Why India’s health insurance models frustrate and exclude a large part of the population.

Three quarters of India’s population has no health insurance. Union Health Minister Jagat Prakash Nadda said in May 2016 that only about 24 per cent of the population has some form of medical insurance. That includes private and public sector insurance, and the Central scheme for weaker sections, the Rashtriya Swasthya Bima Yojana.

In 2015, there were 20 Central and State-sponsored insurance schemes in operation and the Insurance Regulatory and Development Authority of India estimates that 28.8 crore individuals were insured as of 2014-15.

India primarily relies on commercial health insurance now.

Rather than pool financial resources across social groupings for risk protection, and move towards tax-funded health care, government policy has created fragments with low insurance. Can the base of these pools be widened and merged to mitigate classic insurance failures?

Even as a copy of the U.S. model, commercial health insurance in India is seriously deficient. It almost entirely covers only catastrophic expenditure, such as the cost of highly restricted hospital treatments, which are offered without cost and quality regulation and external audits. Outpatient treatment and prescription medicines are not covered.

Commercial health insurance has traditionally experienced two problems. First, adverse selection: Only those who currently need care are more likely to insure themselves, rather than everyone. This reduces the risk pool size. The insurer responds by screening beneficiaries to reduce exposure and protect returns, defeating the insurance objective. Second, moral hazard: patients and care providers like hospitals build up claims without cost concerns. If there is any attempt to regulate providers, they respond with cost-cutting measures that harm patients.

As economist Kenneth Arrow pointed in 1963, demand for medical care is irregular and unpredictable, unlike the steady demand for food or clothing. This makes healthcare unlike other goods in the market, and commercial arrangements are not the best.

Data from the 71st round of the National Sample Survey, 2014, point to a steady increase in the cost of health care. The compounded annual growth rate of the cost of hospitalised care in a private institution calculated on the base year of 2004-05 was 3.6 per cent at 2004 prices (and higher at current prices), and for outpatient care, 1.8 per cent, according to a recent article in the Lancet medical journal.

The WHO estimates out-of-pocket spending as a percentage of total health spending to be 62.42 per cent in India in 2014.

Even in the Central Government Health Scheme, in 2010, 42 per cent of beneficiaries incurred out-of-pocket expenses which added up to 30 per cent of their total annual health expenditure.

This is part four of a six-part series, Malady Nation, on India's multi-dimensional healthcare crisis. This part examines why India's health insurance models frustrate and exclude a large part of the population.