Observations on the Aarogyasri program

Aarogyasri is a hugely popular health insurance program initiated the Government of Andhra Pradesh. Administered by a government-run Aarogyasri Trust, it covers all the below poverty line (BPL) citizens, and provides for pretty much the entire spectrum of high-value tertiary treatments. In the language of insurance, the Aarogyasri is a single-payer (government), mandatory coverage (for all BPL families), pure community rated (same insurance rate for all those covered) insurance scheme.

Its supporters point to four features of the program as proof of its widespread appeal. One, it covers all the major medical conditions, with a generous coverage of upto Rs 2 lakh per family every year. Two, it provides un-paralleled choice to patients, giving them the freedom to choose any hospital, government or private, for their treatment. Three, it provides for completely cashless treatment in any of the empaneled hospitals. Four, the scheme incentivizes government doctors by earmarking a share of the payments recieved by their hospital for treating Aarogyasri cases to the doctors and staff.

However, it is precisely these four attractions that form the basis of concerns about its long-term sustainability.

1. The universal coverage is a red herring. In reality, the supply-side is severely constricted by the available treatment facilities. In fact, even with the spurt of private hospitals in the wake of the program, less than a quarter of patients suffering from a covered medical condition are likely to be treated under the scheme.

Herein lies one of the biggest challenge for the scheme. If the present trend continues, more private hospitals will crop up, if only to exclusively service patients covered by the scheme. This will in turn increase the available treatment facilities and thereby the actual claims processed by the insurer. It is inevitable that premiums will keep going up for years to come, merely due to the addition of new treatment facilities.

As the numbers of private hospitals increase, there will also be increased pressure to expand the pool of covered procedures. This too will drive premiums north. Adding to all this will be the universal trend of rapidly increasing medical treatment costs. Will the government budget prove deep and resilient enough to meet all these upward pressures?

2. The level of patient choice in Aarogyasri is simply unprecedented, a luxury not available to even patients in many developed economies. Given the state of government hospitals and the incentives of private and government hospitals (the former have no incentive to chase patients), patients are more or less certain to prefer the former. This would be a shame since most government secondary and tertiary care hospitals have well qualified doctors and adequate diagnostic and surgical devices, though the quality of service delivery is questionable. Questions will invariably have to be asked about whether it is possible to leverage the Aarogyasri program to improve the quality of service delivery in government hospitals.

3. Related to the previous point, the prevailing government policy on secondary and tertiary healthcare provides for no synergy between the government's own single-payer Aarogyasri health insurance program and its existing secondary and tertiary care facilities. In fact, they are each considered distinct and mutually exclusive. This is unlike the health insurance model in most western countries, where there are strict protocols for referrals, with cases being referred to private hospitals only when government hospitals are unavailable.

An application of the same model would have brought in the government hospitals as a major health service providers in the Aarogyasri scheme through a similar protocols-based sharing of cases between them and private hospitals. It would also have enabled resource-strapped Government hospitals to access payments from the Aarogyasri program. This cash flow becomes all the more important since the state government reduced its budgetary allocation to all these hospitals in lieu of the Aarogyasri allotment. In simple terms, the budgetary allocations to Aarogyasri and existing government hospitals being a near zero-sum game (net allocation being more or less the same), the private hospitals benefitted at the cost of the government hospitals.

4. Further, once the patient is admitted by the private hospital, given the pay-per-intervention payment system, their incentives are strongly aligned towards over-treatment. Since the treatment is cashless, the incentives of the patient are aligned towards accepting the "best" available treatment. Unfortunately, in the prevailing model, the incentives of the doctors are aligned towards projecting expensive invasive surgical procedures as the "best" option. For example, irrespective of the medical condition and the age profile of the patient, irradiation therapies are generally preferred (by both doctors and patients) over medication. In simple terms, the most aggressive treatments have become the standard of healthcare.

In standard insurance schemes, insurers have to keep a strict vigil on the pre-authorization process (when the tests are done and the patient is screened for a particular surgery/therapy) so as to minimize over-treatment. This is all the more so since the payments to health service providers (doctors and hospitals) are on a pay-per-procedure/intervention basis, as against the less distortionary fixed payment for treatment of a medical condition.

