90% enrolled with the four public sectorinsurance companies. These four companies collected a pre-mium of Rs 1128.64 crore under Mediclaim. Of the 102 lakhenrolled by these four companies (excluding GIC, EmploymentGuarantee Corporation, AICL), which are permitted to markethealth insurance products, Mediclaim alone accounts for 97lakh persons, the rest being enrolled under other insurance



Fig 2

The increasing per person expenditure on

outpatient and inpatient (2001-04)

Source: Ministry of Health and Family Welfare, GOI

Table 2

Total expenditure on CGHS (Rs in crore)

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

Establishment 117.1125 123.8712 125.3384 133.1083 139.4496

Supplies and materials 106.176 131.2345 165.3858 185.1242 222.9404

Professional services 47.8071 51.2002 65.7699 81.9203 140.7256

TOTAL CGHS 271.0956 306.3059 356.4941 400.1528 503.1156

TOTAL Department of Health 2132.46 2291.84 2577.04 2625.37 2800.64

% Share of CGHS 12.7 13.4 13.8 15.2 18.0

Total contributions 54.27 52.54 50.65 70.9 60.58

% of expenditure 20.2 17.15 14.21 17.71 12.04

Source: Demand for Grants, MOHFW

schemes such as Jan Arogya, etc. During 2003–2004, the claimratio was about 96.34%. The industry, however, believes thatthe overall claim ratio is expected to go up from around 130%to 300%–350% in the next three years (Table 5).

The question that arises is whether pro-moting the private commercial insurance sec-tor will help India achieve its health objec-tives of equity, efficiency and quality? Whatare its implications? Should India considerother options, or is this a case of one sizefitting all? International experience and eco-nomic theory on private insurance marketshowever show evidence of widening inequity,excessive utilization, adverse selection,increase in inappropriate care, risk selectionincreasing overall cost of care and in a highlycompetitive, voluntary market, high admin-istrative costs, unviable risk pools, under-cutting and unrealistic pricing leading tomarket instability and bankruptcies. Privatecommercial-led health insurance systemsresulting in, etc.—factors that contribute toinflation in costs. Yet of the 39(2001) coun-tries having private insurance contributing

to 5% of the total health expenditure, 46% were low- and mid-dle-income countries where private insurance is perceived asan important source of health financing (Sikhri 2005), con-tributing to about 5%–20% of the country’s total health spend-



No. of cards OPD attendance No. per dispensary Cards per dispensary OPD per dispensary

Ahmedabad 6672 118764 5 1334 23752

Allahabad 17794 279625 7 2542 39946

Bangalore 61409 592042 10 6140 59204

Bhopal 2627 14656 1 2627 14656

Bhubaneshwar 2147 60927 2 1073 30463

Chandigarh 7762 103346 1 7762 103346

Chennai 48156 486342 14 3439 34738

Dehradun 1

Delhi 456468 87 5246

Guwahati 9243 106484 3 3081 35494

Hyderabad 90262 949448 14 6447 67817

Jabalpur 19534 227542 3 6511 75847

Jaipur 24504 380177 5 4900 76035

Kanpur 27439 529268 9 3048 58807

Kolkata 56426 17 3319

Lucknow 20068 6 3344

Meerut 13626 6 2271

Mumbai 91379 724995 28 3263 25892

Nagpur 21274 508847 10 2127 50884

Patna 13407 5 2681

Pune 46631 390151 7 6661 55735

Ranchi 2789 70999 2 1394 35499

Shillong 1771 12004 1 1771 12004

Thiruvananathapuram 6155 98160 3 2051 32720

Total 1047543 5653777 247 83041 832847

Average 3610 46269

OPD: outpatient department Note: Blank cells indicate data not available and have been excluded in the calculations Source: MOHFW, GOI

Table 3

City-wise utilization (of allopathy) during 2003-04

Table 4

Health-seeking behaviour and trends towards utilization of

health facilities

Government Private Private/ Private as

institutions institutions Government a % of the

(in Rs) (in Rs) ratio total

1999- Individual claims 733236 (58) 914897 (46) 1.25 55.5%

2003- Individual claims 658083 (79) 2018361 (114)

2003- Hospital claims 1156281 (33) 16427031 (1425)

2003-Diagnostic provider claims 0 2900829 (1287)

2003 Total Paid 1814364 21346221 11.77 92.2%

2004- Individual claims 3281255 (305) 7277243 (332)

2004- Hospital claims 1299264 (39) 29227474 (2072)

2004-Diagnostic provider claims 0 2579414

2004 Total Paid 4580519 39084131 8.53 89.5%

Period selected for the study was June-July for 2003 and 2004, and July-December for 1999; Figures in parenthesis are number of cases

Source: NCMH analysis, 2004

ing. Private insurance in these countries arosein response to increased expectations of afflu-ent classes, covering the healthiest and thewealthiest resulting in limited social gain.Therefore, no country relies on private insur-ance to resolve the problems of financialrisk protection for the poor and the ill. Andregulation is required to minimize some ofthe adverse impacts.

The case of Chile

The USA and Chile are the two best exam-ples of private health insurance. Chile, a mid-dle-income country, consisting of 1.58 crorepeople, spends US$ 697 per capita (7.2%of the GDP) but has health outcomes thatalmost equal those of the USA. Table 6givesa comparative statement of key indicatorsof India, Chile, China and the USA

Chile developed its health system in threephases: the first till the 1980s was focusedon reducing the burden of infectious andcommunicable diseases; the second duringthe 1980s when the National Health Fundwas established to administer the SHI scheme(Fonasa) through a network of 194 hospi-tals run by the National Health Services Sys-tem; and the third during the 1990s whenhealth insurance was opened up to the pri-vate sector (Isapres). As of date, 67% of thepopulation is enrolled with Fonasa, while20% are covered under 40,000 private planswith 18 licensed, private Isapres. Insuranceis mandatory and all have to pay 7% of theirwages for health insurance. Both schemesare regulated by the Superintendence ofIsapres, under the Ministry of Health (Gov-ernment of Chile).

Under the Fonasa, care is provided throughits own public hospital network and forenhanced contributions, accredited networkof private hospitals based on a fixed pricereimbursement for specific ambulatory andinpatient medical services. Seventy-five percent of the Fonasa budget is released toprimary health centres that are obliged toprovide a predefined package of health serv-ices. Isapres, on the other hand, offers a myr-iad and individually customized, risk-ratedpremium plans based on the age, health andeconomic status. They function on a fee-for-service basis. The Isapres have the free-dom to fix the premium, indicate the con-tent and coverage levels, degree of co-pay-ment and set the limits for reimbursements.Regulation is only on contractual compli-



Table 5

Premium and claim figures-Mediclaim (1999 to 2003-04)

1) National Insurance Co. Ltd

(Rs in lakh)

2) New India Assurance Co. Ltd

(Rs in lakh)

3) Oriental Insurance Co. Ltd

(Rs in lakh)

4) United India Insurance Co. Ltd

(Rs in lakh)

GIPSA Companies

(Rs in lakh)

Year No. of Number Premium No. of No. of Incurred Incurred

policies covered received claims claims claim claim ratio

issued reported settled amount (%)

1999-2000 572308 748508 5210 48653 44760 3630 69.67

2000--01 610571 803742 5668 84392 77643 6045 117.13

2001-02 897480 2497801 17614 213313 189595 14572 82.70

2002-03 436273 2025610 22533 148963 140274 22037 104.17

2003--04 505260 3122536 29802 198573 186110 30471 102.24



issued (Rs) reported settled amount (%)

