Private Health Insurance and Public Health Goals in India
Item
- Title
- Private Health Insurance and Public Health Goals in India
- extracted text
-
May 2000
CONTENTS
INTRODUCTION
By David Peters, G.N.V Ramana and K. Sujatha Rao........................................................................... 3
IMPLICATIONS OF CURRENT EXPERIENCES OF HEALTH INSURANCE IN INDIA
By Charu C. Garg.................................................................................................................................... 5
PRIVATE ENTRY INTO HEALTH INSURANCE IN INDIA: AN ASSESSMENT
ByAjay Mahal........................................................................................................................................30
PRIVATE HEALTH INSURANCE IN INDIA: WOULD
ITS IMPLEMENTATION AFFECT THE POOR?
By Alejandro Ferreiro........................................................................................................................... 49
CONCLUSIONS
By David Peters, G.N.V Ramana and K. Sujatha Rao........................................................................ 52
GLOSSARY
54
3
INTRODUCTION
In anticipation of the passage of the Insurance Regulatory
and Development Authority Act 1999, the Government of
India (GOI) held a seminar for senior policy makers on
health insurance. The objectives of the seminar, which
was held on November 16-17, 1999, were to: (a) understand
the potential risks and benefits of private health insurance;
and (b) identify what the Government of India should do to
ensure that social objectives are met with the liberalization
of health insurance. The papers published in this volume
highlight some of the key issues raised at the seminar,
which should be of interest to those concerned with the
future directions of India's health sector.
The meeting was attended by over 30 key policy makers
and stakeholders, including representatives from the
private sector (insurance companies, private care
providers), academicians, senior public officials (from the
office of the Prime Minister, Ministry of Health, Department
of Insurance), and non-government organizations.
IN THE COURSE OF A LIVELY DEBATE,
THE FOLLOWING MAJOR THEMES
WERE ADDRESSED
existing social insurance schemes. As a fee-for-service
approach to payment of health providers is likely to emerge,
along with the risk of cost escalation, the GOI would look
for ways to encourage managed care models.
The likely impact on the poor is not clear. They could
benefit from expansion of quality in the private sector, if
the introduction of evidence-based medicine - that would
be demanded by international health insurance companies
- trickles down to other providers that are used more
frequently by the poor. Alternatively, the gap between access
in quality may increase, and there also remains a risk of
subsidizing the wealthy. To deal with these issues, the
following recommendations were made:
PRO-POOR RECOMMENDATIONS
Reduce the pubic subsidy to the wealthy by charging
full cost recovery to the insured who use private
insurance, finance the regulatory agency through
premiums (e.g. a 0.5 percent levy on premiums) and
reduce or eliminate tax incentives for private
insurance, particularly indemnity based insurance.
o Define a minimum package of services covered that
include preventive, maternity, and catastrophic cases,
in order to prevent such cases from being dumped back
' on the public sector.
o Encourage informal community financing schemes,
e.g. managed care schemes through NGOs with less
regulation and lower capital deposit requirements, and
assess other financing options for the poor.
o
Implications of current experiences in health insurance.
o Perspectives from the private sector financier.
o International experience with private health insurance.
o Prospects for health insuran ce in the informal sector.
o Regulation of health insurance in India.
This publication includes a selection of the presentations
made at the conference. It begins with a paper by Charu
HEALTH SYSTEMS RECOMMENDATIONS
Garg, which outlines the current situation of health
insurance in India, describing the theoretical and practical o Establish a specialized regulatory agency for health
insurance which would define benefits packages,
aspects of the regulatory challenges that must be dealt
ensure transparency and comparability of packages,
with. Ajay Mahal's paper describes the legal tools currently
define treatment protocols, ensure guaranteed
available to regulate health insurance, the type of system
renewal of policies, reduce ability to deny coverage on
needed to regulate health insurance effectively, and the
the basis of pre-existing conditions, establish conflict
large gap between the two. He further examines how
resolution mechanisms, promote community
liberalization of health insurance may effect the health
financing, and monitor the performance of different
markets in India. In Alejandro Ferreira's paper, the
schemes.
international experience is used to argue that preventive
regulation is more effective when a system is introduced, o Develop quality assurance procedures in health care.
rather than waiting for the system to be in operation and
then responding. The final paper is a summary of the
workshop conclusions, which also offers some of steps for'
the future.
MAIN FINDINGS
As the GOI is moving forward with liberalization of the ■
private insurance market, it will want to ensure, that the .
outcome will offer value for money for the. direct
beneficiaries (which is estimated to include the five
percent of the most wealthy Indians), and that it does not
have an adverse impact on the poor. The proposed approach
is to support voluntary insurance, rather than expanding
IMPLICATIONS OF CURRENT EXPERIENCES OF
HEALTH INSURANCE IN INDIA
INTRODUCTION
A large population (almost touching a billion), challenges
of infectious and communicable diseases on one hand and
life style diseases like cancer, AIDS, and coronary diseases
on the other hand, and improving medical technology are
some of the factors which contribute to increased costs of
financing health care in India. It has been estimated that
India spends 5 percent of the GDP on health care.1 Of this
more than three-quarters are financed by the private sector,
which is mostly out-of-pocket This large out-of-pocket
expenditure on health care exists even though the role of
the government in financing and providing almost free
health care has been emphasized since the time of
independence. Most people prefer the private sector for
health care, presumably because they perceive quality to
be better there and because of the failure of the public
sector to respond to client needs (non-availability of
functionaries, shortages of drugs consumables etc.). This
leaves little option for both the rich and the poor but to
seek private care.
The use of public services is determined not only by the
quality of services, but also by the cost to the consumers.
Reliance on private sector has increased as the gap
between the average total expenditure on private and public
facilities for inpatient treatment has decreased from 5 times
in 1993-94 to 2 times in 1995-96 (Table 1). Further, the
average expenditure per hospitalization episode at current
prices has increased three times between 1993-94 and
1995-96 and four times between 1986-87 and 1995-96 for
both rural and urban areas. Even at constant prices, an
increase of 60 to 70 percent is evidenced in average
expenditure per hospitalised treatment (Table 1). With the
large majority of people living in the rural areas and about
one-third of the population living below the poverty line,
the question arises if individuals should pool their
resources to cover uncertain costly events, which would
otherwise be difficult for individuals to afford at the time of
need.
TABLE 1
UTILISATION OF HEALTH SERVICES AND AVERAGE EXPENDITURE INCURRED
FOR TREATMENT AS OUTPATIENT AND INPATIENT
1995-96
1993-94
1986-87
Rural
Urban
Rural
Urban
Rural
Urban
% of ailing persons not treated
% treated as Outpatient(OP)
18
11
12
8
17
9
Public
Private
26
74
28
72
42
58
34
66
19
81
20
80
Public
Private
60
40
60
40
61
39
60
40
44
56
43
57
Average payment for OP treatment/
episode (Rs.) (At current prices)
Public
Private
All
73
78
76
74
81
79
51
123
93
65
141
115
129
186
176
166
200
194
73
78
76
74
81
79
27
65
49
35
75
61
48
74
69
64
81
78
% treated as inpatients (IP)
Average Payment for OP treatment/episode (Rs.)
(at constant 86-87 prices)
Public
Private
All
'Wb?ldDank(l995>c,nmslt, (using 42nd nsund <bu o( NSSO (or 1WM7> 6 pocenl o( GDP is King spoil on talik care. Using NCAER dsu f«
on health care (Garg 1998. 1999)
K is es.imuud Ihs, 5 patens o( GDP Is spun!
6
1986-87
Average Total Expenditure for IP treatment
/episode (Rs.) (at current prices)
Public
Private
.All
1993-94
1995-96
Rural
Urban
Rural
Urban
Rural
Urban
722
1156
886
653
1570
1007
559
1876
1076
452
2336
1210
2080
4300
3202
2195
5344
3921
722
1156
886
653
1570
1007
297
998
572
240
1243
644
912
1886
1404
963
2344
1720
Average Tbtal Expenditure for IP treatment/episode (Rs.
(at constant 86-87 prices)
Public
Private
All
Source: o For 1986-87 data: NSSO (1992)
Note:
o For 1993-94: Garg (1998) Compiled from the tables in Shariff et. al. (1998)
o GOI(1998)
o Data for 19 93-94 relates to the survey by NCAER and for 1986-87 and 1995-96 data relates to a survey by
NSSO in their 42nd and 52nd round.
o Consumer Price Index was used to convert the data from current to constant prices.
Health expenditures are known to follow a skewed
distribution where expenditures are zero or very small for
most people and large for very few people. Pooling is
considered a way of realising social justice, because it is
based on solidarity and cooperation between the well and
ill, the rich and the poor. Pooling helps to avoid large
financial risks, as well as help people gain access to health
care that would otherwise be unaffordable. Thus, health
insurance provides financial protection against the high
cost of medical treatment and unpredictable health events.
It is presumed that the larger the number of people
utilizing the health services of the private sector through
health insurance, the less will be the burden on
government resources to finance secondary and tertiary
care. It is also argued that private insurance will be able to
provide coverage to those who are ineligible for public
insurance, or for those who want supplemental coverage
not covered by public insurance programs. It is important
to take into consideration the numerous diseases and a
large population that will not be covered under private
insurance because of the market failures associated with
the private insurance system.
In the light of the above, the major objective of this study
is to analyze the existing health insurance market in India
to determine the critical issues/ risks and to identify the
opportunities and constraints to bring about changes. This
study also aims to identify the options for a more equitable
health financing system, particularly for the poor.
Interventions to guide changes in the current health
insurance market in India are also suggested.
The study is divided into four sections. The introduction
above outlines the need for studying the health insurance
markets in the Indian context. Section 2 discusses each of
the formal and informal insurance markets in terms of the
types of beneficiaries, level of coverage, types of benefits,
premiums charged, provider payments and administrative
costs. Section 3 discusses the risks associated with health
insurance like moral hazards, adverse selection, skimping,
skimming, supplier induced demand, high costs and low
quality of care, and consumer redress mechanisms in the
context of the health insurance products and the private
health insurance market. In Section 4, various options for
risk pooling are analysed. The final section has policy
options for bringing changes to the health insurance
market in India.
EXISTING HEALTH INSURANCE
MARKETS IN INDIA
The health insurance market in India is generally very
limited. The various schemes can be categorized into four
broad groups: i) Mandatory health insurance schemes, ii)
Voluntary health insurance schemes iii) Employer-based
schemes and iv) Insurance offered by the NGO sector. The
four schemes together are estimated to cover roughly about
10 percent of India's population.
Mandatory health insurance schemes
These are the Employees State Insurance Scheme (ESIS)
for certain low-income employees of the organized
industrial sector and the Central Government Health
Scheme (CGHS) mainly for the central government
employees. Both these schemes are principally financed
by the contributions of beneficiaries and their employers
and from taxes. The former receives some contribution
from state governments whereas the latter is mainly
financed from central government revenues. Under both
7
the schemes, the beneficiaries (which cover the family
members also) are provided a wide gamut of services like
preventive, promotive and curative care under various
systems of medicine through the government-managed
dispensaries and hospitals. In addition, ESIS also provides
cash benefits. ESIS covered 35 4 million beneficiaries in
1998 and CGHS covered only 4.4 million beneficiaries in
1996. Providers mainly work on salaries and hospitals work
under global budgets. Details of the schemes are given in
Appendices 1 and 2.
Private (Voluntary) Health Insurance
Voluntary health insurance schemes for individuals and
corporations are available mainly through the General
Insurance Corporation (GIC) of India and its four
subsidiaries - a government owned monopoly. These
schemes are financed from household and corporate funds.
GIC offers MEDICLAIM (MC) policy for groups and
individuals and the JAN AROGYA BI MA scheme to individuals
and families, mainly, to cover poor people. These policies
have had only limited success in India covering only 1.7
million people in 1996. These are annual policies covering
mainly hospitalised treatment. There are exclusions and
pre-existing disease clauses. Further, the schemes are of
indemnity type, which makes it unattractive for many.
Providers have to be paid by the insured, who are in turn
reimbursed by the insurer. Some of the innovations include
no-claim bonuses, group discounts, tax exemptions, and
no in-limits within the sum insured for. Premiums are risk
rated according to age. Further, other schemes like
overseas medical insurance, old age medical insurance
and personal accident insurance also exist. Some of the
details of the schemes are given in Appendix 3.
Employer Based Insurance
Health insurance is offered both by public and private
sector companies through their own employer-managed
facilities by way of lump sum payments, reimbursement of
employees' health expenditure or covering them under
the group health insurance policy with one of the
subsidiaries of GIC. Workers buy health insurance through
their employers, taking insurance in lieu of wages. Ellis
(1997) estimates that roughly 30 million people are covered
under the employer-based scheme. Some detail on
coverage, type of benefits and provider payment is given
in Appendix 4.
Health Insurance Schemes in the NGO/
Voluntary Sector
Besides the mandatory insurance schemes, employment
based schemes in the formal sector and private health
insurance, other risk sharing arrangements include
community-based insurance schemes, primarily for
informal sector.
Based on the review of some of the NGOs by Bennett
(1997) and Ford Foundation (1994), it was found that the
beneficiaries of most of the schemes are defined both by
geographical location and nature of work. Total coverage
is estimated to be about 30 million (Ellis 1997). The
schemes tend to coverall insured members of community
for all available services but have emphasis on primary
health. Most of the schemes are financed from patient
collections, government grants, donations and other
miscellaneous items like interest earnings, employment
schemes, etc. Most NGOs have their own facilities and/or
mobile clinics to provide health care. In this case, the
providers are paid wages and salaries. Some NGOs have
FFS scheme for providers and providers are partly
reimbursed by the NGOs. Many hospital-based schemes
pay on a case basis or fee-for-service basis, or allocate all
collected funds to the nearest provider on a lump sum basis.
The administrative costs of the schemes in the NGO sector
are generally low, varying between 3-5 percent for different
schemes. Details on coverage, type of benefits and provider
payment for some NGOs are given in Appendix 5.
Box 1 below summarises some of the features of the
different health insurance schemes existing in India.
CRITICAL ISSUES IN CURRENT HEALTH
INSURANCE MARKETS
An ideal health insurance market is the one where the
insurers would charge an actuarially fair premium'm', if
the cost of medical care is a random variable with the
mean m. A risk-averter would be willing to pay this premium
'm' and have a welfare gain (Arrow 1963). The insurers
also have reasons for loading the premiums, as there may
be some degree of risk aversion by insurers. Further, there
is a cost of capital tied up because of the irregularity of
payments an insurance company has to make and a need
to cover the administrative costs. As long as the loading is
not very high, the consumer will be willing to buy the policy.
The health insurance markets, however, face certain risks
of insurance. The following section discusses the demand
and supply side limitations with respect to the current
health insurance markets existing in India and also the
methods on how the risks are minimised in the case of
private health insurance.
DEMAND SIDE LIMITATIONS
Moral Hazard
Moral hazard is a major demand side problem of health
insurance whereby the demand for medical care increases
because of the health insurance. Even though the person
may not entirely be able to affect the occurrence of his
illness,2 the costs of medical care are not completely
determined by the nature of illness suffered. The costs of
the medical care would depend on the person's
willingness to use medical services, the type of medical
services and his choice of doctor. Insurance removes all
the incentives for the patient to shop for a better price for
hospitalisation and medical care.
Moral hazard can be assessed by looking at the average
expenditures incurred under the various schemes as well
as the utilisation of the facilities under the schemes. Under
mandatory social insurance schemes, expenditure per
beneficiary on medical care as well as cash benefits in
ESIS dispensaries and hospitals was Rs. 285 in 1995-96,
’ An extreme case would be (hat the person becomes so careless about his health that he docs not bother to take preventive care, as he feecis that he will bee covered by insurance in event of illness.
This is an ex ante type of moral hazard.
BOX 1: SALIENT FEATURE OF SOME INSURANCE SCHEMES IN INDIA
Voluntary Private
Employer-Based
Indicators
ESIS
CGHS
Insurance- MEDICLAIM
Scheme
Types of
beneficiaries
Factory sector employees
with income less than
Rs. 6500 per month.
Their dependants
are also covered.
Employees of Central
government-current and
retired, some autonomous
and semi--govt. organisations.
MPs, judgees, freedom
fighters, journalists
Individuals and groups with
persons aged 5 to 75 years.
Children between 3 months
and 5 years covered with
parents.
Public and
Private sector
People in the
communities
communities
Coverage
As per table Al
(About 35.3 million
beneficiaries in 1998)
As per Table A7.
(About 4.4 million
beneficiaries in 1996)
As per Table Al 1. (1.7 m persons
covered). Urban poor and groups
more likely to purchase policy.
about 30 million
people
About 30 million.
Normally quarter of the
target group (Table Al5)
Types of
Benefits
Medical benefits,
cash benefits
Preventive and
promotivee care, and
health education.
All OP facilities, preventive
and promotive care available
Hospitalisation and domiciliary
hospitalisation according to
the sum insured. Exclusions
Categories under
i) CHIP
Mainly preventive care.
Also ambulatory and
inpatient care.
Mandatory Social Insurance Schemes
in dispensaries IP facilities
available in government
hospitals and in approved
private hospitals on being
and waiting period clause.
Maternity benefits allowed
with extra premium.
ii) Reimbursements
ill) Lump sum
payments
iv) own facilities
Community based
Insurance/NGOs
referred.
Premium
(financing of
scheme)
4.7596 of employees wages
by employers
1.7596 of their wages
by employees
12.596 of total expenses
Varies from Rs 15 to Rs 150
per month based on salaries
Premium based on age
and sum insured.
of the employees.
Depends on the
above mentioned
scheme
Mainly financed by
Premiums depend
on the scheme -fiat
Central Government funds
rate or income based.
by state governments
Provider
payments
Financed by patient
collection, govt, grants
and donations.
Mainly salaries for
Salaries for doctors.
Indemnity type. Insured
Salaries under the
phisicians in dispensaries
Providers not allowed
pays to the provider who is
own facility scheme.
and referral hospitals.
private practice.
later reimbursed according
FFS by patients,
IMP paid on capitation
Treatment in private
to the sum insured.
covered partly or
basis. Hospitals have
hospitals is reimbursed
wholly by the
global budget financed by
on case basis, subject
company
ES1C through state
to actual expenditure
government
are prescribed ceilings.
Mainly fee-for service
Direct administrative costs
Generally High
Low claim-premium ratio
Depends on the
scheme implementec
Generally low (396-596
including travel expenditure,
wages for corporation
office expenses, RRT - 5% of
reflects that a large proportion
by the company
scheme)
employees, and
administering cash benefits,
total expenditure. Part of
of funds are utilised for
Will be highest for
salaries can also be charged
running the scheme or
own facilities.
to administrative costs.
kept as profits.
Administrative About 21% of revenue
expenditure. For paying
Costs
revenue recovery and
implementation in new area
depending on the
9
and under CGHS was Rs 392 in 1995-96 In terms of co-insurance or the maximum sum insured. The moral
utilisation of facilities, it is seen that in both 1987-88 and hazard problem is minimised in prepayment plans where
1995-96, a larger number of cases were reported using the patient is bound with the closed panel and freedom of
free wards for hospitalised cases in government facilities choice is minimal.
as compared to paying for general and special wards. In
Another way to minimise the risk of moral hazard problem
1995-96, more than 80 percent of hospitalised cases is to have third party control over the payments or introduce
reported using free wards in both rural and urban areas a system of gatekeeper (Chollet and Lewis 1997). In third
(NSSO 1992, GOI1998). This shows that moral hazard exists party payments, the same group could provide insurance
for hospitalised treatment in government free facilities.
and medical services. A network of primary care physicians
Under private insurance (GIC), moral hazard is witnessed and specialists is established and the enrolee chooses
both in terms of the number of claims reported and average from the primary care physicians. Specialist treatment is
expenditure incurred per beneficiary. Claims reported under allowed only when the physician refers. This emphasises
MC (which roughly indicates the hospitalisation episodes) the use of preventive care and puts less emphasis on
were higher at 52 per thousand3 as compared to the average expensive treatment. Another way third party control occurs
number hospitalisations in urban areas, which were 20 is by having an intermediary between the insurance
per thousand in 1995-96 (GOI 1998). Further, in 1995-96, company and the patient. This third party could collect
the amount settled per claim (which would represent premiums from the insured thereby providing group
expenditure incurred per episode of hospitalised illness) incentives and at the same time help in minimising the
is higher under GIC at Rs 7715 as compared to an average moral hazard by tying up with providers.
expenditure of Rs 5344 per hospitalised illness in urban
Reducing the supply of doctors, thereby increasing the
areas in private clinics (Table 1). This indicates that people waiting lines and waiting time for the patients can also
with insurance are on an average using more hospitalised reduce moral hazard. This of course affects the quality of
facilities as well as spending more per hospitalisation on service towards consumers.
medical care This expenditure is expected to increase more
in the recent years as GIC has done away with in-limits Adverse Selection
Another problem visualised on the demand side in the
and pays according to the sum insured.
insurance market is that of adverse selection where only
There are several ways by which the risk of moral hazard
the sick will buy the insurance. This problem arises because
can be minimised in the private health insurance markets.
of the asymmetry of information and because of pooling of
GIC now offers incentives to reduce utilisation, such as a
unequal risks - the whole concept on which the insurance
cumulative bonus of 5 percent on the sum insured is given
is based. Persons with high-expected health expenditures
for every claim-free year. Further, group discounts also are more likely to purchase insurance than those with less
change based on the claim premium ratio for the group.
health expenditures. If equal premiums are charged, then
Data for the current years will be able to indicate whether those with low risks will prefer to be excluded, leading to
the utilisation is changing with these features.
an overall high premium for the balance. If not checked,
Further, private insurance companies can introduce this can take serious proportions and can lead to a
features that can reduce the risk of moral hazard. Co breakdown of the insurance mechanism.
insurance, where a patient bears a certain percentage for
In India, adverse selection is evidenced in some NGO
every extra rupee spent on medical care reduces the
schemes as well as under the GIC MC policy. In the NGO
incentive to seek expensive care. Deductibles, which are a
sector, schemes that allow for enrolment throughout the
certain minimum sum which the insured consumer has to
year without any waiting period encourages people to join
pay out-of pocket before the insurance company begins to
pay, also deter unnecessary use, especially for small claims. the scheme when they get sick (e g. VHS, Madras). Some
Co-payments, which are a fixed proportional amount to be schemes minimise adverse selection by ensuring that
paid for every visit, reduce moral hazard by restricting the certain minimum percent of the people in the village join
number of visits to the doctor. While the individual will the scheme (Creese & Bennett 1997).
prefer an initial deductible and then be covered 100
Under the GIC MC policy, age-wise information on 45,169
percent, the insurance companies will like co-insurance policies indicates that the premium to policy ratio is lower
and co-payments to minimise the risk of uncertainty than the average in age bands 5-45 and 71-75
Box 2 provides the risks and incentives that arise out of (Ellis et. al 1997). This may indicate an adverse selection
these different benefit packages
among the lower age band as lower average premiums
Moral hazard ca n also be influenced by the mode in could be due to both a lower number of enrolments as well
which the patients are covered for their insurance. The as due to the lower coverage of policy. On the other hand,
three different methods to cover health care costs are (i) lower premium per policy in age band 71-75 could be due
prepayments- which are paid in kind in terms of medical to risk selection exercised by the company. The current
services; (ii) indemnities based on fixed schedule: and (iii) GIC policy reduces the risk of adverse selection by charging
insurance against costs subject to deductibles, different premiums from people of different ages and by
• Based on the data for United India Insurance Company for 1995 %.
10
BOX 2: FREE CARE OR INSURED BENEFIT PACKAGE:
FINANCIAL RISK AND INCENTIVES
Risk borne by:
Insurer
Patient
Incentive for
Patient
Functions
Limitations/
Advantages
Free
All
None
Increase demand
Incentive for low
income consumer
Affects freedom of
choice of provider
Full user fee
None
All
Reduce demand
Incentive for provider
to give best quality
and good service
Increases
inequalities
Deductible
Amount
above
deductible
Amount
up-to total
deductible
demand
Reduce demand till
deductible amount is
reached, then increase
Deters unnecessary
use and avoids the
cost of
administering small
claims
Incompatible with
preventive, low
cost care, and for
low income people
who cannot afford
Fixed
co-payment
per visit
Full charge
minus
co-payment
Co-payment
Reduce demand for
visits
Deters unnecessary
visits for diseases
with excessive
incentives to visit
doctors, eg mental
care, dental care etc.
Low administrative
costs for Insurance
agencies
Co-insurance
(1-X) % of
(% of charges) charges
X%of
charges
Reduce demand
(Depends on 96 of co
insurance). Can be
applied for all or some
covered services.
Reduces incentives
to use expensive
care
High
administrative
costs for insurance
agencies
Ceiling on
amount paid
by insurance
Amount
above
ceiling
Reduce demand when
ceiling is exceeded
Deters the use above
a limit
Consumers may not
be able to cover cost
above the limit
Amount
below
ceiling
Source: Prepared using information from Hsiao (1998)
encouraging group insurance. Group discounts vary from
15 to 67 percent depending on the size of the group.
Adverse selection can be minimised by having compulsory
universal insurance or a risk rated premium. Encouraging
group insurance according to geographical locations or
occupation groups can also help to minimise adverse
selection. Also, income redistribution with a longer time
perspective, that is a life time enrolment, can help to
minimise adverse selection.
Under Utilisation of Care
The discussion above on moral hazard has shown that
private insurance is likely to lead to excess demand. So the
question of under-utilisation is more relevant for the
uninsured needy who may not have enough resources for
treatment in private facilities. The estimates for 1995-96
show a strong positive association between MPCE (monthly
per capita consumption expenditure) and rate of
hospitalisations. Hospitalisations during the last 365 days
by MPCE show that the number of persons per thousand
hospitalised was four in the lowest income decile as
compared to 37 in the upper most income decile in rural
areas. The corresponding numbers were 12 and 38 in the
urban areas. The estimated number of hospitalised
persons differed significantly in rural and urban areas.
The proportion of persons hospitalised, in fact, declined
from 28 to 13 between 1986-87 and 1995-96 in rural areas
whereas it increased from 17 to 20 during the same period
for urban areas (GDI 1998). Many people in the rural areas
get excluded from hospitalisation because of the lack of
facilities, especially for inpatient treatment in these areas.
Under-utilisation is also likely to occur for some treatments
that have positive externalities like communicable
diseases, immunisation, maternal care etc.
Under-utilisation by the insured occurs if the facilities
covered by the insurance are not satisfactory. Under
utilisation of the capacity, especially for inpatient treatment
seems to be an endemic feature of the ESI scheme. The
bed occupancy rate was only 52 percent in 1997-98. The
various factors underlined for these include over-planned
hospitals in certain areas as well as: badly located, under
staffed, and overall unsatisfactory level of services provided
Inadequate speciality and super speciality services,
frequent and unnecessary referrals to government
hospitals, and inadequate supplies are other reasons listed
for poor utilisation (GO1 1999a).
The utilisation of care by the poor and needy can be
improved if large costs associated with hospitalisation can
be borne by the government or the insurance company.
The utilisation of subsidised government facilities will
depend on the quality ofcare accessible there Information,
education and communication can play important role in
making people aware of the benefits of keeping healthy
and in encouraging use of preventive care.
SUPPLY SIDE LIMITATIONS
Supplier induced demand (SID)
A symmetry of information in the health care market leads
11
to adverse selection on the demand side and supplierinduced demand by the provider of services. Once the
patient goes to a provider, the supplier can induce demand
by certifying the necessity of a given treatment. The
physician, who knows about the right amount of treatment
for his patient for a particular illness could act as a limiting
factor However, he may not have any incentive to do so
and may in fact prescribe more frequent visits, expensive
medication, unnecessary diagnosis, private nurses and
encourage a longer stay in the hospital to possibly make
more money himself. The supplier-induced demand may
arise out of the target income hypothesis or the increased
availability of doctors Whatever be the method or the
reason, SID is likely to increase the costs of care and can
be dealt with by changing the payment mechanism to the
provider.
Under both CGHS and ESIS, doctors are paid their salary
and hospitals have their budget, giving no incentives to
providers to induce demand. However, it is noticed that the
average length of stay is higher in public hospitals and in
paid wards as compared to private hospitals and free wards
(NSSO 1992).
Under the GIC indemnity scheme, patients are
reimbursed by the insurance agency after they have made
the payment to the hospital. As there are no in-limits,
hospitals can charge and have the incentive to overcharge
and indulge in any of the practices mentioned above. The
average length of stay (ALS) and unit costs are likely to be
higher with insurance rather than without insurance. As
mentioned earlier, average expenditures with insurance
are higher at Rs. 7715 as compared to an average
expenditure of Rs. 5344 per episode of inpatient treatment
in private facilities in urban areas. It may, however,
be difficult to say whether higher expenditures are due to
moral hazard or due to supplier induced demand.
Supplier induced demand can be influenced by the
method of payment to the physician and the hospital
(Box 3). Under the fee for service system (FFS) and capitation
system, providers have an incentive to increase the number
of patients. The FFS system also provides incentives to
providers to increase the number of visits, decrease the
amount of service per chargeable visit, and report a higher
illness severity. Salary payments for providers and global
budgets for hospitals provide incentives to decrease the
BOX 3: PAYMENT MECHANISM FOR PHYSICIANS AND HOSPITALS:
FINANCIAL RISK AND INCENTIVES
Payment
mechanism
Basket of
services
paid for
Risk borne by
Payer
FFS
(P & H)
Each item
of service &
consultation
All risk
borne by
payer
Case
payment
(e.g. DRG)
(H)
Payment
rates vary
by case
Admission
(H)
Provider incentive to
Increase
Decrease no.
number of of services
patients
per
chargeable
unit of care/
consultation
Increase
reported
illness
severity
Select
healthier
patients
No risk borne
by provider
Yes
No
Yes
No
Risk of number
of cases and
severity
classification
Risk of cost of
treatment for a
given case
Yes
Yes
Yes
Yes
Each
admission
Risk of
number of
admission
Risk of number
of services per
admission
Yes
Yes
No
Yes
Per-Diem
(H)
Each
patient day
Risk of
number of
days
Risk of cost of
services within
a given day
Yes
Yes
No
No
Capitation
(P & H)
All covered
services for
a person in a
given period
Amount
above
"stoploss"
ceiling
All risk borne
by provider up
to a given
ceiling
(stoploss)
Yes
Yes
No
Yes
Global
budget
(H)
All services
provided by
a provider
institution
in a given
period
No risk
borne by the
payer
All risk borne
by provider
NO
Yes
No
Yes
Salary
(P)
For one
week or one
month work
All risks
No risks
No
Yes
No
Yes
Provider
Source, compiled using Hsiao (1997)
Note: P and H in the first column refer to the physicians and hospital payment mechanisms respectively
12
number of visits and also the quantity of service per
treatment episode. For insurance agencies, a direct tie up
with the hospital or reimbursing the provider according to
the ‘Diagnosis related groups', or standardisation
of treatment and paying for that could reduce the
unnecessary supply.
