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The Case against Health Insurance

Medical insurance is now being actively promoted by the government as a means of providing and covering the costs of healthcare. But such insurance is riddled with problems and faces some very India-specific constraints. It may contribute to the growth of the insurance industry but it is a second-best solution that represents the abdication of responsibility by the state to provide healthcare for all citizens.

COMMENTARYEconomic & Political Weekly EPW september 27, 200815The Case against Health InsuranceVinod VyasuluMedical insurance is now being actively promoted by the government as a means of providing and covering the costs of healthcare. But such insurance is riddled with problems and faces some very India-specific constraints. It may contribute to the growth of the insurance industry but it is a second-best solution that represents the abdication of responsibility by the state to provide healthcare for all citizens.The idea behind health insurance is simple. In a given population, there will be at any time a certain numberof people who are ill. This figure is fairly stable over populations for long periods of time. But one cannot predict who exactly in that population will be ill; this is uncertain. It is therefore possible to get large numbers of people to pay a defined fee that covers those in the paying population who fall ill against the risk of illness for a period of time, usually a year. If everyone covers himself or herself against the risk of illness, the amount col-lected will be large enough to meet the health costs of those who actually fall ill. This is the opportunity that companies have converted into a business – the insurance industry. In many parts of the world, it is huge. The health insurance business in India is beginning to grow rapidly. Given the huge population, this can be really big business. The monopoly of the public sector has been broken, and a regulatory system has been set up. A number of private companies, with multinational partners, are becoming active. There are also non-governmental organisations (NGOs)promoting health insurance for poor people in various regions – this is called micro-insurance. There are other schemes like Yashaswini in Karnataka that works with the government. If one takes into account charitable activities – free eye surgeries, for example – this is an active field. Various products are being designed and offered. Retiring civil servants, who are members of the Contributory Govern-ment Health Scheme, are now, on pay-ment of a nominal fee, given cards that entitle them, for life, to access private hos-pitals when needed. This has given private hospitals a boost. Is this a good thing for the country and its people? This may seem like a surprising question to ask in a situa-tion of rising healthcare costs and poor public service provision. Nevertheless it needs to be asked and debated.I would argue that health insurance represents a second best solution to the so-called middle class to protect itself against serious illnesses in a country where the government has failed com-pletely in its responsibility to provide appropriate healthcare (preventive or cur-ative) to its people. Seeing a business opportunity in this failure, the private sector has set up hospitals (these are even listed on stock exchanges) to provide standardised (“quality”) healthcare. There is even talk of “medical tourism” in which people from other nations come to India for treatment because it is cheaper than in their own countries! Abdicating ResponsibilityThese “corporate” hospitals are expensive – and becoming more so everyday. Insur-ance, which manages risk in large popula-tions, is one answer to this need for accessing expensive healthcare. The mid-dle class is slowly going in for such insur-ance in order to be able to access these corporate hospitals when the need arises. The more the number of people do this, the more viable the insurance industry will be; but it also means that an impor-tant segment of the population is opting out of any state system of healthcare (which it sees no future for) because it can afford to do so. The tax concessions that the government is providing – both to encourage buying health insurance, and for investing in hospitals – suggest that it is ready to abdicate responsibility for healthcare provision. This model is based on the experience of countries that have relied on private healthcare financed via insurance. The best example is the United States which believes that individuals not only have the right to make their own decisions, but that they must be encouraged to do so without state intervention. The result is a system in which the private sector provides healthcare as a business: doctors practise as professionals who provide their exper-tise for a fee. Hospitals provide institu-tional care on the same basis. And since this may be costly, insurance steps in to take advantage of the law of large num-bers to protect those who join a scheme for Vinod Vyasulu (vinod_vyasulu@yahoo.com) is at the Centre for Budget and Policy Studies, Bangalore.