1999-2000 489150 2163876 16165 108247 90573 15629.37 96.68

2000-01 609255 2951010 23915 275774 305406 20349.96 85.09

2001-02 822534 2794510 26996 165368 116819 18853.00 69.84`

2002-03 937012 3086763 35443 201108 196300 31053.00 87.61

2003-04 949648 2856675 36641 167898 161959 30068.12 82.06




1999-00 269288 1077151 7450 12220 11556 6570 87.13

2000-01 376878 1507512 10553 16386 15420 8870 84.06

2001-02 502512 2010047 15075 63166 53617 14188 94.11

2002-03 537061 2148247 20408 74620 64251 15754 77.19

2003-04 555858 2223436 22953 83050 71907 22407 97.62




1999-2000 322845 904594 9124 60120 54077 7620 83.52

2000-01 105331 361600 11761 32452 27759 8850 75.25

2001-02 140441 482133 14518 30130 25626 15819 108.96

2002-03 245000 772000 21569 40000 37889 22317 103.46

2003-04 305000 845000 23528 50500 42585 25018 101.92



issued reported settled amount (%)

1999-2000 1653600 3924693 38040 229240 200968 33448 88

2000-01 1702035 5623864 51897 409004 426228 44114 85

2001-02 2362967 7575427 94400 471977 385657 64800 69

2002-03 2155348 7885465 102600 464691 438714 91160 90

2003-04 2315768 9047647 112900 500021 462561 106400 94

Source: Department of Insurance, Ministry of Finance, GOI

ance but not on the content of the policies. To safeguard thestability of the insurance pool, Isapres are known to followrigorous procedures of screening out high risks, provide lowcoverage for high-cost illnesses and expensive procedures,discriminate against or even terminate subscribers with high-cost chronic diseases by increasing the premium or contractconditions, forcing the subscriber to opt out. Typically, there-fore, the Isapres enrollees have a mean income that is fourtimes more than those enrolled in Fonasa; 70% of the ben-eficiaries are in the age group of 15–64 years with 2.5% above65 years compared to 62% and 10%, respectively in Fonasa.Such tiered rating is inevitable so as to keep the premiumlow enough to retain the young healthy subscribers.

As in India, Chile has the problem of inappropriate skill mixin public hospitals, not in keeping with the changed epi-demiology; the centralized budgeting system giving little dis-cretion, salaried system of provider payments with no incen-tives to improve efficiencies, resulting in 50% bed occu-pancy in peripheral hospitals and overcrowded city hospitals.

Second, with private sector allowed to provide the same setof services, there is duplication of infrastructure and result-ant wastage in the system as a whole. However, since the qual-ity of care is similar in public hospitals, despite a law, 12% ofIsapres beneficiaries were found to have availed free care inpublic hospitals. In other words, the system induces the sub-scriber to avail ambulatory care in Isapres and move to Fonasawhen sick. Besides, due to the short-term character of thecontracts and ability to offload patients when ill, the Isapreshave no incentive of providing preventive care. This dual sys-tem has thus resulted in segmenting the population on thebasis of income and risk. With the freedom to fix premiums,the risk-rating system has resulted in a systematic discrimi-nation against fertile women, chronically ill and the elderlythrough the three stratagems of higher premiums, reducedbenefits and refusal to enrol or renew contracts. The lack ofuniformity or transparency of insurance plans makes it eas-ier to resort to such tactics. The effect of such a system isseen in the disproportionate share of high-risk persons beingdischarged onto the public hospitals: HIV/AIDS (82%), cervixcancer (90%), kidney failure (83%) and leukaemia (80%).The system encompasses all the incentives for increased costof care: fee for service as a basis of provider payment. Withmandatory insurance, the competition is on quality, based

on sophisticated technology, which may notalways be cost-effective and also puts pres-sure on the public system to keep pace. Thus,competition is on offering high-technologyclinical procedures to low-risk individuals.

Third, the need for spending substantialamounts on screening out high-risk patients.Such risk-rated premiums also affect the oldor those who fall sick as their option to changethe insurers is only Fonasa, as no other Isapreswill accept a high-risk enrollee. The admin-istrative costs of Isapres are 14% and esca-lation of average fee per visit is 80%, higherthan that of Fonasa, which are 1.2% and

50%, respectively. The cost of the whole system is high asdespite mandatory payment of 7% of the wage, the out-of-pocket expenditures account for another 35% of the totalhealth spending. Finally, in the event of insolvency or merg-ers between one Isapres and another, the interests of theenrollee are not protected.

In 2002, Chile launched a major health reform process. Thekey features consist of mobilizing additional resources byearmarking 1% of the value-added tax (VAT) for health; accred-itation of facilities and providers in the public and privatesector; standardized benefit packages for delivery by Fonasaand Isapres guaranteeing access, opportunity, quality andfinancial protection; ensuring stability of enrollee interests incase of insolvency of a private insurer; and regulations forpreventing risk discrimination and dumping of high-riskenrollees. Of importance is the Standard Benefit Package: accessis guaranteed by entitling enrollees to receive care listed inthe package at the appropriate level and within reasonable dis-tance; opportunity implies defining a maximum wait periodfor each service, with the option to get the service from anyplace of choice to be reimbursed by the plan; quality is ensuredby service provisioning by accredited members; and financialprotection ensures that none are denied care for want of abil-ity to pay and a ceiling of co-payment to be 20% or not exceed-ing a patient’s 2 months’ wage. For implementing these reforms,organizational and financial restructuring have also beendesigned with laws protecting enrollee interests and provid-ing for a solidarity compensation fund to compensate privateinsurers for the enrolment of high-risk persons.

Current status of private health insurance in India

India has lessons to learn from the experience of Chile. Indiatoo has a dual system of care—a private fee-for-service basedsector where the money is paid out-of-pocket by individualhouseholds and a tax-based public sector where the providersare salaried. Utilization of insurance under both these systemsis partly restricted and rationed by the affordability of theindividual household and availability of the budget.

On the other hand, insurance as a means of financing is afar more sophisticated mechanism, requiring a comprehen-sive understanding of the failures that characterize health insur-ance markets. For example, a problem such as asymmetry in



Table 6

Key indicators of India, Chile, China and the USA

Indicator India Chile USA China

Population in crore 103.34 1.54 28.8 128.52

Health expenditure per capita (in US$ 96 642 5274 261

Public expenditure. on health* as % of GDP/2000 0.9 3.1 5.8 1.9

IMR per 1000 live-births 2001 68 10 2 31

Life expectancy at birth 62 77 77 71

Maternal mortality ratio per 100,000 lakh births* 540 23 8 55

Source: World Health Report, 2005, WHO, * MDG-UNDP, 2002

information puts the patient and the insurer at a disadvan-tage due to their inability to resist or challenge medical opin-ion regarding an existing condition or future treatment. Besides,in the absence of knowledge of prices, the provider can short-change the two by overcharging. Second, cashless insurancecreates disincentives to control costs as it appears to be a‘free’ good for the patient and the provider, often resulting inexcessive treatment by the provider (induced demand) and friv-olous use by the patient taking treatment even for a condi-tion which he would normally have ignored or cured with ahome remedy (moral hazard). Third, it is only the patientswho know their health status. Since it is normally those in needof health care who tend to subscribe to health insurance, thisputs the risk on insurance agencies to resort to extensiveprocesses of risk selection, such as medical examination, beforebeing given admittance as an enrollee and focusing on low-risk groups, such as the young or healthy. Risk selection in indi-vidual-based policies however results in increasing the load-ing fee and consequently the cost of premium. This is onereason for the attractive group discounts being as high as 67%.For these reasons, private commercial health insurance is knownto select its customers—the young, healthy, rich, males—leav-ing the bad risks to the government—old, poor, young womenin the reproductive age group, and the ill.