Cost Control Measures
Insurers exercise various options in their health plans in
order to control costs. Since the program's income is
constant, skimming, skimping, caps on benefits, excluding
certain high cost diseases and pre-existing conditions,
waiting periods, are some measures used by the insurers
to lower the price of the health insurance contract.
Skimping
Skimping is a supply side problem where the insurers
can deny or delay benefits to the sick for the services
needed or demanded.
Under the mandatory ESIS and CGHS, the government
undertakes insurance and facilities are available to those
who are covered. However, benefits are indirectly denied
to the sick as available facilities are poor and doctors are
either not available or there are long waiting lines, leading
the beneficiaries to use private facilities (Reports of the
evaluation committee, GO1 1999a). By not having the
facilities in all areas, some of the beneficiaries, like retired
persons, are denied benefits under CGHS.
GIC exercises skimping by not covering diagnosis that is
not related to subsequent hospitalisation. Treatment
arising from or traceable to pregnancy/childbirth including
caesarean section is not covered. Domiciliary
hospitalisation is not allowed under maternity benefits
extension. Further, skimping is exercised by denying or
delaying reimbursements of claims.
Outpatient treatment is normally denied coverage by
private insurance since it can be easily influenced by the
doctor as well as the patient. For example the number of
visits can be increased, expensive medicines can be
prescribed, etc. Covering out patient treatment involves
high cost of administration for insurance agencies.
Insurance companies can influence outpatient visits by
imposing a high deductible for a treatment. Provider
payments can also indirectly influence the outpatient visits.
Skimming
Skimming or creaming is a supply side incentive practised
by the insurance companies to insure the more healthy
people and exclude the less healthy. This phenomenon,
also known as risk selection, is to ensure the profit motive
and financial stability of the company or the provider.
Insurance companies indulge in risk selection through
underwriting rules and targeting products to low risk
groups.
ESIS and CGHS do not indulge in skimming, as it is
mandatoiy for them to cover all eligible employees and
their families. Risk selection is exercised by GIC by varying
rates of premiums according to the age under the
MEDICLAIM scheme and varying premiums based on the
relative risk of jobs or activities of the person in the
accident insurance policy of GIC. Further, GIC has been
encouraging the group insurance policies which are mainly
offered to employees, their spouse and their children, which
is mainly the healthy group. By offering to include
dependent parents in such schemes it can reduce some
amount of skimming.
Regulatory methods can be used for controlling risk
selection. Government could instruct insurance companies
to open the plan to everyone in the community and to
charge uniform premium from participants in broad
geographic and demographic group without regard to
health status (community rating). Risk adjusted premiums
could also help to discourage skimming.
Skimming (creaming), skimping and dumping are the
three strategies that the providers adopt in response to
their reimbursement systems (Ellis, 1997). While the cost
based reimbursement results in over-provision to all types
of patients, prospectively paid providers using case
payment (e.g. DRG) skim low severity patients and skimp
high severity ones. Skimming would be noticed under the
payment made on admission or capitation. It is only under
the fee-for-service system and per diem payment system
that the providers do not have incentives to select only
healthier patients. The effect of provider payments on
skimming is shown in Box 3.
Exclusions
Insurers keep the premiums under control by excluding
certain diseases for the entire period of the contract and
pre-existing conditions for a stipulated period. GIC has
several exclusion clauses in their health insurance scheme
First, the scheme covers only hospitalisation and
domiciliary hospitalisation up to a certain limit of the sum
insured. There are caps on reimbursement according to
the sum insured. All pre-existing diseases and those
contracted in the first 30 days of the first year of policy are
excluded. Certain diseases like cataract, hysterectomy,
hernia, piles etc. are excluded for first year of the policy.
Eye check-ups, dental treatment, convalescence,
naturopathy treatment, AIDS treatment are not covered in
the policy at all.
Each of these methods can create problems for certain
consumers. The payment mechanism to providers can
influence these cost control measures. While salary and
global budgets provide no incentive to the physician
or hospitals, the FFS and case payments provide incentive
to report increased severity of illness (Box 3).
Further, exclusions for pre-existing conditions should not
be there for the lifetime and should be limited. There
should be guaranteed renewability and continuity of
coverage.
Box 4 summarises some of the market failures in health
financing. It ppresents the demand side limitations and
supply side limitations, their effects, and some measures
used to correct such failures.
13
BOX 4: MARKET FAILURES IN FINANCING HEALTH
Market failures
Consequences
Measures used to correct failures
Moral hazard
Overuse of services by patients.
Deductible, co-insurance, co-payments etc.
Gatekeepers, Waiting lines
Adverse selection
Little risk pooling
No insurance market will exist. Only
some insured.
Under use of services/treatments with
lumpy costs by poor and also for
preventive care and diseases with
externalities.
Demand Side Limitations
Under-utilisation of
health care
Thx subsidy, compulsory universal coverage.
Lifetime enrolment
Education, Information and Communication.
Free or subsidised care.
Supply side Limitations
Supplier Induced
Demand
Increased demand by patients. Raises
costs of care.
Risk selection
(Skimming)
Skimping
Exclusions
No insurance for disabled, sick, poor
and elderly
Deny benefits to the sick
Exclude pre-existing conditions and
certain diseases for stipulated period
or life of the contract.
Excess profit, poor quality products,
underproduction
Monopoly or insurance
cartel
OTHER FACTORS INFLUENCING THE
HEALTH INSURANCE MARKET
Costs of Care
Both the demand and supply of health care services can
influence the cost of health care. The costs of medical care
are influenced by the person's willingness to use medical
services, the type of medical services and his choice of
doctor Depending on the kind of insurance cover, the
patient tends to use or over use the health services. On the
other hand, the suppliers affect the costs by prescribing
more visits or expensive treatments.
Under ESIS, costs are controlled by placing a ceiling on
the expenditure at Rs. 500 per year per IP out of which Rs.
165 is earmarked for drugs (this is proposed to be increased
to Rs. 600 per year per IP (GOI 1999a)). Even the IM P is paid
only Rs. 5 per IP per month. In 1995-96, total expenses per
beneficiary were Rs. 260 and cost per inpatient per day
was Rs. 396 (ESIS 1996). In 1986-87, ALS was reported to be
about 17 in government facilities (NSSO 1992) Using the
same ALS, cost per hospitalisation episode can be
estimated to be Rs. 6732 which is higher than the
expenditure incurred for inpatient treatment in both public
and private facilities.
The cost of care under CGHS was Rs. 338 per beneficiary
in 1995-96. The cost to premium ratio is 140 percent and
the scheme is highly subsidised with contributions from
the government. In order to keep the costs under control,
ceilings are placed for reimbursements for different
treatments in private hospitals.
The costs of care under GIC were kept low by having inlimits and by putting a ceiling on the maximum
reimbursable amount. However, even with in-limits, the
Use provider payment mechanisms like
salries, global budget, and case payments
(See Box 3)
Open enrolment, Community rating,
Risk adjusted premiums for individuals
Social Insurance
Lifetime and compulsory insurance.
Guaranteed renewability
Anti-trust laws
cost of treatment was higher with insurance as compared
to average expenditure for inpatient treatment in private
facilities. Under the new policy, the in-limits have been
removed and the maximum reimbursable amount has
increased which may increase the costs even further.
Employer-based payments control costs by having limits
on reimbursements or lump sum payments.
In the NGO sector, the costs of care are covered from their
revenues and donations. The costs are kept low as
administrative costs are low and most NGOs spend about
two-third to three-fourth of expenditure on low cost
preventive and promotive programs and rest on curative
care (e.g. in AHRT and SEWA, Ford Foundation 1990) The
major cost is on salaries, drugs and supplies.
Introducing co-insurance, deductibles and co-payments,
or limits on reimbursements can moderate costs of care by
indirectly affecting the demand for medical care.
Further, provider payment mechanisms can influence the
health care costs on the supply side. Fee-for-service is an
inflationary payment mechanism that leads to over
treatment and prescription of expensive medicines by the
physician. Other payment mechanisms have smaller
incentives to increase the costs directly but influence the
length of stay or the number of visits.
Quality of care
The quality of care provided by the physicians again
depends on the payment mechanism to the physician and
the hospitals. While the fee-for-service mechanism or the
user fees have the maximum incentive for the providers
to give the best quality of care, salary, global budget,
capitation and per diem have incentives to reduce the
quality of care. The per diem payment gives incentives to
14
providers to increase the average length of stay but gives
nothing to improve the quality. Capitation and admission
gives incentives to reduce both quantity and quality of
service for every patient seen (Box 3)
Under the government subsidised system and mandatory'
social insurance system, the payment mechanisms are
mainly global budgets for hospitals and salaries for
physicians. Under both these mechanisms, quality and
efficiency are likely to be low. For example, even though
ESIS has standard norms for establishment of hospitals/
dispensaries, staffing and equipment, there has been a
problem of understaffing, obsolete equipment, poor quality
of medicines and medical supplies, and poor quality of
services. There have been recommendations to improve
the quality in ESIS by privatisation of management in ESI
hospitals, improving quality checks for drugs, replacement
ofobsolete equipment, motivating the staff, entrusting more
powers with the hospital's superintendent, and having
proper staffing system to ensure all support staff is
available. Allowing super-speciality treatment for ESIS
beneficiaries in private facilities has been a step towards
quality improvement (GO1 1999a).
CGHS has taken steps towards quality improvement by
allowing treatment for hospitalisation in many good private
hospitals that have been recognised by the government
Medical audits for private hospitals are proposed under
the MOU currently under consideration. Treatment taken
at these places is directly paid by the government or
reimbursed to the patient, giving more freedom of choice
to users.
GIC offers the best quality within the amount insured
More freedom of choice is provided by removing all sub
limits within the sum insured. Further, GIC has a fairly
high ratio of percentage of claims settled to claims reported
at about 90 percent. However, the claim settled to the
premium ratio is low implying a high retention ratio.
Private insurance ensures good quality care by allowing
a greater freedom of choice of treatment in high quality
tertiary hospitals. Even though there is no evidence to show
better quality in private hospitals, site visits suggest large
private hospitals run efficiently with excellent diagnostic
and infrastructure facilities (Naylor et. al. 1999).
Consumer Redress Mechanism
Consumer redress mechanisms are important to ensure
that proper quality of care is made available to the patients
and that the insurance company pays the legitimate claims
on time.
Under ESIS, there are tripartite regional boards and local
committees with representatives of workers, employers,
state government and ESIC. These committees conduct
periodical reviews and inspections and look into the
complaints of insured persons. However the complaints of
the beneficiaries are not properly monitored. There are
suggestions to set up Local Medical Benefit Councils to
decide matters at the local level. Even though ESIC is
responsible for lapses in the services, it passes the buck to
the state governments, which is a poor practice (GOl,
1999a). Under CGHS, there is a three-tier system to look
into the complaints of consumers. Grievances can be
brought to the notice of area welfare officers, zonal officers,
or finally, to the head quarters. GIC’s mechanisms to look
into consumer redress is in accordance with the provisions
of the Indian Arbitration Act, 1940 as amended from time
to time and for the time being is in force (as per clauses
5.10 and 5.11 of the MEDICLAIM insurance policy of United
India Insurance Policy).
Simplified consumer redress mechanisms are very
important under the private insurance system so that the
beneficiaries do not suffer with respect to their claims
being paid and the services they receive.
Health Management Information System
A health insurance company should typically be using
actuarial methods based on epidemiological data from
different regions cross-classified by segments and socio
economic classes to calculate their premium The paucity
of such data for India inhibits the calculation of
probabilities of diseases for different sections of
individuals. Hence, the calculation of premiums is not
based on the actuarial methods but is dependent on other
considerations. GIC has based its premium on the
consideration of claims incurred. Recently, it has adjusted
its premium by age. Again, CGHS and ESIS use no actuarial
information but base their premiums on the sliding scale
of income. CGHS depends heavily on the central
government funds to subsidise the scheme. Voluntary
schemes normally have a fiat rate based on the ability of
the community to pay premiums. Better epidemiological
data are required for private insurance to calculate
actuarially fair premiums.
Options for Risk Pooling
The major objectives of health financing in any country
are to provide universal coverage in terms of both
affordability and accessibility of health care services to
the entire population, ensure equity in financing, control
costs, take care of the consumer choice and ensure
reasonable quality of health care services. In order to attain
these objectives, the country has to choose from different
methods of financing which could be general taxation,
earmarked taxes, social insurance, voluntary community
insurance or private insurance. These methods have their
own strengths and weaknesses in achieving the above
objectives and handling the risks of insurance. Box 5
enlists these financing options and evaluates them against
the objectives and risks of insurance.
While considering the options for risk pooling in India
we must take into account some of the important features
of the Indian economy, which include:
° population is almost a billion
° only 26 percent live in urban areas
° low density of population in rural areas
(One-seventh of urban areas)
15
BOX 5: ASSESSMENT OF DIFFERENT METHODS OF RISK POOLING IN HEALTH CARE
Indicators
Gen. taxation
Social Insurance
(gov t financed
(Mandatory)
and delivered)
(Financed & delivered)
Voluntary community
Private Insurance
insurance
No
In terms of major objectives fulfilled
Universal Coverage
Equity in access
Equity in finance
Yes
Somewhat high
Progressive
Yes
Moderately high
Slightly Progressive
(depends on how
premium is calculated)
Incentive to
control cost
Incentive for quality
assurance
Consumer choice
Yes
Yes
NO
Moderate
Moderately regressive.
Normally a flat rate
premium for the
community
Yes
Low
Generally low
Moderate
Good
Low
Low
Moderate
High
Moral Hazard
Yes if quality is
good
Yes if quality is
good
Adverse Selection
Risk selection
Skimping
No
NO
No
NO
No
Depends on
other payment
(Box 2)
Yes
Supplier-Induced
Demand
No (Normally
salaried doctors
and global
budgets)
Yes if no payments
have to be made after
the premiums
Yes
Generally low
Low. Normally covers
primary care and some
tertiary care.
Depends on payment to
the provider (ref. Box 3)
Risk rated
No
Very
regressive
No
Risks Involved
No
Depends on payment to
the provider (ref. Box 3)
High
High
Depends on
provider
payment ( Box 3)
Other Factors affecting the financing mechanism
How are
contributions rated ?
Do contributions
determine benefits ?
Collection of
revenue/contributions
Profit Incentive
o
o
o
o
o
Income
Income
No
No
Flat rate.
Community rated
Yes
Difficult for
unorganized
and rural sector
NO
Difficult for
unorganized and rural
sector
No
Difficult for people not
interested in joining
the scheme
Weak
high infant mortality rates (72 per thousand)
one-third of the population is below the poverty line
about one-third of the population is illiterate
only 28 million are employed in the organised sector
5 percent of GDP is spent on health care.
Given this scenario, and coupled with the fact that there
are trade-offs between different objectives like equity,
efficiency and control of health costs, it becomes
challenging to achieve the stated objectives by using
different methods of financing. While achieving universal
coverage with equity is one of the major goals of the
economy, yet people expect to get good quality care at
reasonable costs. In this context, no one method of risk
pooling is adequate to meet the stated objectives and a
mixed system of financing is required which has already
evolved in India.
The discussion below examines different financing
options existing in India and considers how far they have
been able to achieve the given objectives and handle the
risks of insurance.
Yes
Possible
High
Public Financing and delivery
As observed from Box 5, the tax-financed approach can
provide universal coverage with equity in access and
finance. Costs can be kept under control by having salary
payments for providers and global budgets for the hospitals.
However, it is difficult to provide freedom of choice of
providers and ensure good quality care with limited public
budget. Contributions do not determine the benefits.
Contributions are income rated and deducted in the form
of taxes and put in a common pool for different uses. Not
everyone pays taxes and hence, does not contribute towards
the common pool of resources. Risk of moral hazard is
likely to increase if quality of care is improved. As every
one is likely to be covered, the problem of adverse selection
and risk selection does not exist.
In India, government financed and delivered health care
is based on progressive tax structure and meets the
objective of equity in finance. There is free and universal
coverage of health care provided through a network of
dispensaries and hospitals all over the country. Public
hospitals play an important role in providing free care to
16
lower income groups. However, these are few and mostly
located in urban areas. They are grossly under-funded and
over-utilised and the rich are able to corner large benefits.
On the other hand, poor quality of care in primary health
facilities in rural areas leaves primary health centers
largely under-utilised. Further, a relatively thin density of
population in large rural areas burdens the government
budget. Keeping in view the resource constraint and the
positive externalities associated with preventive care,
emphasis is shifting from curative care to preventive care,
which helps to cover a larger population.
Separating delivery from financing can be one option
under the public financed system It is hoped that the
proper monitoring of private providers can help not only
in improving the access but also provide more freedom of
choice to consumers. The other option could be to continue
with public providers while incorporating more incentive
based payment systems.
Mandatory social Insurance
This scheme can provide universal coverage and can
ensure equity in finance if premiums are graded according
to incomes. Costs and quality of care can be controlled
through payment mechanism to the provider (Box 3). Moral
hazard could be minimised by introducing supplementary
payments for expensive treatment. Compulsory and lifetime
enrollment can help to reduce the risk of adverse selection.
Supply side limitations can be influenced through provider
payment mechanisms. Consumer redress mechanisms can
ensure good quality care at the cheapest rates.
In India, the social insurance is limited to only a small
proportion of people in the organised sector and to central
government employees. With a large rural and informal
sector, social security approach will have its inherent
problems. There will be problems in assessing the incomes
of people and collecting premiums from small, unregistered
firms and from those in the unorganized industries and
rural sector, just as there are problems in collecting income
tax. Further, the consumer redress mechanism will not
function effectively because of a large percentage of
illiterate population.
A large industrial formal sector, increasing size of
population in urban areas, growing incomes of the countiy
and high population density are all the necessary factors
to expand the employment based social security approach.
Risks can also be pooled by maintaining the compulsory
'medisave accounts' just like the provident fund accounts
for the employed. People should be made to pay a certain
percentage of their incomes and be allowed to use the
funds only for treatment of illnesses. Usage of funds should
be allowed for lifetime if the person has contributed in
that account for a stipulated period. Payment to the
providers or reimbursements to the insured can be DRG
based in recognised facilities subject to some maximum
ceiling. For outpatient treatment, there could be some
incentive mechanism like deductibles, co-payments to
reduce moral hazard. Another incentive could be to pay
back a certain amount of the person's contribution along
with interest in case the usage is below a certain amount
after some stipulated time period. Different funds could be
pooled at the national level for risk and resource
equalisation.
Community-based Insurance
Community financing can complement formal social
security schemes that cover regularly employed or self
employed, particularly in rural communities. These are 'soft
compulsory' implying that there is a local pressure on
individuals to take a cover and also the term of insurance
is long so that insurance funds could be planned as if the
insurance is compulsory (Ensor 1997). Community based
insurance schemes are important as they cover primary
care, which is difficult for private insurance to administer.
Another advantage of the community-based schemes is
that they have low administrative costs and most of the
expenditure is on providing drugs and paying doctors. For
community schemes to sustain, the demand should be from
within the community. Funds have to be locally managed
and benefits and premiums should also be decided at the
local level for people to trust the scheme. Inherent
problems visualised in these schemes are low coverage,
poor cost recovery and limited ability to protect the interest
of the poorest both in terms of access and financing. Also,
these schemes are based on the demand for those services/
facilities for which there is local demand and not on
professionally perceived needs.
In a low income country like India, where the industry
based social security approach is difficult to implement
across the entire economy, community led approaches
might seem useful, especially for the rural population
However, they have had a low coverage. It has been found
that the urban population benefits more. Wherever the
schemes are operative, they have been able to provide a
moderate quality of services. The premiums are normally
community rated and most people are able to pay. The
biggest advantage of most of these schemes is that the
cost has been kept low and met from the revenues. However,
with a large poor population in India (especially in the
rural areas), some external support, whether from
government or from donors is almost necessary for the
schemes to sustain.
Private Insurance
Private insurance, which offers greater consumer choice
and is perceived as providing better quality of services,
arises out of consumer demand for economic security. It
can neither provide universal coverage nor is it equitable
in terms of financing. Premiums are risk rated to avoid
adverse selection and generally higher risks are associated
with the poor and the elderly. The chances of skimping
and skimming are high to ensure profitability Generally,
high costs are said to be associated with private insurance
but these can be controlled depending on the payment
mechanism to the provider and hospitals. Private
insurance is effective for high cost care. It will generally
BOX 6: ASSESSMENT OF DIFFERENT METHODS OF FINANCING HEALTH CARE IN INDIA
Options
Objectives Fulfilled
Risks involved
Constraints
Interventions suggested
Government
Financed and
delivered
o High Universal Coverage
o Equity in finance-based on
progressive tax structure
o Costs are controlled by having
salaries and global budgets
Risk of moral hazard for free
care.
o Poor quality in primary facilities
Poor accessibility in rural areas
o Rich manage to corner the benefits
of the tertiary facilities
o No freedom of choice to consumers
o Difficult to collect revenues/
contributions from rurals and
unorganised sector
o Shift the delivery aspect from
govemmennt to private providers or
make the payment to the public
provider more incentive based.
o Monitor and accredit private
providers
Social
Insurance
Funds
(Financed and
Delivered)
o Equity in finance as premiums
are related to incomes
o Costs are controlled as
providers are paid salaries
& hospitals global budgerts
j
No moral hazard because
of poor quality. Under
utilisation of capacity.
Risk if quality improves.
o No adverse seelection
because of compulsory
insurance
o Coverage limited to only a small
selection of the society
o Low freedom of choice of
providers
o Poor quality of services delivered
o Difficult to collect premiums from
rural & unorganised sector
o shift provision to private providers
or make payment to the public
providers more incentive based.
o Have risk equalisation schemes to
cover risks with different risks and
resources
o Have medisave account/lifetime
insurance
Voluntary
Community
Insurance
o Low coverage but help to
organize funds for reelatively
poor people
o Low cost, mostly spent on
primary care
o Access affected by
geographical proximity.
Services available for all
o Moral hazard in some
schemes
o Adverse selection, unless
it is compulsory to join
the scheme
o Flat rate or community rated
premium. Not progressive
o Difficult to collect premiums from
those not interested in joining the
scheme
o External support from government
or donors-almost necessary
condition to sustain the schemes
o Organise funds at local level by
involving local bodies/panchayats
o Make the schemes more attractive
for everyone in the community to
join
■> Proper monitoring of the
schemes
Private
Insurance
o Greater freedom of choice for
provider
o Good quality of care likely as
providers are paid like
FFS system
> Moral hazard both in terms
of visits and costs
o Adverse selection by people
in age 18-45
o Skimming exercised by
varying premiums according
to age and activity
j Exclusions for certain
diseases and OP care
j SID under fee-for-service
o Very low coverate
o Cover maternal and OP care
o High costs of treatment
o Limit exclusions and guarantee
o Regressive in financing as premiums
renewals
and risk rated
> Have co-insurance, deductibles,
o idemnity type of insurance makes it
etc. to minimise moral hazard
unattractive for many when they have J Have prepayments or direct link
to make large payments out-of-pocket
up with providers
and be reimbursed later.
o Allow freedom of choice in
o Exclusion for certain disease and
different systems of medicine
pre-existing conditions
o Have anti-trust laws to prevent
funds to form cartels
18
not cover services that are of high frequency and low costs,
as the administrative costs of these will be very high.
Outpatient visits can be covered by introducing high
deductibles.
Private insurance has not found its way into India largely
because of poor product and marketing and to some extent
because of government policies. The existing private
insurance in India is of indemnity in nature. This implies
that a large section of population that cannot afford large
payments for catastrophic illness at a time will not be able
to afford this type of insurance. Private insurance will be
ineffective in covering primary care because of a large
population and the high incidence of risk associated with
it. Lack of high quality inpatient facilities for rural areas
questions the relevance of private insurance to cover a
large section of the population. Further, private insurance
may not be feasible on a large scale unless there is a
sophisticated administrative infrastructure, uniform
accounting procedures for hospitals, accurate clinical
record system, computerized claim auditing, adequate
health information and technical capacity to calculate
premiums actuarially, know-how on underwriting methods
to prevent adverse selection and risk selection' and
procedures to detect fraud and abuse. All these procedures
would require high administrative costs, which will have
to be borne by consumers in the form of higher premiums.
A system aimed at providing cover to the poor, especially
in rural areas, as well as giving supplemental insurance to
those who demand quality assurance needs to be
introduced. Standard benefit packages covering maternal,
preventive, catastrophic and chronic care, with standard
prices need to emerge to ensure social objectives.
Exclusions should be limited and there should be a
guaranteed renewal. Provider accreditation should be
made public. Consumer redress mechanisms should be
simple. Further, private insurance does not market products
well in rural areas as it involves high administrative costs.
NGOs can play a crucial role as an intermediary between
the private insurer and the community.
Box 6 summarises (i) different financing options existing
in India (ii) objectives and risks of insurance (iii) constraints
faced under these different options and (iv) some
interventions to remove the constraints.
POLICY OPTIONS FOR HEALTH
INSURANCE IN INDIA
Having discussed the strengths and weaknesses of
different financing options, and the trade off that exists
between them, we can see that the optimum scenario for
health financing in India would be a mixed one with the
state as well as the private agencies playing an important
role in the financing and delivery of health care. Some of
the important aspects of the suggested system are
discussed below.
An optimum health financing
and delivery system for India
o In order to ensure universal coverage with equity, public
financed system should continue to finance a basic
minimum health package comprising preventive care
and public health services for all, and some primary
and curative care to cater to the needs of the poor.
o As this will have cost implications and as the
government’s contribution towards health is not very
high, allocation to health should increase. Earmarked
taxes for health care could be charged to ease pressure
on public budget. However, the political feasibility of
this has to be tested.
o Mandatory social insurance may be extended to more
sectors at least to cover all employed.
o There is a need to reform ESIS and CGHS There could
be social insurance funds like the medisave accounts
for the employed to cover them for lifetime.
o Income redistribution with a lifetime enrolment can
help to minimise adverse selection and would pool the
risks between the young and elderly.
o Risk equalisation schemes can cover groups with
unequal risks and unequal resources Cross
subsidisation of funds at local, state or national level
can be monitored by the government.
o Community insurance may be encouraged in rural areas.
Maximum non-governmental resources should be
organised and used in a transparent and accountable
way. NGOs and local bodies can help in moblising funds
from the community for social insurance or private
insurance. They can also play a role in ensuring that
quality services are available at cheap rales and help
consumers with redress mechanisms.
o Liberalise private insurance
o Need to establish products with standard benefits and
standard prices upon which insurance companies
should compete. Competition among the insurers can
improve the quality of the product within the standard
package.
o Package should include
o Outpatient treatment, maternal care, preventive care,
and the treatment for chronic diseases and catastrophic
illnesses.
o Assured renewability and offer of coverage to every one
o Limited exclusions for pre-existing conditions.
o As far as possible, individual rating of premiums should
be avoided.
o Quality standards and treatment protocols should be
made public and quality ratings of providers should be
available.
o When tying up with the private providers, provider
payment should be incentive based to improve the
quality of services and costs can be kept under control.
The indemnity type of insurance especially for
treatments with large payments must be avoided.
o Consumer redress mechanisms should be made simple
and cheap.
19
o Regulations, reforms and a set up of basic administrative
structure are prior conditions to liberalise India's private
health insurance market. The monitoring of frauds and
excessive fees are important.
o Under both public financed system as well as social
insurance funds, delivery aspects must be either shifted
to private providers in order to improve the quality of
care and provide greater freedom of choice to consumers
or make payments to public providers more incentive
based. One needs to monitor and regulate the quality of
care in both the private and public sectors of the
economy.
o For outpatient care, patients should be allowed to
choose from recognised private providers.
o Specialized curative care may be provided in
government tertiary facilities or recognised private
tertiary hospitals on being referred by OP private
providers. Greater autonomy for public hospitals.
o Community health clinics run by NGOs are especially
effective in providing primary care. These need to be
encouraged but at the same time monitored by the
government.
o Fee structure for both outpatient and in-patient
treatment should be formalised and monitored.
o Proper monitoring and accreditation of private providers
is required and quality ratings must be made publicly
available.
Finally, one can conclude that there is no one method of
risk pooling that would be suitable for the entire country,
but a pluralistic approach needs to be followed for different
areas and sections of society to meet various objectives to
the best possible extent.
20
REFERENCES
Arrow K. J. (1963):' Uncertainty and Welfare Economics
GargCharu C. (1998):' Equity in Financing and Delivery
of Medical Care’ American Economic Review, 53.
in India' Research Paper no. 144, Takemi Program in
International Health, Harvard School of Public Health,
Harvard University, USA.
ASCI (1996): ’Feasibility Study of introducing Health
Insurance Schemes in India' Center for Social Services.
Administrative Staff College of India, Hyderabad, August.
Bennett S. (1998): 'Risk Sharing Schemes for Non Formal
Sector Employees and Farmers’ PHR, Abt Associates,
Washington D.C., USA.
CGHS (1999): 'Annual Report: 1995-96’ Ministry of Health
and Family Welfare, Government of India, New Delhi.
CHGS (1999a): 'Standard Brief on Central Government
Health Scheme’: Mimeographed. Personally collected from
CGHS office, Nirman Bhavan, Delhi.
