Unhealthy sector……….P Raghavan
The withdrawal of cashless hospitalisation facilities by the four major public sector health insurance companies in Delhi and other metros subsequently restored on a case-by-case basis is a landmark event, one that will impact the long-term viability of the private health insurance industry in India. A major reason for the dispute has been growing abuse of the cashless treatment facility after the entry of third party administrators or TPAs, which led to large losses for the public sector insurance companies.
Numbers also show that though the entry of the TPAs at the start of the decade has helped accelerate growth in the industry, there have been sharp fluctuations in the number of policies issued and in premiums paid, as the industry attempts to stem the growing losses in the sector. This has not only affected the industrys credibility but, indeed, threatened its very viability.
For instance: though health insurance policies have grown steadily, at an average annual rate of above 20 per cent in the five years till 2008-09, and premiums risen at a stupendous 37.7 per cent during that period, growth has been very uneven. Policies issued, for example, went down sharply by close to a tenth in 2004-05 and then by almost double that level in 2006-07. Similarly the amount of premium paid also suddenly dropped by 2.2 per cent in 2007-08 despite a simultaneous, double-digit, increase in the number of policies issued.
But more than the sharp fluctuations in volumes, the industrys greater concern has been its rapidly growing losses. Though it made some profits in the second half of the decade, with the claims-to-premium ratio dipping from 96 per cent in 2004-05 to 78 per cent in 2006-07, the gains were neutralised by the sharp increase in claims in subsequent years; in 2007-08, the claims-to-premium ratio rose to 105 per cent, and it stayed above 100 per cent in 2008-09, at 103 per cent.
The reason for the large claims being made in the health insurance market have been well-documented. Studies from across the world show that the main reason is asymmetry of information: both the patient and the insurance company are at a disadvantage vis-a-vis the health service provider, whose advice on current diagnoses and future treatments or prices cannot be challenged in the absence, at least, of a strong competitive market for health services.
And the problem worsens when it comes to cashless insurance, where there are no clear incentives to control costs, as it is looked upon as a free good by both the patients and the service providers who can exploit the fee for a service-based payment system. So while the health provider is tempted to go in for excessive treatment and maximise revenues a moral hazard that is difficult to overcome the patient is encouraged to seek treatment for frivolous issues which he would have normally ignored.
The main reason for this unhealthy trend in the industry is the lack of any regulation of health service providers about the quality or cost of services. Though the National Accreditation Board for Hospitals and Health Care Providers (generally abbreviated NABH) has made suggestions that insurance firms should only empanel hospitals that it has accredited, the proposal has not made much headway: only around 327 hospitals have applied, and a mere 44 hospitals have so far been accredited. And the end result is the bloated growth of health insurance claims. Though the number of policies sold has gone up by an average rate of around 8 per cent in the three years till 2008-09, the outgo on claims made has shot up at more than four times that pace.
But it is just not the sharp deterioration in the claims-to-premium ratio that is worrying the insurance PSUs. More disturbing for them is their widening gap with the claim ratios of private insurance companies. The numbers for 2007-08 and
2008-09 show that, not only have claims-to-premium ratios in the public sector deteriorated sharply from 112 per cent to 117 per cent, the gap with the ratio of private insurance companies has widened, with the latter improving from 95 per cent to 85 per cent.
So the public sector companies drive the health insurance business remain saddled with the losses while the private companies, which have a more stringent mechanism for checking manipulation of service providers and judging claims, remain profitable. At least a part of the bloated premium claims on the public sector health insurance companies have to be borne by the TPA. In fact a committee set up by insurance regulator IRDA to evaluate the TPA system in 2008 highlighted the significant variation in the cost of treatment for the same ailment across providers in different geographies; low incentives for fraud control; leakage and lack of controls in health claims processing; and the prevalence of non-standard billing and payment processes, as the main reasons for the growing gaps in claims-to-premium ratios between the public and private sector companies. Now it is for IRDA, which appointed the committee, to try and end the anomalies, using the services of the industry chambers that have stepped in to resolve the issue.
The writer is a senior editor at The Financial Express