Health insurance in India is usually associated with the‘Mediclaim’ policy of the GIC, which was introduced in 1986as a voluntary health insurance scheme offered by the pub-lic sector. The premium based on the age, risk and the bene-fit package opted for, ranged from a minimum premium ofRs 201 for those <25 years of age, to a maximum benefit ofRs 15,000 with discounts for group memberships. In 2001,there were 78 lakh persons covered under Mediclaim (Gupta2003). The subscribers are usually from the middle and upperclass, especially since there is a tax benefit in subscribing toMediclaim. The standard Mediclaim policy covers only hos-pital care and domiciliary hospitalization benefits. Most med-ical conditions are reimbursed though there are importantexclusions, such as pre-existing diseases, pregnancy and childbirth, HIV/AIDS, etc. Hospitals with more than 15 beds andregistered with a local authority can be identified as providers.

The insurance company (or the TPA, where applicable) admin-isters the scheme. Being an indemnity scheme, the patient paysthe hospital bills and submits the necessary documents to thecompany. The company in turn reimburses the patient. A studyof 621 GIC claims for the year 1998–99 by Bhat and Reuben(2001) showed that the average time between submission ofdocuments and reimbursement is 121 days. This study alsoshowed that one-third of the claims were due to adverseselection; 38% pertained to doctor’s fees and 25% chargesfor diagnostic services. The provider-induced claims thusaccounted for 63%. Yet another interesting insight was that22% of the total claims were for the treatment of communi-cable diseases, while 64% were for non-communicable dis-eases. There is also uncertainty about the amount reimbursed,there are times when the patient is reimbursed only partially,the usual reason being the insufficiency of documentation.The policy is not renewed automatically and is dependent on

the timely payment of premium. Ellis et al. observed that theGIC was more interested in whether the claim pertained to anexisting disease or whether the facility was qualified or not,but spent little time on detecting fraud. With claims exceed-ing 30% a year, more than the household spending, it reflectsthe problem of moral hazard which requires close monitor-ing. Second, it was also observed that the GIC sets premiumon the filing of claims and not actual amounts settled, givingit a cushion year on year as settled claims amounts are alwayslower than those filed, an amount that remains unadjusted.

During 1994, 4.4% of the insured persons made a claim, ofwhich only 75% of claims were settled. The claims ratio was45%. However, of late, the claims ratio is growing at a fastrate, allegedly because of collusion between the patients,insurance agents and hospitals.

From the above discussion, five features that characterizethe health insurance system in India emerge:1. By and large, the system offers traditional indemnity,

under which the insured first pay the amount and thenseek reimbursement. Under indemnity, all known dis-eases or health conditions are excluded and thereforesuch policies typically have a large number of exclusions.This also means that those most in need of insurance,i.e. the sick, get excluded for any financial risk protec-tion against the diseases they are suffering from.

2. It is a fee-for-service-based payment system. Such asystem of payment is advantageous for the provider sincehe bears no risk for the prices he can charge for servicesrendered by him. Combined with the asymmetry in infor-mation, such a system usually entails increased costs.

3. Policies provide a ceiling of the assured sum. Such a sys-tem, and that too within a fee-for-service payment sys-tem, results in shortchanging the insured as he gets lessvalue for money, as the provider and the insurer have noobligations to provide quality care and/or over provide/overcharge services so long as the amounts are within theassured amount of the insurance policy.

4. The system is based on risk-rated premiums. This againputs the risk on the insured as the premium is fixed inaccordance with the health status and age. Under sucha system, women in the reproductive age group, the old,the poor and the ill get to pay higher amounts and arediscriminated against.

5. The system is voluntary, making it difficult to form viablerisk pools for keeping premiums low.

Reasons for poor penetration of health insurance

Penetration of health insurance has been slow and halting,despite the ‘huge market’ estimated to range between Rs7.5–20 crores. Some reasons that explain for the slow expan-sion of health insurance in the country are as follows:

1. Lack of regulations and control on provider behaviour

The unregulated environment and a near total absence of anyform of control over providers regarding quality, cost or



data-sharing, makes it difficult for proper underwriting andactuarial premium setting. This puts the entire risk on theinsurer as there could be the problems of moral hazard andinduced demand. Most insurance companies are thereforewary about selling health insurance as they do not have thedata, the expertise and the power to regulate the providers.Weak monitoring systems for checking fraud or manipula-tion by clients and providers, add to the problem.

2. Unaffordable premiums and high claim ratios

Increased use of services and high claim ratios only result inhigher premiums. The insurance agencies in the face of poorinformation also tend to overestimate the risk and fix highpremiums. Besides, the administrative costs are also high—over 30%, i.e. 15% commission to agent; 5.5% administra-tive fee to TPA; own administrative cost 20%, etc. Patientsalso experience problems in getting their reimbursementsincluding long delays to partial reimbursements.

3. Reluctance of the health insurance companies topromote their products and lack of innovation

Apart from high claim ratios, the non-exclusivity of healthinsurance as a product is another reason. In India, an insur-ance company cannot sell non-life as well as life insuranceproducts. Since insurance against fire or natural disaster ortheft is far more profitable, insurance companies tend to com-pete by adding low incentive such as premium health insur-ance products to important clients, cross-subsidizing theresultant losses. With a view to get the non-life accounts,insurance companies tend to provide health insurance coverat unviable premiums. Thus, there is total lack of any effortto promote health insurance through campaigns regardingthe benefits of health insurance and lack of innovation tomake the policies suitable to the needs of the people.

4. Too many exclusions and administrative procedures

Apart from delays in settlement of claims, non-transparentprocedures make it difficult for the insured to know about theirentitlements, because of which the insurer is able to, on onestratagem or the other, reduce the claim amount, thus demo-tivating the insured and deepening mistrust. The benefit pack-age also needs to be modified to suit the needs of the insured.Exclusions go against the logic of covering health risks, though,there can be a system where the existing conditions can beexcluded for a time period—one or two years but not forever.Besides, the system entail equity implications.

5. Inadequate supply of services

There is an acute shortage of supply of services in rural areas.Not only is there non-availability of hospitals for simple sur-geries, but several parts of the country have barely one or twohospitals with specialist services. Many centres have no cardi-ologists or orthopaedicians for several non-communicable dis-

eases that are expensive to treat and can be catastrophic. If wetake the number of beds as a proxy for availability of institu-tional care, the variance is high with Kerala having 26 beds per1000 population compared with 2.5 in Madhya Pradesh.

6. Co-variate risks

High prevalence levels of risks that could affect a majority ofthe people at the same time could make the enterprise unvi-able as there would be no gains in forming large pools. Theresult could be higher premiums. In India this is an importantfactor due to the large load of communicable diseases. A studyof claims (Bhat 2002) found that 22% of total claims werefor communicable diseases.

