In today’s newsletter we cover Insurance. And honestly, I don’t think we’ve ever covered anything this boring.

The Story

Insurance is boring. Government policy is boring. Put them together and you have a snoozefest. However, there are times when we must persevere for the sake of knowledge. And the recent NITI Aayog report on the healthcare/insurance industry in India does just that — Offer us knowledge.

On the side, it also illustrates some of the problems plaguing the healthcare industry in India. It even does a pretty good job of laying a roadmap to fix some of these issues. Unfortunately its 320 pages long.

And we are going to condense it and present a 3 min version right here.

So here goes…

Problem 1: Risk Pooling

Risk pooling is one of the fundamental building blocks of the insurance industry. A health insurance risk pool involves a group of people coming together (prompted by an insurer) to pool small amounts of money to cover those who need medical care. Pooling risks allows the higher costs of the less healthy to be offset by the relatively lower costs of the healthy. So as more people enter the risk pool, insurance companies will be able to cover high-risk individuals by sharing costs and potential exposure more evenly across the board. Unfortunately, not enough Indians have joined the risk pool yet and that’s a major concern.

Think about it. A major catastrophe in a low-income household can throw the family into poverty. However, by setting aside a modest sum and paying for an insurance policy, they can effectively insulate themselves against such financial shocks. In summary, households can mitigate disaster by paying a small premium and joining the risk pool instead of paying out of their pockets every time there’s an emergency.

Conclusion: More people buying insurance is a good thing i.e. we need larger risk pools

Problem 2: Economies of scale

As more people join the risk pool, insurers will be better equipped to leverage economies of scale. For instance, if you’re an insurance company, you buy goods and services from hospitals and pay for them on behalf of your clients. Now if you’re dealing with a small client base, there are only so many things you can buy. You won’t have any real bargaining power to ensure your clients receive the best healthcare service on offer. But when the risk pool increases and there are more clients in the mix, insurance companies can bargain for greater quality and efficiency from healthcare providers.

Conclusion: Larger the risk pool, better the health care

Problem 3: Fragmentation

The healthcare system primarily involves three functions. Collecting the revenue (premiums), pooling them together and purchasing healthcare service in order to meet a client’s health emergency needs. However, if there are too many small organizations involved in performing these three tasks, it can damage the overall ecosystem. You can’t have any economies of scale here. So, yes you need larger risk pools but you have to have less fragmentation.

Conclusion: Fragmentation is bad

In summary here’s what the report states about the current state of the healthcare industry in India.

“Imagine a billion transactions every year where individual patients seek care from a million healthcare providers dominated by the private sector negotiating their own prices for the procedures they undergo. Even among the organized players, there are multiple schemes. This multiplicity of purchasing platforms, apart from fragmenting risk pools into sub-optimal sizes, prevents standardization of purchasing procedures.”

And that’s the real concern here. There’s no standard service anywhere. Sometimes they tell you they don’t cover certain illnesses. Sometimes they tell you they can’t process your claim because you are ineligible due to some obscure clause in the contract. Sometimes the healthcare service provider does only half the job and you’re left scratching your head thinking — “What’s the point of insurance at all?”

Niti Aayog’s recommendation is that within 5 years we have got to ensure insurance and healthcare providers are held to a higher degree of accountability. Maybe bring in a mandatory basic coverage, a standard package of sorts to form the basis of all health insurance products to avoid what Niti Aayog calls “shallow coverage” policies. This move should bring in more clarity on what the customers can expect when they buy health insurance. Meanwhile, regulations and better guidelines ought to help the fragmented industry to come together and promote overall efficiency.

Yeah, that’s about it...

Actually, there’s a lot more. Sorry!!! Can’t cover everything here. So if you want to read the whole thing, here’s the link. Go on fellow comrade. Read the full draft. Do us proud.

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