Chollet D.J. and M. Lewis (1997): 'Private Insurance:
Principles and Practice' in G. Schieber edited 'Innovations
in Health Care Financing', Proceedings of a World Bank
Conference, World Bank Discussion Paper no. 365.
Creese A. and S. Bennett (1997):' Rural Risk sharing
Strategies' in G. Schieber edited 'Innovations in Health
Care Financing', Proceedings of a World Bank Conference,
World Bank Discussion Paper no. 365.
Duggal R. (1993): "Employee Medical Benefit in
Corporate Sector" The Foundation for Research in
Community Health, Bombay.
Ellis R.P. (1997): ' Creaming Skimping and Dumping:
Provider Competition on the Intensive and Extensive
Margins' Economics Department, Boston University, USA.
Ellis R., M. Alam and I. Gupta (1997): "Health
Insurance in India: Prognosis and Prospectus", Working
Paper, Boston University, MA and Institute of Economic
Growth, New Delhi.
Ensor T. (1997): "Macro Issues in Development of Health
Insurance: World Experience and Lessons for Transitional
Asia", Center for Health Economics, University of York,
York, UK.
ESIS (1996): 'Employee State Insurance Corporation:
Annual Report -1995-96', Ministry of Labour, Government
of India Press, New Delhi.
ESIS (1997): 'Employee State Insurance Corporation:
Annual Report- 1996-97', Ministry of Labour, Government
of India Press, New Delhi.
Garg Charu C. (1999): Financing of Health Care in India.
Results of NHA from Karnataka', Paper presented at the
symposium on National Health Accounts at International
Health Economics Association Conference held at
Rotterdam. Netherlands, June.
Government of India (1997): 'Rural Health Statistics:
December 1997' Ministry of Health and Family Welfare,
Government of India.
Government of India (1998): 'Morbidity and Treatment
of Ailments' NSS 52nd round, National Sample Survey
Organisation, Department of Statistics, Government of
India, November 1998.
Government of India (1999): 'Performance Budget:
1998-99' Ministry of Health and Family Welfare,
Government of India
Government of India (1999a): Report of the committee
on working of ESI hospitals 1999’, Ministry of Labour,
Government of India, New Delhi.
Hsiao W.C. (1995): 'Abnormal Economics in the Health
Sector', Health Policy 32, January.
Hsiao W.C. (1997): 'Financial Incentives' Discussion notes.
Harvard School of Public Health, Harvard University, USA.
Hsiao W.C. (1998): ‘Healthcare Financing in Developing
Nations' A background paper, Harvard University School of
Public Health, January.
Krishnamurthy V. (1995): ' Health and Medical Care in
the Plantation Sector'. Paper presented at International
Workshop on Health Insurance in India, September 1995,
Banglore.
NSSO (1992): "Sarvekshana - 42nd Round' Department of
Statistics, National Sample Survey Organisation,
Department of Statistics, Government of India, Vol. XV No.4,
April-June.
Naylor D.C., Jha P., Woods J. and A Shariff (1999):
'A Fine Balance: Some options for Public and Private Health
Care in Urban India', The Human Development Network,
The World Bank, Washington D.C., USA
ESIS (1998): 'Employee State Insurance Corporation:
Shariff, A., A.Gumber, R. Duggal M. and M. Alam
(1997): 'Health Care Financing and Insurance: Perspective
Annual Report- 1997-98’, Ministry of Labour, Government
of India Press, New Delhi.
Ford Foundation (1990): The Costs and Financing of
Health Care: Experiences in Voluntary Sector', Case Study,
Anubhav Project, New Delhi.
for Ninth Plan, Mimeograph, National Council of Applied
Economic Research, New Delhi.
World Bank (1995): 'India Policy and Financing Strategies
for Strengthening Primary Health Care Services', Report
no. 13042-IN, May 15.
21
APPENDIX 1
EMPLOYEES STATE INSURANCE SCHEME (ESIS)
Types of beneficiaries and coverage
ESIS covers factory sector' employees earning less than
Rs. 6500/- per month and also employees of shops, hotels,
cinema halls, theatres and road transport undertakings
employing 20 or more persons. The dependants of the
insured employee are also covered under the scheme.
TABLE Al
beneficiaries over 22 states and union territories (Table
Al). The coverage over the last five years indicates a decline
in beneficiaries per doctor as well as beneficiaries per
dispensary (Table A2).
Region-wise coverage shows larger coverage in
industrialized states like Mumbai, Tbmil Nadu, West Bengal,
Karnataka and Gujarat and relatively poor coverage for
LEVEL OF COVERAGE UNDER ESIS: 1998
No. of Centres
No. of Employees
No. of Insured Women
Total Beneficiaries
No. of Employers covered
Local. Inspection and Cash Offices
ESI dispensaries. Hospitalsand Annexes
No. of ESI Beds
Insurance Medical Officers
Insurance Medical Practitioners
640
8,361.900
1,524,100
35,290,350
212,931
1162
1620
23.692
6,059
2,885
Source: Annual Report: ESIS 1997-1998
TABLE A2
Level of coverage and facilities under the ESIS scheme over last 5 years
Years
Coverage
No. of
centers
1997
629
632
Employers
covered (in
thousand)
162.1
169.8
190 9
200.5
1998
640
212.9
1994
1995
1996
617
622
Employers
covered (in
Thousands)
6,627
6,796
6,613
7,731
8,361
Facilities
Beneficiaries
(in Thousand
NO. of
doctors
28,692
29,350
28,335
32,767
35,290
NO. of
beds
9419
9380
9212
9120
No. of
hospitals &
dispensaries
1545
1555
1564
1570
8944
1577
23,692
23,348
23.387
23,470
23,334
Source: ESIS Annual report: 1997-98
The scheme presently covers 8.4 million employees with
18 percent women. It covers a total of 35.3 million
states like Jammu and Kashmir, Himachal, Assam and
Meghalaya (Table A3)
TABLE A3
REGION WISE PERFORMANCE OF ESIS: 1997- 98
Coverage
State /Areas
Per capita Expenditure
No. of
Imployers
No. of IPs
No. of
Beneficiaries
Andhra Pradesh
12663
503500
1953600
800.16
118.88
Assam & Meghalaya
1235
43850
170100
1759.93
374.73
Bihar
5038
184050
714100
443.90
20.34
Chandigarh
1353
30900
119900
429.12
239.03
Delhi
23202
58500
2283400
733.07
174.88
Goa
1485
70800
274700
353 63
146.55
Exp. On
medical care
Exp. on
medicines
22
17034
8495
483
290
14625
9644
4833
45742
2367
673
Gujarat
Haryana
Himachal Pradesh
J&K
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
Pondicherry
Punjab
Rajasthan
Tamil Nadu
Uttar Pradesh
West Bengal
All India
9579
6277
23350
11277
13290
212931
2727850
1570600
139300
703050
404800
35900
16400
724700
461950
256500
1653250
154700
35950
435750
311650
1107350
63650
2811850
1792350
995200
6234600
600250
139500
1690700
1209200
4298500
1879100
3443900
35290350
484300
887600
9095450
720.43
382.83
350.75
81.41
400.50
576.88
153.81
66.82
139 40
6.38
126.48
163.11
787.97
469.83
585.35
934.70
505.89
538.16
471.02
757.06
235.67
120.09
13731
88 78
126.72
136.24
118 99
125 24
47.90
438.69
547.84
Source: ESIS, Annual Report 1997-98, GO1 (1999)
TYPES OF BENEFITS
ESIS provides medical care as well as cash benefits
through well-established hospitals and medical staff The
cash benefits, mainly to compensate for the wages lost
due to medical reasons, include sickness benefit, maternity
benefit, disablement benefit, dependent benefit, funeral
expenses and rehabilitation allowance and are available
on being recommended by ESI Medical officer. The medical
services provided by the ESIS comprise a wide gamut of
services ranging from preventive, promotive, curative and
rehabilitative services.5 Services of the Indian system of
medicines are also provided. Medical benefits can include
outpatient care, hospitalisation, or specialist treatment.
However, the package of benefits available in an area
of 12.5 per cent of the total expenditure on medical care in
their respective states. In 1997-98, the contribution per
employee was Rs 1420 whereas the expenditure per family
for providing cash and medical benefits was Rs. 1107 (Table
A4). Medical expenditure per beneficiary was Rs. 112 and
cash benefits per beneficiaiy were Rs. 91 in 1997-98.
Table A5 shows that the income of the corporation doubled
between 1993-94 and 1997-98, mainly because of the
increase in the contribution income. However, the medical
benefits did not increase leading to a sharp increase from
14% to 31% in the ESI reserve fund.
Provider Payments
Out patient services are provided through service
dispensaries or the panel system. Specialist treatment from
TABLE A4
Contributions Made and Benefits Received by the Employees: ESIS
Year
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
Contribution per
Employee (Rs.)
557.44
572.06
672.47
749.87
766.74
796.25
781.83
1419.9
Total Expenses
Per Family (Rs.)
Total Expenses
Per Beneficiary
(Rs.)
% of Medical &
Cash Benefits in
Total Expenditure
728.44
165.30
19020
201.65
241.34
242.32
259.96
182.57
285.38
56.47
67.20
48.40
70 32
63.03
64.66
77.22
71.51
841.27
870.45
1044.92
1046.45
1113.78
708.36
1107.27
Source: Employees' State Insurance Corporation, Annual Reports: Various Years, New Delhi
depends on the level of facilities available annoton
the premium.
FINANCING OF SCHEME
The scheme is financed by employers who contribute
4.75 per cent of the wages payable to the covered
employees, by employees who contribute 1.75 per cent of
their wages and State Governments contribute a minimum
outside is allowed if referred by ESIS doctors Inpatient
treatment is generally provided through ESI hospitals.
Some arrangement is also made with governmental and
non-governmental organizations to provide treatment. The
providers at ESIS facilities are mainly paid salaries. The
panel doctors or the Insurance Medical Practitioners (IMP)
are paid on capitation basis at Rs. 5 per IP per month. The
IMPS are allowed to carry on their private practice. ESI
* Those corporations that employ 10 or more workers with power and 20 or more workers without power fall under the Factory Sector. ESI Act is applicable to non-seasonal factories.
23
TABLE A5 PERCENTAGE DISTRI BUTION OF
INCOME AND EXPENDITURE ACCOU NT:ESIS
Income (in Rs. Million)
Contribution Income
Interest and Dividends
Rent Rates and Taxes
Compensations
State Govt's Share towards medical care incurred
initially by corporation
Miscellaneous
Expenditure (Rs. million)
Medical Benefit
Cash Benefit
Other Benefit
Administrative Expenses
Provision for I) Depreciation
2) Repair, maintenance of Hospital/dispensary
3) Rents and taxes
Provision for Capital Construction Fund
Net Excess transferred to ESI fund
1993-94
1997-98
6924.7
71 8
18.9
7.5
0.2
14518
81.8
14.4
12
0.4
0.4
0.3
6924.7
48.7
21.6
0.1
9.8
0.2
1.0
14518
27.3
22.2
0.07
14.6
0.2
0.8
0.7
3.6
14.2
100
0.07
4.1
2.9
-
30.6
100
Source: ESIS : Annual Report
TABLE A6 PERCENTAGE OF ADMINISTRATIVE COSTS TO EXPENDITURE ON
REVENUE ACCOUNT, CONTRIBUTIONS AND BENEFITS: ESIS
Percentage of Admin exp. to
Exp. on revenue account
Contribution income
Medical and cash benefits
1994
1.5
13.7
13.9
1995
13.1
14.2
16.5
1996
13.8
115.7
17.3
1997
15.3
15.2
19.8
1998
21.1
17.9
29.5
Source: ESIS Annual Report, 1997-98
medical officers (IMO) are generally given non-practicing
allowance. Some states allow IMOs to cany on their private
practice also
Cost of Administration
Administrative expenses necessary for running the
scheme have been increasing over the past 5 years. In
1997-98, the ratio of administrative costs to expenditure
on revenue account was 21 per cent, ratio of administrative
costs to contributions was 18 per cent and to benefits
was 30 per cent (Table A6)
• lb: prcvcnlivc wrrica iuclodc immuniudon. nulcnul mJ child hcahh. mJ family .dim: cenwec. Health cducmon mJ hculih check up camp, come under the prenmuce ceniees Curuuvc
renicer include diepenmry mJ hovpoul erne. Jufnoslic tohuec. Jrag, mJ Jrcvung. wrgical pracejurec, eye, mJ Jcnul care. The benenciane, me >1» prundej .uh lhe rehabilitative service,, aid,
and appliances as required by them
24
APPENDIX 2
TYPES OF BENEFITS
CENTRAL GOVERNMENT
HEALTH SCHEME (CGHS)
Types of beneficiaries and coverage
The scheme covers employees and retirees of central
government, certain autonomous, semi-autonomous, and
semi-government organisations. It also covers MPs,
governors, accredited journalists and members of the
general public in some specified areas. The families of the
employees are also covered under the scheme It covered
4.3 million beneficiaries in 18 major cities in 1995-96 (Table
A7). City-wise coverage shows maximum beneficiaries in
Delhi followed by Mumbai (Table A8).
TABLE A7 COVERAGE DATA
FOR CGHS, MARCH 1996
18
956112
4,360,823
241
Cities
Families
Beneficiaries
Allopathic Dispensaries
Other Dispensaries*
Total Attendance
Total Expenditure
The facilities under the scheme include outpatient care
provided through a network of allopathic, ayurvedic,
homeopathic, and unani dispensaries maintained for
exclusive use by CGHS beneficiaries. Further, the scheme
also ensures free supply of necessary medicines; laboratory
and X-ray investigations, domiciliary visits, emergency
treatment, antenatal care, confinement and post-natal care,
advice on family welfare, specialist's consultations and
hospitalisation facilities.
Premiums
Most of the expenditure of the CGHS is met by the funds
from the central government. The premiums, payable by
employees vary from Rs. 15 to Rs. 150 per month per family
according to their income range (Table A9). In 1995-96, the
contributions were 15 6 percent of the expenditure and Rs.
241 per family per annum.
Provider Payments
CGHS doctors, paramedical and other staff in dispensaries
and family welfare centres are paid salaries from central
government funds. Of the total expenditure, 32 per cent is
spent on wages and salaries of the staff working for CGHS
(GOI 1999). The providers under the CGHS are not allowed
to carry on private practice. Treatment in semi-government
95
15.58 millions
1475.7 millions
Source: CGHS (1999) Annual Report: 1995-96
•Includes Ayurvedic, Homeopathic, Unani, and Sidha
dispensaries and also polyclinics
TABLE A8 CITY WISE FAMILIES AND BENEFICIARIES- CGHS: 1995-96
City
No. of
families
covered
No. of
Beneficiari
es
Percent attendance for
allopathic clinics
MFC
________
Ahmedabad
Allahabad
8082
27943
36453_________44
159764
46
37
32
19
22
Percent attendance for other
systems of medicines
Total (in
M
F
C
Total (in
thousand)________________________ thousand)
114.397
386.5
56
41
32
32
12
26
3.494
105.6
Delhi__________ 348274_______ 1574695________ 37
Hyderabad
76650
450451_________ 32
Jabalpur
11057
52410
47
Jaipur__________ 22281________ 105633_________42
Kanpur_________41664________ 210524_________38
Lucknow_______ 12661_________ 63473________ 38
Madras_________ 33357________ 139692_________43
Meerut________ 12187
68864_________ 39
Nagpur_________ 32586________ 150112_________38
Patna__________ 24850________ 120169________ 39
Pune___________ 40257________ 150925_________46
36
27_______ 6419.2
32
37________ 991.0
33
20
164.5
34
25________ 300.3
32
30________ 585.4
34
28________ 286.7
40
18________ 555.8
34
27________ 375.6
37
25________ 648.2
34
27________ 179.9
41______ 13________ 415.5
40____ 37_____ 23______ 1146,0..
45
38
17_______ 141.8
0
0
0
0.0
47
34
19________ 23.1
32
31
38________ 80.2
46
34
20________ 71 5
47
41
12________ 46.5
46
31
23________ 49.2
50
37
13________ 74.9
35
31
3-1________ 45.9
47
45
8________ 29.7
TOTAL
36
41
956112
4360823
39
25
13611.9
37
22
1967.9
Source: CGHS, 1999
Note: Bhubaneshwar and Ranchi exclusively for AG's employees. For Trivandrum and Guwahati, data was not available
M-Males; F-Females; C- Children; T- Total
25
and certain certified private hospitals is reimbursed on
case basis by the government according to the treatment
provided, but have ceilings attached for different kinds of
treatments About 6 percent of total CGHS expenditure are
used towards payment for professional and special services
The expenditure of the CGHS during 1995-96 was Rs.
1,475.7 million or Rs. 297 per beneficiary. Of this total
expenditure, 56.6 percent is incurred on material and supply
which comprises mainly the drug expenditure. The
expenditure incurred on office travel expenses, rent, rates,
taxes, motor vehicles, and other charges can be taken to
constitute administrative expenditure This makes about 5
percent of total expenditure (Table A10).
TABLE A9
RATE OF CONTRIBUTION FOR SERVING
CENTRAL GOVT. EMPLOYEES: CGHS
Up to 3,000
3,001-6,000
6001-10,000
10,001-15,000
Contribution
per month (Rs.)
15
40
70
100
Above Rs. 15,000
150
Pay Range per month (Rs.)
Source: CGHS (1999a), MOHFWGOI
TABLE A1O
PLAN AND NON-PLAN EXPENDITURE UNDER CGHS: 1995-96
Plan Exp.
Non Plan
Exp
Plan +
non-Plan
M.E.
M.S.
charges
Other
V
2.01
84.62
Rent,
rate &
taxes
.86
1096
4.74
4.52
13.96
821.53
2.27
1.11
86.63
11.82
9.26
835.49
3.38
Salaty
Wages
Travel
Exp.
Office
Exp.
PPSS
10.03
.463.2
.03
.71
.17
6.72
1.19
21.71
473.2
.74
6.89
22.89
Source: CGHS (1999)
Note: PPSS- payment for professional and special services
ME- Machinery and Equipment; MS - Material and Supply; MV- Motor and Vehicle
'
(Rs. million)
M&
Total
.18
23.4
35.44
1440.32
23.6
1475.77
26
APPENDIX 3
PRIVATE INSURANCE SCHEMES
Types of beneficiaries and coverage: GIC offers medical
insurance to groups as well as the individual through
MEDICLAIM (MC) policies. Further, 'JAN AROGYA BIMA’
scheme offers insurance to individual and families, mainly,
to cover poor people. These policies are available to persons
between the age of 5 years and 75 years. Children between
age 3 months to 5 years can be covered if one or both the
parents are covered concurrently. GIC also offers personal
accident insurance policy to any person between the age
■Voluntary insurance has had limited success in India. In
1995-96, the number of MC policies issued were 465
thousand covering 1.67 million persons (Table All).
The Jan Arogya policy introduced in August 1996 covered
400,000 people by March 1997 (Naylor et.al. 1999) . Further,
the present MC scheme is confined mainly to the urban
areas and males where about 95 per cent and 83 per cent
of the policyholders are in the urban areas and males,
respectively. As the policy mainly covers hospitalisation
and most private hospitals are in urban areas, higher
TABLE Al 1
MC STATISTICS OF GIC AND ITS SUBSIDIARIES
Year
Policies
Issued
Persons
Covered
Total
Premium
(Rs. Million)
Claims
Incurred
Rs. Million)
1990-91
1991-92
165283
191510
252163
278.37
344.73
489.18
137.08
186.6
1992-93
1993-94
1994-95
566791
697018
985674
440377
391002
465194
1276509
1659069
1668161
974.33
1995-96
767.91
997.18
Per-Capita
Premium
(Rs)
24629
471.46
491.53
644.84
Amount
settled per
claim'
Claims %
Premium
491.13
6684
4924
494.57
496.29
763.26
462.85
597.77
3737
4773
54.13
50.35
5938
811!
48.39
64.01
64.67
7715
Source: GIC, Bombay, Personal Communication. * Based on United India Insurance company
TABLE Al2
NUMBER OF GIC POLICY HOLDERS
IN URBAN AND RURAL AREAS
AND BY GENDER
Source: UNDP research study, GIC, Bombay, Personal
Communication
TABLE Al 3
coverage in urban areas is expected. (Table Al 2). Further,
more than 73 per cent of the policyholders were in the
lower income range (Table A13).
Types of Benefits
The MEDICLAIM and JAN AROGYA policy are annual
policies. These cover hospitalisation and domiciliary
hospitalisation for illness/diseases/injury contracted
during the period for which the insurance is taken.1 Full
benefits are given to all insured as per sum insured opted
for. Under the MC policy, family discountsup to 10 per cent
and group discounts varying from 15 percent to about 67
percent depending on the size of the group are available.
NUMBER OF POLICIES BY INCOME CATEGORIES
Income
categories
<2500
2500-5000
5001-10000
10001 and >
Total
Category of benefits chosen
III
I
II
17432
2623
2912
651
23618
3117
701
478
105
4401
3278
874
404
156
4712
Total
%
27764
73.4
12.8
IV
V
VI
2089
249
97
84
1044
158
53
804
232
84
45
1300
169
4837
4028
1210
1289
37839
2519
.
10.6
3.2
100
Source: UNDP research study, GIC. Bombay, Personal Communication
of 15-70. It also offers Overseas Mediclaim Policies (OMP)
and old age medical insurance scheme. Life Insurance
Corporation, another public sector company introduced
'Asha Deep' policy in 1995 to cover four dreaded diseases
i.e. cancer, paralysis, dialysis and heart diseases for
individuals between 18-50 years of age.
For this reason, the group health insurance policies have
become more attractive as compared to individual policies
as reflected in chart 1.
Chart 1: Coverage of MEDICLAIM by GIC
The schemes have exclusions for pre existing diseases
• The domieilury hovpilaltoiun meur.s oealmenr foe Ihose illne.ee. to would nonredly required ho.pilal.uuun but are irealed al home under eornpe Hing cireum.iance, u per doclor’. advice.
Domiciliary bospiulizaboo rermburesemenl i. a maximum of 20 percent of rhe ioial cum opled for.
27
TABLE Al4
MEDICLAIM STATISTICS FOR FOUR SUBSIDIARIES OF GIC: 1995-96
Year
Policies
Issued
Persons
Covered
Total
Premium
(Rs. Million)
Claims
Incurred
(Rs. million)
Per-Capita
Premium
(Rs)
Persons
Covered
Per Policy
Claims %
Premium
National
87024
205387
60434
284464
3.27
3.20
4.21
4.20
63.98
65.88
471647
122.69
325.45
22.69
173.61
674.13
112349
191.77
493 97
38.67
272.78
New India
Oriental
United
657755
254295
750.99
152.06
578.36
58.69
63.64
Source: GIC, Bombay, Personal Communication
There is a thirty days waiting period clause and expenses
for treatment of AIDS, naturopathy treatment, dental care
etc. are not reimbursed, in most cases, statement from the
individual is sufficient and medical check up is not required
group) is calculated based on the age of the proposer as
also the sum insured opted for. The sum insured varies
from Rs. 15,000/to Rs. 3,00,000/- and premium varies from
a minimum of Rs. 175 to Rs. 5770. The average per-capita
premium was Rs.598 in 1995-96. Premiums for JAN AROGYA
policy vary from Rs 10 to Rs. 140perannum depending on
the age of the subscribers. Under the accident insurance
policy, the rate of premium depends on the risk group
covered based on the occupation and the benefits the
person opts for The premium for Overseas MEDICLAIM
insurance depends on the age of the person, duration of
the trip and the plan the person opts for. The old age
medical insurance scheme is like a medical savings account
where the funds accrue during the person's life and are
available later.
Provider payments
prior to taking the policy. Certain diseases excluded in the
first year of cover are covered, if policy is renewed
continuously. Maternity benefit is available with extra
loading in the premium. The scheme has a facility for
health check up for 4 continuous claim free years.
Incentives like no-claim bonus and tax-incentives are
also there.
Premiums
Premium for MEDICLAIM scheme (individual as well as
The scheme is of indemnity type, where the individual or
the hospitals are reimbursed after the payments have been
made or after the treatment has been provided. Expenditure
above the sum insured has to be borne by the individuals
as out-of-pocket payments.
Costs of Administration
The high costs of administration of the MC scheme,
reflected in the low-claim premium ratio, were 35 per cent
in 1995-96. This implicit high cost is due to selling costs
and costs of commissions, acquisitions and several other
types of operating costs.
28
APPENDIX 4
EMPLOYER-BASED INSURANCE
Types of beneficiaries and coverage
Employer managed facilities cover mainly the employees
of large public and private sector undertakings and Stateowned enterprises like railways and defense. Ellis (1997)
estimates that roughly 30 million people are covered under
the employer-based scheme.
TYPES OF BENEFITS
The employers could cover their employees under any
one or combinations of the four major schemes: i) Group
Health Insurance Scheme with GIC, ii) Reimbursement of
actual expenses claimed by the employees for out patient
care and hospitalisation, iii) Fixed Medical Allowance,
monthly or annually, irrespective of actual expenses, and
iv) In-house hospital facilities where companies have wellequipped, self-sufficient hospital services and out patient
facilities in their own dispensaries and also provide
medicines for their employees. Normally employees
earning less than Rs. 6500 per month are covered under
the ESIS scheme.
Expenditure on medical care for the sample companies
works out to be Rs. 5.64 million per company or Rs. 164 7.58
per employee per annum for 1988-89 On an average, public
sector spends more at Rs. 2251 per employee per year
whereas private sector spends only Rs. 1225.46 per
employee per year (Duggal 1993). The study found that
claims or reimbursement account for the single largest
category of medical care expenditure.
Premiums
The rates of premium and extent of coverage vaiy for
different employees in different companies. The company
generally pays the premiums However, some companies
require their employees also to pay a part of the premium,
which could be related to one's basic monthly salary.
Provider Payments
Payments to provider vary according to the benefits
provided by the company While under the first three
schemes the patient incurs out-of-pocket expenditure and
is later reimbursed by the company, for in-house facilities
providers are likely to be employed by the company on
salary basis.
29
APPENDIX 5
HEALTH INSURANCE SCHEMES IN THE
NGO/VOLUNTARY SECTOR
Community-based insurance schemes, primarily for
people in the informal sector, can have great relevance in
countries with poor growth prospects and a growing
informal workforce. A major challenge is to find ways and
means in which accessible care of good quality can be
organized using a maximum of non-government resources
in a transparent and accountable manner.
In India, several schemes exist which are run by NGOs
for providing health care for people working in informal
sector and living primarily in rural areas. However, not all
are documented A review of 82 schemes in the non-formal
sector undertaken by Bennett (1997) for different countries
include 12 such schemes from India. In addition, a survey
of some of the NGOs was carried out by Ford Foundation
(1994) in the Anubhav Project. The following review is based
on the experience of some of these NGOs.
provision of primary health care to all members of
community through inpatient, outpatient treatment in
health facilities or in medical centres and mobile clinics.
For example, Streehitkarni in Bombay, KEM in Pune, CENI
in West Bengal and VHS in Tamilnadu and Delhi emphasise
on maternal, family planning and child health services.
Some NGOs, like KEM in Pune and SEWA in Gujarat, also
provide health education. The contribution of NGOs in
curative health care is also substantial as many NGOs such
as Banwasi Seva Ashram in Uttar Pradesh, Community
Health Development Project in Maharashtra, VHS in
Tamilnadu and Delhi, run their own dispensaries, clinics
and hospitals.
Financing of the Schemes
Beneficiaries of most of the schemes are defined both by
geographical location and nature of work. Membership is
individual or household based. Some schemes target just
the women, e.g. SEWA. Evidence from several schemes
points out that the very poor are seldom well represented
in voluntary schemes unless subzidised by outside agency,
usually the government. Secondly, rural participation is
frequently lower in mixed schemes, which cover both rural
and urban areas. Berman (1992) estimates about 5 percent
of the total population is covered by the NGO sector. Ellis
(1997) estimates the total coverage to be about 30 millions.
Most of the schemes have a low coverage level - not more
than a quarter of the target group Table Al 5 gives the
coverage for some of these schemes.
Most of the schemes are financed from patient collections,
government grants, donations and other miscellaneous
items like interest earnings etc. Patient collections
generally comprise premiums or fee-for-service payments.
Premium in most of the schemes is on flat rate basis, paid
annually and payment is mostly in cash. In more
sophisticated schemes, premium is according to income.
Sevagram, AGRT, VHS set premium on sliding scale
according to income. The Sevagram scheme also allows
payment in kind. SWRC allows monthly or quarterly
payment. All the schemes rely on funds additional to those
received from premiums, though the percentage from
different sources varies in different schemes. For example,
in AGRT, Pachod 22 percent were from government
donations, 2 percent from donations and rest from patient
collections. In SEWA-Rural, revenue contribution from
government grants is 73 percent, patient collection account
for 13 percent and donations 13 percent (Ford Foundation,
1990). The Seventh plan budgeted a government grant of
Rs. 1500 millions for the NGO sector (Ellis et. al. 1997).
Types of Benefits
Provider payments
Types of Beneficiaries and coverage
Some of the schemes have defined benefit packages but
most identify benefits as all services available at their
health centre and/ or hospital. Some schemes have
exclusions; otherwise, they tend to cover all available
services An important aspect of NGOs services is the
TABLE Al 5
COVERAGE FOR SOME SCHEMES IN
NON-FORMAL SECTOR IN INDIA
Name of the
Scheme
Barpali
Tribhovandas
96 of target group
covered
KSSS
SWRC
Sewagram
Golpara
SEWA
Source: Bennett (1998)
696
16-2096
18%
2596
7496
8696
Most NGOs have their own facilities to provide health
care. In this case, the providers are paid wages and salaries.
Many hospital-based schemes pay hospitals on a case basis
or fee-per-service basis. For example, SEWA uses the fee
for service and members are reimbursed on the basis of
bills. For most primary care schemes, all collected funds
are allocated to the nearest provider on a lump sum basis.
Administrative Management and Costs
No. of
Beneficiaries
——
800,000
34,000
20,000
19,450
1,250
75,000(1994)
The administrative costs of the schemes in the NGO sector
are generally low. The AGRT scheme, Pachod and SEWARural, Jhagadia has administrative costs varying between
3 to 5 percent for different projects under the scheme. This
low administrative cost is probably because the schemes
do not indulge in too much marketing and most of the
expenditure is used for the welfare of beneficiaries.