Third party administrators

With the entry of TPAs under the IRDA Regulations Act, 2001,the insurance industry is taking a new turn towards ‘Man-aged Care’. The TPAs are required to be registered under theCompanies Act, 1956, and licensed by the IRDA, and be con-tracted by one or several insurance companies ‘for the provi-sion of health services’. The original role of a TPA was to pro-vide the back-office administrative set-up to insurance com-panies—issuing ID cards to subscribers, processing claims, mak-ing payments, etc. Taking advantage of the lack of clarity onthe specific role and responsibilities of TPAs, some among themare rapidly developing capacity to establish provider networksto service the needs of the insured, collecting and analysingdata, fixing and negotiating rates for procedures with providers,contracting providers, processing claims and making directpayment to them and arbitrating any dispute between the sub-scriber and the provider. This system, often referred to as ‘cash-less payment’, has resulted in relieving the patients of thepsychological stress of having to mobilize resources at shortnotice. By scrutinizing provider claims, TPAs also help insafeguarding the interests of the insuring company of anyfraudulent claims by the providers. For all these services, theinsurance companies pay 5.5% of the total amount of pre-mium collected under the policy. In addition, TPAs were alsoto be given a bonus from insurance companies for reducedclaim ratios or for promoting the companies with the insur-ers. This then would have given them the financial incentivesto develop systems for provider control: contracting throughpredetermined rates for procedures and treatment, utilizationsreviews, prior authorization for expensive surgeries, etc. andalso ensuring that the patients do not resort to frivolous useof the services. However, with the administrative fee beinglow and the idea of bonus not operationalized, there is reallyno incentive for the TPAs to reduce the claim ratios. Secondly,barring a few, for most TPAs health insurance itself is a sec-ondary concern to their main activity of brokerage.

The system of TPAs has facilitated cashless payments andexpanded access to providers but is yet to show evidence ofhaving been able to control cost or provide appropriate care.As the system of TPAs unfolds there are apprehensions: (i)whether patients will get adequate treatment and appropri-



ate care; (ii) whether quality of treatment will be compro-mised with the gradual loss of control and autonomy of thephysician on the kind of treatment to be given to his/her patient;(iii) whether costs will go up due to the substantial adminis-trative responsibilities placed on the providers for record main-tenance, filling claim and billing forms—in USA, where healthinsurance is organized on a TPA system, doctors spend almost30% of their time on processing their claims and the admin-istrative costs of the system are 25%–30% as compared to3% in Canada.; (iv) will there be possibilities of collusion betweenthe TPA and some providers in the network, resulting in pro-cessing their higher claims even if not justified, affecting theinterests of the insurance agency; (v) with TPAs getting organ-ized over time, whether they may acquire monopoly controlover the processes and dictate higher administrative fees, sincein the current system the TPA bears no risk; and finally (vi) thelegal uncertainty of the future in view of the framework regard-ing the functioning of TPAs being ambiguous and unclear. Forexample, the IRDA does not supervise or regulate the finan-cial activities of TPAs, the contractual relationships with providersor relationships with the corporate or union health plans. Inthe light of such limited regulatory oversight, some alreadycombine subscription plans being serviced by a provider net-work without involving any insurance company such as forexample, the Karnataka Police insurance with Apollo-spon-sored TPA which provides hospital services in a network ofsome 35 hospitals. In the absence of any statutory control orobligations imposed by the IRDA, such as networking onlyaccredited providers, or those adhering to certain quality bench-marks, or submitting reports on the qualifications of the providerand performance reports, etc., there is a major lacuna, mak-ing it difficult to ensure appropriate accountability in the sys-tem. Overall international literature1 does show that the TPAsystem is expensive (personal communication with Professorao, Harvard School of Public Health); even when their role isconfined to payment of benefits and management of claims,the administrative costs run up to 20%–30%. If they are assignedthe role of identifying providers then the amount can go evenhigher to 45%, making insurance products very unafford-able. Besides, such literature also seems to suggest that theTPAs neither have any motivation to undertake the steward-ship function to protect consumer interest nor enroll newpersons. In this context NGOs could be better agents.

Given the complexities of these markets, the key lesson forIndia is to closely study behavioural responses that such financ-ing systems generate among all the major players and instituteappropriate regulatory systems to minimize likely distortions.

Universal Health Insurance Scheme (UHIS)

For providing financial risk protection to the poor, the Gov-ernment announced a UHIS in 2003. Under this scheme, fora premium of Rs 365 per year per person, Rs 548 for a fam-ily of five and Rs 730 for a family of seven, health care for anassured sum of Rs 30,000 was provided. BPL families weregiven a premium subsidy of Rs 200 per annum. The schemewas redesigned in May 2004 with higher subsidy and restrict-

ing eligibility to BPL families only. The subsidy was increasedto Rs 200, Rs 300 and Rs 400 to individuals, families of fiveand seven, respectively. To make the scheme more saleable,the insurance companies provided for a floater clause thatmade any member of the family eligible as against the MediclaimPolicy which is for an individual member. Yet in the last twoyears of its implementation the coverage has been around10,000 BPL families in the first year and 34,000 in the sec-ond year till 31 January 2005.

The reasons for failing to attract the rural poor are many. First,the public sector companies who were required to implementthis scheme find it to be potentially loss-making and do notinvest in propagating it, resulting in very low levels of aware-ness, reflected in the low enrollment and very poor claimratios. To meet the targets, it is learnt that several field officerspay up the premium under fictitious names. Second, a majorproblem has been the identification of the eligible families.Identification became cumbersome as the family needed tohave some form of certification, which is difficult to obtainfrom revenue authorities. Besides, the poor also find it difficultto pay the entire premium money at one time for a future ben-efit, foregoing current consumption needs. Third, the proce-dures are cumbersome and difficult for the poor—the pre-mium has to be paid in a lump sum; the paperwork requiredfor enrolment as well as getting claim amounts is very time-consuming. Fourth, in most places there is a deficit in the sup-ply or availability of service providers, particularly becausegovernment hospitals are not eligible. For example, in Uttaran-chal, only 17 hospitals could be accredited under this scheme,which could have gone up to 37 if government hospitals wereallowed to be included and also expanded access and choiceto the enrollees. Besides, in several areas there are just no doc-tors available. Fifth, there was a set-back due to health insur-ance companies refusing to renew the previous year’s policies.Finally, the TPAs are also not willing to implement this schemeat 5.5% of premium amount as their administrative costs ofcovering rural populations in dispersed villages makes it unvi-able.

During 2004, the Government also provided an insuranceproduct under which for a premium of Rs 120 the sum assuredwas Rs 10,000. This was, to be available only for self-helpgroups (SHG). However, the intake is reportedly negligible. Thereasons for this poor intake are similar to those cited above.

With the Common Minimum Programme (CMP) commit-ted to having a UHIS, there has been much effort and debateto evolve a suitable and sustainable design. To expand thehealth insurance business, recommendations are also beingmade to reduce the minimum pre-qualification of Rs 100 croreequity as it will require 15 years to break even. Another set ofrecommendations is for permitting TPAs and hospitals tointroduce health insurance products. There are, however,doubts regarding this model as it may promote conflict ofinterest. In combining various aspects of provisioning andinsuring there could be perverse interests to provide low qual-ity of care over-diagnose or under-treat—for making profits.