COMMENTARYseptember 27, 2008 EPW Economic & Political Weekly16a fee. It sounds perfect. But millions in the US have no access to this sophisticated health system! In practice, there are many problems, as the debate on healthcare in the current presidential election in theUS – in spite of Medicare and Medicaid – shows. For our citizens, the following are some of the relevant issues:yMany people may think they are healthy, and likely to remain so. So they do not think it is worth paying a premium for covering something that may never happen. They see better returns for their money from other uses like mutual funds. This reduces the size of the insured popu-lation and may send up the cost for those who do insure.yThere are many who cannot afford the premium for comprehensive coverage. I am not referring only to those below the poverty line. Young people, starting out on a career, may find that the premiums that apply to the young and healthy are beyond their capacity – or willingness – to pay. The millions without insurance in the US show this is not an insignificant number even in wealthy countries.yThere are also many who do not qualify for insurance cover. Covering such risk is a business proposition, and compa-nies try to minimise their risk. Thus those who most need insurance cover often are not given such cover even if they are will-ing to pay a premium over the regular fee. Senior citizens are an example of this; those over 80 are not given insurance cover. Those who suffer from some health problem, for example diabetes, are often not given insurance cover, or are given a cover that excludes risks from diabetes. In such cases, the value of the cover is ques-tionable, and many, for good reason, opt out, perhaps unhappily. y In order to encourage more people to take up insurance, the government often passes legislation that requires firms to provide some form of health insurance for their employees. Firms argue this pushes up the cost of doing business and resist. Even when they do comply, this often applies only to “permanent” employees and many are left out.yThose who do take up insurance, then find that premiums are high, that they rise every year, and that there are many things that are not covered by the policy. The “small print” becomes a big issue. Often, dental problems are not covered. Often, insurance does not pay for spectacles for those who may need them. And so on. Even after buying insurance, such people often have to spend not insignificant sums on healthcare. Thus, coverage in a system that depends on people buying insurance is never com-plete. Many remain without cover, and these are often those who belong to the weaker and poorer sections of society who really need medical protection. For them, an episode of serious illness means disaster from which it is difficult to recover. Research in India has shown that medical costs are the single most important factor in pushing families below the poverty line. There are also genuine problems in the insurance industry.y Firms are afraid that people will hide their true health condition in taking up insurance (adverse selection) with the intention of passing on medical bills to insurance companies. There is also the new term “moral hazard” that refers to the attitude of some who do not behave responsibly because “the insurance is there to pay the bills”. Thus, elaborate sys-tems of scrutiny are put in place. Ways of dealing with moral hazard lead to systems like co-payment, deductibles, etc, which reduce the scope of coverage for the ordi-nary person. Those who are ill, for no fault of their own, find they have to pay much higher premiums than the healthy. The companies argue that they have no option if they are to stay in business – and this could well be true. y All insurance firms find it important to verify a claim for reimbursement of medical expenses. Often, this means patients have to go to “approved hospi-tals”. All firms want to ensure, correctly, that items not covered are excluded from payments they make. This results in the need for people who scrutinise and approve claims. Often, the work of such supervisors is judged by the savings they make for the company. The result is the growth of a huge bureaucracy, whose main role becomes that of finding fault in claims made so that they can be whittled down. Paper work and “following rules” become the key, not health cover. A pri-vate sector bureaucracy is no better than a public one! It could be worse! y In a competitive environment, a sys-tem of insurance may tempt hospitals into what is called “padding” bills. Once they know that a patient is covered by insur-ance, they may charge higher rates, or include items that have not been provided. This is a common complaint in India. This is not to accuse hospitals of unethical behaviour, but to recognise that account-ants preparing bills often face pressures and temptations. It should come as no sur-prise that some give in to temptation.In spite of these problems, many in India opt for health insurance cover. This is because as risk-averse individuals, they have no other way of protecting them-selves against unexpected, big medical expenses because the state has failed spec-tacularly to invest in health over many decades. It is rational to protect oneself in this way even if the system is socially not the best.EPW on JSTORThe Economic and Political Weekly is now on JSTOR. Past issues of EPW from 1966 to 2002 are currently loaded on JSTOR archives. Institutions with access to JSTOR can read and download all EPW articles from 1966 onwards at these archives. EPW issues will be available on JSTOR with a moving wall of five years.Readers can visit http://www.jstor.org/action/showPublication?journalCode=econpoliweek for more information.Please note: While access to EPW on JSTOR archives are available only to participating institutions, EPW has been working to digitise its issues going back first to 1966 and ultimately to 1949 (Economic Weekly). The first batch of an expanded archives will be available on the EPW site from January 2009. These will cover 1989 to the latest issue, and by April 2009 they should extend up to January 1949. These archives will be available to all subscribers of EPW.