A major challenge is to find ways and means in which
accessible care ot good quality can be organised using a
maximum of non-government resources in a transparent
and accountable manner.
30
PRIVATE ENTRY INTO HEALTH INSURANCE KN
INDIA: AN ASSESSMENT
INTRODUCTION
The passage of the Insurance Regulatory and
Development Authority (IRDA) Bill in the Indian parliament
marks the latest phase in the move towards the
privatization of the insurance sector in India (Asian Age
1999, Government of India 1999a). Up to now, the provision
of various types of formal insurance has been under
the exclusive control of the public sector (Government
of India 1999a,b,c). The bill allows for the entry of
private sector entities in the Indian insurance sector,
including health insurance, and envisages the creation of
a regulatory authority that would oversee the operations
of various players in the insurance market
(Government of India 1999a)
The private corporate sector has been quite enthused by
this development. Several large health care providers and
international health insurance companies have already
positioned themselves to enter the market as soon as it is
open to the private sector and the story is similar for their
potential Indian partners (Sinha 1999a). Global insurance
giants like Cigna and Aetna have entered into pacts with
Indian partners and domestic firms are actively carrying
out epidemiological mappings of the Indian population,
investing in hospitals and conducting market surveys. One
private consulting firm estimates that the health insurance
market will grow to five times its current levels by the year
2005 (Dhawan 1999).
In contrast to the hectic activity in the corporate sector,
the government appears to have been lethargic in
anticipating developments, at least as far as health
insurance is concerned. For instance, the IRDA bill itself
contains no reference whatsoever to the health sector or
to health insurance (Government of India 1999a). Nor is
health mentioned in the nearly 175 pages of the Insurance
Act of 1938, an amended version of which will come into
force once the IRDA Bill is effected, and presumably is
included under "miscellaneous insurance business"
(Government of India 1999a,d).' This is broadly reflective
of the policy environment in India, where health insurance
continues to be neglected. As another example, in a report
prepared by a government of India committee on insurance
reform, there was exactly one reference to health
insurance, on page 97 of a 104-page report (Government
oflndia, 1994).
The apparent lack of attention to health insurance in
Indian government policy documents may reflect a
somewhat sanguine view of the functioning of markets in
health care provision, insurance and elsewhere.2 The
many problems with quality and consumer satisfaction in
the existing Indian health system may have led to a belief
that the entry of private insurance, especially in its
managed care form (such as Health Maintenance
Organizations (HMOs)) would lead to social net gains
(Sinha 1999b, Srivastava 1999; Times of India 1999a). It
may also be the case that the government expects any
pertinent regulatory issues to be taken care of by the
Insurance Regulatory and Development Authority (IRDA).
The IRDA is supposed to protect the interests of policy
holders, promote efficiency in the conduct of (all) insurance
business, regulate the rates and terms and conditions of
policies offered by insurers and direct the maintenance of
solvency margins (for further details, refer to Government
oflndia 1999a, pp. 1 -4)?
Whatever the reasons underlying the government
approach towards the entry and functioning of the private
health insurance sector in India, it is not always the case
that private provision of health insurance works to promote
the standard objectives of health policy.'1 This is apparent
from the economic theory of health insurance that points
to problems of excess usage of health facilities, increase
in inappropriate care, adverse selection and risk selection
and their implications for the standard goals of health
policy (see Section II below for further details). Moreover,
the experience with private health insurance in developing
countries such as Chile and Uruguay bears out some of
these concerns (Medici et al. 1997, Ferreiro 1999). Even a
well-designed regulatory set up for private health
insurance such as in the United States may not yield
entirely satisfactory outcomes. It has often been suggested
that the high proportion of health expenditures to GDP
(14.5 percent in 1995 (World Bank 1997))5 and the presence
of 40-50 million uninsured Americans is associated with
the strong presence of private health insurance in the
United States (Chollet and Lewis 1997; World Bank 1993).
Of course, all of this depends on the actual size of the private
health insurance market that emerges, and a small size
signifies smaller effects, at least in the short run.
In this chapter we assess whether the steps envisaged in
the IRDA Bill including especially the provision for entry of
'Section 2.13(B) of the Insurance Act refen to "’miscellaneous insurance business' as the business of effects contracts of insurance which is not ..included in..." (Government of India |999d. p.4).
•This is obviously not a view shared by employees of the public sector insurance companies Life Insurance Corporation (UC) and General Insurance Corporation (G1C). some two hundred thousand of whom
went on strike on October 29. 1999 (Business Standard 1999)1
•'Statements by IRDA officials such as The IRDA will deal firmly with those...who violate laws" likely form the basis for Qus posiuon (Tunes of India 1999b).
‘We shall not be concerned here with other impacts of reforming private insurance on the economy, such as enhancing the investment climate, infrastructure investment and employment (Sinha 1999c; Snvastava
1999).
This is much higher than the proportion for other OECD countnes ranging typically from 7 percent to 10 percent of GDP (Workd Bank 1997)
* Equity on health care can have many meanings including in terms of health outcomes, access to. and uuhsaiion of health care facilities (Musgrove 1996) However, most of the measures arc likely to be
conelaud with equity in the burden of health spending.
31
private firms will bring about an environment in the health existing regulation by other organizations may be needed
sector sufficient for meeting India’s health policy goals. (as for accreditation, standards for medical institutions and
The relevant policy goals are assumed to be a health care malpractice), which is a real problem given the long history
system that is not too costly, is of good quality, and with an of poor performance. Finally, the IRDAiseven less likely to
equitably distributed burden of health care spending.6 be able to influence the impacts of private health insurance
Given that the financial burden of sickness upon the poor on the public health system and on the resultant quality of
typically depends on government budgets that fund the care available there. As a consequence, the effects of the
public health sector and the personnel employed in it, the introduction of private health insurance in India may turn
potential impact of the IRDA bill on government health out to be unfavorable although their magnitude will be
services will also be a subject of our inquiry.
small in the short run.
Taking the size of the private insurance sector as a given,
PRIVATE HEALTH INSURANCE AND COST,
we will first revisit the relationship between the increased
QUALITY AND EQUITY IN HEALTH CARE
spread of private health insurance and costs of health care,
PROVISION AND FINANCING
the quality of care, and the distribution of the burden of
This
section
has three parts - focusing on the
health care spending. Apart from indicating the
implications of private health insurance for India, this relationship between the spread of private health
analysis will also highlight the potential role of alternative insurance and issues of cost, quality and the equity in the
regulatory tools that can be effectively utilized to address health sector, respectively. The section relies heavily on
adverse implications (if any) of its spread. Second, the paper the seminal work of Arrow (1963) and recent surveys of
will describe the existing regulatory structure in India as it related literature by Einthoven (1997), Chollett and Lewis
relates to health care provision and private health (1997), Musgrove (1996) and others.
insurance and discuss its ability to promote national health Private health insurance and aggregate
policy goals. This is used to draw inferences about the costs of health care
potential impact of the entry of private health insurance in
In theory, the introduction of private health insurance
India and to suggest an agenda for regulatory reform in can contribute to increasing the aggregate costs of health
the health sector. Finally, we provide a set of estimates of care in several different ways. Most of the arguments in
the potential future size of the private health insurance favor of increasing health care due to private health
market and discuss the implications of these projections insurance have to do with some disparity in the information
for the satisfaction of health policy goals.
available to parties involved in transactions in the health
Our main conclusions are as follows: A review of the care and health insurance markets.
theoretical and empirical literature suggests that private
In interactions between health care providers such as
health insurance may turn out to be somewhat more doctors and patients it is a given that the former have much
expensive and inequitable than a system of social better information about their patients' health status and
insurance of comparable coverage, although the future course of treatment than the latter. This, together
implications for quality of care are less certain. Even if a with the prospect of being ill and accompanying
social insurance system were not feasible, many of the psychological costs and loss of eamings makes the demand
cost enhancing effects of private insurance and some of for health care fairly dependent on the course of treatment
its impacts on the distribution of the burden of care can be recommended by a physician. One consequence is that in
ameliorated by appropriate regulation, if properly a regime of pure indemnity insurance providers have an
implemented. However, the regulatory setup as currently incentive to provide more care than may be medically
envisaged in the IRDA bill and related legislation will not appropriate. For the same reason the patient, or insurers
be sufficient to promote the health policy goals as stated for that matter, may be less willing to question the
previously. This is partly because it is unlikely that the IRDA qualifications of the doctor as to his or her expertise (Arrow
will take an active interest in regulatory issues specific to 1963, pp. 371 -3). The problem will be greater in situations
health insurance, given both the historical neglect of this where the patient can choose his or her doctor and
issue among policymakers and recent pronouncements treatment freely and then present the bill to the insurer
attributed to members of the currently existing "interim" for reimbursement.8
IRDA ' More importantly, the powers vested in the IRDA
The transaction between the insurer and the insured in
may not be sufficient to bring about the regulatory changes the health market suffers as a result of inadequate or
needed, even if taken in their broadest meaning and incorrect information as well. Once insured, an individual
assuming an activist approach on its part Important faces a reduced incentive to take precautions against poor
regulatory issues that IRDA could take up would require health, much as a person with house fire insurance is likely
complementary regulations in health care provision to to take less precaution in storing hazardous materials in
work effectively and these may not be under its control. In her house. A sick person may also feel less compelled to
some cases, new legislation may have to be undertaken by control her consumption of health care and expensive
the Indian Parliament. In others, better enforcement of diagnostic examinations if medical care costs are co
’For instance the IRDA docs not plan to intrerfcre in the premiums set b> insurance companies for their policies, leaving that to “market competition." (Times of India. November 10
• The insurers can. under an indemnity system, rely on a co-payments or co-insurance to curtail consumer use of care, however.
03038
32
by insurance. Moreover, doctors and hospitals may only be United States' annual average growth of 6.4 percent
too willing to provide enhanced care in view of the (Phelps 1997).
discussion of the previous paragraph. Thus an increase in
To the extent that private insurance in the form of
insurance coverage could lead to an increased demand for managed care can yield low cost outcomes in comparison
health facilities and personnel and push up the cost of to a fee-for-service system, the relevant issue for policy
providing health care.
makers and regulators is to devise methods to promote
The arguments outlined above hold truefor any type of their emergence. At one level such institutions might be
insurance regime, public or private, so it is unclear on this thought to be a logical market outcome given their lower
basis alone whether costs are likely to be higher in a private costs and no obvious declines in consumer satisfaction
insurance system in comparison to public sector dominated relative to fee-for-service systems (see below for impact of
financing.’ it might be argued, however, that public managed care on quality). However, the experience of the
operated insurance schemes, which typically involve dual United States suggests that such an outcome is not afait
functions of the financing and provision of services may accompli and HMOs faced stiff resistance from medical
involve a myriad of restrictions on health care utilization, associations and legislatures until the 1970s and
especially referral to higher order care. In India, afterwards. Much of this resistance had to do with the
government employees covered under the Central prevailing "guild free choice" model that supported the
Government Health Scheme (CGHS) cannot obtain idea of free choice of health care providers by consumers.
reimbursements for private care unless appropriate Indeed, right up until the 1980s many states outlawed
referrals have been obtained from authorized medical settings whereby employers could offer their workers
practitioners or the Director of CGHS (Government of India, preferential terms of coverage if they used specific
Various; see also Table 1). A similar set of rules appears to providers with whom they had a contract on grounds of
hold for the state supported Employees State Insurance being discriminatory against providers (Einthoven 1997,
Scheme (ESIS) for workers employed in the organized sector pp 198-9). HMOs got a boost in the United States when
in India (see Table I). This process assumes that there is laws were passed requiring employers to offer at least one
an effective referral process that curtails the usage of HMO option to their employees and as the government
public facilities, or private care if permitted under the public began offering its own employees the option of such plans
scheme. Under CGHS, only about 6 percent of the total (Einthoven 1997, pp.212-3). Further evidence on this issue
expenditure is accounted for by outside/private referrals is available from the health reform experience of Chile
suggesting that the process for external referrals may be where ISAPREs (private insurers) have functioned mainly
effective in India (Garg 1999b, p. 34).10 However, this does as pure third-party payers (Baeza 1998; Ferreiro 1999).
not appear to be the case for referrals within the public
A second form of information asymmetry common to
system where the utilization patterns are biased towards insurance markets is the fact that individuals are likely to
public hospitals as against primary care facilities (World know much more about their health status and future needs
Bank 1995 and Mahal et al. 2000).
than insurers. Thus, people expecting to incur significant
Managed care institutions such as health maintenance health expenditures in the near future will figure
organizations (HMOs) that have emerged in the private disproportionately among those who choose to get insured.
sector combine the roles of the provider and the insurer This causes profit-oriented private insurance companies
and can therefore serve to cut costs. The cost-cutting to adopt procedures that are often expensive to weed out
mechanisms could include stricter referral processes, bad risks via a process called risk selection. In Chile, for
payments based on diagnostically related groups, instance, where the population over 60 accounts for 9 5
capitation payments, and other methods of managing the percent of the country's population, the share of the 60
utilization of health care services (Einthoven 1997; Phelps years-plus group in the population insured with private
1997). In the United States, such systems covered nearly insurers was only 3.2 percent, with the rest being covered
60 percent of the population in 1995 with the population by the public sector (Baeza 1998, p. 18). Similarly, the
coverage having expanded at rates of 12 percent per annum average family size in Chile is 4 members, whereas the
during the previous decade (Einthoven 1997). Similar average among 1SAPRE members is only 2.3 (Ferreiro 1999).
institutions have emerged in Latin America - such as the
The "administrative" costs resulting from this process of
ISAPREs in Chile and the IMACs in Uruguay - and on a risk selection — essentially a deadweight loss — can be
miniscule scale in India (Gupta et al. 1992; Medici et al. quite high relative to expenditures and usually are passed
1997)." There is some evidence to suggest that the on to customers in the form of higher loading charges.12
emergence of HMOs has led to cost-containment in the Those unable to obtain insurance at the higher premiums
United States. California, the state which experienced the may then go back to the free public health system if access
fastest growth of HMOs during the 1980-91, also saw the under this system is open to all, or to out-of-pocket
slowest expansion in the cost of care among all states at payments. In sum, overall health care costs would be higher
3.7 percent per annum in the same period compared to the than under a comparable public insurance system (unless
‘Of course, in the existing scenario where the bulk of health expenditure* in India are out-of-pocket (nearly 80 percent (World Bank 19951. use may be limited much earlier by household or local
community resources in comparison to • setting with expanded insurance, public or pns-te
‘This does not rule out inequities arising in the sense that a small segment of the beneficiary pool may be using a disproportionately large amount of the external referrals
"ISAPREs are the Instituciones de Salud Previsional (Musgrove 1991) and IMACs are “Collective Institutions of Medical Assistance” (Medici et al I997i
' Loading charges can also include profit margins.
33
outweighed by the inefficiencies of a public sector
bureaucracy) where membership into the insurance
scheme may be compulsory for designated groups.'3
Regulatory methods to prevent risk selection must, per
force, face up to the problem of adverse selection (of poor
risks disproportionately seeking insurance) which may
have implications for the financial viability of an insurance
company. In this sense, market outcomes that lead to
insuring large groups are desirable so that there is little to
suspect a preponderance of poor risks in the applicant
pool.14 Indeed, there is clear evidence that larger groups
face lower administrative costs. In the United States,
loading charges (defined as (Premiums/claims) less 1)
typically range from 40 percent for individual insurance to
5-8 percent for group insurance (Phelps 1997, p.346; see
also Table 2). In India, insurance plans offered by the
General Insurance Corporation (G1C) offer discounts over
individual premium rates that range from 15 percent to 67
percent for groups of size 50 thousand or more.15
Large group insurance is unlikely to address all
motivations for risk selection. It will not, for example,
address the problem of risk selection across small
employment groups and the self-employed if there are
profitable opportunities in those areas It will also not
adequately address the possibility of selecting among
individuals who change jobs or whose insurance comes
up for renewal. Seemingly in the realm of "unfair"
exclusion from insurance, regulations that curb the denial
of insurance coverage to these groups may affect the costs
of selecting among risks, for instance by inhibiting insurer
motivation to acquire individual-specific utilization data
from other companies or cartying out expensive pre
selection tests. On the other hand, regulations that cap
total overhead expenditure of insurance companies would
be more likely to promote group insurance business than
the administratively more costly individual-based
insurance (Government of India 1999d).16 Employment
based group insurance can also be promoted by insurance
contribution-linked tax benefits given to employers without
corresponding tax liabilities for the employees (but not if
premiums are paid by employees), as in the United States
(Phelps 1997, pp.349-54).17 In India, however, tax benefits
can accrue both to employers and employees depending
on who pays the premium.18 In this setting, employer paid
premiums may still be desirable as a means to promote
group insurance if corporate tax rates are higher than
personal income tax rates or if there are returns to scale to
employers from administering group insurance.
in developing countries, there is another informationrelated factor that could potentially lead to high health
care costs. This is related to the financial health of health
insurance companies. In the absence of minimum capital
reserves and incomplete epidemiological information
about the population, there is a risk that insurance
companies could be guessing wrong and charging
premiums that are much lower in comparison to the
benefits offered in a competitive environment.'9 The
problems would be exacerbated if get-rich quick companies
were to invest their premium income in high-risk assets
that are not aligned to insurance claim liabilities. The
importance of health insurance and the dependence upon
it of a large cross-section of the population means that the
government is unlikely to accept even short-run scenarios
where the companies can become bankrupt.20 As a
consequence, the government or the insurance sector may
be ready to incur additional amounts in expensive bailout
packages for sick health insurance firms, creating a
disincentive for individual firm managers to perform
financially, since their downside risks are covered to some
extent.
Governments across the world have sought to address
these concerns by setting a minimum set of conditions
relating to management and personnel, actuarial analyses,
solvency, working capital and investment profile; and a
system for dealing with liquidations/takeovers. In most
cases, there is a national level regulator to oversee the
implementation of these conditions. Some of the relevant
regulations prevalent in the United States and the European
Community are summarized below in section III.
Aggregate cost implications of private
insurance: Cross-country evidence
In this section, we examine cross-country data to check if
increased health spending per capita is associated with
increased private insurance, all else remaining the same.
We use information on per capita income, health care
expenditures and private and public insurance coverage
for about thirty-one developed and developing countries
for this purpose (for details about the sample of countries
and data sources, please refer to Table 3). Of course, a
macro-assessment of the cost impact of the private
insurance sector using national level data is not
straightforward since it is likely to be confounded by income
effects, the type of public insurance available, the nature
and implementation of regulations and the like. Our
preliminary analysis does not rule out the possibility that
private insurance may have a much smaller impact on
health spending than one would suspect.
Column 1 of Table 3 reports the results of a regression of
the natural log of health spending per capita on the
proportion of population covered by private insurance. The
magnitude of the coefficient suggests that health spending
'One key exception lo (he argument in favour of lower administration costs in social insurance is a system where social insurance lakes the form of a contribution into a national tend, payments out of
which are made to various "private" entities to insure the contributors. In this case, risk selection by these entities would continue unless appropriate regulatory measures are adopted (sec Chapter III for
father details)
“With the assumption that the group insured was fanned for rcxvons other than to seek health insurance
'These are the rates for Group Mcdiclaim Insurance plans (communication with Rxshmi Shanna. New India Insurance Company)
■Under the insurance rules of 1939. management expenses for “miscellaneous" insurance cannot exceed the sum of agent commissions (limited to 10 percent of gross prermums) and a number ranging
from 20-35 percent of gross premiums depending on the volume of business. There are some exceptions for newly established companies, however (Government of India1999c pp 21-231
'This Is hkrly io bo (ho cash ol employer. rind ,( admlniunUvely cosily <o deal -(th mdo.Jual msuranoo paeL.ge4s, eg. ,t wage ddlerenuals Rood on .nvanuxo coembeuon. -on: (o bo (asuiuusl
Individual policies account for only 6 percent of the entire pnvaicly insured populatiom in the United Stales (Phelps 1997. p.349)
•Communication with Mr. Sikandar Khan (Member of Income Tax Tribunal)
The problem is likely to be excerbated in an environment with many competitors so that scale economies in administering msurancc may not be possible (see Baeza 199$ Musgrove 1996 P54)
-'The market would work by cluninatrng inefficient firms over time but in the case of insurance this may be a cost too high to bear for the government.
‘
34
per capita is positively associated with the proportion of
population covered by private insurance. Indeed, a onepercentage point increase in the proportion of population
covered by private insurance is associated with a 7.8
percentage point increase in the costs of health care
per capita.
Health spending, however, depends on many factors
including income. Increased income may also lead to an
increased demand for insurance, both public and private.
Increased incomes may also lead to greater out-of-pocket
health spending. Thus, at the very least, the regression
analysis would have to control for the overall level of
insurance (and/or income) in examining the impact of
private health insurance. This reduces the coefficient on
private insurance to statistical insignificance at the 5percent level and its magnitude becomes small as well
Column 2 of Table 3 indicates that an increase in the
proportion of population covered by private insurance of
one percentage point is associated now with only a 0.7
percent increase in the costs of health care per capita, if
variations in income are controlled for. The results remain
unchanged even if we control for the type of health
insurance coverage in operation - that is, whether it is an
alternative or merely a supplement to an existing system
of public health insurance (see Thble 3).
quality of health care currently available to seekers of
health care in India. For instance, patients both rich and
poor tend to overwhelmingly favor the private sector when
it comes to ambulatory care (ASCI 1996; World Bank 1995).
This suggests the generally poor perception of the state of
medical consultation available in the public sector, a fact
confirmed by large shortfalls in personnel, equipment, and
medicines in public facilities reported in primary health
centers and sub-centers (Naylor et al. 1999; World Bank
1995). The situation is no better for workers with access to
facilities under the ESIC (Employees State Insurance
Corporation) ESI facilities are well known for their
unresponsive staff and their poor state of equipment (ASCI
1996; Wadhawan 1987). Finally, the private sector itself is
known for providing low quality health care A study in two
districts of Maharashtra found a large number of doctors
practicing modern medicine without being qualified to do
so, several hospitals that did not have even the basic
infrastructure and personnel to carryout their functions,
and operating without any licenses or registration (Nandraj
and Duggal 1996). More recent studies of private medical
hospitals in Calcutta and Bombay further confirm the poor
state of private sector facilities, apart from highlighting
the frequency of medically unnecessary procedures carried
out on patients (Nandraj, Khot, and Menon 1999).
Is this result reasonable? The United States is often held
up as an outstanding example of a country with "very high
costs" of health care, a fact that is often linked to its
predominantly private health insurance system. In
particular, the United States has a high spending on health
per capita (US$3,828 in 1995) in comparison toother OECD
countries such as France (US$2,600), Japan (US$2,947), and
especially the United Kingdom (US$1,205) and Canada
(US$1,814) (World Bank 1997). On the other hand, it is worth
noting that with some notable exceptions such as the
United Kingdom, the rale ofgrowth of health care costs in
the United States has often fallen below that of many of
the OECD countries. California, a state with much
experience in managed care, experienced even lower rates
of growth in health costs during the 1980s and 1990s. Thus,
a popular text on health economics for undergraduate
students remarks that "The very strong relationship
between per capita medical care spending and per capita
income is all the more remarkable, given the wide diversity
in health care systems.(Phelps 1997, p.621).
In addition to poor quality, there is reason to believe that
some of the care provided is cost-ineffective. The obvious
example is the much higher rate at which patients utilize
outpatient departments of hospitals and other sources of
advanced care in comparison to primary health clinics.21
The rapid spread of diagnostic centers in the public and
private sectors (TN example) leads one to suspect the
inefficient use of this technology in the provision of health
care as well.
Quality and Cost-effectiveness of
Health Care
In the sense used here, quality refers to the level of
competence with which a given examination and
treatment protocol is implemented by provider(s) - be it
medical examinations, diagnostic tests, the quality of
administered drugs, or hospital care. Cost-effectiveness
refers to the efficacy of the treatment protocol itself, by a
comparison of expenditures in relation to outcomes.
There is an extensive literature that summarizes the poor
In a free market with no uncertainty about the outcome of
treatment, one might expect higher quality treatment to
be undertaken (subject to the usual constraints) as fully
informed consumers choose the most effective doctors and
medical facilities, ignoring the rest. However, a major
problem in the health care market is precisely the
uncertainty about outcomes on the part of the consumer of
services, a fact noted by Arrow nearly forty years ago (Arrow
1963). Alternatively, institutions might develop to label/
certify doctors and health care facilities, without
necessarily excluding them from service provision, so as
to address this problem of lack of information with the
consumer (see Phelps (1997) for examples from the United
States). In this case, one would naturally expect a greater
demand for certified personnel and facilities and the
gradual sidelining of others not so certified. This depends
on the extent to which the public is capable of taking
informed decisions and whether it considers the
certifications credible. Finally, there could be licensure
that excludes everyone other than those meeting certain
standards from practicing medicine.
The contribution of an insurance scheme, whether public
"The obvious culprit it the poor quality of primary care facilities, but the lack of an effective referral system is also a problem
35
or private, to improving the quality of health care depends
on whether the scheme is able to influence the process of
labeling or licensure of medical personnel and facilities
or the entry of highly skilled individuals in the health
sector.
As noted previously, the provision of insurance may
increase the demand for health care and so push up its
price While this would improve opportunities for highquality individuals who might have otherwise sought
employment in other sectors, it would also increase the
supply of low skilled individuals into the health sector,
unless appropriate screening takes place. That is, the mere
increase in returns to health care provision in this sector
may not increase average quality and may even reduce
quality at the margin.
Insurance companies could contribute to enhancing
quality if, for example, they put quality-determined
restrictions on the nature of expenses they would
reimburse.22 In the case of HMOs and other managed-care
institutions, they could empanel only those doctors who
meet certain qualification and treatment guidelines
(Einthoven 1997). By enhancing the returns of such doctors
over that of others they could increase the demand for
such qualifications over time. The same could presumably
be done for institutions such as hospitals and diagnostic
centers. Moreover, by restricting the use of unnecessary
expensive care through guidelines for referrals and
hospital stays, managed care could also promote costeffective treatment guidelines.
There are, however, three areas of concern First, it is not
obvious that arguments that hold for HMOs also hold for
indemnity based insurance. In the case of indemnity
insurance, an expansion in coverage if accompanied by
an increase in demand for care induced by physicians and
lack of resistance to it by private insurers and patients
could lead to an enhanced use of expensive care and
diagnostics without any change in health outcomes. It also
does not follow that an indemnity system would cater only
to highly skilled personnel and institutions. This problem
cannot be readily addressed by competition if consumers
of health care are unable to readily distinguish among
different insurance plans and premiums charged by
managed care institutions and indemnity-type insurance.
it might even appear that indemnity type insurance is more
consumer-friendly by not putting restrictions on whom to
consult and get treated by. Even otherwise, effective
competition from managed care organizations might be
slow to emerge if there is resistance from associations of
medical personnel, consumers and employers (for
examples from the United States see Einthoven (1997)).
Moreover, the formation of panels and exclusive
contracting with doctors characteristic of managed care
may be problematic if there are pre-existing laws against
restrictive pricing practices. For instance, the GIC is exempt
from the provisions of the Monopoly and Restrictive Trade
Practices (MRTP) Act (Government of India 1999h, pp. 5-8).
To the extent that preferential treatment for panel doctors
associated with HMOs can be interpreted as a form of
restrictive trade practice, the MRTP Act would hinder the
development of managed care in India, apart from giving
GIC an unfair advantage in the insurance market. In these
circumstances licensure and its strict implementation are
clearly necessary.
Second, there is the possibility that insurers in managed
care type systems sacrifice quality of care in exchange for
lower costs by empanelling lower quality (and cheaper)
doctors and facilities if there is a low level of quality
awareness among consumers and if laws against
malpractice are poorly enforced.23 Again, this would not
happen in a market where information about alternative
plans and quality of care is readily available and
comparable even if malpractice law was difficult to enforce.
One way around this would be regulation that promotes
uniform benefits' packages.
Third, if private health insurance leads to increased
incomes among private providers of care, it may affect the
quality of medical personnel available in public sector
facilities. High returns in the private sector would lead to
their exit from relatively low paying public sector jobs as
well as reduce the number of new entrants into public
sector jobs. There is anecdotal evidence that this is already
taking place (see Naylor eta/. 1999, pp.4, 7). Consequently,
it can be expected that their departure would adversely
affect the remaining users of public health facilities if
replacements are unavailable.
The experience of the United States clearly suggests that
HMOs provide as good if not better care than their pure
indemnity counterparts whether measured in terms of
client satisfaction or in health outcomes (Einthoven 1997;
Phelps 1997). However, in India this would require
providing information about insurance packages to
consumers so as to promote more effective competition,
addressing the legal issue of restrictive practices and better
enforcement of standards on accreditation and laws on
malpractice. In any event, it would still not address the
problem of worsening quality for users of the public health
care system.
Equity Implications of Private Health
Insurance
Would the entry of private health insurance companies
worsen the distribution of the burden of health care
spending? This can happen for two main reasons. First,
private insurance companies may find it profitable to
undertake risk selection so as to insure low risk individuals
and exclude the high risk ones from insurance.2,1 This
imposes a large burden of care on the people who are
likely to get sick and most in need of risk protection. In
Chile, the ISAPREs (private managed care) insure a
disproportionately large number of people in the
economically well off groups, leaving the worst-off to the
•-To some extent, this already exists under GIC plans. Under the Jan /Vogya Scheme for instance, reimbursement for medical expenses depends on whether the medical facility used was registered with
local authorities and had a qualified medical practitioner. In the sense of being registered with the appropriate provincial medical council (Rashim Shanna. National Insurance Company of India)
’’For the generally poor stale of the law on malpractice in India, sec section III below.
•‘‘Via exclusion conditions, tiered or durational rating (Chollel and Lewis 1997).
