India's National Health Protection Scheme (NHPS) aims to be the world's largest government-funded health insurance programme. As in the existing government-funded health insurance schemes, health insurance companies are likely to play a crucial role in the implementation of NHPS. In addition, the number of Indians purchasing health insurance (on their own) has grown in the past few years. Of the total out-of-pocket expenditure (80% of the total health expenditure), payments for health insurance premium have increased from 5.28% in 2013-14 to 6.51% in 2015-16. However, all is not well in this growing industry. This has raised concerns of fair play and efficiency in the industry.
While there is some literature on consumer protection concerns in the overall insurance industry, the existing literature on the health insurance industry in India is sparse. In a new paper, Fair play in Indian health insurance, we study the functioning of this industry through an analysis of the claims ratio and the complaints rate.
Efficiency in the insurance market is commonly measured through the claims ratio. The claims ratio is defined as the percentage of the total premium collected that is paid out as claims by an insurer. Claims ratio close to (but less than) 100% indicates that the insurer is efficient (low operating costs). Claims ratio above 100% indicates that the insurance company is paying more than it is collecting as premium. This implies that the insurance company is unsustainable and may go bankrupt. When the claims ratio is too low, there are concerns about consumer protection. It indicates that the insurer is charging too much from the consumers. Figure 1 shows the range of claims ratio that insurance regulators use as an indicator for the insurer's quality.
Our analysis of the claims ratio shows that the functioning of the Indian health industry is neither desirable nor sustainable. A part of the industry, the private stand-alone health insurers, appear to be overcharging its consumers. Between 2013 and 2016, the claims ratio of these insurers fell from 67% to 58%. Such low claims would have triggered mandatory refunds if these insurers were operating in the US. However, there are no regulations mandating minimum claims ratio in India. Another part of the industry, the government insurers, suffers from financial fragility. Group insurance businesses and government-funded health insurance schemes also raise concerns related to insolvency. We conclude that the evidence from claims ratio raises concerns about consumer protection and micro prudential regulation.
In addition to the claims ratio, the complaints rate is used to measure the quality of products in the insurance industry. The complaints rate is the number of complaints made by consumers of insurance (to a third party) in a year per million persons covered. Our analysis of the complaints rate shows that India has the highest complaints rate when compared with other common law jurisdictions: Canada, Australia, UK and California. This finding is probably conservative for two reasons. First, unlike other jurisdictions, Indian health insurance only covers hospitalisation. In addition to hospitalisation, other jurisdictions provide clinical visits, medication and some wellness care under health insurance. Thus, increasing the number of touch points and transactions, where failures can generate complaints. Second, India is a less litigious country than other jurisdictions. So, we must adjust the Indian complaints rate with the litigation rate (civil suits filed per hundred thousand persons). Table 1 is our estimation of the complaints rate in India and the compared jurisdictions for 2015-16. The last column is our estimation of India's litigation rate adjusted complaints rate (Column 3).
Putting these two factors together, we view the complaints rate that prevails in the Indian health insurance industry as a source of concern. We also read a large number of court orders settling health insurance disputes. One common thread which stood out was the absence of complexity in these disputes, most relating to arbitrary and illegitimate rejection of claims by the insurers.
When we investigate the sources of these problems, they are traced to infirmities in the regulatory framework governing the health insurance industry. We identify three issues in the regulatory framework. The first issue is deficiencies in the existing regulations. For example, the regulations are not clear on disclosures that insurance companies should make to its consumers, the manner in which disclosures should be made and the procedure for settlement of claims. The second issue is poor enforcement of existing regulations. The insurance regulator and the insurance companies seem to easily bypass their obligations under the regulations without any repercussions. The third issue is fundamental deficiencies in the design of the insurance ombudsman, in so far as its offices and day to day administration is controlled by the insurance industry. We then engage in a comparative law analysis, where each of these issues is analysed with respect to the legal systems of Australia, South Africa, US and UK.
Finally, we turn to existing strategies for reform in the Indian insurance sector. Financial Sector Legislative Reforms Commission, provides insights into the approach to consumer protection for financial services. The report comprises of two volumes. Volume I is "Analysis and Recommendation". Volume II is the "Indian Financial Code", a model law for the regulation of the financial sector. We engage in counter-factual analysis of the three identified issues in a hypothetical world, where the Indian Financial Code was enacted. We find that all the three issues are suitably addressed. We conclude that the Financial Sector Legislative Reforms Commission, provides an intellectual framework through which the problems of health insurance can be understood and solved. Implementation of these measures will have positive implications for health insurance in India.
The authors are researchers at the National Institute of Public Finance and Policy.