Rising Out-of-Pocket medical costs can be covered. Here’s how

There are a range of tools and interventions that can complement high deductible health plans.

On a recent visit to a large private hospital in Bangalore, I was dismayed to see a prominent appeal for crowdfunding displayed in the swanky lobby. Although Out-of-Pocket Expenditure (OOPE) in India has been gradually declining, it continues to account for more than half of spending on health by people. This means that the burden of expenditure largely falls on the individual, not the Government or the insurer. Such an over-reliance on OOPEs by Indian households is indicative of the lack of penetration and utilisation of effective financing mechanisms. The commercial health insurance is at its nascent stage in the country, accounting for less than 10 percent of India’s health expenditure.

While there must be a sustained effort to increase the coverage of individuals under formal insurance, health insurance will not cover all expenditures incurred by patients. Insurance is typically relevant for expenditures that have low-probability and high-severity characteristics. Given the fact that the process of pooling through the insurance mechanism is an expensive proposition (administrative costs are as high as 20 percent), this is likely to be most useful in the case of secondary and tertiary healthcare-related expenditures where the benefits of pooling and the resultant sharp reduction in volatility are so significant that it is well worth incurring the very high associated administrative costs. This still leaves the large gamut of out-patient expenditures outside the scope of insurance. 

Other financial strategies for dealing with health expenditures can include savings withdrawals or borrowing. Non-financial strategies can include sale of assets, cutting back on other essential expenditures such as schooling or even, foregoing care. In countries such as India where the burden of OOPE is high, we see a mix of financial and non-financial strategies – the latter, particularly among low-income households. Given the low credit scores of people in many parts of the country, obtaining formal loans is hard to begin with, more so, for consumption purposes such as healthcare. Therefore, non-insurance interventions must include enabling access to good credit facilities or savings plans so that people can save money to address health expenditures. The interventions must also include access to financing plans so that people can afford to purchase the health insurance cover that is necessary to manage significant shocks.
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One such tool is the Health Savings Account (HSA). It has been implemented in Singapore, South Africa, the United States and China, among others. An HSA, as a non-insurance mechanism, allows prepayment which lets households plan for medical expenses in advance and not have to find liquidity at short notice. Pre-payment via an HSA could then provide a tool for consumption smoothing, while also potentially reducing the incidence of delayed care-seeking resulting from lack of funds or illiquidity. While insurance provides a mechanism for high-cost, low-frequency events, HSAs offer a mechanism to cover low-cost, high-frequency events – complementing existing interventions and adding to the completeness of the healthcare financing toolkit available to households. A combination of HSAs with high deductible insurance can possibly allow insurers to offer cheaper insurance products that may be more affordable for the public and may offer a viable option to cover India’s large “missing middle.”

Notwithstanding the issue of how Indians are financing their healthcare expenditure, the larger challenge remains that they receive too little value for what is spent. Despite high out-of-pocket spending, India has worse health outcomes, as measured by Disability Adjusted Life Years (DALYs), than countries whose citizens spend a comparable amount in out-of-pocket expenses. One of the many reasons for this poor value equation is the dominance of fee-for-service relationships in healthcare in India. This has created a fragmented and transactional relationship between the patient and the provider. Payment methods where the provider starts to assume some, if not all the uncertainty around the patient’s expenditure will start to align the interests of the provider. So, instead of paying each time I see a doctor, under a subscription service or a managed care service, I pay a fixed amount to the provider and all my expenses can to be met within that.

Value-based healthcare (VBC) is a delivery model where providers are rewarded for helping patients improve their health, reduce the effects and incidence of chronic disease, and live healthier lives in an evidence-based way. In many countries, insurers are taking the lead in driving VBC models since they have the most to gain (in addition to the patient) from meaningful interventions. The focus in value-based model is on health outcomes and reducing the incidence of hospitalisation in a low-resource environment. 

In the coming years, one hopes there can be more attention and innovation around how Indians pay for their healthcare. We need a range of tools that will complement insurance.