36
public insurance system (Baeza 1 ouu) in this sense, prix ate
insurance enhances inequity unless there is access to
public services of reasonable quality as a last resort If
private insurance and subsequent private care expansion
attract doctors and other skilled medical personnel away
from public health facilities, it would imply the worsening
of quality of care available to precisely those who are denied
this insurance. Second, if the entry of private insurance
raises the overall costs of health care, patients who cannot
afford to buy insurance (especially the poor) would have to
pay larger amounts out-of-pocket.
As against this, an expansion in private insurance could
lead the better off groups to consume high quality private
care, thereby improving access to lower quality public
sector facilities for the worse-off groups (see, for example.
Besley and Coate 1991; Gertler and Sturm 1997). However.
this requires the assumption that a shift out of public care
by the rich will leave the magnitude of public expenditures
unaffected.
It can also be argued that the burden of health care is
already quite unequally distributed so that the introduction
of private insurance will not make much of a difference.
For instance, in their study of five Indian states, Pravin
Visaria and Anil Gumber found that health expenditures
as a proportion of total expenditure quintiles of the lowest
expenditure quintile was typically higher than the average
for all quintiles, in both rural and urban areas (World Bank
1995, p. 194). This is not surprising in a regime where
more than 80 percent of all health care spending is out-ofpocket. Moreover, work by the author using the 1995-96
round of the NSS (National Sample Survey) reveals that
within public facilities, the economically well off use a
disproportionately large amount of inpatient care
suggesting that they comer a large part of the public health
spending as well (Mahal et al. 2000). To the extent that the
poor are unable to access the best doctors/specialists in
the public sector anyway, it may not make much difference
to them if these medical personnel are lured away by the
private sector with the entry of private insurance, political
ramifications apart
Internationally, however, the empirical evidence suggests
that inequality will worsen with private insurance. A
recently completed study of OECD countries found that
private insurance as a means of financing health care has
fairly large adverse redistributive effects across income
groups in countries where it plays a major role, such as the
United States and Switzerland (van Doorsaler et al. 1999).
Moreover, simulations carried out by the author suggest
that the shift effect out of the public into the private sector
will be small in any event (Mahal 2000).
Health Insurance Regulation: Challenges
for India
The main lessons from the theoretical and empirical
literature are essentially the following; In an ideal world
with well-informed consumers who can evaluate
alternative health care and insurance packages with
proper legal protection and affordable care, private
insurance may not be harmful for cost and quality, although
its impact could still be adverse from an equity point of
view The previous section also suggests that there are
specific things the government could do to yield belter
outcomes. These include steps to ensure financial stability
of insurers, enhance consumer protection, control risk
selection, promote competition among insurers, and
strengthen legislation complementary to health insurance
such as malpractice law and accreditation.
This section has two parts. The first focuses on regulation
that relates specifically to insurance and compares the
standard approach worldwide with the regulatory system
in India.25 The second describes existing Indian legislation
regarding quality standards and consumer protection and
discusses the problems faced in its enforcement.
Health Insurance Regulation: "Model"
versus the situation in India
In line with the preceding discussion, we will focus on
the following five topics. The last two topics relate to the
regulatory agency and its powers. In each case, there is a
general description of existing (or recommended) practices
in other countries followed by a brief discussion of the
relevant regulatory features in India
o Financial requirements (for entry, operation, and exit);
o Consumer protection
o Risk Selection/Faimess (underwriting, rating standards)
o Benefits
o Regulatory agency: Overview
FINANCIAL STABILITY
The key issue here is to balance the requirements of
financial stability with that of enhanced competition, since
very strict financial standards may leave few insurers in
the marketplace. Extreme competition of the "cut-throat"
variety may lead to financial instability and bankruptcies
(see, for example, Ranade and Ahuja 2000).
Capital and solvency requirements
Current regulatory practice is for insurers to meet
minimum capital requirements and surplus (over liabilities)
requirements known as the solvency margin The first
establishes a floor for insurers wishing to enter the market
and remaining there. The second takes into account the
insurer's size and risk profile. For example, the larger its
estimated liabilities, the greater will be the surplus
requirement. This is obviously a better indicator of the
company's solvency than a system relying solely on some
fixed minimum capital requirement.
In the United Stales, the trend is towards using a "risk
based capital standard" (RBC). The RBC formula takes
consideration of possible risks from lower asset values,
higher rates of morbidity and mortality, lower interest risk,
and other business risks. In the European Union, the
"solvency margin" is calculated as the higher of the claims
37
basis (23-26 percent of average claims in the last 3- 7 years)
or the premium basis (16-18 percent of retained
premiums).26 A reduction is allowed for reinsurance, up to
a maximum of 50 percent of the solvency margin (EC 1999).
The limit on using reinsurance for calculating solvency
margins is to avoid creating incentives for the insurer to
take on more risk.
The Indian regulatory structure under the IRDA Bill has
similar features. Under the 1938 Insurance Act, the solvency
margin (assets /ess liabilities) was given as a percentage
of retained/net premiums (gross premiums less
reinsurance payments), of the order of 20 percent
(Government of India 1999d). The IRDA Bill of 1999 provides
for a minimum lower bound of rupees 50 crores for the
solvency margin along with a requirement of 20 percent of
net premiums, or 30 percent of the average of net incurred
claims in the three preceding years (Government of India
1999d, p. 28) This is in addition to an entry requirement of
a minimum capital of rupees 100 crores.27 In this sense,
many of the provisions of the IRDA Bill parallel the
regulatory features of other countries and they may become
even more similar as the regulatory authority gets a sense
of conditions in the insurance market over time.
As in other countries, there are a number of restrictions
on the nature of investments that can be undertaken by an
insurance company in India (Tapay, NAIC reference). The
Insurance Act of 1938 sets these out in more detail in
sections 27B and 28B (Government of India 1999d).
The IRDA bill also prohibits the investment of funds outside
of India (inserted as Section 27C in the Insurance Act).
Accounting and Auditing
A second condition has to do with periodic reviews of an
insurer's financial condition, including audits, submission
of annual reports and so on. In the United States, insurance
regulators have broad powers of changing the management
and financial practices should the need arise (Chollet and
Lewis, p.88). Establishing and evaluating the solvency
status of an insurer requires a uniform set of accounting
procedures and methods by which contracts issued by an
insurer can be translated into assets and liabilities.
Under the Insurance Act of 1938 and the IRDA Bill, the
controller of insurance (now the Insurance Regulatory
Development Authority) has wide powers just as in the
United States and elsewhere. These include auditing by
qualified actuaries, periodic submission of reports,
appointing directors or taking over management,
requesting information and even shutting down the
operations of the insurance company through a court order
(Government of India 1998b, 1999d).
Organizational restrictions
In many countries, insurers cannot undertake additional
business that is not directly linked to insurance as, for
example, banking. The main regulatory concern is that
insolvency of one business may cause the insolvency of
the other (Chollet and Lewis, 1997). An argument against
this restriction is that given banks, insurance companies
and stock markets essentially are markets that deal with
risk, an artificial separation may neither be desirable in
the interests of efficiency, nor feasible (Ranade and Ahuja,
2000). Restrictions may also include specifying some
desirable citizenship or residency status, ownership in the
insurance company, and experience with similar business
elsewhere (see also EC 1999, p.6).
Similar restrictions can be found in the Insurance Act,
1938, although not linked to any specific industry
(Government of India 1999c).
Exit and Guaranty Fund
Exit rules are to ensure orderly exits from the market. The
insurer who plans to leave the industry may have to give a
timely notice to the regulator and submit plans for payment
of all liabilities prior to the exit date. In the event of
company insolvency, the practice often is that all insurers
participate (contribute to) in the formation of a Guaranty
Fund. The means of participation could be taxes on
insurance premiums of the insurers. Generally, the fund
does not pay out the full liabilities but only some portion of
it to the insured. This is to address any problems of moral
hazard on the part of insurers.
While there is an extensive discussion of liquidation of a
company (voluntary or court-ordered) under the Insurance
Act of 1938, there is no mention of a Guaranty Fund under
Indian law. However, there appears to be some discussion
about setting up a guarantee fund in the IRDA
(communication with T. Raghavan, Business Standard).
CONSUMER PROTECTION BY THE
REGULATORY AGENCY
Generally, regulation with regard to consumer protection
revolves around (a) the marketing and language of
insurance contracts; and (b) the relationship between
insurers and providers.
Marketing and language of insurance
contracts
This categoty covers the language of insurance contracts
in a manner that it becomes easy to understand the concept
along with the terms used - benefits package, premium
rate, deductibles, and so on. It also includes regulations
relating to unfair trade practices such as misrepresentation,
discrimination, inducements, and failure to maintain
records. Moreover qualifications of insurance agents and
their mode of functioning may also fall in this category.
Tapay (1999) documents a case where the United States
government prohibited agents from specifically looking
for healthy patients to enroll.
The Insurance Act of 1938 addresses directly only two
concerns relating to consumer protection. It does so first
by detailing the procedure by which insurance agents are
licensed including the requirement that they have not been
previously convicted of "...criminal breach of trust, or
cheating or forgery..." or of participating in "...fraud,
-’’Some countries use "gross" premiums to calculate solvency margins. This penalises companies that hase reinsurance (Tapay 1999).
•’’There it a 50 percent upper limit on the amount ol reinatrnnee that can be utej to calculate net prenuuntt lor ealculaliont of the aolteney ntarpn. juat at in the European Community tGOI. 19990,
38
dishonesty, or misrepresentation..(Government of India
1999d, p. 62). Second, it imposes limitations on
commissions that agents can be given or the incentives
they can offer to clients while selling insurance
(Government of India 1999d, pp.56-60). The 1RDA Bill gives
authority to the regulator to specify a code of conduct for
agents but no further specifics are provided. It also allows
for a tariff advisory committee to oversee premium rates
and insurance plans and also prevent discrimination
(Government of India 1999c, p. 9).
There is also other legislation in India that addresses
the issue of consumer protection more forcefully. Apart from
a regulatory authority, Indian consumers also have access
to consumer courts under the Consumer Protection Act of
1986, protections under contract and tort law in the Code
for Civil Procedure, and the Arbitration and Conciliation
Act of 1996 These are discussed further below.
Relationship between
providers
insurers
and
The aim is to ensure that health care providers remain
professionally independent of the providers in a managed
care system In its absence, providers may be under
pressure not to recommend expensive treatments. In the
United States, regulations permit any provider to join a
plan if he or she accepts its payment conditions. Similarly,
they allow providers to work with patients outside their
plan (the provider cannot be locked in by the HMO or other
form of managed care organization).
Unfortunately, consumer protection laws in India have
little to say on the relationship between the insurer and
the provider. It may be that some of the practices described
above could potentially fall into some version of "unfair
trade practices" which belong in the realm of the MRTP
(Monopoly and Restrictive Trade Practices) Act
(Government of India 1999h). At the present time, there is
no case law to support or dispute this assertion. The bulk
of the existing case law deals with fraudulent claims or
delays in clearing claims by the insurer (see, for example,
Aggarwal and Chaudhri 1998).
RISK SELECTION/FAIRNESS
Regulation in this area has taken two main forms in the
United States: (a) restriction of underwriting/risk selection;
and (b) restriction on prices based on health status.
Underwriting restrictions
These restrictions may involve a guaranteed issue of
certain plans (or all plans) to all applicants, without regard
to their risk profile. A variation on this may be guaranteed
renewal where the insurer can underwrite applicants at
the time of first issue but not on subsequent renewals. In
case only a few select plans are subject to this restriction,
these plans will become much more expensive if the risk
composition of the plan determines its price. Of course, if
all plans were subject to this restriction there would be
the problem of adverse selection. Ways to get around this
would be the exclusion of "pre-existing" conditions, or
“A number ot rule in lhe U.S. hare luu-nuo rerinruoni (Chollel and Lewia 1997)
having open enrollment only at certain times of the year.
A variation of the restrictions noted in the previous
paragraph is the portability requirement. These are often
used along with pre-existing exclusion restrictions For
example, as long as a reasonable continuity is maintained
in coverage, a second insurer cannot impose a pre-existing
exclusion on a person who has already exhausted a similar
exclusion with another insurer. Other restrictions could
relate to insurer requests for medical history, application
forms for insurance coverage, and so on.
Community rating and rate review
Community rating is the requirement that premiums be
based on some broad geographic or demographic criterion
rather than'on individual health status. This is likely to be
somewhat inefficient since it involves a degree of cross
subsidy across participants.
Another approach to this is controlling the premium rates
directly by requiring government approval for rate levels
and increases. The normal method to do this is by
examining "loss ratios" - the proportion of claims to
premium income — and putting a bound on them 28
By restricting risk selection, the expectation is that
insurers will compete in quality and prices However, this
may be particularly problematic in countries newly opened
to the private insurance sector, as problems of adverse
selection could overwhelm the small number of companies
who first enter the market. As in the previous section, there
is currently no legislation in India that has specifics on
underwriting restrictions However, a tariff advisory
committee and the 1RDA have the power to issue
guidelines relating to non-discrimination and the
"...control and regulation of rates, advantages, termsand
conditions..." (Government of India 1999c, p 9,
Government of India 1999d).
BENEFITS
There are two issues of interest with regard to benefit
packages: (a) a minimum package of services available to
everyone, and (b) catastrophic insurance.
Uniform minimum benefits package
Given a uniform minimum benefits package that is
accessible to all applicants, insurance companies would
have a tendency to offer additional products to appeal to
low risk applicants, or indulge in underwriting. Both
options would increase costs and promote inequity - the
latter by way of higher administration costs as well as
increased premiums for the relatively more sick, and the
former in terms of higher premiums for the sick which
increase difficulty in choosing among options on account
of greater variety. Thus, it would seem that the regulation
on benefits packages ought to accompany some sort of
market "managing" regulation in the sense of Einthoven
(1997) or Medici et al. (1997) that creates large buyers in
the insurance market. The presence of large buyers could
help enforce rules among insurers in exchange for the
volume of business they can bring. Examples of this are
39
the social insurance schemes of the type in Netherlands
and Israel (Chinitz 1995; West 1997; Ham 1997). In each
case, a (uniform) basic package of services is provided by a
set of sickness funds with compulsory enrollment in at
least one of them. Funds from a central source follow the
individual and there is some risk-adjusted capitation
payment to curtail risk selection. As a consequence, there
is an increased likelihood of competition in quality and
less of risk selection.
Catastrophic insurance and emergency care
These can only be covered through reinsurance of various
kinds in view of the rarity with which they occur.
Unfortunately, in developing countries, private reinsurance
is typical ly difficult to obtain because of the poor quality of
actuarial data on rare events (Chollet and Lewis 1997, p 94).
Reinsurance could be promoted in the form of more relaxed
solvency margin requirements as in the European
Community
There is no legislation in India relating to benefits
packages of either type. The only pertinent statement is in
the Insurance Act of 1938 stating that the Tariff Advisory
Committee (and the Insurance Regulatory and
Development Authority under the IRDA Bill) will oversee
rates, benefits and other activities of insurers. The IRDA
Bill, however, does allow not only the entry of re-insurers
in the Indian insurance market but also relaxes solvency
margin requirements (Government of India 1999c)
REGULATORY AUTHORITY: OVERVIEW
There are two issues of relevance here - (a) What are the
mam functions of this authority? And who does what? (b)
How will the authority be funded’
Main functions
The two main functions relate to market standards
(including consumer protection) and to overseeing
solvency and financial regulation. In the United States,
the states have the primary responsibility for regulating
insurance, including solvency and financial standards. In
the European Union, supervisors in each country enforce
country-specific market standards, but the financial
standards are similar for all EU countries fiapay 1997).
Funding
Funding could be obtained from sources such as a
premium tax (about 2 percent of annual premiums in the
United States), allocation from general funds to the
insurance department, and a "dedicated funding system"
whereby fees, fines and other income generated by it are
placed in a separate fund.2’
Unlike the previous two sections, the Insurance Act of
1938 and the IRDA Bill of 1999 have much to say on the
nature and functions of the regulatory authority. In some
cases, the authority is wielded directly by the so-called
"controller of insurance" or the IRDA. In other cases, it is
committees predominantly composed of insurers and
headed by the controller (for details see Government of
India (1999c,d). As per the Indian Constitution, the authority
•'’In 1997. premium volume in life and health insurance was USS340 billion
‘Items 43 and 47 (Union list) of Schedule VII of the Indian Constitution (Government of India 1996).
to regulate insurance is centralized in the IRDA and the
central government with little control by Indian states."
The IRDA has the authority to levy fees or other charges to
carryout its functionsand can have access to grants from
the central government.
Summary Remarks
The general picture that emerges is that legislation
(existing and proposed) concerning health insurance in
India is fairly comprehensive even in comparison to a
model set of regulations when focusing on auditing,
financial controls, investment guidelines and licensing
regulations. There is much less focus, however, on the
demand side of the market - especially the consumer of
insurance products. To be sure, both the Insurance Act of
1938 and the IRDA Bill are sufficiently comprehensive
(ambiguous!) to allow increased focus on consumer
interests, yet problems remain. Discussions about
managing the demand side of the market invariably have
implications for revamping CGHS and ESIS, the latter being
directly related to an Act of Parliament over which IRDA
has no authority. Regulating the relationships between
insurers and providers or controlling rates would have
implications under the MRTP Act and that too is included
in parliamentary legislation.
The IRDA has little or no authority over various types of
legislation that relate to quality of health inputs and it is to
that we now turn.
Other Legislation Relevant to Health
Insurance in India
The discussion of the previous two sections points to the
importance of the following types of legislation for health
insurance to function properly:
o Consumer protection (including malpractice law);
o Quality of medical personnel;
o Quality of health infrastructure.
Table 4 summarizes some of the major features of law
related to consumer protection in India. The two most
common avenues for relief in the arena of medical care
are the Consumer Protection Act and various civil courts
(see, for example. Reddy 1997). Unfortunately, the
experience with the Indian court system is not very positive
which, by all accounts, is characterized by lengthy delays,
problems with procedural law and a massive backlog of
cases. According to one estimate it would take nearly 324
years to clear the existing backlog! (Debroy 1999).
Given these problems, it is not surprising that the various
consumer commissions established under the Consumer
Protection Act (COPRA) of 1986 have begun playing a key
role in protecting consumer rights, in spite of their relatively
recent origin. The main rationale for COPRA was that it
could offer a quicker and cheaper way for consumers to
address their grievances. Certainly, a number of cases
related to insurance and medical negligence have reached
these courts (Aggarwal and Chaudhri 1998; Vats 1997).
Unfortunately, recent evidence suggests that problems with
40
backlogs have begun to occur in consumer courts as well,
due to an inadequacy of "judges" and to the increase in
the burden of cases (Bhat 1996). These courts also a face a
problem of adequately addressing malpractice suits against
doctors. The problem has arisen because doctors are
unwilling to depose against their peers and the poor record
of medical councils in this respect.
This last point highlights the failure of medical councils
of practitioners at the national and state levels to self
regulate. Indeed, there is clear evidence of foot-dragging
by doctors in cases that involve malpractice suits against
their colleagues (Jesani, Singhi and Prakash 1997).
Table 5 presents legislation related to the maintenance
of quality standards in the health sector - whether for
medical facilities, or for medical personnel. There is some
legislation that seeks to maintain quality among medical
personnel (including practitioners of traditional medicine)
at various levels - both at the central and provincial levels.
Typically, this legislation involves the setting up of bodies
(or councils) that oversee the maintenance of quality in
new entrants to the profession, maintenance of
membership records of the profession and, through codes
of conduct and sanctions, maintenance of standards among
existing members. Although these councils are widespread
and cover various states, the record of these councils in
ensuring continued good behavior is quite poor (Jesani,
Singhi and Prakash 1997). Moreover, there is evidence of
practitioners of traditional systems practising modern
allopathic medicine without any sanctions.
The problem with quality control is somewhat worse in
the case of health infrastructure. Until recently, the only
relevant legislation was the Nursing Home Registration
Act, in a small group of states - Delhi, Maharashtra and
Bengal (Nandraj, Khot and Menon 1999).31 The focus of
these lawsis primarily on registration of facilities, although
the Delhi legislation specifies quality standards for these
facilities (Nabhi Publications 2000, p. 12). In any event, the
enforcement of even these laws has been poor - records
of private facilities are generally incomplete and the few
existing studies typically find substandard facilities,
understaffing and generally low quality of care provision.
There was no law with respect to diagnostic centers until
recently (in fact, the Delhi Shops and Establishments act
specifically excludes medical facilities (Nabhi Publications
2000)). Now however, the proposed Delhi Private Medical
Establishments "Act" (Aggarwal and Chaudhri 1998) also
seeks to impose quality standards on diagnostic centers.
Moreover, the Environment Act (1986) may have
implications for X-ray centers by setting conditions on
polluting emission of radioactive particles (Government
of India 1999i, p. 79).32.
Concluding Remarks
There are three main conclusions with regard to issues
specific to insurance. First, the impact of the entry of private
health insurance could have adverse implications for some
ofthe goals of health policy. However, a competitive health
insurance market, less risk selection and an informed
insurance regulation are likely to lead to better social
outcomes. Second, there are clear areas where regulation
with regard to health insurance could be useful — in
instituting benefit packages, restrictions on risk-selection
procedures, and some aspects of consumer protection.
Third, there are areas where the work of the IRDA would
require coordination with other central institutions such
as the MRTP Commission.
Addressing these issues requires meeting some
challenges. The first and most compelling one is based on
the observation that in a regime with poor enforcement,
this would simply complicate the picture without yielding
any direct benefits. Even COPRA (Consumer Protection Act
of 1986) that was meant to address the rights of consumers
through the establishment of special consumer courts has
suffered from delays of various kinds (Bhat 1996a, Hindu
1999). There is, therefore, no reason a priori to expect that
health insurance regulation enforcement would do any
better. It might be argued that as an independent regulator,
the Insurance Regulatory and Development Authority (IRDA)
would have much greater leeway in implementing its own
guidelines. However, the recent experience ofanother such
institution in the telecommunications sector
(Telecommunications Regulatory Authority ofIndia (TRAI))
suggests that this is, by no means, certain.
Second, it is also the case that some of the regulatory
changes envisaged in health insurance also appear to
require more fundamental changes in the existing publicly
financed and provided care. In particular, for uniform
benefit packages to work and for competition among
insurance companies, large buyer groups may have to be
created on the pattern of the United States and various
European countries. One interesting possibility is
revamping the CGHS (Central Government Health
Scheme) and ESIS (Employees State Insurance Scheme)
to divest them of their provision function. But these could
imply large legislative shocks to the existing system and
meet strong political resistance. On the other hand, it may
be that the actual costs are not as high as the perceived
costs — they might well be small if one considers the
general lack of satisfaction with CGHS and ESIS facilities.
Third, there is the issue of the size of the private health
insurance market in equilibrium. One rough estimate by
the author is of the order of 3,000 to 4,000 crores of rupees
in terms of annual premium income (Mahal 2000). Even at
thirty to forty times its current size, it is still quite small at
6 percent of existing levels of private health spending.
This suggests that the gains (or losses) from the
introduction from private health insurance are likely to be
small in the aggregate. So any additional legislation to
influence the private health insurance market could simply
incur low costs for low return in the short-run. Again the
long-term implications ought to be clear. Once a system is
in place, it acquires an inertia of its own as in the case of
resistance put up by provider associations during the efforts
rccenlJr
*“>« have begun taking Maps to introduce fresh law. regarding private eataHid
lenLs (AggrawaJ and Chaudhn 1998. Nandraj. Kho< and Duggal 1999).
■There is also legislation on pre-natal diagnostic techniques (see Aggarwal and Chaudhri 19981
41
to expand the coverage of managed care organizations in
the United States (Einthoven 1997)
Where legislation on quality standards in health care
provision is concerned, the IRDA faces an even greater
challenge since many of the laws and their
implementation are in the hands of individual states as
constitutional requirement. Moreover, all evidence
indicates that these are incomplete in scope, poorly
designed, and hardly ever implemented. This makes the
design of insurance policy more difficult and suggests
taking a comprehensive and long-term look at issues of
health insurance and care provision in India.
42
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TABLE 1. CHARACTERISTICS OF TWO PUBLIC INSURANCE SCHEMES
Type of
Insurance
ESIS
(Employees
State
Insurance
Scheme)
CGHS
(Central
Government
Health
Scheme)
Contribution
Reimbursement
Entitlements
Eligibility
Employees: 4.7596 of wages
Employers: 1.7596 of wages
All contributions are deposited
by the employer;
State governments contribute a
minimum of 12.5 percent on
ESIS health expenditure in their
respective states (Garg 1999b, p.30).
Sec also section 59A (Government
of India 1999g, pp. 51 -52)
Does not disallow reimbursement
of medical treatment outside of
allotted facilities.For instance,
the Employees State Insurance Act,
1948 states that entitlement to
medical benefits does not entitle
insured to "claim reimbursement
for medical treatment... except
under regulations." (Government
of India 1999g. p. 50). Seealso
Chapter III, 28(v) and ESI (General)
Regulations, 1950 (Government
of India 1999g, p. 156).
Depending on "allotment" as per the
ESI Act
1. Outpatient medical care at dispensaries
or panel clinics;
2. Consultation with specialist and supply
of special medicines and tests in
addition to outpatient care;
3. Hospitalization.specialists, drugsand
special diet.
4 Cash benefits: Periodical payments to
any insured person in case of sickness,
pregnancy, disablement or death
resulting from an employment injury.
Employees (and
dependants) working
in establishments
employing ten or more
persons (with power) or
twenty or more persons
(without power) and
earning less than
Rs 6,500 per month
(Garg 1999a, p. 85)
1. Reimbursement of consultation
fee for up to four consultations
In a total spell of ten days
(on referral).
2. Cost of medicines;
3. Charges for a maximum of
ten injections;
4. Reimbursement for specified
diseases/ailments
1. First level consultation and
preventive health care services
through dispensaries and
hospitals under the scheme;
2. Consultation al a CGHS dispensary/
polyclinic, or CGI IS wing at a
recognized hospital;
3. Treatment from specialist through
referral, emergency treatment in
private hospitals and outside India.
Employees of the central
government (excepting
Railways, Armed forces
pensioners and Delhi
Admn.), pensioners,
widows of central
government employees,
Delhi Police employees,
Defence employees and
dependants residing in
24 specified locations
(see Government of
India, Various)
Pay/pension
(Rs/month)
<3,000
3,001-6.000
6,001-10,000
10,001-15,000
>15,000
Contribution
(Rs/month)
15
40
70
100
150
The bulk of the resources
(85 percent) come from general
revenues of the central
government (Garg 1999b, p. 34).
45
TABLE 2. ADMINISTRATIVE COSTS OF
OPERATING HEALTH INSURANCE
PROGRAMS: A COMPARISON OF PRIVATE
AND PUBLIC INSURERS
Country
Costs of administerineinsurance
(as percent of expenditures)
Private
Public
Chile
Sweden
United Kingdom
United States
India
Notes: For the United States, the range in the private
sector reflects low costs for group insurance to high costs
for individual insurance; for India the range in the private
insurance represents the different experiences of the four
subsidiaries of the General Insurance Corporation (GIC);
for the public sector insurance in India the lower bound
for the range are'the costs of CGHS and the upper bound
for ESIS (Garg 1999); for Sweden, the range reflects public
schemes operating in City Councils and among those
relating to private doctors; GP - General Practitioner.
Sources: Chile (Baeza 1998, Ferreiro 1999); India (Garg
1999; communication with Anurag Kaul (New India
Assurance Company)), Sweden (Rehnberg 1997); United
States (Rehnberg 1997); United Kingdom (West 1997).
18.5
1.8
n.a.
n.a.
5.5-40.0
20.0-32.0
1.5-5.0
10.0 (GP Fundholdings)
2.1 (Medicare)
5.0-14.6
TABLE 3: HEALTH SPENDING PER CAPITA AND PRIVATE INSURANCE COVERAGE:
Cross-country regressions
Dependent Variable; Log health spending per capita(US$)
Regressors
Constant
(1)
3.86
(0.35)
Private health insurance
Coverage (% of population)
0.08
(0.01)
Log of per capita income
(US$)
(2)
(3)
(4)
-5.02
(0.48)
-4.83
(0.48)
-4.83
(0.46)
0.007
(0.004)
0.007
(0.005)
1.23
124
1.27
(0.06)
(0.06)
Dummy for type of
private health insurance
(0.06)
-0.005
(0.180)
Sample size
31
31
31
31
R-squared
0.42
0.93
0.94
0.94
Notes: Robust standard errors reported in parentheses.
Type of private insurance: 1 for countries where
private insurance is offered as an alternative to social
insurance or public scheme; 0 for countries where private
health insurance can only be offered as a supplement to a
public insurance scheme.
Countries included in sample: Australia, Germany,
Ireland, Netherlands, United Kingdom, United States
(OECD); Argentina, Brazil, Chile, Colombia, Dominican
Republic, Ecuador, Gautemala, Jamaica, Honduras, Mexico,
Peru, Uruguay (Latin America and the Caribbean); Ivory
Coast, Egypt, Jordan, Kenya, South Africa, Zimbabwe (Africa
and the Middle East); India, Indonesia, Philippines, Sri
Lanka, Thailand (Asia); and the Czech Republic.
Sources ofData: Chollet and Lewis (1997); World Bank
(1997).
TABLE 4. SELECTED LIST OF LEGISLATION/RULES LINKED TO CONSUMER PROTECTION IN INDIA
Legislat
Consumer Protection
Act, 1986
MRTPAct, 1969
Powers/Functions/
Procedure
Monitoring/lmplementing
Authority
To protect consumer rights
such as:
1. Protection from marketing
A complaint under the Act can
Central and State Consumer Councils
be made when there is a
deficiency in services - any
■promote' various objectives related
to consumer rights
of services hazardous to life
2. Right to be informed about
quality, quantity, standard.
fault, shortcoming, inadequacy
in quality of medical or
insurance services, or if an
price and purity for protection
against unfair trade practices
3. Seek redressal against
Unfair trade practices or
excessively high price is
being charged.
To observe principles of natural
justice and to award appropriately,
Exploitation of consumers
compensation to consumers.
Prevention of concentration
of economic power, control
of monopolies and prohibition
of monopolistic and restrictive
trade practices
Conduct inquiries into
monopolistic and restrictive trade
practices based on complaints by
the government, own information,
or a consumer, or an association
or consumers or traders.
