Poor claims ratio, ‘hidden’ clauses—India’s health insurance firms need new business models

In an environment where there is, often legitimate, mistrust between stakeholders—insurance firms, hospitals and patients—it is no surprise that the results are sub-optimal.

The Print
27 March, 2024

If you have been admitted to a hospital in India, then you know that dealing with insurance claims can delay your stay long after the treatment is over. Indian health insurance is notorious for a poor claims ratio, and “hidden” clauses that can result in partial coverage or sometimes denial of coverage. Improving regulation is an obvious fix to the problem. However, deeper reform requires aligning the incentives of patients, doctors and insurance companies, so that quality health care is provided at competitive prices. This may require new approaches and potentially new business models.

Difficulties in providing health insurance

A basic illustration can help one understand the challenges of health insurance provision. Imagine that there is only one procedure covered by an insurance firm and it costs Rs 100. The firm insures 10 people, charging a premium of Rs 11 each. This means they have an amount of Rs 110. Let’s assume that only one person will fall ill. The firm pays Rs 100 when they get hospitalised and keeps the remaining Rs 10 to cover its own costs.

This calculation goes awry if more than one person falls ill or if the procedure costs more than Rs 100. This can happen for several reasons. There may be an unforeseen health catastrophe such as Covid-19, where the number of people falling ill shoots up unexpectedly. People may neglect early signs of their illness, not get check-ups as frequently as they should, or may demand more expensive care than necessary. The more healthy people may drop out of the pool and stop paying premiums, reducing the collective amount. Doctors and hospitals might also be incentivised to provide relatively expensive procedures, especially when they know that the insurance firm will bear the cost. As a consequence, the firm may scrounge on paying claims, or deny coverage altogether.

This simple example shows the number of things that can break down. There are incentive issues caused by “hidden information” in all transactions. The insurance firm cannot know if the level of care provided by the hospital is proportionate to the underlying condition. It has few levers to cross-check the decisions of either the customer or the hospital. The patient does not know if the hospital has overcharged or if the insurance company is misbehaving. The hospital and insurance company do not know if the patient neglected her health and could have come in earlier. In an environment where there is, often legitimate, mistrust between all stakeholders, it is no surprise that the results are sub-optimal.

Encouraging fair play

According to a 2018 paper, Fair Play in Indian Health Insurance, deficiencies in regulation, weak enforcement, and poor grievance redress procedures lead to a lack of fair play in the health insurance system. These are an obvious fix to improve the working of health insurance firms and need to be taken up by the Insurance Regulatory Development Authority of India (IRDAI).

The deeper solution needs mechanisms that will align the incentives of all stakeholders in the system. Some potential solutions are as follows.

First, insurance companies could incentivise regular check-ups for their customers to save expensive hospitalisations later. However, experience suggests that customers are often not willing to undergo tests, and fear the potential increase in premium if the check-up reveals an adverse condition. Mandatory check-ups before access to insurance, especially for older customers, may be difficult to operationalise but offer a possible solution to keep costs low and also provide less intrusive healthcare.

Second, the design of protocols for health procedures may establish standards of care that hospitals should follow. This will allow insurance firms to evaluate whether the hospital is charging appropriately. Improving fair play in the medical establishment is as important as fixing the problems of health insurance.

Another model used across the world is combining health care with insurance. This is known as the Managed Care model. In this model, insurance firms and health care providers form a network through which preventive care is emphasised. An example of such a model is the Kaiser Permanente in the United States. Establishing institutional frameworks where potential patients are given preventive care such that fewer of them need hospitalisation will not only cut costs but also provide a better quality of life. Here, the incentive of the health care provider is aligned with that of the patient. The more hospitalisations that can be prevented, the better it is for everyone. This model has not yet taken root in India. In fact, only in January 2024, did one of the first such initiatives Narayana Health Insurance Limited, a subsidiary of Narayana Hrudayalaya, receive a license to operate as an insurance company. The early experiences of this initiative may help set up managed-care alternatives in India. The Indian market has some way to go before it can provide quality health care at competitive prices.

What’s the true cost of free electricity to states? Just look at Tamil Nadu

Many states dedicate a large portion of their subsidies to free electricity, but the true financial burden doesn’t show up in budget documents.

The Print
13 March 2024

The power sector’s contribution to the deterioration in the financial health of Indian states is relatively well-documented. A large share of a state’s total subsidies is spent on providing free electricity. For instance, 97 per cent of Rajasthan’s and 80 per cent of Punjab’s and Bihar’s total subsidy expenditure went toward electricity in 2020-21. But two other important dimensions are often overlooked in the context of state finances.

