The Elephant in the Insurance Controversy Room

I have been witness to many instances where hospitals overcharge as soon as they know you hold an insurance policy. A friend of mine was charged around Rs 250/- for a simple Out Patient Discharge because she happened to mention she had insurance. If she hadn’t, it could have cost more than Rs 100/- for the same. Similarly, another friend of mine was told by a hospital where her mother was having a cataract that the bills charged were high because she had insurance. They even organised all the necessary bills in order to justify the costs, including a more expensive room, an extra few hours at the hospital and so on.

Its not a new or a surprising fact that hospital overcharge insured patients and I am not wrong in saying that all of us have faced this at some point in our experience with insurance and accessing health care services. In fact, this problem is a commonly discussed one across the world where insurance companies and health care providers have locked horns in these debates on moral hazard.

So are insurance companies justified in removing cashless transactions?

It is true that by removing this facility, the person most battered by this decision is the consumer. But the consumer in India is used to being hit with everything, higher import duties, rising food inflation, unsecular politics.. But let’s leave aside the consumer for a moment and address this elephant in the room.

Why in the first place are prices so high that a cashless transaction is a key selling point for a consumer?

Even as we enter the new decade, statistics tell us that nearly 94% of private health expenditures is out of pocket. This means than for every Rs 100/- spent on health care, Rs 94 comes from an individual’s liquid cash resources. In some countries like the United Kingdom, health services are free for citizens. Even in countries like China and Brazil, out of pocket expenses for health care are lower – at around 60-70%. A disastrous consequence of rising out of pocket expenditures is the increased likelihood that families can be pushed into poverty. Statistics in India show that Indians spend around 58% of their incomes on hospital expenditures. 40% of Indians will borrow to pay for these expenditures and there around 25% of those are likely to fall into poverty because of health care expenditures. Even the upwardly mobile middle class is finding it difficult to keep pace with rising medical expenses. A cashless transaction that removes the burden of out of pocket expenses thus becomes an important selling point for most families.

The discussion that often gets swept under the carpet is that about regulation of the medical industry.

As the insurance company removed the cashless transactions there was no news on a court case against the hospital(/s) who has been involved with the charges on fraud made by the insurance company. Instead the consumer was the quickest to get punished for abetting with the hospitals. The first question that this raises is whether there is a disincentive mechanisms in place that could make the hospital liable to pay a penalty for being involved in the fraud?

The health care industry is targeted to grow in a 75 Billion USD industry by 2012 and the health insurance industry to a 5.75 billion USD company. While most articles peg these growth forecasts on an increasing health conscious Indian crowd, there is also an underlying emphasis on the failure of the public sector in delivering health services. Statistics also show that there is a rising trend for non communicable diseases within the country. Diseases like diabetes have been forecasted to grow to 11% prevalence; cancers are increasing at the rate of 7 lakh new cases a year. This is true for injuries from accidents and other kinds of health care hospitalization services that are being covered by insurance companies. This raises the second issue – if these forecasts are partly true, common economic sense tells us that as the demand for health care increases, prices of health care services will also increase.

Historically the private sector has had a free hand in the medical sector with little or no regulation on their activities. A continuum of this indifferent attitude of the government towards regulation has the potential of making the electorate more vulnerable to the rising health care costs. A classic example is that of the current health care reforms that are being pushed by the Obama government in the US in order to protect his electorate from exclusive insurance products that prevent them from accessing expensive health care.

What about regulation of the health insurance industry?

The IRDA has been set up with the primary purpose to regulate and monitor the insurance industry. Right now patients have the right to approach the IRDA in case they are denied services. However, the only law that can be used in their favour is the consumer protection laws. The problem with these laws is that unlike in other cases, is the definition of the health product. Since there is a huge amount of asymmetry of insurance associated with the health product, health insurance becomes a tricky insurance. Here, a large amount of information lies with the service providers putting the beneficiary at a disadvantage in terms of his bargaining power with the service providers. Laws for consumers in context of Health insurance, need to be clearly designed to cover for these asymmetry of information.

Medical industry claims that a lot of the limits to an operation are determined in open transparent discussion. Most of the limits are set on industry average but no one is asking why the industry average is the way it is? Who plays the crucial role in setting or monitoring this industry average? What sort of data is collected, what sort of research done in order to set the rates? If the government sets the rates, like in the case of government sponsored insurance schemes, on what basis are the decisions made? Unfortunately, at this time there is no transparency in this process and no laws and regulations on the same.

What are the implications?

As the insurance companies pull the cashless transaction red carpet from under the feet of the consumer, what thus become the impending issues of lack of regulation of the medical industry and the health insurance industry. Till the government starts to attempt into looking into these issues, the consumer will always have to bear the consequences alone.

What are the options available for the government?

In most countries with many private service providers of health, regulation is still an important backbone to health care service delivery mechanism. In countries like Canada and Singapore the government places a cap on the fees that is to be charged by the hospitals. This is done through a bargaining process between the government and the medical associations within each geographically constituted province. In countries like Netherlands, Insurance companies and the government decide on the caps to be set for the private sector based on their performance. In Germany, there is a fee schedule and a target volume of services (soft budget) for hospital providers. This is negotiated between patient associations and the sickness funds (insurance agent). The hospital providers have to comply to get a share of the Social Health Insurance of the government. And even with this high amount of regulation and involvement of various stakeholders, it is not an unknown fact that all these countries have been far better health services and consequently health indicators to show for that. Other than the customer protection law there are however no laws in India that support customers or help to create lobbies that can represent customers on negotiations on package rates for health insurance. Even in the above mentioned countries, patient lobbies are involved in the process on setting the caps on the pay outs and negotiating the structure of the benefit packages. There are laws in place and judicial enquiries on frauds.

In most countries, these health systems have developed over 100 years. India has now the advantage on learning from the mistakes of these models, taking their best practices in context of the Indian market and applying it to reform the current health system that operates. The potential for reform is huge, but are policy makers ready to address these questions? More importantly is the electorate ready to demand these changes?

Anaka Aiyar

Centre for Budget and Policy Studies

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