Objective
District, State and National Consumer
Commissions function as quasi
judicial forums to address consumer
complaints. Orders of the National
Commission can be appealed only
in the Supreme Court.
Monopolies and Restrictive Trade
Practices Commission.
Can award compensation for any
loss or damage resulting from
unfair trade practice.
Employees' State
Insurance Act, 1948
(Section)
Address consumer (and other)
complaints
Complaints about treatment
received; benefits not received;
Medical Benefit Council
Medical Appeal Tribunal
eligibility, etc.
Employees' Insurance Court
O'
CGHS Rules
Arbitration and Act,
Conciliation 1996
complaints
Complaints about treatment
received, benefits not received,
eligibility, etc.
Address Consumer (and
other complaints) generally,
All complaints and demands
for compensation
Arbitration Tribunal
For breach of contract,
Judicial system/Courts
Address consumer (and other)
Internal dispute resolution
mechanism
but also GIC specifically
Indian Contract Act
1872; Code of Civil
(Criminal Procedure)
Consumer complaints
Drugs (Control) Act,
1950
Control over sale and price
Fix maximum prices and
Chief Commissioner
of drugs
maximum quantities that may
be sold
Drug Controller of India
deficiency in services, damages,
dispute of facts, negligence and
soon
General limitations on the
quantity that may be possessed at
any one time
Indian Medical
Council Act, 1956
Defining a professional code
of conduct
"faking doctors off the registry
roles for violation of rules of
conduct
Sources:
Aggarwal and Chaudhri (1998); Reddy (1997); Government of India (1999c); Bhat (1996).
State medical council
Medical council of India
TABLE 5. LEGISLATION RELATED TO STANDARDS IN THE HEALTH SECTOR
Legislation
The Bureau of
Indian Standards
Act, 1986
Objective
Powers and Functions
Quality Controls
Implementing/
Monitoring Authority
Provide for the
Co-ordinate activities of any
manufacturer or association
or consumer(s) engaged in
standardisation and
improvement of quality
Establish and publish
Indian standards in
Bureau of Indian Standards
establishment of a
Bureau for the
harmonious development
of activities of
standardisation, marking
and quality certification of
goods
relation to any article
or process
Grant, renew, suspend, or
Specify a standard mark to
be called the "Bureau of
cancel licenses for use of
standard mark.
Indian Standards Certification
Mark"
Inspect samples, establish
laboratories for standardisation
and quality control
Address consumer complaints
about quality of a product
Drugs and
Cosmetics Act,
1986
Quality control of drugs
Power to deem a drug misbranded,
Define standards of quality,
adulterated, spurious and to prohibi adulterated, misbranded and
import, manufacture and sale of
spurious drugs
certain drugs
Nursing Home
Registration Acts
(Delhi, Maharashtra,
Bengal)
Registration of private
hospitals
Maintain a register of private
hospitals; may enter and inspect
a nursing home; inspect any
records; cancel registration
if not meeting the
provisions of the Act.
None specified
Municipal Authority/
Stale Government
Indian Medical
Council Act/Nursing
Council Act, 1947/
Pharmacy Act 1948/
Indian Medical
Degrees Act 1916)
and various.
Create minimum and
uniform quality standards
Various Councils (Medical, Nursing,
Pharmacy, Dental, Indian Systems):
Give recognition to institutions that
train medical personnel; maintain
uniform standards; maintain
registry; define a professional code
of conduct for doctors; take doctors
off the rolls for violation of code of
ethics
May prescribe standard
curricula for training of
medical personnel; con
ditions for admission;
examination standards
Indian Medical association;
Medical/Nursing/Pharmacy
Councils of India and
Sources: Sunil Nandraj (personal communication); Aggarwal and Chaudhri (1998); Government of India (various)
Inspectors for this purpose
appointed by central and
state governments
respective State Councils.
49
PRIVATE HEALTH INSURANCE IN INDIA:
WOULD ITS IMPLEMENTATION
AFFECT THE POOR?
On November 16 and 17, 1999, a specialized seminar
was held in Delhi with regard to the introduction of private
health insurance, its potential impact for both those who
would be able to buy a health insurance policy and the vast
majority of the population who certainly would stay out of
the new scheme. A discussion on the proper regulation of
private health insurance was also addressed. Further
discussions with emphasis on field experience followed.
Summary
Before considering the nature and prospects of an
adequate regulatory framework for private health
insurance, a basic and fundamental question about the
final objectives of the Minister of Health (MoH)
intervention in the current process ought to be answered.
Who are the subjects or potential beneficiaries of the MoH
concern? Are both sectors - the 3 to 5 percent of the better
off population as well as the remaining 95 percent of
Indians - within the scope of official concern?
Depending on these considerations, recommendations
should either vary or be adjusted. In effect, if private
policyholders are to be protected from the most common
shortcomings, failures and potential abuses that occur due
to unregulated private health insurance, there are very
specific suggestions that can be presented for the building
of a comprehensive regulatory framework However, some
of the suggestions are both ineffective and unnecessary
when dealing with a voluntary/supplementary type of
health insurance.
It is a fact that those who can afford a private health
insurance are not the priority of public regulation. This
argument is based not only in the fact that the wealthy
population can look after its own rights and expectations,
but also on the very nature of a voluntary scheme. If the
customer/insured does not feel he/she is getting real value
(financial protection and/or fluid access to good health
care) for money, he/she would just refuse to buy a policy or
would move from one firm to another. In a voluntary
scheme, like the one which is under consideration in India,
market competition will certainly control and counteract
any shortcoming of the insurer. This can be ensured to the
extent that relevant and reliable information is made
available for a well-informed client decision making
process.
The answer to the preceding question might be, on the
contrary, that only the poor should constitute the
government concern. If it were so, the analysis should focus
on how the poor could avail some of the potential benefits
that are expected to result from the introduction of private
health insurance in the country. If this is impossible or
irrelevant, public policy should aim to prevent any
undesirable negative effect on the needy population at the
least.
Approach to a Regulatory Framework
TWo approaches can be observed when dealing with the
issue of when regulation should be introduced. A "wait
and see" attitude to regulating health insurance may prove
to be a high-risk decision, as other countries' experiences
can demonstrate (Chile, USA). From a strictly technical
perspective, it is always better to regulate after monitoring
and evaluating concrete problems. However, it should be
borne in mind that late regulation tends to become
impossible to get approved, due to the preventive and
obstructing lobbying capacity exercised by those players
who take advantage of the prevalent situation.
A "do it now" approach would probably emerge as the
only responsible and feasible alternative, for regulation
might be acceptable as an "entrance fee" for the same
that would reject it afterwards.
Therefore, a preemptive strategy, aiming to protect both
the poor from a further worsening of their access to health
care and the privately insured should be considered.
Can the poor benefit from the introduction
of private health insurance?
Unfortunately, a clear-cut answer does not seem to be
available at this point. Although some suggest that the
migration of the better-off to a private scheme would ease
the currently overloaded public facilities in favor of the
poor, the available data regarding the high ratio of private
expenditure and the growing importance of private
providers tend to prove that the migration of the majority
of the population already occurred some years ago.
Therefore, a social gain in this regard seems unlikely.
The poor might benefit from the expansion of private
providers if the supply of health care expands due to an
increase in health care affordability resulting from health
insurance. However, if prices grow faster than delivery
capacity, cost escalation may even expand the existing gap
between the poor and the required access to health care.
All this is highly unpredictable, since it depends on the
supply of health care and the prevalent model of health
insurance to be implemented. Regarding the latter, it is
clear that an indemnity/fee-for-service system will
unavoidably result in a severe cost escalation whereas a
managed care oriented type of insurance would probably
be capable of maintaining costs under control.1
In the long term, however, the entire population might
benefit from the introduction by the international health
Some concern has arisen in relauon to the poss.b.l.iy that come version. of managed care could be found illegal under current lnd.cn anu-monopoly reguladons. In fact, even chanty hospital, employ,ng souse
kind of pre-payment meehamsm are under Krisuny. If that legal eonsum.nl become, a real obstacle foe the expansion of managed earn oriented health Insurance, the md.nm.iy model^dl prelaw mulung
both in cost escalation and tn a significant! reduction of the potential market for private insurance
3
un*
50
insurance companies of the medicine based on evidence
approach, concretely represented by standards, protocol
guidelines for treatment, cost-effectiveness and clinical
data analysis. Indeed, the latter should be expected if
managed care be allowed to pursue the strategic goal of
expanding the prospects of health insurance market shares
beyond the few who can afford an indemnity policy. Since
managed care inherently entails some integration
between the payer and the provider and can ensure the
monitoring of the type and quality of the health care
provided, this market driven effort towards quality
assurance might be considered as a likely positive side
effect of private health insurance in India.
How to prevent negative side effects for
the poor resulting from the introduction
of private health insurance.
The impact of private health insurance on the wealthy
and its effects especially over the poor is not yet clear.
While the migration of doctors and health care staff to the
private sector occurred some time ago, the impact of prices
on the poor is not clear, particularly' because it is uncertain
that this will occur within the scope of the health care that
the poor already have access to.
Nonetheless, some direct action can be taken to prevent
public subsidies to private health insurance, since that is
second method by which the poor can be negatively
affected by private health insurance.
In this regard, the following recommenda
tions should be borne in mind:
o Private funding to support a specialized regulatory
agency. Unless the indemnity model is envisioned as
the exclusive type of health insurance, a specialized
regulatory method is needed to deal with the health
care specifications of health insurance. Allocating public
budget to that purpose contradicts equity oriented public
policies for it would result in an undesired public subsidy
for the better off Therefore, the resources needed to
fund the private health insurance regulatory' agency
should be extracted from premiums. A more detailed
calculation is needed with regard to the fixed amount
or percentage to be charged of every policy.
o Conflict resolution proceedings must be part of
specialized regulatory agency duties. Otherwise, if
subscribers have to present their claims to a regular
tribunal, a public subsidy will be rendered. Additionally,
the complainant may find the exercise worthless in
• ' .relation to litigation expenses.
o User fees ought to be charged to the privately insured
when ’they- avail health care services from a public
facility. Those who prove to have the payment capacity
to buy’a private health insurance should pay the full
rate (real cost of delivery, including investment
provisions) of.the health care given by a public provider.
• ‘ Although most sobscribers may prefer to access a private
facility, internatrohal evidence shows that many private
health-plans establish limited coverage for high cost
treatments (catastrophic diseases, for instance) forcing
their insured to resort to a public hospital to get a low
price treatment. This risk is inherent if some good
quality public hospitals exist. Therefore, this possibility
must be taken seriously to prevent another form of
undesired cross subsidy.
PROTECTING THE SUBSCRIBERS OF PRIVATE
HEALTH INSURANCE: A BASIC, USEFUL AND
FEASIBLE REGULATION FOR A VOLUNTARY TYPE
OF PRIVATE HEALTH INSURANCE
Two basic considerations frame the
following analysis:
o Some problems seem unavoidable in the functioning of
voluntary private health insurance. Among these, the
most salient is risk rating, and its inherent negative
effect upon those whose actuarial health risk ranks
higher than their payment capacity - the elderly, large
families, infants, and women during fertility age if
maternity care is included in the package of benefits A
risk equalization scheme needs mandatory enrollment
to be implemented. Otherwise, cross subsidization
becomes impossible and those who intend to pay more
than their actuarial risk would obviously be unwilling
to do so Therefore, risk selection against the poor and
the risky would be the inescapable consequence of
pricing policies under a voluntary scheme. For various
reasons, regulators can do little to control underwriting
or the denial of coverage regarding pre-existing
conditions. Indeed, by doing so, a subsidy from the
healthy towards the already sick appears, since
whenever an insurer is forced to pay for preexisting
conditions in a way that would promote adverse
selection, that financial load is translated to the
portfolio's premiums. Moreover, in such a situation,
adverse selection would even reach levels that
challenge the financial sustainability of the whole
system. In sum, under a voluntary supplementary system
like the one which is currently envisioned in India, a
cautious approach with regard to these kind of
regulations is to be suggested. The same can be said in
relation to fixing prices, since it has been demonstrated
that health expenditures are almost impossible to predict
over a long term, particularly under an indemnity/feefor-service model. As we see in the following lines,
market competition when provided, can be more
efficient tn regulating prices.
Customer (insured) can and should vote
with their feet
Under a voluntary scheme, people would join a private
insurance only if they feel it is worthy. If a player can't
approve the "value for money" test, its actual or potential
customers will punish the player either by quitting or
neglecting the scheme. This market driven self-control
mechanism is bound to work efficiently if some basic
preconditions are provided.
Information: Comparative, reliable and comprehensive
51
information should be given to the public. Otherwise, blind
decisions may shadow the interaction between the insurer
and insured. When dealing with managed care, information
should include references to the quality of care delivered
by the preferred provider. Rankings elaborated and
published by the regulatory agency may help in promoting
competition based on real quality and efficiency.
Mobility: Unless subscribers are entitled to move without
major restrictions from one health insurance company to
another, the coexistence of several insurers would not result
in real quality oriented competition Therefore, some
regulations are to be implemented to guarantee mobility
among the insured2.
This is not to deny the importance of regulation. On the
contrary, regulation is certainly needed, though its final
impact depends, not only on the enforcement capacity of
the regulatory agency, but to a great extent on the ability to
limit the focus of the regulatory tools to what is reasonably
achievable. Finally, regulators should regard self regulation
by market forces as a partner that needs to be nourished
through information and transparency.
It is recommended that the following basic
regulations/steps be considered:
Having underlined the importance of self-regulation
within a voluntary health insurance system, a brief review
of basic regulations is needed In this regard, some
fundamental rules of the game must be noted.
o Uniform minimum benefits package. This is needed not
only to make comparison between competitors possible,
but also to assure some compatibility between sanitary
priorities and the service provided. The package might
include catastrophic disease and emergency care.
o Renewal of contracts must be guaranteed. The risk is to
be placed in the insurer, for that is what insurance is all
about. If the insurer is allowed to cancel a policy or to
adjust its conditions (prices and/or benefits) according
to the insured medical record, private health insurance
would result in social fraud Therefore, whereas the
insured need to enjoy freedom to exit the contractual
relationship, that must not be available for insurers.
o Consumer redressal mechanism. It should be simple
and inexpensive for the insured. It should also be fair,
specialized and work most smoothly. In addition, conflict
resolution schemes should be entitled with the right to
punish illegitimate denials of claims on the part of the
insurer.
o Regulating marketing and language of insurance
contracts.
The regulatory agency must set some uniform and clear
instructions with regard to the design, order, and language
of contracts. This is crucial to strengthen the consumer's
ability to understand, compare, and choose on the basis of
adequate information and a well-formed opinion.
Accordingly, unfair but common trade practices such as
misleading, misrepresentation, inducements, and
falsifications of the subscriber signature ought to be
severely forbidden and punished.
•Nonetheless, sonic reasonable length of stay with the elected insurer is to be mandated-1 to 2 years. Otherwise, an extreme mobility would generate adverse selection, while
excessive cost in agents’ fees and advertising.
52
CONCLUSIONS OF THE NATIONAL SEMINAR
ON HEALTH INSURANCE
is important to deal with this risk in part depends on how
large the private insurance market becomes in India. If
only a small portion of the wealthiest segments of Indian
society are engaged in private health insurance, the risks
posed to social goals are less problematic. The alternative
approach is to establish appropriate regulations at the point
of introduction of private health insurance, to ensure a
more transparent, fair, and efficient health insurance
Health Insurance Objectives
The underlying assumption is that government's interests market.
Voluntary health insurance inevitably leads to risk ratings
are to assure that appropriate health care is affordable
and available to all its citizens, and to the poor in particular. of premiums, which has discriminative effects on the sick,
The liberalization of private health insurance must not be the elderly, women, large families, and the poor in general.
seen in isolation of other health reforms needed to improve There are some ways to reduce these effects through
access, quality, and affordability of health services, and regulation, but short of mandatory insurance systems with
built-in risk equalization schemes, they are imperfect. GOI
improving health outcomes.
In designing the IRDA Bill, the liberalization of insurance is not yet prepared to reform and expand mandatory health
was expected to have a minor influence on the health insurance systems, so other mechanisms must be
system Private insurance was viewed as a source of introduced to mitigate these effects.
supplementary insurance for better off sections of society Specific Recommendations
and those in the organized sector who could afford it
TWo types of recommendations are made, including those
(perhaps up to 3-5 percent of the population), whereas designed to: 1. Directly protect the interests of the poor;
basic health service needs would be covered by the state. and 2. Make private health insurance operate better for
However, the vast majority of health spending and health subscribers and contribute to the overall health system,
delivery is already occurring in the private sector in India, with the view that one day larger portions of the population
including among the poor. Health insurance must be may benefit from health insurance mechanisms.
examined in the context of what efforts India can make to Pro-Poor Recommendations
better the use of the large amount of private financing and o Public subsidies to the wealthy should be reduced or
delivery of health. One significant risk of insurance
eliminated, including those that are introduced through
liberalization is that it could further drain resources away
private health insurance. Such measures would include;
from the poor.
o Charge full cost recovery in public hospitals to people
Key Health Insurance Considerations
who have private health insurance.
Key questions considered at the meeting were:
o Ensure that the agency responsible for regulating
o How can health insurance improve efficiency and equity
health insurers is financed through premiums, rather
in the health sector? What else is needed?
than through general taxes, at say 0.5 percent of the
premium cost (a special health insurance regulatory
o How can government prevent any unwanted damage to
agency is proposed - see below).
the health system that may result from the introduction
of private health insurance?
o Reduce or eliminate tax incentives for private insurance,
particularly indemnity-based insurance which is more
Fee-for-service payments to providers, based on
likely to escalate health care costs.
indemnity insurance, is the main type of insurance
expected in an unregulated market in India. This has lead o Define a minimum package of benefits for all insurance
to unbearable cost escalations in health care in countries
packages, including key preventive and maternity
where this type of private health insurance has been
services.
introduced. The likely effect is to increase the gap between o Ensure that there are no barriers to managed care
the price of health care and those who are able to afford
through not-for-profit (trust) hospitals or non-profit
care, leading to greater overall health care costs and larger
networks. Similarly, community financing schemes for
inequities. The GOI should take measures to prevent this
the poor and non-formal sector, such as those
from occurring.
established by cooperatives, associations, or other non
profit organizations, should be encouraged. A Rs. 100
A "wait and see" attitude to regulating health insurance
crore capital requirement for health insurance proposed
is a high risk approach - other countries have found it
in the IRDA Bill should not apply to these schemes.
nearly impossible to change the rules for insurers or
Rather, a guarantee, such as one month's worth of
providers once there are established interests. Whether it
On November 16-17, 1999, a meeting was held in New
Delhi to identify actions to be taken by the Government of
India (GOI) to deal with the pending introduction of private
health insurance, which is a part of the Insurance
Regulatory and Development Authority (1RDA) Bill currently
before Parliament. This note summarizes the main findings
and recommendations.
53
premiums could be kept on deposit by the regulator.
Government should provide or obtain financial and
technical assistance for experiments designed to
provide pooling of funds for health care to the poor.
o The GOI should expand the public debate on health
insurance, particularly to provide information on how
insurance can be used by the public, and to discuss ways
in which health insurance can help meet the needs of
the poor.
° Experiment in health financing. Government should
also undertake studies to develop other options for
health financing to cover the poor and non-formal
sectors. These include:
° A more detailed study on the options for risk equalization
schemes and universal, mandatory insurance schemes,
probably through a mix of public and private enterprises.
o Experiments in community financing schemes for the
non-formal sector.
° Focus on improving the quality of public health service
delivery. The initial response of private health insurance
will be to provide services to the better off segments of
society. The public sector delivery system is expected to
then provide a greater proportion of services to the poor.
Therefore, increased investment in making the public
system more efficient should benefit the poor.
IMPROVED PRIVATE HEALTH INSURANCE
& HEALTH SYSTEMS RECOMMENDATIONS
° Improvements in the IRDA: It is important to distinguish
health insurance from other forms of insurance in the
IRDA Bill, and be explicit about the public health aims
for insurance in the Bill. For example, objectives for
health insurance would be that it provides a mechanism
to encourage people to take better care of themselves;
to get better value for money from health services; and
to protect themselves from the financial burden of
illness.
In addition to the Insurance Regulatory Development
Authority that oversees general and life insurance
regulation, a specialized independent agency (or agencies)
should be established to oversee regulation of health
insurance. The experience from other countries is that such
specialization is needed because the frequency and nature
of contacts involved in health insurance is greater and
more intense compared to other types of insurance, and
because of the particular needs for consumers, providers,
and insurers to understand quality of care issues in the
management of the health insurance market. In addressing
health insurance regulation, this agency would be
expected to implement the following immediate strategies:
o Establish standard benefits packages upon which
health insurance companies would compete. This would
ensure comparability of packages and fairness in
provision of benefits. It would also safeguard social
objectives to include fairness in financing and provision
of key services such as maternity care, preventive
services, and care for catastrophic illnesses.
° Make treatment protocolsand quality standards publicly
available. Publish quality ratings of providers and
institutions engaged in health insurance.
° Guarantee renewal of insurance policies, even as
subscribers become ill.
° Reduce the ability to deny coverage to those with pre
existing conditions, and standardize and reduce
insurers' ability to individually rate premiums.
° Establish an efficient conflict resolution mechanism,
where conflicts can be arbitrated quickly and cheaply,
outside the court system.
° Ensure that small scale community financing is
allowable under the IRDA.
° Regularly disseminate information on the performance
of insurance companies, with respect to such
characteristics as- administrative costs, premiums
charged for standard packages, frequency of complaints,
differential charges by age and sex, clinical outcomes,
and the inclusion of preventive care.
° Develop Quality Assurance Procedures. The introduction
of private health insurance demands greater emphasis
on quality assurance and standardization of health care.
This is an opportunity that GOI should seize. In particular,
accreditation schemes for hospitals and providers
should be established. Specific treatment protocols need
to be established and published, and utilization review
mechanisms initiated. This may be one benefit that
international private insurers can bring to the Indian
market, but also must be pursued vigorously by the
government. The government can support this through
the development of a National Health Standards
Council, which would develop or collate standards, and
be a resource center for information on standards,
disease factors, and related treatment costs.
54
GLOSSARY OF HEALTH INSURANCE
AND RELATED TERMS
To
account means to furnish a justification or detailed
explanation of financial activities or responsibilities; to
furnish substantial reasons or convincing explanations.
Accountability entails an obligation to periodically disclose
in adequate detail and consistent form to all directly and
indirectly responsible or properly interested parties The
concept is important in health planning and regulation
programs (such as health systems agencies) which should
be accountable to the public and those they affect for their
actions. There is no specific or detailed agreement on
what accountability is or how to assure it. In the United
States, Public Law 93-641, for example, contains a variety
of provisions designed to make the planning conducted
under it accountable: agency governing boards must have
a consumer majority; the affected parties must be
represented on agency governing boards; data files, and
meetings must all be open to the public; and decisions
must be made according to established public procedures
and criteria.
accreditation: the process by which an agency or
organization evaluates and recognizes a program of study
or an institution as meeting certain predetermined
standards. The recognition is called accreditation. Similar
assessment of individuals is called certification. Standards
are usually defined in terms of: physical plant, governing
body, administration, medical and other staff, and scope
and organization of services. Accreditation is usually given
by a private organization created for the purpose of assuring
the public of the quality of the accredited (such as the Joint
Commission on Accreditation ofHospitals) Accreditation
standards and individual performance with respect to such
standards are not always available to the public. In some
situations public governments recognize accreditation in
lieu of, accept as a basis of, or require it as a condition of
licensure. Public or private payment programs often require
accreditation as a condition of payment for covered
services. Accreditation may either be permanent once
obtained or for a specified period of time. Unlike a license,
accreditation is not a condition of lawful practice, but is
intended as an indication of high quality practice, although
where payment is effectively conditioned on accreditation
it may have the same effect.
actuary: in insurance, a person trained in statistics,
accounting, and mathematics who determines policy rates,
reserves, and dividends by deciding what assumptions
should be made with respect to each of the risk factors
involved (such as the frequency of occurrence of the peril,
the average benefit that will be payable, the rate of
investment earnings, if any, expenses, and persistency
rates), and who endeavors to secure as valid statistics as
possible on which to base his assumptions.
acquisition cost: the immediate cost of selling,
accountability: responsible, liable, explainable.
underwriting, and issuing a new insurance policy, including
clerical costs, agents' commissions, advertising, and
medical inspection fees. Also refers to the cost paid by a
pharmacist or other retailer to a manufacturer or
wholesaler for a supply of drugs.
adverse selection: disproportionate insurance of risks
who are poorer or more prone to suffer loss or make claims
than the average risk. It may result from the tendency for
poorer risks or less desirable insureds (sick people) to seek
or continue insurance to a greater extent than do better
risks (healthy people), or from the tendency for the insured
to take advantage of favorable options in insurance
contracts. Favorable, as compared to adverse, selection,
when intentional, is called skimming.
allowable charge: generic term referring to the
maximum fee that a third party will use in reimbursing a
provider for a given service. An allowable charge may not
be the same as either a reasonable, customary or prevailing
charge as the terms are used under the Medicare program
in the United States.
anti-substitution laws: Laws that require the pharmacist
to "dispense as written." The effect is to prohibit a
pharmacist from substituting a different brand name drug
for the one prescribed, or from substituting a generic
equivalent drug in place of a drug presenbed by brand name,
even if the drug that would be substituted is considered to
be therapeutically equivalent to the drug prescribed and
perhaps is less expensive. Drug reimbursement programs
such as the Maximum Allowable Cost Program, which will
limit reimbursement to the lowest cost at which a drug is
generally available, will be more effective if they override
anti-substitution laws.
assessment: in insurance, a charge upon carriers to raise
funds for a specific purpose (such as meeting the
administrative costs of a government required program)
made by government (usually State government) or a
special organization authorized by government, and
provided for in law or regulation. Applied to all carriers
handling a specific line of coverage subject to regulation
by the government in question and based upon a formula.
assigned risk: a risk which underwritten do not care to
insure (such as a person with hypertension seeking health
insurance) but which, because of State law or otherwise,
must be insured. Insuring assigned risks is usually handled
through a group of insurers (such as all companies licensed
to issue health insurance in the State) and individual
assigned risks are assigned to the companies in turn or in
proportion to their share of the State's total health
insurance business. Assignment of risks is common in
casualty insurance and less common in health insurance.
As an approach to providing insurance to such risks, it can
be c'ontrasted with pooling of such risks (see insurance
55
pool) in which the losses rather than the risks are
distributed among the group of insurers.
assignment: an agreement in which a potential assigns
to another party, usually a provider, the right to receive
payment from a third-party for the service the patient has
received. Assignment is used instead of a patient paying
directly for the service and then receiving reimbursement
from public or private insurance programs.
beneficiary: a person who is eligible to receive, or is
receiving, benefits from an insurance policy (usually) or
health maintenance organization (occasionally, see
member). Usually includes both people who have
themselves contracted for benefits and their eligible
dependents. See also subscriber and insured.
benefit: in insurance, a sum of money provided in an
insurance policy payable for certain types of loss, or for
covered services, under the terms of the policy. The
benefits may be paid to the insured or on his behalf to
others. In prepayment programs, like HMOs, benefits are
the services the program will provide a member whenever,
and to the extent needed
benefits in kind: Health services provided to insured
persons which are delivered, paid or reimbursed in full or
in part by the scheme
blanket medical expense: a provision (usually included
as an added feature of a policy primarily providing some
other type of coverage, such as loss of income insurance)
which entitles the insured to collect, up to a maximum
established in the policy, for all hospital and medical
expenses incurred, without limitations on individual types
of medical expenses.
capitation: a method of payment for health services in
which an individual or institutional provider is paid a fixed,
per capita amount for each person served without regard
to the actual number or nature of services provided to each
person. Capitation is characteristic of health maintenance
organizations but unusual for physicians (see fee-forsetvice). Also, a method of support of health professional
schools, in which each eligible school receives a fixed
capitation payment for each student enrolled, called a
capitation grant.
Capital Expenditure Review (CER): review of proposed
capital expenditures of hospitals and/or other health
facilities to determine the need for, and appropriateness of,
the proposed expenditures. The review is done by a
designated regulatory agency such as a State health
planning and development agency and has a sanction
attached which prevents (see certijicate-of-need) or
discourages unneeded expenditures.
case-mix: the diagnosis-specific makeup of a health
program's work-load. Case-mix directly influences the
length ofstays in, and intensity, cost and scope of the services
provided by a hospital or other health program.
cash benefits: cash payments made by the scheme to
compensate for loss of income in case of illness, accident
or maternity, or for additional expenditures in case of
maternity or death.
catastrophic health insurance: health insurance
which provides protection against the high cost of treating
severe or lengthy illnesses or disabilities. Generally such
policies cover all or a specified percentage of medical
expenses above an amount that is the responsibility of the
insured himself (or the responsibility of another insurance
policy up to the maximum limit of liability). Under pending
NH1 proposals of this type, protection would typically begin
after an individual or family unit had incurred medical
expenses equal to a specified dollar amount (e g. $2,000
within a 12-month period) or a specified percentage of
income (e.g. fifteen percent); or had been in a medical
institution for a specified period (e g. 60 days). Individuals
would be liable for all costs up to the specified limits.
However, in the absence ofany effective prohibition against
doing so, they could be expected to obtain health insurance
protection for costs below the catastrophic limits. Generally
there is no maximum amount of coverage under these
plans; however, many include some coinsurance, (see also
major medical).
catchment area: a geographic area defined and served
by a health program or institution such as a hospital or
community mental health center Delineated on the basis
of such factors as population distribution, natural
geographic boundaries, and transportation accessibility.
Should be contrasted with service, medical market, or
medical trade area. All residents of the area needing the
services of the program are usually eligible for them,
although eligibility may also depend on additional criteria
(age or income). Residents of the area may or may not be
limited to obtaining services from the program, be known
to, or enrolled in the program. The program may or may not
be limited to providing services to residents of the area or
under any obligation to know of, register, or have the
capacity to serve all residents of the area.
certification: the process by which a governmental or
nongovernmental agency or association evaluates and
recognizes an individual, institution or educational
program as meeting predetermined standards. One so
recognized is said to be certified. Essentially synonymous
with accreditation, except that certification is usually
applied to individuals an accreditation to institutions.
Certification programs are generally nongovernmental
and do not exclude the uncertified from practice as do
licensure programs. In the PSRO and other regulatory
programs, certification of services means that their
provision has been approved and payment for them
assured (see certificate-of-need).
circumvention fee: fixed fee which is due if an insured
person contacts directly a provider on a higher level of
care than on the designated entry level of the health care
delivery system. For example, when a person contacts a
specialist without seeing a general practitioner first and
being referred to the specialist.
56
claim: a request to an insurer by an insured person (or, on
medical review) Used in the PSRO and Medicare programs
his behalf, by the provider of a service or good) for payment in the United States, where it is sometimes called extended
of benefits under an insurance policy
duration review (see also concurrent review).
claims review: review of claims by governments, medical contribution ceiling: the maximum amount of earnings
foundations, PSROs, insurers or others responsible for which is subject to social security contributions Earnings
payment to determine liability and amount of payment. up to this ceiling are therefore termed insurable earnings.
This review may include determination of the eligibility of contributory insurance: group insurance in which all
the claimant or beneficiaiy; of the eligibility of the provider or part of the premium is paid by the employee, the
of the benefit; that the benefit for which payment is claimed remainder, if any, being paid by the employer or union. In
is covered: that the benefit is not payable under another this context, noncontributory insurance is insurance in
policy; and that the benefit was necessary and of reasonable which the employer pays all the premium. So called
cost and quality.
because the risk, or employee, contributes to the
coinsurance: a cost-sharing requirement under a health cost of the insurance as well as the insured (see also
insurance policy which provides that the insured will enrollment period).
assume a portion or percentage of costs of covered services
copayment: a type of cost sharing whereby insured or
The health insurance policy provides that the insurer will covered persons pay a specified flat amount per unit of
reimburse a specified percentage (usually 80 percent) of service or unit of time (e g $2 per visit, $ 10 per inpatient
all, or certain specified covered medical expenses in excess hospital day), their insurer paying the rest of the cost. The
of any deductible amounts payable by the insured The copayment is incurred at the time the service is used. The
insured is then liable for the remaining percentage of the amount paid does not vary with the cost of service (unlike
costs, until the maximum amount payable under the coinsurance, which is payment of some percentage of
insurance policy, if any, is reached.
the cost).
community rating: a method of establishing premiums cost center: accounting device whereby all related costs
for health insurance in which the premium is based on the attributable to some "center" within an institution, such
average cost of actual or anticipated health care used by as an activity, department, or program (e.g. hospital burn
all subscribers in a specific geographic area or industry center), are segregated for accounting or reimbursement
and does not vary for different groups or subgroups of purposes. Contrasts with segregating costs of different
subscribers or with such variables as the group’s claims types, such as nursing, drugs, or laundry, regardless of
experience, age, sex, or health status.
which "center" incurred them.
compulsory insurance: an insurance program in which cost of insurance: the amount which a policyholder
legislation defines the population and benefits covered. pays to the insurer minus what he gets back from it. This
the conditions of eligibility, and the sources of funds in a should be distinguished from the rate for a given unit of
scheme. A plan may be compulsory only for an employer insurance ($10 for a $1000 life insurance policy). Such
(coverage must be offered to employees and a specified costs, which may be difficult to obtain and are rarely
portion of the premium paid, if they opt to take it) or for compared, are roughly approximated by the loading or the
individuals as well. Any universal public plan is necessarily ratio of amounts paid in benefits to income produced from
compulsory in the payment of taxes to support the plan is premiums (see also expenses).
not optional with the individual.
cost-related reimbursement: one method of payment
concurrent review: review of the medical necessity of of medical care programs by third parties (typically Blue
hospital or other health facility admissions upon or within Cross plans or government agencies in the United States),
a short period following an admission and the periodic for services delivered to patients. In cost-related systems,
review of services provided during the course of treatment
the amount of the payment based on the costs to the
The initial review usually assigns an appropriate length of provider of delivering service. The actual payment may be
stay to the admission (using diagnosis specific criteria) based on any one of several different formulae, such as
which may also be reassessed periodically. Where full cost, full cost plus an additional percentage, allowable
concurrent review is required, payment for unneeded costs, or a fraction of the costs Other reimbursement
hospitalizations or service is usually denied.
schemes are based on the charges for the services delivered,
contingency reserve: funds, deriving from contributions or on budgeted or anticipated costs for a future time period
or other sources, which are set aside by the scheme to (prospective reimbursement).
meet unforeseen income or expenditure deviations.
cost sharing: provisions of a health insurance policy
continued stay review: review during a patient's which require the insured or otherwise covered individual
hospitalization to determine the medical necessity and to pay some portion of his covered medical expenses.
appropriateness of continuation of the patient's stay at a Several forms of cost-sharing are employed, particularly
hospital level of care. It may also include assessment of deductibles, coinsurance and copayments. A deductible is a
the quality of care being provided. Occasionally used for set amount which a person must pay before any payment
similar review of patients in other health facilities (see ofbenefits occurs. A copayment is usually a fixed amount to
57
be paid with each service. Coinsurance is payment of a set a prescription. One of two ways that pharmacists charge
portion of the cost of each service. Cost-sharing does not for the service of filling a prescription, the other being a
refer to or include the amounts paid in premiums for the standard percentage markup on the acquisition cost of the
coverage.
drug involved. A dispensing fee is the same for all
coverage: the guarantee against specific losses provided prescriptions, thus representing a larger mark-up cost of
under the terms of an insurance policy. Frequently used an inexpensive drug or a small prescription than on an
interchangeably with benefits or protection. The extent of expensive drug or large prescription. However, it reflects
the insurance afforded by a policy. Often used to mean the fact that a pharmacist's service is the same whatever
the cost of the drug Some pharmacists combine the
insurance or an insurance contract
two approaches, using a percentage mark-up with a
creaming: seeskimming.
minimum fee.
credentialing: the recognition of professional or
economies of scale: cost savings resulting from
technical competence. The credentialing process may
aggregation of resources and/or mass production. In
include registration, certification, licensure, professional
particular, it refers to decreases in average cost when all
association membership, or the award of a degree in a
factors of production are expanded proportionately. For
field. Certification and licensure affect the supply of health
example, hospital costs for a unit of service are generally
manpower by controlling entrance into practice, and
less in 300 than 30 bed hospitals. (There is some evidence
influence the stability of the labor force by affecting
that they may be greater in 1,000 bed than 300 bed hospitals,
geographic distribution, mobility, and retention ofworkers.
a diseconomy of scale). Frequently used, less accurately,
Credentialing also determines the quality of personnel by
to refer to savings achieved when underused resources
providing standards for evaluating competence, and
are used more efficiently. For example, when many
defining the scope of functions and how personnel may be
individuals use the same product, or when, health care
used.
facilities share in the costs and use of expensive equipment
customary charge: generally, the amount which a (e.g. automated laboratory equipment) or otherwise
physician normally or usually charges the majority of underused and highly trained personnel (e.g. open-heart
patients.
surgery teams).
deductible: the amount of loss or expense that must be effectiveness: the degree to which diagnostic,
incurred by an insured or otherwise covered individual preventive, therapeutic or other action or actions achieves
before an insurer will assume any liability for all or part of the intended result. Effectiveness requires a consideration
the remaining cost of covered services Deductibles may of outcomes to measure. It does not require consideration
be either fixed dollar amounts or the value of specified of the cost of action, although one way of comparing the
services (such as two days of hospital care or one physician effectiveness of actions with the same or similar intended
visit) Deductibles are usually tied to some reference period results is to compare the ratios of their effectiveness to
over which they must be incurred (e g. $ 100 per calendar their costs. The Federal Food, Drug, and Cosmetic Act
year, benefit period, or spell of illness). Deductibles in requires prior demonstration of effectiveness for most
existing policies are generally of two types: (1) static drugs marketed for human use No similar requirement
deductibles which are fixed dollar amounts, and (2) exists for most other medical action paid for or regulated
dynamic deductibles which are adjusted from time to time under Federal or State law in the United States. Usually
to reflect increasing medical prices. A third type of synonymous with efficacy in common use. (see also quality,
deductible is proposed in some national health insurance efficiency).
plans: aslidingscale deductible, in which the deductible is
efficacy: commonly used synonymously with effectiveness,
related to income and increases as income increases.
but may usefully be distinguished from it by using efficacy
demand or demand schedule: in health economics,
for the results of actions undertaken under ideal
the varying amount of a good or service sought at varying circumstances and effectiveness for their results under
prices, given constant income and other factors. Demand usual or normal circumstances. Actions can thus be
must be distinguished from utilization (the amount of efficacious and effective, or efficacious and ineffective, but
services actually used), and need (for various reasons not the reverse.
services are often sought which either the consumer or
provider feel are unneeded). It is not always translated efficiency: the relationship between the quantity of
into use, particularly when queues develop (see also supply, inputs or resources used in the production of medical
services and the quantity of outputs produced. Efficiency
and elasticity ofdemand).
has three components : input productivity (technical
disability income insurance: a form of health insurance
efficiency), input mix (economic efficiency), and the scale
that provides periodic payments to replace income when
of operation. Efficiency is usually measured by indicators
the insured is unable to work as a result of injuiy or disease
such as output per man hour or cost per unit of output.
(see also workmen's compensation).
However, such indicators fail to account for the numerous
dispensing fee: a fee charges by a pharmacist for filling relevant dimensions (such as quality) of both inputs and
58
outputs and are, therefore, only partial measures
exclusions: specific hazards, perils or conditions listed
Colloquially, efficiency should probably be measured in in an insurance or medical care coverage policy for which
terms of the cost of achieving various health outcomes the policy will not provide benefit payments. Common
defining it in terms of productivity assumes that what is exclusions may include preexisting conditions, such as heart
produced is efficacious and used in an effective manner.
disease, diabetes, hypertension or a pregnancy which
elasticity of demand: in health economics, a measure began before the policy was in effect Because of such
of the sensitivity of demand for a product or service to exclusions, persons who have a serious condition or
changes in its price (price elasticity) or the income of the disease are often unable to secure insurance coverage,
people demanding the product or service (income either for the particular disease or in general Sometimes
elasticity). Price elasticity is the ratio of the resulting excluded conditions are excluded only for a defined period
percentage change in demand to a given percentage after coverage begins, such as nine months for pregnancy
change in price. Price elasticity of demand for health or one year full exclusions. Exclusions are often permanent
services allows one to predict the effect on demand of in individual health insurance, temporary (e.g one year)
different cost sharing provisions in proposed NH1 programs for small groups in group insurance, and uncommon for
and thus aids in predicting the differing stress their large groups capable of absorbing the extra risk involved.
enactment would place on the health system.
expenses: in insurance, the cost to the insurer of
eligibility conditions: conditions that insured persons conducting its business other than paying losses, including
must meet in order to be entitled to the benefits of the acquisition and administrative costs. Expenses are
scheme. These may include a: maximum duration of included in the loading.
benefits (the time during which the insured may receive experience rating: a method of establishing premiums
benefits); qualifying period (minimum period of for health insurance in which the premium is based on
contributions before the insured person or dependants can the average cost of actual or anticipated health care used
qualify for benefits); waiting period (the time an insured by various groups and subgroups of subscribers and thus
person has to wait before qualifying for specific benefits). varies with the health experience of groups and subgroups
enroll: to agree to participate in a contract for benefits or with such variables as age, sex, or health status. It is the
from an insurance company or health maintenance most common method of establishing premiums for health
organization. A person who enrolls is an enrollee or insurance in private programs (see also community rating).
subscriber (see also member and beneficiary). The number externality: in health economics, something that results
of people (and their dependents) enrolled with an insurance from an encounter between a consumer and provider, which
company or HMO is its enrollment (see also open
confers benefits or imposes costs on others, and is not
enrollment).
considered in making the transaction (its value, the
excise tax: a single-stage commodity tax (i.e. a tax levied external cost, not being reflected in any charge for the
on a commodity only once as it passes through the transaction). Pollution is the classic example. In health,
production process to the final consumer). An excise tax is an externality of immunizations is the protection that they
narrowly based; enabling legislation to specify precisely give the unimmunized, since that protection is not
which products are taxed, as well as the tax rate. Sales considered when an individual immunization is obtained
taxes are more broadly based; their tax base comprises or priced
many commodities and legislation designates those
factoring: the practice of one individual or organization
commodities not subject to tax. Excise taxes are commonly
selling its accounts receivable (unpaid bills) to a second at
assessed on automobiles, cigarettes, liquor or gasoline.
a discount. The latter organization, called the 'factor,'
They are sometimes levied in hopes of discouraging the
usually, but not always, assumes full risk of loss if the
use of the product. For example, an excise tax on cigarettes
accounts prove uncollectible. In health services delivery,
might discourage smoking by raising its cost and revenues
from it might be used to fund cancer screening programs. the expression generally refers to a hospital's or
physician's sale of unpaid bills to a collection agent.
enrollment period: period during which individuals may
enroll for insurance or health maintenance organization fee for service: method of charging whereby a physician
benefits. There are two kinds of enrollment periods, for or other practitioner bills for each encounter or service
example, for supplementaiy medical insurance of Medicare rendered. This is the usual method of billing by the majority
in the United States: the initial enrollment period (the ofthe country's physicians. Under a fee for service payment
seven months beginning three months before and ending system, expenditures increase not only if the fees
three months after the month a person first becomes themselves increase but also if more units of service are
eligible, usually by turning 65); and the general enrollment charged for, or more expensive services are substituted for
period (the first three months of each year). Most less expensive ones. This system contrasts with salary,
contributory group insurance has an annual enrollment per capita or prepayment systems, where the payment is
period when members of the group may elect to begin not changed with the number of services actually used or
contributing and become covered (see also open if none are used. While the fee-for-service system is now
generally limited to physicians, dentists, podiatrists and
enrollment).
59
optometrists, a number of other practitioners, such as
physician assistants, have sought reimbursement on a fee
for service basis, (see alsofee schedule, fractionation and
capitation).
fee schedule: a listing of accepted charges or established
allowances for specified medical or dental procedures. It
usually represents either a physician's or third party's
standard or maximum charges for the listed procedures
(see relative value scale).
fiduciary: relating to or founded upon a trust or
confidence. A fiduciary relation exists where an individual
or organization has an explicit or implicit obligation to act
in behalf of another person's or organization's interests
in matters which affect the other person or organization.
A physician has such a relation with his patient and a
hospital trustee with a hospital Because a fiduciary
relationship with a provider obligates one to act in the
interests of the provider, people with such relationships
are defined as providers in the United States, rather than
as consumers, for such purposes as determining whether
a health systems agency governing board has a consumer
majority.
fractionation: the practice of charging separately for
several services or components of a service which were
previously subject to a single charge or not charged for at
all. The usual effect is that the total charge is increased.
The practice is most commonly sent as a response to
limiting increases in the charge which is fractionated.
fraud: intentional misrepresentation by either providers
or consumers to obtain services, obtain payment for
services, or claim program eligibility. Fraud may include
the receipt of services which are obtained through
deliberate misrepresentation of need or eligibility;
providing false information concerning costs or conditions
to obtain reimbursement or certification; or claiming
payment for services which were never delivered or
received. Fraud is illegal and carries a penalty when
proven.
free choice of provider: choice of health care provider
by insured person without restriction.
free rider problem: if persons can benefit from a scheme
without contributing to the scheme.
grace period: a specified period, after a premium
payment is due on an insurance policy, in which the
policyholder may make such payment, and during which
the protection of the policy continues.
group insurance: any insurance plan by which a number
of employees of an employer (and their dependents), or
members of a similar homogeneous group, are insured
under a single policy, issued to their employer or the group,
are insured under a single policy, issued to their employer
or the group with individual certificates ofinsurance given
to each insured individual orfamily. Individual employees
may be insured automatically by virtue of employment, only
on meeting certain conditions (employment for over a
month), or only when they elect to be insured (and usually
to make a contribution to the cost of the insurance). Group
health insurance is usually experience rated (except for
small groups, all of which are insured by an individual
company in the same area are given the same rate by that
company) and less expensive for the insured than
comparable individual insurance (partly because an
employed population is generally healthier than the
general population, and partly because of lower
administrative costs, especially in marketing and billing).
Note that the policy holder or insured is the employer not
the employees (see also contributory insurance).
hazard: a situation or event which introduces, or
increases the probability of, occurrence of a loss arising
from a peril, or that increases the extent of a loss; such as
slippery doors, unsanitary conditions, or congested traffic.
health insurance: insurance against loss by disease or
accidental bodily injury. Such insurance usually covers
some of the medical costs of treating the disease or injury,
may cover other losses (such as loss of present or future
earnings) associated with them and may be either
individual or group insurance.
Health Maintenance Organization (HMO): an entity
with four essential attributes: (1) an organized system for
providing health care in a geographic area, which entity
accepts the responsibility to provide or otherwise assure
the delivery of (2) an agreed upon set of basic and
supplemental health maintenance and treatment services
to (3) a voluntarily enrolled group of persons, and (4) for
which services the HMO is reimbursed through a
predetermined, fixed, periodic prepayment made by or on
behalf of each person or family unit enrolled in the HMO
without regard to the amounts of actual services provided.
The HMO is responsible for providing most health and
medical care services required by enrolled individuals of
families. These services are specified in the contract
between the HMO and the enrollees. The HMO must
employ or contract with health care providers who
undertake a continuing responsibility to provide services
to its enrollees. The prototype HMO is the KaiserPermanente system, a prepaid group practice located on
the West Coast. However, medicalfoundations sponsored
by groups of physicians are included under the definition.
H MOs are of public policy interest because the prototypes
appear to have demonstrated the potential for providing
high quality medical services for less money than the rest
of the medical system. Specifically, rates of hospitalization
and surgery are considerably less in HMOs than occurs in
the system outside such prepaid groups, although some
feel that earlier, skimping or skimming may be better
explanations (see also prepaid health plans (PHPs),
individual practice associations.
incur: in insurance, to become liable for a loss, claim or
expense. Cases or losses incurred are those occurring
within a fixed period for which an insurance plan becomes
liable whether or not reported, adjusted and paid.
indemnity, indemnity benefits: under health insurance
60
policies, benefits in the form of cash payments rather than
services. The indemnity insurance contract usually defines
the maximum amounts which will be paid for the covered
services. In most cases, after the provider of service has
billed the patient in the usual way, the insured person
submits to the insurance company proof that he has paid
the bills and is then reimbursed by the company in the
amount of the covered costs, making up the difference
himself. In some instances, the provider of service may
complete the necessary forms and submit them to the
insurance company directly for reimbursement, billing the
patient for costs which are not covered. Indemnity benefits
are contrasted with service benefits.
Independent Professional Review (IPR): another
name for medical review required by Medicaid for inpatients
in long-term carefacilities.
indexed: describes an amount which is regularly adjusted
in proportion to changes in some index, (e.g. social security
payments are now indexed to (or adjusted to reflect
changes in) the Consumer Price Index. Some proposed
NHI plans index premiums, cost-sharing, catastrophic
thresholds, income levels, or reimbursement rates to the
CPI.
individual health insurance: health insurance covering
an individual (and usually his dependents) rather than a
group. Individual insurance usually offers indemnity
benefits than group insurance.
Individual Practice Association (IPA): a partnership,
corporation, association, or other legal entity which has
entered into an arrangement for provision of their services
with persons who are licensed to practice medicine,
osteopathy, dentistry, or with other health manpower (a
majority of whom are licensed to practice medicine or
osteopathy), which arrangement provides: that such
persons provide their professional services in accordance
with a compensation arrangement established by the
entity; and to the extent feasible (i) that such persons use
such additional professional personnel, allied health
professions personnel, and other health personnel as are
available and appropriate for the effective and effcient
delivery of the services, (ii) for the sharing by such persons
ofmedical and other records, equipment, and professional,
technical and administrative staff, and (iii) for the
arrangement and encouragement of the continuing
education of such persons in the field of clinical medicine
and related areas. IPAs are one source of professional
services for HMOs and are modeled after medical
foundations.
insurable risk: a risk which has the following attributes:
it is one of a large homogeneous group of similar risks; the
loss produced by the risk is definable and quantifiable; the
occurrence of loss in individual cases is accidental or
fortuitous; the potential loss is large enough to cause
hardship; the cost of insuring is economically feasible; the
chance of loss is calculable; and it is sufficiently unlikely
that loss will occur in many individual cases at the same
time.
insurance: the contractual relationship which exists
when one party, for a consideration, agrees to reimburse
another for loss to a person or thing caused by designated
contingencies. The first party is the insurer; the second,
the insured; the contract, the insurance policy; the
consideration, the premium; the person or thing, the risk;
and the contingency, the hazard or peril. Generally, a
formal social device for reducing the risk of losses for
individuals by spreading the risk over groups Insurance
characteristically, but not necessarily, involves equitable
contributions by the insured, pooling of risks, and the
transfer of risks by contract Insurance may be offered on
either a profit or nonprofit basis, to groups or individuals
(see also prepayment).
insurance pool: an organization of insurers or reinsurers
through which particular types ofrisks are shared or pooled
The risk of high loss by any particular insurance company
is transferred to the group as a whole (the insurance pool)
with premiums, losses, and expenses shared in agreed
amounts. The advantage of a pool is that the size of
expected losses can be predicted for the pool with much
more certainty than for any individual party to it. Pooling
arrangements are often used for catastrophic coverage or
for certain high risk populations like the disabled Pooling
may also be done within a single company by pooling risks
insured under various different policies so that high losses
incurred by one policy are shared with others (see also
assigned risk).
insured: the individual or organization protected in case
of loss under the terms of an insurance policy. The insured
is not necessarily the risk, the person whose risk of loss
from accident or sickness is protected against, ingroup
insurance the employer is the insured, the employees are
the risks.
insurer: the party to an insurance policy who contracts to
pay losses or render services.
intermediary: a public or private agency or organization
selected by providers of health care which enters into an
agreement with the financier (usually a government
agency), to pay claims and perform other functions for
financier with respect to such providers. Usually, but not
necessarily, a Blue Cross plan or private insurance company.
(see also carrier andfiscal agent).
joint purchasing agreement: a formal agreement
among two or more healthfacilities or programs to purchase
professional services, equipment or supplies. The
agreements simplify purchasing or result in economies of
scale intended to lower costs to the programs. The
purchased services or supplies may be shared or simply
distributed amount the programs.
length of stay (LOS): the length of an inpatient's stay in
a hospital or other healthfacility. It is one measure of use
of health facilities, reported as an average number of days
spent in a facility per admission or discharge. It is
calculated as follows: total number of days in the facility
for all discharges and deaths occurring during a period
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divided by the number of discharges and deaths during
the same period. In concurrent review an appropriate
length of stay may be assigned each patient upon
admission Average lengths of stay vaiy and are measured
for people with various ages, specific diagnoses, or sources
of payment
liability: something one is bound to do, or an obligation
one is bound to fulfill, by law an justice. A liability may be
enforced in court. Liabilities are usually financial or can
be expressed in financial terms. Also, the probably cost of
meeting such an obligation.
license: a permission granted to an individual or
organization by competent authority, usually public, to
engaging in a practice, occupation or activity otherwise
unlawful. Licensure is the process by which the license is
granted. Since a license is needed to begin lawful practice,
it is usually granted on the basis of examination and/or
proof of education rather than measures of performance.
License when given is usually permanent but may be
conditioned on annual payment of a fee. proof of continuing
education, or proof of competence. Common grounds for
revocation of a license include incompetence, commission
of a crime (whether or not related to the licensed practice)
or moral turpitude. Possession of a medical license from
one State may (reciprocity) or may not suffice to obtain a
license from another There is no national licensure
system for health professionals, although requirements are
often so nearly standardized as to constitute a national
system (see accreditation, certification, and institutional
licensure).
limits on liability: in insurance, limits on dollarcoverage
contained in an insurance policy. Malpractice insurance
generally contains such limits on the amounts payable for
an individual claim, or in the policy year (e.g $ 100,000 to
$200,000, and $300,000 to $600,000, respectively). Excess
coverage describes insurance with limits higher than these
conventional amounts. It may also be used to refer to limits
on professional liability imposed by law. Several states in
the United States have enacted legislation, for example,
which would place a limit of $500,000 on any malpractice
award. Such laws are being challenged as to their legality
and, in some instances, have been ruled unconstitutional.
loading: in insurance, the amount added to the actuarial
value of the coverage (expected or average amounts payable
to the insured) to cover the expense to the insurer of
securing and maintaining the business (i.e. the amount
added to the pure premium needed to meet anticipated
liabilities for expenses, contingencies, profits or special
situations. Loading costs for group health insurance range
from 5 to 25 percent of premiums; for individual health
insurance they go as high as 40 to 60 percent.
locality: in Medicare; the geographic area from which a
canier derives prevailing charges for the purpose of making
reasonable charge determinations. Usually, a locality is a
political or economic subdivision of a State and should
include a cross-section of the population with respect to
economic and other characteristics (see catchment).
long-term care: health and/or personal care services
required by persons who are chronically ill, aged, disabled,
or retarded, in an institution or at home, on a long-term
basis. The term is often used more narrowly to refer only
to long-term institutional care such as that provided in
nursing homes, homes for the retarded and mental
hospitals. Ambulatory services, like home health care, which
also can be provided on a long-term basis, are seen as
alternatives to long-term institutional care.
major medical: insurance designed to offset heavy
medical expenses resulting from catastrophic or prolonged
illness or injuries. Generally, such policies do not provide
first dollarcoverage, but do provide benefit payment of 75
to 80 percent of all types of medical expenses above certain
base amount paid by the insured. Most major medical
policies sold as private insurance contain maximums on
the total amount that will be paid (such as $50,000); thus,
they do not provide last dollar coverage or complete
protection against catastrophic costs. However, there is a
trend toward $250,000 limits or even unlimited plans. In
addition, benefit payments are often 100 percent of
expenses after the individual has incurred some large
amount ($500 to $2,000) of out-of-pocket expenses.
major surgery: surgery in which the operative procedure
is hazardous. Major surgery is irregularly distinguished
from minor surgeiy according to whether or not it requires
a general anesthetic, involves an amputation above the
ankle or wrist, or includes entering one of the body cavities
(abdomen, chest or head).
malpractice: professional misconduct or lack of ordinary
skill in the performance of a professional act. A practitioner
is liable for damages or injuries caused by malpractice.
Such liability, for some professions like medicine, can be
covered by malpractice insurance against the costs of
defending suits instituted against the professional and/or
any damages assessed by the court, usually up to a
maximum limit. Malpractice requires that the patient
demonstrate some injury and that the injury be negligently
caused (see limits on liability).
malpractice insurance: insurance against the risk of
suffering financial damage because of malpractice.
marginal cost: in health economics, the change in the
total cost of producing services which results from a small
or unit change in the quantity of services being produced.
Marginal cost is the appropriate cost concept to consider
when contemplating program expansion or contraction.
Economies of scale will result from the expansion of a
program when marginal cost is less than average or unit
cost.
medical audit: detailed retrospective review and
evaluation of selected medical records by qualified
professional staff. Medical audits are used in some
hospitals, group practices, and occasionally in private
independent practices for evaluating professional
performance by comparing it with accepted criteria,
62
standards and current professional judgment. A medical
audit is usually concerned with the care of a given illness
and is undertaken to identify deficiencies in that care in
anticipation of educational programs to improve it (see
concurrent review).
medical foundation: an organization of physicians,
generally sponsored by a State or local medical association.
Sometimes called a foundation for medical care. It is a
separate and autonomous corporation with its own board
of directors. Every physician member of the medical society
may apply for membership in the foundation and, upon
acceptance, participate in all its activities. A foundation is
concerned with the delivery of medical services at
reasonable cost. It believes in the free choice of a physician
and hospital by the patient,fee-for-service reimbursement
and local peer review. Many foundations operate as prepaid
group practices or as an individual practice association for
an HMO. While these are prepaid on a capitation basis for
services to some or all of their patients, they still pay their
individual members on a fee-for-service basis for the
services they give. Some foundations are organized only
for peer review purposes or other specific functions.
medical indigency: the condition of having insufficient
income to pay for adequate medical care without depriving
oneself or dependents of food, clothing, shelter, and other
essentials of living. Medical indigency may occur when a
self-supporting individual, able under ordinary conditions
to provide basic maintenance for themselves and their
family, is, in time of catastrophic illness, unable to finance
the total cost of medical care.
medically underserved area: a geographic location
(i.e. an urban or rural area) which has insufficient health
resources (manpower and/or facilities) to meet the medical
needs of the resident population. Physician shortage area
applies to a medically underserved area which is
particularly short of physicians. Such areas are also
sometimes defined by measuring the health status of the
resident population rather than the supply of resources,
an area with an unhealthy population being considered
underserved.
medically underserved population: the population of
an urban or rural area with a shortage of personal health
resources (manpower and/or facilities) to meet the medical
needs of the resident population. Physician shortage area
applies to a medically underserved population that may
not reside in a particular medically underserved area, or be
defined by its place of residence. Thus migrants. Native
Americans or the inmates of a prison or mental hospital
may constitute such a population.
medical review: review by a team composed of
physicians and other appropriate health and social service
personnel of the condition and need for care, including a
medical evaluation, of each inpatient in a long-term care
facility. By law, the team must review the: care being
provided in the facilities; adequacy of the services available
in the facilities to meet the current health needs and
promote the maximum physical well-being of the patients;
necessity and desirability of the continued placement of
such patients in the facilities; and feasibility of meeting
their health care needs through alternative institutional
or noninstitutional services Medical review differs from
utilization review in that it requires evaluation of each
individual patient and an analysis of the appropriateness
of his specific treatment in a given institution, whereas
utilization review is often done on a sample basis, with
special attention to certain procedures, conditions or length
ofstay (see also continued stay review).
member: a person who is eligible to receive, or is
receiving, benefits from a health maintenance organization
(usually) or insurance policy (occasionally; see beneftciaiy).