Community-Based Health Insurance

Community financing (CF) as a method of raising finance atthe community level was initiated by UNICEF under its BamakoInitiative for Africa in 1987. The initiative had the followingobjectives: (i) to revitalize public health systems; (ii) to decen-tralize decision-making; (iii) to mobilize resources to coverlocal operating costs; (iv) to encourage community partici-pation through management of services and locally gener-ated funds; and (v) to define the minimum package of essen-tial health services. (UNICEF 1987). Though the experimentfailed in Africa, its concepts are once again gaining recogni-tion as an appropriate strategy for low-income countries whichhave a weak resource base, poorly developed markets and avast population having very low threshold of payment capac-ity (WHO 2002).

In community financing, the community is in control ofthe principal functions of collection and utilization, the mem-bership of the scheme is voluntary and there is willingness toprepay the contributions (Hsiao 2001). The scheme is basedon the hypothesis that with greater social capital there willbe more willingness to pay and participate. The communityhas been defined as a group of households living in close prox-imity or belonging to social, religious or economic organiza-tion. The efficacy of the scheme is based on two implicitprinciples: one, that the community has adequate homo-geneity or social coherence that gets easily translated into acapacity to mobilize resources; and two, that the willingnessto prepay will be influenced by self-interest when each indi-vidual perceives his marginal benefit exceeding his costs, i.e.accessing something of value which can be obtained easilyand more in quality through prepayment. Literature reviewsof such community-based schemes tend to suggest thatthey have enabled an increase in the availability of resources;inclusion of the poorest groups on account of governmentsubsidy; enhanced access to health services; and reducedimpoverishment on grounds of illness (Jakab 2001).

While the CBHI movement is vibrant in Africa, it is slowlypicking up momentum in India. Currently, there are about22 voluntary CBHI programmes in India, initiated and admin-istered by NGOs. Of these about 10 are active (Table 7). Inmany schemes, the community is also involved in various activ-ities such as creating awareness, collecting premiums, pro-cessing claims and reimbursements, and the management ofthe scheme (deciding the benefit package, the premiums, etc).

Devadasan, in his paper identified broadly three types ofcommunity health insurance (CHI) schemes and also analyzedtheir structure and basic features as discussed below: (Devadasanet al. 2004; Fig. 3):� Type I—The provider of health care plays the dual role of

providing care and running the insurance programme (e.gACCORD, VHS)

� Type II—where a voluntary organization/NGO is the insurer,while purchasing care from independent providers (e.g. Trib-huvandas Foundation, DHAN Foundation)

� Type III—(intermediary design)—The NGO plays the role ofthe agent purchasing care from providers and insurance

companies (TPA, e.g. SEWA, Karuna Trust, BAIF).The membership of these CHIs scheme varies from 1000 to

more than 20 lakh. Most of the schemes operate in ruralareas and cover people from the informal sector. Enrolmentis usually facilitated by membership of the organizations,e.g. micro finance groups, cooperatives, trade unions, etc. Theannual premium ranges from Rs 20 to Rs 120 per individual.The unit of enrolment is an individual and the membershipis voluntary in most of the schemes.

All the schemes offer hospitalization; this ranges from theclassical Mediclaim product to a very comprehensive coverincluding all conditions and no exclusions. Many NGOs havebeen successful in negotiating an appropriate insurance pack-age for their members. Most providers are either NGOs or pri-vate for-profit organization. The utilization rates range from6 to more than 240 per 1000 persons insured. The latterobviously indicates extreme adverse selection.

The main strengths of the CBHIs schemes are that theyhave been able to reach out to the weaker sections and pro-vide some form of health security; increase access to healthcare; protect the households from catastrophic health expen-ditures and consequent impoverishment or indebtedness.However, sustainability is an issue as these initiatives aredependent on government subsidy or donor assistance. Theyprovide limited protection in view of the very little cross-subsidy between the rich and the poor, resulting in the smallsize of the revenue pool which also constricts getting a bet-ter bargain from the providers. A disturbing factor in theseprogrammes, (barring one or two) is the very low claim ratio,ranging from 0.25 to 0.66, which indicates that the schemeis not able to overcome the barriers that are hindering accessor the cover provided is too inadequate or the members tooignorant about their entitlements. It is also seen that the poor-est of the poor get excluded on account of their inability topay their share within the specified time limit. Some NGOsmanage the scheme by themselves, which may be ‘illegal’within the current IRDA regulations. Also, some of the schemescover very small numbers and so the potential for scaling-upis restricted. Moreover, many of the schemes see health insur-ance as an end in itself and do not seek to either promotepreventive and promotive health care or extend adequateprovider linkages.

There is no exhaustive evaluation of the CBHI schemes inIndia due to the lack of uniformity in MIS. Many questionsremain unanswered and need to be researched to see if thesemodels can be implemented and replicated in India. For exam-ple, it is not clear how much it costs to administer such schemes,or its impact on strategic purchasing of services, developingprovider networks or on the local quack, or the problems forupscaling and finally if the scheme has helped protect thepoor from penury and if so, how it can be sustained if NGOswithdraw their support, etc.

Of all the schemes in operation, the one that has drawnwidespread attention in India is the Yeshaswani, an insur-ance scheme for farmers, designed and implemented by theGovernment of Karnataka since 2002. Under this scheme,the Cooperative Department enrolled, through a govern-



ment fiat, over 17 lakh farmers within one year and createda corpus of over Rs 15 crore. In the second year, an additional5 lakh members have been enrolled against the target of 1crore. The scheme provides financial risk protection against1600 surgeries offered in 90 accredited hospitals at prefixedrates. Outpatient treatment is free and any diagnostic serv-ice resulting in surgery carries a discount of 50%. To keepthe premium low at Rs 90, now revised to Rs 120, a Trustchaired by Secretary of the Department of Cooperatives, hasbeen constituted with the premium forming the corpus fundfrom which the claims are settled. A commercial TPA has beencontracted by the Trust at 5.5% of premium collected to

provide ID cards to the members, process the claims andmake payments to the service providers. A doctor appointedby the TPA gives prior authorization for expensive surgeriesand also scrutinizes correctness of the claims. Within one yearof establishment of this scheme, over 27,000 persons wereprovided outpatient treatment and 4000 surgeries performed.However, sustainability is an issue. The scheme is now facingmonetary problems and has a long wait list for surgeries andclaims to be paid despite the reimbursement being guaran-teed by the Government of Karnataka. Focusing solely on sur-gical aspects of health can have only a limited appeal and ablind replication of this scheme can give wrong incentives



Name and location Population covered Premium collected Benefit package

of the scheme (target population in 2003) (per cent target

population covered in 2003)

ACCORDGudalur, Tribals living in Gudalur taluk and who are Rs 25 per person Hospitalization cover up to Rs 1500 per person

Nilgiris, Tamil Nadu members of the AMS union (n =13,000) per year (36%) per year

BAIFUrali Kanchan, Women members (between 18 and 58 Rs 105 per person Hospitalization cover up to Rs 5000 per person

Pune, Maharashtra years) of the micro savings scheme in per year (58%) per year

22 villages (n =1500).

BUCCSBuldhana, Members of the Buldhana Urban NA Hospitalization cover up to Rs 5000 per person

Maharashtra Cooperative and Credit society per year

(n = 175,000).

