Friday, October 7, 2011

The case for health insurance and government's role

What should be the role of government and the private sector in India's secondary and tertiary health care system, especially in taking care of those who cannot afford private health care?

Traditionalists see no or limited role for private sector and advocate that government hospitals should meet the requirements. Extreme liberals on the other hand advocate a dominant role for private sector. However, reality demands a much more nuanced appreciation of the health care market and the incentives and challenges facing its participants. This post will attempt to put these issues in some perspective. I will also attempt to outline a model health insurance market, applicable to legacy-free countries like India.

1. Fundamentally, government institutions, even if they expand exponentially, are in no position cover even a majority of those in need of such services. On all primary parameters - doctor to population, beds to population, diagnostic facilities to population, and so on - we lag way behind the requirements. This deficiency will persist well into the future.

It is therefore inevitable that if the government is committed to ensuring atleast access to secondary and tertiary care facilities to its under-privileged population, not only does the public facilities have to grow fast but also be complemented with rapidly expanding private healthcare facilities.

2. However any role for private hospitals raises important questions about the details of this involvement. Crucially, how should private hospitals be involved in the treatment of such cases for those below the poverty line? This question is important because of three reasons.

One, unlike other markets, that for selling and buying health care is rife with market failures (information asymmetry problems like moral hazard, adverse selection, over-treatment), behavioural biases (healthier/younger people prefer to stay uninsured, people prefer more diagnostic tests and invasive procedures) etc. Two, as I had blogged earlier, health care will be among the few markets where productivity imporvements will remain marginal even as technology continuously expands the treatment frontiers. Three, there will be a huge and persistent supply-demand mismatch in developing coutnries which will ensure that health care remains a sellers market for a long time to come.

The first and second factors, along with demographics, have been responsible for the rising health care costs and resultant health care mess in many developed countries. The third factor will only exacerbate the already inherent distortions of health care markets and will be an important factor in countries like India.

In view of all these, the nature of private sector's involvement in the provision of affordable health care becomes important. Experience from across the world shows that health insurance is the most effective strategy to manage these risks optimally and deliver affordable secondary and tertiary healthcare to citizens.

3. Assuming government's commitment to deliver affordable secondary and tertiary health care to all its citizens and the inevitable need for health insurance, the question then is one of ensuring how we can get care that delivers bang for the buck. In other words, how do we achieve the desired health care outcomes at the lowest cost.

This would obviously require leveraging both the government and private health care facilities. The most critical factor would be the design of the insurance model. How do we structure incentives such that the doctors and hospitals confine treatment to only the necessary diagnostic tests and procedures/medications, patients do not demand more than what is required, government hospitals and private hospitals complement each other, and the insurer's administration charges are kept at a minimum?

Here is a simple model of how this insurance can be structured. The real-world model could be some variant or other of this.

Bring all citizens of the country/state into a single risk pool. All those below the poverty line and all government employees, including their families, should be part of this risk pool. In an ideal world, it would be appropriate to include all citizens and usher in a mandatory health insurance model. Further, all the schemes offered in this market should be community rated - same insurance premiums for everyone in the same age group or no differentiation based on pre-existing medical conditions.

Finalize a basic bouquet of treatments that are covered in a universal and basic insurance package and is available to all citizens at a competitively arrived premium. There can be a single or preferably multiple insurers prioviding these schemes. Then there should be a variety of top-ups available on this basic package. Government departments can offer a menu of top-ups to their employees depending on their different levels. Similarly, private employers and individuals too can purchase insurance from this market.

The government could subsidize the premiums at varying levels depending on people's incomes. For example, the poorest could have their entire premiums subsidized. Similarly, for employees, a share of their salaries could be leveraged to complement the government's share of the premium. Employees would have the option to privately top-up on their government package.

The administration of the insurance model itself could be made more transparent and protocols based, so as to minimize excesses and distortions. The entire pre-authorization process can be done transparently and rigorously audited, so as to ensure that insurers/TPAs and service providers do not over- or under-treat patients. To a great extent, as competition increases, the presence of professional insurance agencies and TPAs should contribute towards minimizing these distortions.

A protocols-based referral system can be put in place so that atleast certain categories of those covered in the government financed health insurance model are treated only in government hospitals if facilities are available. The government could, to the extent of the packages fully or partially financed by it, control the empanelment process and negotiate bulk rates with drugs manufacturers and service providers, so as encourage the insurers to quote lower premiums. The presence of a large and vibrant set of government hopspitals will provided the much needed competition to keep private service providers honest.

An additional reason for large network of government health care facilities to exist is because for much of the foreseeable future government hospitals will be necessary to service the vast interiors of the country. Private sector will find such locations commercially unviable. Insurers could deliver their services by leveraging these public facilities in remote areas.

These schemes could be sold in newly established customer-friendly insurance exchanges. Such exchanges could helps customers easily compare across similar kinds of policies, besides making clear the fine-print of these policies. The regular private insurers, who would exist and sell their respective insurance schemes, would all be eligible to bid for offering these set of insurance services. Once the insurers are designated and premiums for the basic package for both poor and different categories of government employees defined, the top-ups may be left to the markets to decide. This will ensure that in the process of rectifying market failures, governments do not end up distorting incentives wholesale and affecting market efficiency.

If required, it may even be desirable to have a risk-equalization pool, like that in Germany and a few other European countries, which would help mitigate the actuarial risks for insurers. This will contribute towards keeping premiums down and reduce the incentive for insurers to turn away patients because of their claim ratios over-shooting. All the actual claims processed each year by all insurers can be consolidated, risk incidence measured, and some pay-outs made so as to normalize risk incidence among all insurers.

Countries like the US, which already have a legacy insurance model, will invariably find it difficult to embrace many elements of this model. But countries like India, which do not have any existing insurance model, will find it easier to embrace elements that are appropriate to its requirements. Furthermore, the favorable age profile of our population too should go a long way towards keeping premiums down if the entire population is covered.

No comments: