Mind the Gap

The Constitution of India states that it is the “duty of the State to raise the level of nutrition and standard of living and to improve public health” (Government of India, 1950). However, for the past decade, the public health expenditure in India continues to hover around one per cent of the gross domestic product (GDP) (MoHFW, 2019). According to the World Bank, India is a Lower Middle-Income country, but its spending on healthcare is even less than the countries in the Lower Income Group. Since government financing is a function of the taxes that it raises, countries with a higher tax to GDP ratio tends to have better-financed healthcare systems. Low and middle-income countries with not so robust tax to GDP ratio finds it difficult to meet the demand for financing the healthcare of its citizens completely.

With a tax to GDP ratio falling to a decade low of 9.88 per cent in FY20 (Seth, 2020), naturally, public financing in India is insufficient to meet the healthcare requirement of its large population, thus forcing households to finance their requirement. Because of lower public expenditure on health coupled with low insurance penetration, over 80 per cent of the country’s population does not have any health expenditure support. Individuals and households are compelled to finance their healthcare requirement through accumulated savings or borrowings from relatives and friends and or by selling productive assets (National Sample Survey Organisation, 2019).

Defining Protection Gap / Underinsurance:

1. The health protection gap is defined as the sum of financial stress arising from unforeseen, direct and out-of-pocket medical expenses and that unaffordable portion that households avoid (Swiss Re, 2012).
2. Underinsurance is the gap between the amount of insurance that is economically beneficial and the amount of insurance actually purchased (Schanz & Wang, 2014).
3. The difference between the level of healthcare costs which would be required to meet the consumer needs versus the amount that would be available to cover those costs (Geneva Association, 2018).

The Insurance Regulatory and Development Authority of India (IRDAI) estimates the protection gap to be approximately Three Lakh Crore (USD 400 billion)[1]. Another study puts the protection gap in India at USD 369 billion as at the end of 2017 (Swiss Re Institute, 2018). With one of the highest protection gaps in Asia, Indians are vulnerable to health and economic shocks.

Insurance, both public and private plays a key role in reducing the protection gap. The penetration of insurance in India is very low and only one in five individuals is covered by some form of insurance (National Sample Survey Organisation, 2019). The insurance penetration in India stood at 3.7 per cent in FY20 as compared to the global average of 6.3 per cent (PTI, 2019). Insurance penetration is the total premium collected as a percentage of gross domestic product in a year. Insurers use insurance penetration to understand the extent of development of the insurance market in an economy.

Of the total population covered by health insurance in India, 88 per cent is through government-provided insurance in the form of either compulsory or social insurance. That leaves a very small segment, which has voluntarily purchased health insurance to cover their costs. The problem is even more acute for the population in the lowest income decile who have the lowest coverage. This has led to a major gap in financing the healthcare needs of the population and given rise to high out of pocket expenses (OOPE). OOPE on healthcare are payments made by an individual at the point of receiving healthcare services or goods.

Financial contributions for health are considered as fair when health expenditure of households is distributed according to their ability to pay rather than to actual costs incurred because of illness. In India, in the past two decades, OOPE has been upwards of 60 per cent of the total healthcare expenditure (World Bank, 2020). Further, households are considered to be incurring catastrophic health expenditure (CHE) when the OOPE exceeds 10 per cent of their total monthly expenditure. The incidence of CHE in India rose to 18 per cent in 2014 from 15 per cent in 2004 pushing nearly 55 million individuals below the poverty line (National Health Systems Resource Centre, 2017).

While India continues to aim to be amongst the largest economies globally, it cannot grow so by leaving a large segment of its population falling below the poverty line for failing to access proper health care, either due to lack of medical facilities or insufficient financing to meet the cost of the treatment. A major thrust is needed to reduce the protection gap and a substantial portion of that has to come from increased public spending. While the government has announced that it intends to increase the health budget to 2.5 per cent of GDP by 2025, it has been in the making for years. Even the ambitious Pradhan Mantri Jan Aarogya Yojana (PMJAY), which aims to provide free insurance cover up to rupees five lakh per annum per family to bottom 40 per cent of the population, has seen minuscule sums being allocated, and a further smaller proportion actually being spent.

The IRDAI will have to encourage innovation in products to suit the demographic requirement (both health and financial) and their distribution/reach to increase the uptake of insurance policies voluntarily. Also, creating awareness about the importance and need for insurance and controlling mis-selling (as merely an investment to save tax, unclear policy terms) will be important areas to focus on, to begin with.

Remember, India needs to get rich before it gets old or else it not only runs the risk of being caught in the middle-income trap but also faces an increasing health care burden, which will derail the economic progress. There is a silver lining though amongst the dark clouds of Covid-19. The pandemic has brought discussions around health and health care financing to the mainstream and hopefully, the subject will receive a much-needed impetus from the policymakers and the public at large.

References

Government of India. (1950). The Constitution of India. New Delhi: Government of India.

MoHFW. (2019). National Health Profile. New Delhi: Ministry of Health & Family Welfare, Government of India.

National Health Systems Resource Centre. (2017). Household Healthcare Utilization & Expenditure in India. New Delhi: Ministry of Health & Family Welfare.

National Sample Survey Organisation. (2019). Key Indicators of Social Consumption in India - Health. New Delhi: Ministry of Statistics and Program Implementation.

PTI. (2019, February 1). Protection gap at 70-80%, insurers should exploit situation: Irdai chief. Retrieved from www.business-standard.com: https://www.business-standard.com/article/pti-stories/protection-gap-in-india-is-70-80-per-cent-says-irdai-chief-119020100631_1.html

Seth, D. (2020, June 24). India's tax-GDP ratio plunges to 9.88% in FY20, lowest in 10 years. Retrieved from www.business-standard.com: https://www.business-standard.com/article/economy-policy/india-s-tax-to-gdp-ratio-plunges-to-a-decade-low-of-9-88-in-fy20-120060801629_1.html

Swiss Re Institute. (2018). Health Protection Gap in Asia - A Modelled Exposure of USD 1.8 trillion. Zurich: Swiss Re Management Ltd.

World Bank. (2020, April 1). Out Of Pocket Expenditure (% of current health expenditure) - India. Retrieved from www.data.worldbank.org: https://data.worldbank.org/indicator/SH.XPD.OOPC.CH.ZS?locations=IN

 

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[1] Exchange rate considered is 1 USD = INR 75