DHAN Foundation Women members of the micro finance Rs 100 per person Hospitalization cover up to Rs 10,000

Kadamalai taluk, Theni scheme and living in Mayiladumparai per year (40%) per person per year

District, Tamil Nadu block (n =19049)

Karuna TrustT Narsipur BPL families in T Narsipur Block (n = Rs 30 per person per year. Hospitalization cover up to Rs 2500 per person

Block, Mysore District, 278,156) Fully subsidized for the per year. Includes ambulance services and

Karnataka SC/ST population (31%) loss of wages

MGIMS HospitalWardha, The small farmers and landless labourers Rs 48 per family of four Hospitalization cover up to Rs 1,500 per

Maharashtra living in the 40 villages around Kasturba (in cash or kind) (90%) person per year

Hospital (n= 30,000)

Raigarh Ambikapur Poor people living in the catchment area Rs 20 per person (58%) Primary and secondary health care

Health Association (RAHA) of the 92 rural health centres and hostel

Raigarh, Chhattisgarh students. (n = 92,000 individuals).

SEWAAhmedabad, SEWA Union women members (urban and Rs 22.50 per person or Hospitalization cover up to Rs 2000 per person

Gujarat rural), and their husbands living in 11 Rs 45 for a couple (10%)

Districts of Gujarat (n = 1,067,348)

SHADEKolencherry, Members of the SHGs operating in The Universal Health Hospitalization cover for family up to a maximum

Kerala Ernakulam district (n = 9000) Insurance Scheme (Rs 548 limit of Rs 30,000 per family per year

for a family of 5) (20%)

Student's Health Full-time student in West Bengal State, Rs 4 per student per Primary and secondary health care

HomeKolkata, from Class 5 to University level. year (23%)

West Bengal (n =56 lakh students)

Voluntary Health Services Total population of the catchment area Rs 250 per family Hospital cover

Chennai, Tamil Nadu of 14 mini-health centres (n= 104,247) of five (12%)

YeshasviniBangalore, Members of the District Farmer's Rs 120 per person (25%) Cover for all surgeries up to Rs 100,000

Karnataka cooperative societies and their

families (n = 80 lakh)

Source: Devadasan et al. 2004

Table 7

Some community health insurance schemes in India

for investing in surgery and neglecting other medical needs.However, the scheme has been innovative in demonstratingthe benefits of utilizing government resources for the admin-istration of insurance schemes, in bringing down the admin-istrative overheads and facilitating lower premiums.

The Yeshaswani model as well as experimentation abroad,seem to clearly point towards the fact that while CBHI is anaffordable model of financial risk protection in low-risk set-tings, it needs institutional support and formal mechanismsfor carrying out the critical functions of health insurance—collection of premium, settlement of claims, laying downclear rules of entitlements and oversight. Only when suchsystems are designed and put in place can the CBHI modelsbe upscaled to reach risk pools that are financially viableand provide sustainability.

China’s model of Community-Based HealthInsurance

In China, a model is under implementation on a pilot basistheir combins certain design features to address the rottenhealth system in the rural areas. The model, based on a part-nership between the government and the community, usesthe village-based barefoot doctor as the key provider and

gatekeeper for referrals. (This portion on China is fromProfessor Hsaio of Harvard School of Public Health, USA ina personal communication with the author). The schemedetails are as under:

Three underpinning concepts

(a) People by themselves, especially those living in rural areasand the poor, are unlikely to be able to raise enoughmoney for such schemes to be fully self-financing, neces-sitating public subsidy;

(b) Even if financing could somehow be organized, there isthe issue of how services are to be delivered, since exist-ing services are neither efficient nor effective in termsof quality;

(c) Issues related to governance and management: how isone to organize and manage such schemes and whowill perform the stewardship (or oversight) functions?These include overseeing the financial functioning andhealth of such schemes, the functioning of medical careproviders, contracting (if any) with providers.



Fig 3

Types of community health insurance schemes in India

NGO

(ACCORD, JRHIS, SHH, VHS)

NGO

(SEWA, BAIF, Navsarjan and

Karuna)

Insurance Company

Premium

Premium Premium

Reimbursement

(KKVS)

Reimbursement

(SEWA, BAIF)

Reimbursement

(RAHA)

Health careHealth care

Reimbursement

(Karuna Trust,

Navsarjan Trust)

Health

care Group

Premium

Reimbursement

Community

NGO

(KKVS, RAHA)

Community Community

Providers

Providers

Source: Devadasan. 2004

Outline of the scheme

Premium

The premium is Rs 100 per person plus the government sub-sidy (Fig. 4). The contributions of each enrolled member areroughly equal, except for the very poor, from whom no pre-mium is charged. There is an upper limit of benefits. Enrol-ment is on an annual basis—the first month of each year forrenewals or new enrolments—and after that no enrolmentsare allowed to prevent adverse selection.

Jurisdiction of the scheme

Typically, each scheme covers several villages. The experiencehas been that 93% of the people covered under the schemesupport it, but only 60% actually join it. Even this is sufficientto ensure a deep enough pool of members—6000 and above.

Benefit package

Free consultation visits to the village doctor as he is salariedunder the scheme, but there is payment for the drugs prescribed.Fifty per cent of the amount of payment is reimbursed by the

scheme upon examination of the prescription. Roughly 230drugs can be prescribed—including both modern and tradi-tional medicines—based on some type of essential drugs list.In addition, in case of referral to the subdistrict facility (Tehsillevel), the patient is reimbursed 50% of the expenditures incurred;20%–30% of all expenses for hospitalization at higher levels.

Referral

The patient can go to a higher order facility only if he gets areferral from the village doctor, who in turn has to take notesand justify why he is referring (Fig 5).

Government subsidy

A sum of Rs 110 per person is provided to those communitieswilling to set-up community financing organizations with aminimum number of members (about 70%). This acts as anincentive as well as subsidy.

Provisioning

Typically in China, every village has one or a maximum oftwo village doctors. The villagers decide which doctor is to



Fig 4

China’s health insurance system

Regular budget

Public

health and

prevention

Reimbursement

for services and

for village

doctors' salaries

and bonus after

THC find their

work meet

quality standards

Government

subsidy

Premium

Co-insurance

Co-insurance

Salary and

bonus

payments to

village doctors

County and

Town Government

Fund Management

Office

Enrollees

County hospital

Township health

center

Village Health Post

Source: Hsiao, HSPH, USA

be involved with the scheme. This village doctor is employedon a salaried contract that lasts for only one year at a time.The village doctor gets paid in two parts: (i) a salary as per con-tract, and (ii) a performance-linked bonus. The salary is justenough to cover subsistence to ensure that he is interestedin the bonus. The bonus depends on three factors: (i) thedemand for the service of the doctor as reflected in the num-ber of visits by the villagers; (ii) careful keeping of medicalrecords (patient details, age, sex, number of visits, diagnosis,prescription); and (ii) regularity in attending continuing med-ical education and passing medical exams.

Training

The ‘barefoot village doctor’ (who is like the RMP/quack inIndia) is provided training. Those practising for over 5 yearsare exempted from training in the first year of the scheme,but in subsequent years they have to take continuing edu-cation courses or pass exams to remain a part of the scheme.For all others, a three-year course is necessary for qualifica-tion to work in the scheme, followed by annual examinations,and short continuing education courses on an annual basis.The training (and continuing education) of village-based doc-tors is focused on promoting the ability to treat the eight most

common health conditions, and on recognizing when to referpatients to higher-level facilities.

Medicines

The village doctor purchases the medicines from subdistrictlevel storage facilities operated by some agency, which he isallowed to sell at no more than 20% mark-up of the cost price.The price lists are prominently announced and displayed onnotice boards.

Administration

A manager and a clerk handle the day-to-day operation ofeach scheme. The manager reports on the functioning of thescheme to a management committee; the clerk keeps pre-mium receipts and payment records.