The Aarogyasri program too makes payments to hospitals based on a pay-per-procedure basis. In fact, the tender premiums quoted by the insurers are based on this premise. The Trust prefers this approach since it believes that its in-house pre-authorization process is rigorous enough to effectively screen patients and prevent over-treatment. In fact, effective pre-authorization is the forte of the best Third Party Administrators (TPAs) hired by the insurers. If the Aarogyasri Trust does this effectively, then it has to be counted among the most effective TPAs. In any case, as the program expands, maintaining such rigorous pre-authorization process will become difficult.

However, unless it moves away from the in-house pre-authorization process to a purer insurance model, it may not be possible to change the payment model. A medical condition based payment approach is much more complex to administer and riskier too and may not be possible with an in-house model of pre-authorization.

5. In simple terms, the incentives under the Aarogyasri scheme offered a cash reward top-up to doctors for doing much the same procedures which they were doing through their regular hospital in-patient channel. This has the potential to create a moral hazard - the doctors who internalize the incentive and do these procedures come to slowly view these incentives as entitlements.

This turn of events can damagingly distort the incentives facing doctors, especially if at some point in time the government decides to abandon Aarogyasri and decides to revert back to the old model of government institutions based health care. Further, it cannot be denied that atleast some doctors are likely to be disincentivized in taking proper care of patients not covered by Aarogyasri. Also, what about the cash incentive crowding out intrinsic motivation?

Aarogyasri incentive structuring is a powerful example of the need to exercise great caution when we introduce performance-based pay systems into government bureaucracies. Unless carefully structured, cash incentives not only distorts the current implementation, but it also generates adverse expectations which come in the way of future implementation of performance based pay. In some ways, this is similar to a situation where a doctor abruptly replaces a commonplace but effective drug with a powerful new medication against a particular virus/bacteria, only to find after some time that the second generation drug too is losing sting, leaving us with limited available options to effectively treat the microbe.

So what can be done to make the Aarogyasri program more cost-effective without radically tinkering with its existing model?

For a start, it is imperative that there be a clear protocols-based system of referrals, so that the existing government facilities are more closely integrated into the Aarogyasri scheme. The government hospitals benefit by way of accessing more funds and thereby better diagnostic and surgical facilities. It will also help the government accommodate the massive budgetary support that is inevitable in the coming years as the scheme grows.

A treatment facility wise mapping of government hospitals can help route Aarogyasri patients to those hospitals for specific medical conditions. Only those cases which cannot be treated in these hospitals (for either lack of bed space or lack of required facilities) should be referred to private hospitals. Simultaneously, there should be a vigorous campaign to improve service delivery standards in secondary and tertiary hospitals.

The incentive system for government doctors provided for under the Aarogyasri scheme has to be either dismantled or be made more nuanced. If the later is preferred, the incentives should kick-in only after a certain performance benchmark is breached.

Under the Aarogyasri scheme, the insurance premium quoted by the insurer is a function of the number of procedures/therapies covered, N, the respective price (to be paid to the hospital) fixed for each surgery/therapy (or medical condition) i, Pi, the number of empaneled hospitals (or number of available treatment beds for each surgery/therapy i), Ei, and the disease incidence risk among the population pool insured for each medical condition i, Ri.

In other words, Premium, Pr = f(N)+g(Pi)+h(Ei)+q(Ri)

Insurers seek to ensure that their expenditure due to claims and administration costs is lower than the premiums collected.

Of these, the most important parameter is the prices of procedures. Neither the insurer nor the health service providers have an incentive to control it. The health service providers are the direct beneficiaries of higher procedure rates and therefore lobby hard for maximizing procedure prices. The insurers merely pass on these higher prices on to the consumers by way of higher premiums.

The insurer seeks to minimize his claim outgo either by limiting the number of empaneled hospitals (so that the numbers of cases that can be treated is controlled) or turning away (on some pretext or other) those who claim treatment. Both these problems can be addressed. The former can be mitigated by defining the list of empaneled hospitals in the tender itself, including those which are likley to be added each year and details of when they will become operational. Since the premiums are revised each year and it takes atleast an year for establishing any hospital, such up-front disclosure is not likely to create any problems. The later can be overcome by making it mandatory to treat all the patients pre-authorized by the Aarogyasri Trust.

Both the aforementioned conditions, coupled with upfront disclosure of number of surgeries/therapies, transparent fixation of prices for each procedure, and government-run pre-authorization can substantially align the incentives of all parties. If these conditions are fulfilled, the insurer's bid would be determined purely based on his actuarial risk calculation for the insured risk pool and their administration costs. Such bids are more likely to generate efficient outcomes, since it increases the likelihood of the successful bidder also being the most efficient insurer.