Getting health premiums to fall

While most have interpreted the Insurance Regulatory Development Authority’s (IRDA’s) proposal to allow the free pricing of non-life insurance premiums from January 1 next year as a sign that health insurance rates will rise, if the IRDA does its job right, it is likely health insurance premiums may actually fall, at least for the individual segment. The reason for this lies in the complex web of cross-subsidies that are currently prevalent in the sector; so once policies are freed, they will be priced on the basis of actual costs and risks.

What happens to all premiums after January 1 will hinge critically on fire insurance, which, today, contributes 50-60 per cent of the profit of non-life insurance companies—right now this rate is regulated/fixed at a level that is much higher than warranted by the risks of fire. Since insurance firms today make a killing on fire insurance, the practice so far has been to supply group medical insurance to companies at rates that are too low to make economic sense—if insurance firms refuse to give corporate clients some sort of sops like this, they threaten to take their lucrative fire business elsewhere. On group mediclaim policies, however, insurance firms typically end up paying claims of anywhere between 140 and 180 per cent of the premiums collected. On individual policies, by contrast, payouts are typically between 90 and 100 per cent of the premiums. So when the insurance companies put out numbers saying their medical insurance payout is around 120 per cent of the annual premiums, this is largely on account of subsidised group medical insurance.

Logically then, once insurance rates are freed, fire insurance premiums will be the first to fall to realistic levels. Once this happens, insurance firms will no longer be under any obligation to sell below-cost group medical insurance policies, and so there is no reason why rates for individual medical insurance should be used to cross-subsidise group policies. Indeed, once the practice of subsidising group medical insurance goes, it should even be possible that specialised medical insurance firms will come up.

This, however, is just one part of the story. After all, if insurance firms end up paying out claims of anywhere between 90 and 100 per cent of the premiums paid on even individual medical policies, it doesn’t automatically mean premiums will fall in the future. This is where the government/IRDA has to take steps that have been pending for several decades.

Obviously, the only way medical insurance premiums can fall, apart from trying to get in younger clients, who need less medical attention in the first 15-20 years of their lives, is to ensure that hospitals charge lower rates for those covered by medical insurance. After all, this is an industry that shells out around Rs 3,000 crore each year to hospitals, and yet it doesn’t have enough clout to get preferred rates for its clients—in the US, by contrast, top hospitals offer huge discounts to top insurance firms to be able to get their clients. Indeed, a study in Mumbai by a Third Party Administrator (TPAs are the people who run medical insurance policies for insurance firms, examining hospital bills and making the payouts) found that hospitals were actually marking up their bills by around 40 per cent for patients covered by medical insurance! Indeed, when TPAs ask for discounts or suggest hospitals reduce the number of tests (this is the way the marking up of bills takes place), hospitals typically threaten to blacklist them. And when word gets around that a particular TPA is not able to provide cashless service with top hospitals, its future gets a bit bleak.

One way to increase the bargaining power of TPAs or specialised health insurance firms is to establish codes/protocols for various kinds of treatment—a patient for a by-pass has to come in two days before the surgery and leave a week after; while the first MRI can be prescribed without a problem, the second can be done only after a minimum number of days and after certain other tests are carried out; and so on. This can be done only by a medical council, and until this is done, the hospitals will always have the upper hand as there will be no benchmark to assess them against.

The other area that needs tackling is that of accreditation of hospitals, in exactly the same manner that hotels are accredited-two-star, three-star, and so on. This is done by examining their success rates, infection rates, and so on. Automatically, this will bring in some discipline on rates for various procedures/rooms across the country. It is only after 14-15 years of discussions that the Quality Council of India has now been appointed to develop such accreditation standards.

Co-payments of bills, reportedly on the anvil from next year, are another way to check hospital bills—if patients have to pay a certain share of the hospital bill, they too will try to ensure they’re not being prescribed irrelevant tests, and not opt for deluxe rooms, as is the practice today—after all, if I’m having a gall bladder removed and am fully covered by medical insurance, chances are I’ll opt for the super-deluxe hotel (oops, hospital!) room even though I don’t really need it. All of this is going to be a long haul, but ultimately it is the only way healthcare can grow while still being affordable.