The ‘Management committee’ is organized at several lev-els. First, each village under the scheme has a managementcommittee of 5—typically composed of retired teachers, retiredlocal officials, etc. Their functions are: (i) overseeing the func-tioning of the local doctor’s clinic—making sure there are nocomplaints, no price gouging, etc.; (ii) maintaining a sug-gestion box where complaints can be placed; and (iii) organ-



Fig 5

Model for provision of health care services in China

Village Health PostPatients

Patients who

decided to

bypass referral

(they get less

reimbursement)

Emergency

service

Referral

Referral

Normal

County Hospital

Township Health

center


izing enrolment under the scheme.From each village-level ‘management committee’ one per-

son is nominated to represent them at the ‘Board of Direc-tors’ at the subdistrict level (the level at which the scheme isorganized). Because of the large number of likely membersof the Board, it meets only four times a year. However, a ‘stand-ing committee’ of 7 that works on behalf of this Board,meets more frequently and oversees the manager and the clerkalong with other functions. The standing committee maychange from year to year. No payments are made to the stand-ing committee and management committee members. Thestanding committee, based on simple contracts, employs thevillage doctors, etc. (Fig 6).

Oversight and stewardship by government

In technical matters for which the committees at the villageand subdistrict levels are not equipped, the government pro-vides the support:

(a) Auditing of accounts;(b) Checking drug quality through laboratory testing and

random checks.A broader approach to analyse/assess CBHI schemes is needed

through examination of two policy issues: (i) coordination ofCBHI and government risk pools, and (ii) equity implicationsof CBHI schemes and the role of government subsidies in suchschemes. There is a strong need for empirical work to explorehow CBHI schemes and the broader health care financing sys-tem interact. Even if individual schemes achieve their objec-tives (in terms of equity, efficiency, etc.), it does not neces-sarily imply that such objectives will be achieved at the sys-tem level.

What are the lessons for India?

The lessons that emerge from the China Model and discus-sions in the earlier paragraphs are that given the huge size,diversity and levels of development in India, it is important



Fig 6

Regulation, monitoring and supervision of community-based health care system in China

Elect 5 members

Elect 1

members

Report

Report

Supervise

Financial

report

File

claim

records

Pay,

supervise

and train

Monitor

clinical

work

Supervise

and train

Regulate

and

monitor

Monitor

Audit and

Subsidize

Regulate and

Monitor

Supervise and

County hospital

Village Health Post

Enrolled peasants Board of Directors

Town People's

Congress

Board of Directors

Executive

Committee

Fund

Management Office

County People's

Congress

Party Secretary

Township Health

Centre

County and

Town Government


to adopt a four legged strategy for affording real risk pro-tection to the poor: (i) Bring down covariate risk in the com-munity and address the containment of infectious and child-hood diseases by intensifying public health programmes; (ii)strengthen government facilities to enable them to provideequally good quality care to the poor – this is the cheapestand most affordable option for government in the short runas a well functioning public health system has great poten-tial to protect the poor from risk; (iii) experiment with dif-ferent models of financing to spread risk and reduce theburden on the government. Such models will imply design-ing the features and implementing them on a pilot basisbefore coming up with a final policy framework; and (iv) inplaces/states where there are networks of self help groupsand evidence of solidarity experiment the China Model as itwould: (a) strengthen participation and that of local bodiesand Panchayat Raj institutions; (b) incorporate the RMPinto the system; (c) drastically reduce costs; (d) enable pro-viding healthcare within the village itself.

Such designing needs to be based on, first, being clear asto what the objectives of public policy are—is it deepeninginsurance markets, or extending financial risk protectionagainst illness, or increasing FDI to India? Second, the sizeof the risk pool and lowered risk factors are critical for lowpremiums that could be affordable for the majority of peo-ple. Thirdly if the system is to be based largely on a fee forservice system of payment, with zero cost at the point ofservice, then it will entail putting in place a set of prerequi-sites, such as standardized treatment protocols and unit costs;regulations to control the provider, disease classification usingICD-10 and/or grouping of diseases under Diagnostic RelatedGroup for payment system, pricing controls, putting sub-lim-its to expenses rather than having a cap of assured sum tocontain charges, making it mandatory for data returns, stan-dardization of claim forms etc. Besides, in any insurance sys-tem it is equally necessary to have regulations for quality andcost; mechanisms for accreditation and certification, issueof unique ID cards for members, different premium structures,controlling prices etc.

Implementation of the Package - RestructuringInstitutional Mechanisms and ReorganizingRelationships

Most importantly, for the actual implementation of UHIS, acritical institutional player needs to be inducted on the demandside commanding considerable market power to negotiatethe best possible care at the most affordable prices for thepatients. The concept is based on the assumption that orga-nizational structures are normally shaped to suit the objec-tives of financing systems. If expenditure control is theoverriding objective then there is usually a tendency towardscentralization of all spending decisions—costing, sanction-ing, releasing, accounting, mandating referrals through gate-keepers, etc. But in a prepaid insurance system the key actoris the consumer on whose willingness to contribute reststhe whole system. Since individual patients cannot be expected

to bargain prices on account of their vulnerability and thesuperior strength of the provider who has more informationon their needs, Enthoven’s idea of a sponsor, as an instru-ment to strengthen demand side to tilt the market to theadvantage of the consumer has force (Enthoven 1983, 1993).It implies that the purchasing function needs to be central-ized into one entity large enough to make a difference tothe practice and earnings of the providers. The concept alsodraws from the power of a single payer being able to nego-tiate better terms as in Canada than in a multipayer envi-ronment as in US. This concept is then the theoretical basisfor proposing a Social Health Insurance Corporation as thesponsor and reinsurer for independent health insurance com-panies. One option for the establishment of such a SHIC inIndian conditions is a) by the merger of the ESIS (medicalside) with the CGHS; and b) by steadily moving towards amandatory health insurance paradigm. For this the startingpoint could be mandating all public servants working in thegovernment or government owned entities to compulsorilypool their contributions to the SHIC. Combined with a broad-ened ESIS membership, this alone will increase the corpusamount over four to five times to the existing Rs. 1100 croreof premium collected for Health Insurance. This corpus canfurther be widened when the premium subsidy for the pooris also pooled in here. Such a mechanism will provide therequired volume and velocity required to trigger establish-ment of health insurance companies, professional providernetworks, mutual fund cooperatives like weavers and fish-ermen cooperative societies, a federation of CBHI schemes,HMO’s by hospitals having more than 500 beds and abilityto establishment own provider network etc. All these enti-ties subject to meeting solvency rules etc could be the vehi-cles to access the poor in the rural hinterland—like the com-mercial banks reach out through the grameen bank networks.For their operations the SHIC can act as the reinsurer. Sec-ondly, in the future years, as this system settles down, theSHIC can also establish an equalization fund as in Chile. InChile the equalization fund is made up of a proportion ofthe premiums collected by all the insurance companies beingpooled into the fund. Subsequently, this fund reimburses thecompanies in accordance with the risk profile of the insured.This then acts as a positive incentive to adhere to the guide-lines of not denying insurance to any one on grounds of riskand having exclusions of any kind. The success of this modelwill however depend upon our ability to bring in a high cal-iber of professional management to the SHIC and other financ-ing entities – having capacity to collect premiums, issueID’s, process claims, reimburse in a timely fashion, accreditand develop provider networks, negotiate rates etc.