COMMENTARYEconomic & Political Weekly EPW september 27, 200817The best system is one where the gov-ernment – the State – takes up the respon-sibility for providing healthcare to its citizens, because this is not a short-term consumption expenditure, but a long-term investment in its people and their capacity to be productive citizens. Canada, Britain, Sweden, and many others have estab-lished such systems. They are financed by taxes, and are citizen entitlements. This is not to say there are no problems in these countries. There are different models at work in different countries. India should design its own, based on the best experi-ence in the world.That the State has failed spectacularly in providing healthcare, and opened the way for a private industry, does it mean that the state can never improve? Does it mean that we accept corruption and sloth as an unchanging given in our society? Does it mean that workable solutions do not – cannot – exist or that the State will always fail in service provision? The State in India has had many spectacular suc-cesses – when it sets its mind on a subject. We can – and must – move beyond this second-best solution in a sub-optimal world.The debate should be about the kind of state health system that India should have. It should be about the design of such a sys-tem. It should be about proper incentives and institutional structures. It should balance out medical needs, technical require-ments, costs, and huge distances – and many more issues that are India-specific. For example, we have an agricultural policy that subsidises sugar – the consumption of which is not considered conducive to good health – or rice, but not cereals like jowar and bajra which are part of the traditional diet and much better for health. Could not agricultural policy be made consistent with good diet that is an important part of any health policy? To encourage good health habits we need to look beyond hospitals, though they are essential.That the State must do all this is easy to say. Designing the system is the challenge. It is unfortunate we are taking the easy way out with private provision through insur-ance as against the better one of universal state coverage based on taxes. Failures of the past do not imply a failure to improve in the future, especially when there are exam-ples of state successes. Is this challenge beyond us as a people and a country?The views expressed here are personal.Madhoo Pavaskar (madhoopavaskar@yahoo.com) and Nilanjan Ghosh (nilanjan.ghosh@gmail.com) are with Takshashila Academia of Economic Research, Mumbai.Commodity Transaction Tax: A Recipe for DisasterMadhoo Pavaskar, Nilanjan GhoshThe commodity transaction tax announced in the 2008 Union Budget will prove counterproductive for it will provide little revenue for the government and at the same time, unsettle the commodity derivative market.Economic utility of no economic activity is so little understood and so much misconceived as that of commodity derivative trading. Had it not been so, the Union Budget for 2008-09 would not have clamped a devastating transaction tax of 0.017 per cent on the sale of a commodity derivative contract. Such unprecedented commodity trans-action tax (CTT) betrays utter lack of understanding on the part of the authori-ties that a commodity futures market is essentially a hedging market, unlike a securities market that serves primarily the financial investors, either retail or institutional, besides hordes of specula-tors. In contrast, a commodity derivative market performs a vital economic func-tion of assisting the physical market func-tionaries in price discovery (by providing proper benchmark or reference prices so as to enable them to enter into physical contracts for forward delivery in the domestic and export markets at prices that truly represent the current expecta-tions of the present and prospective supply and demand conditions), while offering alongside an effective and effi-cient price risk management instrument. Not a Stock ExchangeAs it is, the rationale for the CTT is hard to comprehend. Nowhere have the authori-ties spelled out the reasons for such a levy, except that they had imposed a similar tax in the last financial year on securities mar-ket transactions. But a commodity exchange is clearly not a stock exchange. The economic objectives and intents of the two markets are altogether different. While the stock market players are inter-ested solely in making profits from the ex-pected rising stock values, the commodity market functionaries trade in commodity futures primarily to hedge their price risks in both the falling and the rising markets, depending on their commitments in the physical markets. While farmers, mer-chants, stockists and importers hedge their stocks and forward purchases against a possible price fall, processors, manufacturers, exporters and even trad-ers with forward sale commitments require hedging against probable adverse price increase. Hedging merely reduces their unforeseen losses in the physical markets and does not yield positive profits [Pavaskar 2004].It is therefore manifestly unfair to burden such genuine commodity market operators with a transaction tax. Price discovery by a futures market also has a much more basic role in a

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