Usually includes both people who have themselves enrolled
or subscribed for benefits and their eligible dependents
(see also subscriber and insured)
moral hazard: ability of an insured person to exploit
benefits unduly to the detriment or disadvantage of others,
or the scheme as a whole, without having to bear the full
financial consequences of his behavior
mutual benefit associations: fraternal or social
organizations or corporations for the relief of members of
the organization from specified perils or costs such as the
costs of illness Such associations pay losses with
assessments on their members intended to liquidate
specific losses rather than by fixed premiums payable in
advance.
mutual insurance company: insurance companies with
no capital stock, owned by the policyholders. Trustees of
the company are chosen by the policyholders. Earnings
over and above payment of tosses, operating expenses, and
reserves are the property of the policyholdersand returned
to them in some way such as dividends or reduced premiums
(see also stock insurance company)
National Health Insurance (NHI): Programs in which
the government insures or otherwise arranges financing
for health care without arranging for, owning or operating
it (though they may include some measure of regulation of
the financed services). A term not yet defined in the United
States (see national health service).
national health service: often used synonymously with
national health insurance (incorrectly). They are sometimes
usefully distinguished by applying the former to health
programs in which the national government directly
operates a health system which serves some of all of its
citizens and the latter to those in which it finances without
owning or operating the services.
need: some thing or action which is essential,
indispensable, required or cannot be done or lived without;
a condition marked by the lack or want of some such thing
or action. The presence or absence of a need can and
should be measured by an objective criterion or standard.
Needs may or may not be perceived or expressed by the
person in need and must be distinguished from demands,
63
expressed desires whether or not needed Like
appropriateness, need is frequently and irregularly used
in health care with respect to health facilities and services
(see certificate-of-need), and people (see medically needy).
It is thus important to specify what thing or action's need
is being considered, by what criteria the need is to be
established, by whom (provider, consumer, or third party),
and with what effect (since payment for services by
insurance is, for instance, sometimes conditioned upon
the necessity of their provision).
occupancy rate: a measure of inpatient health facility
use, determined by dividing available bed days by patient
days. It measures the average percentage of a hospital's
beds occupied and may be institution-wide, or specific for
one department or service.
open enrollment: a period when new subscribers may
elect to enroll in a health insurance plan or prepaid group
practice. Open enrollment periods may be used in the sale
of either group or individual insurance and be the only
period of a year when insurance is available. Individuals
perceived as high-risk (perhaps because of a preexisting
condition) may be subjected to high premiums or exclusions
during open enrollment periods. The term also refers to
periodic opportunities for the general public, on a first
come, first served basis, to join an HMO. The United States
law presently requires that HMOs have at least one annual
open enrollment period during which an HMO accepts,
"up to its capacity, individuals in the order that they apply"
unless the HMO can demonstrate to government that open
enrollment would threaten its economic viability In such
cases, government can waive the open enrollment
requirement for a period of up to three years.
opportunity cost: in health economics, the value that
resources, used in a particular way, would have if used in
the best possible or another specified alternative way.
When opportunity costs exceed the value the resources
have in the way they are being used, they represent lost
opportunities to get value from the resources. One
opportunity cost of devoting physician time to tertiary care
is the lost value of devoting the same time to primary care.
Opportunity costs are the appropriate cost concept to
consider when making resource allocation decisions.
Actual costs often, but not always, can be assumed to
represent (be proportional to) opportunity costs (see also
marginal cost).
optional services: services which may be provided or
covered by a health program or provider and, if provided,
will be paid for in addition to any required services which
must be offered.
over-billing: additional charge made by the provider over
and above the charge listed in the fee schedule. This
additional amount is borne by the patient. In some national
health insurance systems, over-billing is not allowed.
out-of-pocket payments or costs: those bome directly
by a patient without benefit of insurance, sometimes called
direct costs. Unless insured, these include patient
payments under cost-sharing provisions.
outpatient: a patient who is receiving ambulatory care at
a hospital or other healthfacility without being admitted to
the facility. Usually does not mean people receiving
services from a physician's office or other program which
does not also give inpatient care. Outpatient care refers to
care given outpatients, often in organized programs.
participation (participating): a physician participates
in an insurance plan when he agrees to accept the plan's
pre-established fee or reasonable charge as the maximum
amount which can be collected for services rendered. A
non-participating physician may charge more than the
insurance program's maximum allowable amount for a
particular service. The patient is then liable for the excess
above the allowed amount. This system was developed in
the private sector as a method of providing the insured
with specific health care services at no out-of-pocket costs
A hospital or other health program is called a participating
provider when it meets the various requirements of, and
accepts reimbursement from, a public or private health
insurance program
patient days: a measure of institutional use, usually
measured as the number of inpatients at a specified time
(e.g. midnight). See also occupancy rate.
patient mix: the number and types of patients served by
a hospital or other health program. Patients may be
classified according to their homes (see patient origin
study).
pay-as-you-go system: a system of financing an
insurance scheme under which the total expenditure for
benefits and administration of a given period are met out
of the income (from contributions and other sources) of
the same period Pay-as-you-go insurance schemes do
not accumulate reserves except for contingency reserves.
payroll deduction: a specified amount taken out of pay
to finance a benefit. Payroll deductions may be either a set
payroll tax, at the social security tax, or a required payment
for a benefit, for example, a group health insurance
premium. A payroll deduction generally refers to any
amount withheld from the earnings of an employee.
peer review: generally, the evaluation by practicing
physicians or other professionals of the effectiveness and
efficiency of services ordered or performed by other
practicing physicians or other members of the profession
whose work is being reviewed (peers).
penetration: in marketing insurance or HMOs, the
percentage of possible subscribers who have in fact
contracted for benefits (subscribed). Participation is
sometimes used synonymously (see also saturation).
personal health services: all those health services
provided to specific individuals. Contrasted with
environmental and community health, public health,
consultation and education services and health education.
which are all usually directed at populations, not
individuals, and are undertaken to promote healthful
64
environments, behavior and lifestyles.
policy: a course of action adopted and pursued by a
government, party, statesman, or other individual or
organization; any course of action adopted as proper,
advantageous or expedient. Government makes policy
principally by writing legislation and conducting oversight
activities. The term is sometimes used less actively, to
describe any stated position on matters at issue, i.e. an
organization's policy statement on national health
insurance In insurance, a written contract of insurance
between an insurer and the insured. In the executive branch
of the Federal government of the United States, policies
are documents which interpret or enlarge upon rules, and
are sometimes referred to as guidelines. Policies bear the
same relationship to rules (regulations) as rules do to law,
except that, unlike regulations, they do not have the force
of law.
pre-existing condition: an injury occurring, disease
contracted, or physical condition which existed prior to
the issuance of a health insurance policy. Usually results
in an exclusion from coverage under the policy for costs
resulting from the condition.
premium: the amount of money or consideration which
is paid by an insured person or policyholder (or on his
behalf) to an insurer or third party for insurance coverage
under an insurance policy. The premium is generally paid
in periodic amounts. It is related to the actuarial value of
the benefits provided by the policy, plus a loading to cover
administrative costs, proft, etc. Premium amounts for
employment related insurance are often split between
employers and employees (see contributory insurance);
under current tax law, one-half of the amount spent on
premiums by employees up to a maximum of $150 is
deductible for income tax purposes for those who itemize
deductions Premiums paid by the employer are nontaxable income for the employee. Premiums are paid for
coverage whether benefits are actually used or not, they
should not be confused with cost-sharing, like copayments
and deductibles which are paid only if benefits are actually
used.
prepaid group practice: an arrangement where a formal
association of three or more physicians provides a defined
set of services to persons over a specified time period in
return for a fixed periodic prepayment made in advance of
the use of service (see also medicalfoundation and health
maintenance organization).
prepaid health plan (PHP): generically, a contract
between an insurer and a subscriber or group of subscribers
whereby the PHP provides a specified set of health benefits
in return for a periodic premium.
prepayment:
inconsistently used, sometimes
synonymous with insurance, sometimes refers to any
payment ahead of time to a provider for anticipated services
(such as an expectant mother paying advance for maternity
care), sometimes distinguished from insurance as referring
to payment organizations (such as HMOs, prepaid group
practices and medical foundations) which, unlike an
insurance company, take responsibility for arranging for
and providing needed services as well as paying for them.
prevailing charge: a charge which falls within the range
of charges most frequently used in a locality for a particular
medical service or procedure The top of this range
establishes an over-all limitation on the charges which a
carrier, which considers prevailing charges in
reimbursement, will accept as reasonable for a given
service, without adequate special justification
prior authorization: requirement imposed by a third
party, under some systems of utilization review, that a
provider must justify before a peer review committee,
insurance company representative, or State agent the need
for delivering a particular service to a patient before actually
providing the service in order to receive reimbursement.
Generally, prior authorization is required for non
emergency services which are expensive (involving a
hospital stay, preadmission certification, for example) or
particularly likely to be overused or abused
private practice: medical practice in which the
practitioner and his practice are independent of any
external policy control. It usually requires that the
practitioner be self-employed, except when he is salaried
by a partnership in which he is a partner with similar
practitioners. It is sometimes wrongly used synonymously
with eitherfee-for-service practice (the practitioner may
sell his services by another method; i e. capitation); or solo
practice (group practice may be private). Note that
physicians practice in many different settings and there is
no agreement as to which of these does or does not
constitute private practice. Regulation, which does exert
external control, is not generally felt to make all practice
public. The opposite of private practice is not necessarily
public, in the sense of employment by the government.
Practitioners salaried by private hospitals are not usually
thought to be in private practice. (The professional staff
thought this a difficult concept to define but the 13-yearold son of a physician got it started, saymg, "That's easy.
Practice of your own, charging what you want.")
professional liability: obligation of providers or their
professional liability insurers to pay for damages resulting
from the providers’ acts of omission or commission in
treating patients. The term is sometimes preferred by
providers to medical malpractice because it does not
necessarily imply negligence. It is also a term which more
adequately describes the obligations of all types of
professionals, e.g. lawyers, architects and other health
providers, as well as physicians.
Professional Standards Review Organization
(PSRO): A physician-sponsored organization charged
with comprehensive and on-going review of sezv/ces
provided under the Medicare, Medicaid and Maternal and
Child Health programs in the United States. The purpose
of this review is to determine for purposes of
reimbursement under these programs whether services
65
are: medically necessary; provided in accordance with
professional criteria, norms and standards; and, in the
case of institutional services , rendered in an appropriate
setting. PSRO areas have been designated throughout the
country and organizations in many of these areas are at
various stages of implementing the required review
functions (see also peer and medical review).
profit: the gain made by the sale ofa good or service after
deducting the value of labor, materials, rents, interest on
capital and other expenses involved in the production of
the good or service. Economists define profit as return to
(or on) capital investment, and distinguish normal
(competitive) and excessive (more than competitive) profit.
Profit in the sense of a profit-making or proprietary
institution is present when any of the net earnings of the
institution inure to the benefit of any individual. The
concept of profit is vety hard to define operationally or in
detail, and unreasonable or excessive profit even more so.
It is important to recognize that reasonable profit on
investments must vary with the risks involved in the
investment Profit bears a close relationship to the balance
ofsupply and demand, being a measure of unmet demand.
proprietary hospital: a hospital operated for the purpose
of making a profit for its owners. Proprietary hospitals are
often owned by physicians for the care of their own and
other 'patients. There is also a growing number of investorowned hospitals, usually operated by a parent corporation
which operates a chain of such hospitals.
prospective reimbursement: any method of paying
hospitals or health programs in which amounts of rates of
payment are established in advance for the coming year
and the programs are paid these amounts regardless of
the costs they actually incur. These systems of
reimbursement are designed to introduce a degree of
constraint on charge or cost increases by setting limits on
amounts paid during a future period. In some cases, such
systems provide incentives for improved efficiency by
sharing savings with institutions that perform at lower
than anticipated costs Prospective reimbursement
contrasts with the method of payment presently used under
Medicare and Medicaid where institutions are reimbursed
for actual expenses incurred (i.e. on a retrospective basis.
quality assurance: activities and programs intended to
assure the quality of care in a defined medical setting or
program. Such programs must include educational or other
components intended to remedy identified deficiencies in
quality, as well as the components necessary to identify
such deficiencies (such as peer or utilization review
components) and assess the program's own effectiveness.
A program which identifies quality deficiencies and
responds only with negative sanctions, such as denial of
reimbursement, is not usually considered as a quality
assurance program, although the latter may include use of
such sanctions. Such programs are required of HMOs and
other health programs assisted under authority of the PHS
Act in the United States.
rating: in insurance, the process of determining rates, or
the cost of insurance, for individuals, groups or classes of
risks.
reasonable charge: for any specific service covered
under Medicare, the lower of the customary charge by a
particular physician for that service and the prevailing
charge by physicians in the geographic area for that service.
Reimbursement is based on the lower of the reasonable
and actual charges. For example, suppose the prevailing
charge for a fistulectomy is $100 in a certain locality, i.e.,
this is the 75th percentile of the customary charges for
that service by the physicians in that locality. Dr. A's actual
charge is $75, although he customarily charges $80 for the
procedure; Dr. B's actual charge is his customary charge of
$85; Dr. C’sis his customary charge of $125; Dr. D'sis$I00,
although he customarily charges $80; and there are no
special circumstances in any case. The reasonable charge
for Dr. B would be $85, because his customary charge is
lower than the prevailing charge for that locality. The
reasonable charge for Dr. C would be $ 100, the prevailing
charge for his locality. The reasonable charge for Dr. D
would be $80, because that is his customaty charge which
is lower than the actual charge in this particular case. His
reasonable charge cannot exceed his customary charge in
the absence of special circumstances, even though his
actual charge of $ 100 is the same as the prevailing charge.
Generically, the term is used for any charge payable by an
insurance program which is determined in a similar, but
not necessarily identical fashion.
referral: the practice of sending a patient to another
practitioner or to another program for services or
consultation which the referring source is not prepared or
qualified to provide. In contrast to referral for consultation,
referral for services involves a delegation of responsibility
for patient care to another practitioner or program, and
the referring source may or may not follow-up to ensure
that services are received.
registration: the process by which qualified individuals
are listed on an official roster maintained by a
governmental or non-governmental agency. Standards
for registration may include such things as successful
completion of a written examination given by the registry,
membership in the professional association maintaining
the registry, and education and experience such as
graduation from an approved program or equivalent
experience. Registration is a form of credentialing, similar
to certification. Registration is also used to describe the
recording of notifiable diseases, or the listing and follow
up of patients with such diseases.
regulation: the intervention of government in the health
care or health insurance market to control entry into or
change the behavior of participants in that marketplace
through specification of rules for the participants. This
does not usually include programs which seek to change
behavior through financing mechanisms or incentives. It
also does not include private accreditation programs
66
although they may be relied upon by government regulatory
programs, as is the Joint Commission on Accreditation of
Hospitals under Medicare in the United States. Regulatory
programs can be described in terms of their purpose
(control charges), who is regulated (hospitals), who
regulates (State government), and method (prospective
rate review). Regulatory programs include some
certification, some registration, licensure, certificate ofneed,
and PSRO and other programs. Also, a synonym for a rule
published by the executive branch of the United States
Federal government implementing the law.
reimbursement: payment by the scheme to the provider
of health care, or to the protected persons as a refund, for
all or part of fees for health services.
reinsurance: the practice of one insurance company
buying insurance from a second company for the purpose
of protecting itself against part or all of the losses it might
incur in the process of honoring the claims of its
policyholders. The original company is called the ceding
company; the second is the assuming company or reinsurer
Reinsurance may be sought by the ceding company for
several reasons: to protect itself against losses in individual
cases beyond a certain amount, where competition requires
it to offer policies providing coverage in excess of these
amounts; to offer protection against catastrophic losses in
a certain line of insurance, such as aviation accident or
polio insurance; or to protect against mistakes in rating
and underwriting in entering a new line of insurance such
as major medical.
relative value scale or schedule (RVS): a coded listing
ofphysician or other professional services using units which
indicate the relative value of the various services they
perform: taking into account the time, skill and overhead
cost required for each service; but not usually considering
the relative cost-effectiveness of the services, the relative
need or demand for them, or their importance to people’s
health. The units in this scale are based on median charges
by physicians. Appropriate conversion factors are used to
translate the abstract units in the scale to dollar fees for
each service. Given individual and local variations in
practice, the relative value scale can be used voluntarily as
a guide to physicians in establishing/eesfor services, and
as a guide for insurance carriers and government agencies
in determining appropriate reimbursement (e.g. use of
relative value scales under Medicare where there is no
customary or prevailing charge for covered service). An
example is the scale prepared and revised periodically by
the California Medical Association which includes
independent scales for medicine, anesthesia, surgery,
radiology and pathology. Relative value scales can contain
biases favoring certain specialties (such as surgery) or
types of services (highly technical or specialized) over
others.
reserves: balance sheet accounts set up to report the
liabilities faced by an insurance company under
outstanding insurance policies. Their purpose is to secure
as true a picture as possible of the financial condition of
the organization (by permitting conversion of
disbursements from a paid to an accrual basis). The
company sets the amount of reserves in accord with its
own estimates, State laws, and recommendations of
supervisory officials and national organizations.
Regulatory agencies can accept the reserves or refuse them
as inadequate or excessive. For Blue Cross plans in the
United States, for example, reserves set aside to cover
average monthly claims and operating expenses for some
period of time. Reserves, while estimated, all are obligated
amounts and have four principal components: reserves for
known liabilities not yet paid; reserves for losses incurred
but unreported; reserves for future benefits; and other
reserves for various special purposes, including contingency
reserves for unforeseen circumstances.
retrospective reimbursement: payment to providers
by a third party carrier for costs or charges actually incurred
by subscribers in a previous time period. This is the method
of payment used under Medicare and Medicaid in the United
States.
rider: a legal document which modifies the protection of
an insurance policy, either expanding or decreasing its
benefits, or adding or excluding certain conditions form the
policy's coverage
risk: generally, any chance of toss. In insurance, designates
the individual or property insured by an insurance policy
against loss from some peril or hazard. Also used to refer
to the probability that the loss will occur.
risk charge: the fraction of a premium which goes to
generate or replenish surpluses which a carrier must
develop to protect against the possibility of excessive losses
under its policies. Profits, if any, on the sale of insurance
are also taken from the surpluses developed using risk
charges. The risk charge is sometimes referred to as the
retention or retention rate.
risk rating: adjusting of individual risk by insurer, usually
based on age, pre-existing morbidity
roster: a list of patients served by a given health
professional or program (whose roster it is). The roster
may be derived from a registry or list of encounters but the
listing of an individual on a roster does not necessarily
imply any ongoing relationship between the program and
the individual (see also catchment area).
saturation: in marketing insurance or HMOs, the point
at which further penetration is improbable or excessively
costly.
scope of services: the number, type and intensity or
complexity of services provided by a hospital or health
program. Scope of services is measured, in a number of
quite different ways, so that the capacity and nature of
different programs may be compared. A program's scope
of services should reflect, and be adequate to meet, the
needs of its patient mix.
service benefits: those received as a result ofprepayment
67
or insurance, whereby payment is made directly to the
provider of services or the hospital or other medical care
programs for covered services provided by them to eligible
persons. Service benefits may be full service benefits,
meaning that the plan fully reimburses the hospital, for
example, for all services provided during a period so that
the patient has no out-of-pocket expenses Full service
benefits may also be available when the program itself
provides the service as in a prepaid group practice. Partial
service benefits cover only part of the expenses, the
remainder to be paid by the beneficiary through some form
of cost-sharing (see also vendor payment)
shared services: the coordinated, or otherwise explicitly
agreed upon, sharing of responsibility for provision of
medical or non-medical services on the part of two or more
otherwise independent hospitals or other health programs.
The sharing of medical services might include, for example,
an agreement that one hospital provide all pediatric care
needed in a community and no obstetrical services while
another undertook the reverse. Examples of shared non
medical services would include joint laundry and dietary
services for two or more nursing homes. Common laundiy
services purchased by two or more health programs from
one independent retailer of laundry services are not usually
thought of as shared services unless the health programs
own or otherwise control the retailer.
skimming: the practice in health programs paid on a
prepayment or capitation basis, and in health insurance,
of seeking to enroll only the healthiest people as a way of
controlling program costs (since income is constant
whether or not services are actually used). Contrast with
adverse selection. Sometimes known as creaming. See
also skimping.
skimping: the practice in health programs paid on a
prepayment or capitation basis of denying or delaying the
provision of services needed or demanded by enrolled
members as a way of controlling costs (since income is
constant whether or not services are actually used). The
classic example is the denial or delay of a cataract
extraction. See also skimming and adverse selection.
sliding scale deductible: a deductible which is not set
at a fixed amount but rather varies according to income. A
family is usually required to spend all (a spend-down) of a
set percentage of their income above some base amount
(for example, all or 25 percent of any income over $5,000)
as deductible before a member can receive medical care
benefits. There may be a maximum amount on the
deductible. The sliding scale concept can also be applied
to coinsurance and copayments.
socialized medicine: a medical care system where the
organization and provision of medical care services are
under direct government control, and providers are
employed by or contract for the provision of services directly
with the government; also a term used more generally,
without recognized or constant definition, referring to any
existing or proposed medical care system believed to be
subject to excessive governmental control.
sponsored malpractice insurance: a malpractice
insurance plan which involves an agreement by a
professional society (such as State medical society) to
sponsor a particular insurer's medical malpractice
insurance coverage, and to cooperate with the insurer in
the administration of the coverage. The cooperation may
include participation in marketing, claims review, and
review of ratemaking. Until 1975, this was the
predominant approach to coverage in the United States.
In 1975, a number of carriers with such arrangements
announced they were withdrawing from them. They have
been replaced by professional society operated plans, joint
underwriting associations, State insurance funds and other
arrangements.
standards: generally, a measure set by competent
authority as the rule for measuring quantity or quality.
Conformity with standards is usually a condition of
licensure, accreditation, or payment for services. Standards
may be defined in relation to: the actual or predicted effects
of care; the performance or credentials of professional
personnel; and the physical plant, governance and
administration offacilities and programs. In the PSRO
program in the United States, standards are professionally
developed expressions of the range of acceptable variation
from a norm or criterion. Thus, the critena for care of a
urinary tract infection might be a urinalysis in 100 percent
of the cases and a urine culture only in previously untreated
cases.
stock insurance company: a company owned and
controlled by stockholders and operated for the purpose of
making a profit, and contrasted with a mutual insurance
company. In the former the profits go to the owners, in the
latter they go to the insured.
subrogation: a provision of an insurance policy which
requires an insured individual to turn over any rights he
may have to recover damage from another party to the
insurer, to the extent to which he has been reimbursed by
the insurer. Some experts have argued that private health
insurance (including Blue Cross or group insurance) should
have subrogation rights similar to those in most property
insurance policies (e.g. auto and fire). Having paid the
hospital bill of a policyholder, the health insurance
company could assume his right to sue the party whose
negligence might have caused the hospitalization, and be
reimbursed for its outlay to the policyholder. Subrogation
rights could help insure prompt payment of medical
expenses without duplication ofbenefits. Others respond
that subrogation is time consuming, expensive and may
not offer companies adequate protection against loss. Few
insurers use it voluntarily and some insurance
commissioners forbid its use.
subscriber: often used synonymously with either member
or beneficiary but in a strict sense means only the individual
family head or employee) who has elected to contract for,
or participate in (subscribe to) an insurance or HMO plan
68
for either himself and his eligible dependents.
substitution: the filling of a prescription by a pharmacist
with a drug product therapeutically and chemically equivalent
to, but not. the one prescribed. Many States have anti
substitution laws which prohibit the pharmacist from filling
a prescription with any product other than the specific
product of the manufacturer whose brand name is used on
the prescription.
supplemental health insurance: health insurance
which covers medical expenses not covered by separate
health insurance already held by the insured (e.g. which
supplements another insurance policy) For example,
many insurance companies sell insurance to people
covered under Medicare which covers either the costs of
cost-sharing required by Medicare, services not covered,
or both. Where cost-sharing is intended to control
utilization, the availability of supplemental health
insurance covering cost-sharing limits its effectiveness.
supplier: generally, any institution, individual or agency
that furnishes a medical item or service. In Medicare in the
United Slates, suppliers are distinguished from providers,
including hospitals, and skilled nursing facilities
Institutions classified as providers are reimbursed by
intermediaries on a reasonable cost basis while suppliers,
including physicians, nonhospital laboratories and
ambulance companies, are paid by carriers on the basis of
reasonable charges.
supply: in health economics, the quantity of services
supplied as the price of the service varies, income and other
factors being held constant. For most services, increases
in price induce increases in supply, and for all they ration
existing supply. Increase in demand (but not, necessarily,
in need) normally induce an increase in price.
surplus: in insurance, the excess of a company's assets
(including any capital) over liabilities. Surpluses may be
used for future dividends, expansion of business, or to meet
possible unfavorable future developments. Surpluses may
be developed and increased intentionally by including an
amount in the premium in excess of the pure premium
needed to meet anticipated liabilities known as a risk
charge. Surpluses are sometimes earmarked in part as
contingency reserves and in part as unassigned surplus
third-party payer: any organization, public or private,
that pays or insures health or medical expenses on behalf
of beneficiaries or recipients (e.g. Blue Cross and Blue Shield,
commercial insurance companies, Medicare and Medicaid).
The individual generally pays a premium for such coverage
in all private and some public programs. The organization
then pays bills on his behalf; such payments are called
third party payments and are distinguished by the
separation between the individual receiving the service
(the first party), the individual or institution providing it
(the second party) and the organization paying for it (the
third party). See also service and indemnity benefits.
trust funds: funds collected and used by the Federal
government for carrying out specific purposes and
programs according to terms of a trust agreement or statute,
such as the social security and unemployment trust funds.
Trust funds are administered by the government in a
fiduciary capacity for those benefited and are not available
for the general purposes of the government. Trust fund
receipts whose use is not anticipated in the immediate
future are generally invested in interest bearing
government securities and earn interest for the trust fund
The Medicare program in the United States is financed
through two trust funds — the Federal Hospital Insurance
Fund with finances Part A, and the Federal Supplementary
Medical Insurance Trust Fund which finances part B.
underwriting: in insurance, the process of selecting,
classifying, evaluating and assuming risks according to
their insurability. Its fundamental purpose is to make sure
that the group insured has the same probability of loss and
probable amount of loss, within reasonable limits, as the
universe on which premium rates were based. Since
premium rates are based on an expectation of loss, the
underwriting process must classify risks into classes with
about the same expectation of loss.
underwriting profit: that portion of the earnings of an
insurance company that comes from the function of
underwriting. It excludes earnings from investments (other
than interest earnings required by law or regulation to be
assumed to have been earned for purposes of determining
the reserves held) either in the form of income from
securities or sale of securities at a profit. The remainder
is found by deducting incurred losses and expenses from
earned premium.
uniform cost accounting: the use of a common set of
accounting definitions, procedures, terms, and methods
for the accumulation and communication of quantitative
data relating to the financial activities of several
enterprises The American Hospital Association, for
example, encourages the use of its Chart of Accounts as a
system which can be employed by hospitals in the United
States.
universal coverage: coverage of all the citizens of a
country by the scheme
user charges: payments which a person has to make at
the time of use of health services, in addition to the regular
contributions to the scheme paid for by the insured person.
Generally, these charges cover only part of the cost of
services, and may take the form of a circumvention fee,
coinsurance, or copayment.
utilization review (UR): evaluation of the necessity,
appropriateness and efficiency of the use of medical
services, procedures andfacilities. In a hospital this includes
review of the appropriateness of admissions, services
ordered and provided, length of stay, and discharge
practices, both on a concurrent and retrospective basis.
Utilization review can be done by a utilization review
committee, PSRO, peer review group, or public agency (See
also medical review).
69
vendor: a provider, an institution, agency, organization
or individual practitioner who provides health or medical
services. Vendor payments are those payments which go
directly to such institutions or providers from a third party
program like Medicaid.
vendor payment: used in public assistance programs to
distinguish those payments made directly to vendors of
service from those cash income payments made directly to
assistance recipients. The vendors, or providers of health
services, are reimbursed directly by the program for
services they provide to eligible recipients. Vendor
payments are essentially the same as service benefits
provided under health insurance and prepayment plans.
voluntary health agency: any non-profit, non
governmental agency, governed by lay and/or professional
individuals, organized on a national, State, or local basis,
whose primary purpose is health related. The term usually
designates agencies supported primarily by voluntary
contributions from the public at large, and engaged in a
program of service, education, and research related to a
particular disease, disability, or group of diseases and
disabilities; for example, the American Heart Association,
American Cancer Society, National Tuberculosis
Association, and their State and local affiliates. The term
can also be applied to such agencies such as non-profit
hospitals, visiting nurse associations, and other local service
organizations which have both voluntary contributions,
and charges and fees for services provided.
voluntary health insurance: a health insurance
program in which affiliation to the scheme is not
determined by legislation
waiting period: a period of time an individual must wait
either to become eligible for insurance coverage, or to
become eligible for a given benefit after overall coverage
has commenced (see exclusions). This does not generally
refer to the amount of time it takes to process an application
for insurance, but rather is a defined period before benefits
become payable Some policies will not pay maternity
benefits, for example, until nine months after the policy
has been in force. Another common waiting period occurs
ingroup insurance offered through a place of employment
where coverage may not start until an employee has been
with a firm over 30 days. For disabled persons to be covered
under Medicare in the United States, there is a waiting
period of two years; a person must be entitled to social
security disability benefits for two years before medical
benefits start.
waiver of premium: a provision included in some
policies which exempts the insured from paying premiums
while he is disabled during the life of the contract.
warranty: in malpractice, actions against physicians are
normally based on negligence, but in certain circumstances
the plaintiff can bring his action on the basis of a warranty.
A warranty arises if the physician promises or seems to
promise that the medical procedure to be used is safe or
will be effective. One of the advantages to bringing an
action on warranty grounds, rather than for negligence, is
that the statute of limitations is usually longer. Awarranty
action may be brought and maintained if there is an express
warranty offered by the physician to the patient.
working capital: the sum of an institution's investment
in short-term or current assets including cash, marketable
(short-term) securities, accounts receivable, and
inventories. Net working capital is defined as the excess
of total current assets over total current liabilities.
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