Secondly, the SHIC will have to be a financing instrumentand not a provider. This then means that own hospitals anddispensaries by the ESIS, CGHS and PSUs will need to beconverted into Trust hospitals available for their members atdedicated times and for general public at other times. Theadvantage of this measure will be two: a) that the SHIC willbe able to accrue more for the corpus as the administrativecosts now pass onto the hospitals units which become self



financing, mobilizing its money from insurance policies/user fees; and b) the general public as well as the employeesand members of ESIS, CGHS and PSUs all get a wider accessand choice of hospitals. At present the CGHS dispensaries havean average of 14 OP patients per day and the ESIS hospitalshave an average occupancy rate of 50%, with some havingeven as low as 10%. Likewise, in several remote areas wherepublic infrastructure is weak the PSUs have excellent medicalfacilities with capacity to serve the local populations. Thusover 2000 facilities under ESIS, CGHS and PSUs can be openedup to the general public with an incremental amount ofadditional budget. This would also increase access and fea-sibility of insurance reaching the poor.

Economy of scale that comes from a large risk pool is animportant consideration for covering hospitalization. By lay-ing down a minimum level of say 75-80% population cov-erage at the village panchayat level, or a risk pool of 10-15,000 members as the eligibility criteria for receiving gov-ernment subsidies, it could be ensured to have a more rep-resentative membership – the healthy and the better pay-ing sections along with sick and poor. And in order to achievethe willingness to pay and optimal participation, substan-tial subsidies targeted to the poor, a need based standard-ized benefit package and linkage to provider networksneed to be incorporated as the three core elements of thedesign.

The flip side of the SHIC model is that it may entail highadministrative costs due to the several layers of intermedia-tion. The SHIC will also need to be run on professional lineswith highly skilled and trained persons, which will again increasecosts. The issue then is whether such a structure will be suit-able and affordable and other alternatives to reduce admin-istrative costs need to be examined. In the absence of anyexperience it is incumbent to try out on pilot basis some ofthe financing systems.

To monitor and regulate this huge initiative, there will alsobe an urgent need to have an independent health regulatorand a body of laws that address various issues related to healthinsurance markets and the serious distortions that the cur-rent trends are creating and will be difficult to remove later.In the absence of such a roadmap for reform and clarity ofvision, the goal of having a Universal Health Insurance willnot be realized. This goal was first articulated in 1954 by thethen Prime Minister Jawaharlal Nehru. It is indeed a tragedythat even after five decades such an important goal contin-ues to be an aspiration.

Conclusion

The present system of financing and payment systems raiseseveral important concerns on the suitability of the structureto meet current day problems and future challenges. The

large size of out of pocket expenditures provides an opportu-nity to pool these resources and facilitate spreading risk fromhouseholds to government and employers on a shared basiswhich will be a more equitable financial arrangement. Thedimension of equity is of particular concern as the inelastici-ties of demand for acute care, are resulting in over 33 lakhpersons being pushed below poverty line, every year. In shortthe social benefits of instituting social insurance as a finan-cial instrument to replace user fees, outweighs the possiblerisks of moral hazard and increased costs, typical outcomes ofprepaid insurance. How to minimize these two market fail-ures are of concern and need to be addressed by developinga well thought out strategy taking international evidenceinto account so we build on existing knowledge and learn fromothers’ experiences. It is argued that it is not advisable forgovernments to intervene in health insurance markets in apiecemeal manner—insurance for pensioners by the Depart-ment of Personnel; for weavers by the Department of Tex-tiles, for fishermen by the Department of Agriculture, for farm-ers by the Department of Cooperatives, poor women by theDepartment of Rural Development etc., as such attempts frag-ment risk pools. In other words, resorting to insurance as afinancing instrument must be an act of a deliberate strategythat addresses the market failures in order to ensure thatinequities do not widen and the poor are not marginalized—two typical outcomes of private, fragmented insurance sys-tems.

In conclusion it is reiterated that given the fiscal con-straints for government to provide universal access to freehealth care, insurance can be an important means of mobi-lizing resources, providing risk protection and achievingimproved health outcomes. The critical need is to experi-ment with the wide range of financing instruments availablein different scenarios and have adequate flexibility in thedesign features, the structures and processes, institutionalmechanisms and regulatory frameworks, so that a viable bal-ance can be achieved for minimizing market distortions sothat the outcomes do not make the cure worse than the dis-ease (Enthoven 1983, 1993). Unregulated markets are inef-ficient and inequitable, requiring governments to interveneto ensure no segmentation in the system (Bloom, 2001). Forthis, the burden of building partnerships and managing changeis on the government, which in turn needs to base its strat-egy on sound research.

Acknowledgements

I gratefully acknowledge the assistance of Dr Somil Nagpalfor the analysis of the CGHS and Dr Alaka Singha, WHO, Geneva.I am most indebted to Dr. William Hsiao, Harvard School ofPublic Health, USA for so generously sharing his experiencesof China.





Industry Rural Urban All areas

High Middle Low High Middle Low High Middle Low Total

1. Organized Sector 0.14 1.80 0.87 2.81

1.a. Government 0.14 1.09 0.72 1.94

1.b.1 Agriculture 0.00 0.03 0.05 0.09

1.b.2 Manufacturing, etc. 0.03 0.34 0.17 0.54

1.b.3. Services, etc. 0.04 0.18 0.07 0.25

2. Unorganized Sector 2.23 10.15 12.68 0.90 3.06 4.62 3.12 13.21 17.30 33.62

2.1. Regular salaried 0.40 0.87 0.43 0.40 1.68 1.35 0.80 2.55 1.78 5.13

2.1.a. Agriculture 0.04 0.11 0.19 0.01 0.01 0.01 0.05 0.12 0.20 0.37

2.1.b. Manufacturing, etc. 0.11 0.18 0.11 0.15 0.51 0.40 0.26 0.69 0.51 1.46

2.1.c. Services, etc. 0.28 0.47 0.21 0.37 1.14 0.82 0.65 1.61 1.03 3.30

2.2. Self-employed 1.19 6.56 6.23 0.19 1.31 2.12 1.38 7.87 8.35 17.60

2.2.a. Agriculture 0.96 5.18 4.85 0.03 0.08 0.29 0.99 5.26 5.14 11.39


2.2.c. Services, etc. 0.22 0.80 0.67 0.16 0.94 1.14 0.39 1.74 1.81 3.94

2.3. Casual employed 0.38 3.05 5.95 0.06 0.31 1.16 0.44 3.35 7.10 10.90

2.3.a. Agriculture 0.34 2.11 4.94 0.00 0.06 0.21 0.34 2.17 5.15 7.66


2.3.c. Services, etc. 0.01 0.20 0.30 0.00 0.12 0.35 0.01 0.32 0.65 0.98

(1+2) Total Workforce 2.23 10.15 12.68 0.90 3.06 4.62 3.27 15.01 18.16 36.44

Note: The number of workforce has been measured by the current daily status (CDS). Figures are reconciled using Table 51 of the NSS Report No. 458 and tables extracted from unit-level record data of the 55th Round along

with a table from Economic Survey (2003-04). Data on break-up of urban-rural organized employment are not available. High, middle and low denote the household monthly per capita expenditure class.

Source: Unit Level Records of Employment and Unemployment Survey, 55th Round, National Sample Survey (NSS), 1999-2000

Annexure 1

Number of workforce by employment category, income status and industry classification (1999-2000)


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