First, the analysis of state government finances should include the “full debt” of the state, not just the debt reflected in its budget documents. This not only provides a more accurate picture of the debt-to-GDP ratio, but also helps determine the correct value of the potential interest payments that the state may have to make in the coming years.

Second, the dynamics between the interest rate and GDP growth rate cannot be taken for granted. It is essential to understand the vulnerabilities of the state’s fiscal strategy to changes in these macroeconomic variables.

Our new working paper, ‘The electricity chokepoint in Tamil Nadu public finance’, elaborates on these aspects in the context of the state’s financial dynamics.

‘Corrected’ debt–to–GDP ratios

A standard metric in public finance is the debt-to-GDP ratio, which represents the ratio of a country or state’s debt to its gross domestic product. As the definition suggests, it is an indicator of a state’s ability to repay its debt. The larger the debt-to-GDP ratio, the greater the burden on the state.

Typically, we rely on state government budget documents for debt numbers. However, these understate the debt for two reasons. The first is off-budget debt, which is owed by the state but isn’t reflected in its budget. For all practical purposes, the repayment of this “hidden” debt is the responsibility of the state.

The second is “implicit debt”. This debt isn’t technically owned by the government, but will eventually become its responsibility. This debt is not hidden, but it is generally not considered part of the state government’s official burden.

Taking Tamil Nadu as an example, one could argue that the debt of the two power sector utilities—Tamil Nadu Transmission Corporation (TANTRANSCO) and Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO)—will likely become the state government’s responsibility. If these two entities are unable to repay their debt, then the state government will have to step in, even though both are distinct from the government.

According to the revised estimates for FY 2023, Tamil Nadu’s debt-to-GDP ratio was 31.56. However, when the outstanding long-term borrowings of the two utilities—approximately Rs 2 lakh crore—are added to the state’s debt, the debt-to-GDP ratio shoots up to 39.7. This is an increase of almost 8 percentage points, and has a material impact on the fiscal sustainability of the state. So, how high can a debt-to-GDP ratio be? The Tamil Nadu Fiscal Responsibility Act 2003 set a target of 25 per cent for 2015, after which the debt-to-GDP was intended to decline. But even without the addition of the power sector debt, Tamil Nadu has crossed this threshold. Other states are likely to be in similar positions.

The importance of ‘r’ and ‘g’

In the years ahead, two factors will shape whether a state’s borrowing becomes unsustainable or not. These are the interest rate (r) at which the government borrows, and the rate at which the state GDP grows (g).

If the financial market lends to the state at low interest rates, and the GDP growth rate continues to be high, the state could continue at this level of borrowing. The bond market in India currently lends to state governments at about 7-8 per cent. It does not discriminate between fiscally responsible and irresponsible states, probably owing to an implicit state guarantee. Power sector utilities also seem to continue to get loans from the Power Finance Corporation (PFC) and the Rural Electrification Corporation Limited (REC). Under current conditions, for most states in India, we see that r is less than g. In Tamil Nadu, our projections suggest that the “correct” debt-to-GDP ratio will increase from 39.7 per cent in FY 2023 to about 43.53 per cent by FY 2028 if r is 7 per cent and g around 9 per cent.

However, both the r and the g cannot be taken for granted. There is no guarantee that a state’s GDP growth will continue at the current pace. A bond market crisis, such as the one following the Infrastructure Leasing & Financial Services (IL&FS) default in August 2018, might also make borrowing more expensive. Further, a strategy of borrowing from financial institutions becomes risky if these institutions change how they evaluate the credit risk of states. Some of the non-banking finance companies (NBFCs) lending to power sector utilities are deposit-taking institutions regulated by the RBI. A change in regulations might make it difficult for them to lend depositors’ money to power sector utilities.

These variables can all impact the debt-to-GDP ratio. If borrowing becomes more expensive—say, if interest rates rise to 9 per cent—then the projected debt-to-GDP ratio increases to 47.31 by FY2028 (instead of 43.53). Similarly, if GDP growth falls to 8 per cent instead of 9 per cent, the debt-to-GDP ratio would rise to 45.59 by FY2028. If both scenarios occur at the same time—that is, interest rate rises to 9 per cent and GDP growth falls to 8 per cent—then the projected debt-to-GDP ratio would reach 49.54. These calculations reveal the vulnerabilities of the current fiscal strategy of several states, but can also serve as a basis to devise mechanisms for course-correction.