Health Insurance Leaves Massive Hospitalization Financing Gap

The numbers are unsettling. Last year, we Indians spent nearly USD 100 Bn at hospitals. 83% of this was spent towards in-patient bills, the rest of the money was spent on out-patient treatments. In this article, I try to highlight the massive financing gap that exists for this 100 Bn expenditure.

The Health Insurance Promise

Nearly 47 crore Indians have some form of health insurance, as per IRDAI's annual report for 2018-19. This number takes into account all the lives protected by general and specialized health insurance companies. The number of actual covered lives goes up if you start counting people covered in schemes such as ESI, CGHS, ECHS, Ayushman Bharat etc which are not under the purview of IRDAI. For my analysis, I would keep these schemes out.

We always crib that health insurance in India does not cover out-patient (OP) expenses and only in-patient (IP) expenses get covered. Within the health insurance universe, hospitalization expenses at both network and non-network hospitals can be claimed. There are however, certain circumstances in which IP expenses are not covered due to exclusions in the policies. However, when IP expenses are payable, most health policies also pay for OP expenses for a 30 day duration before admission date and for a 60 day duration after discharge date. Through this mechanism, health insurance pays for the diagnosis of health problem as an OP, treatment at the hospital as an IP and recovery expenses as OP once discharged from hospital.

I coined a term called as 'Critical Healthcare Expenditure' or CHE to denote this OP-IP mix that a patient is entitled to receive from his health insurance claim. Why do I call it CHE? Because this expenditure denotes the physical condition of patient being critical enough that he cannot be taken care of as an OP only. So I consider this entire topline of USD 100 Bn that Indian hospitals earn as CHE. One can argue that some people only consult doctors at hospitals but never admit, so I understand that there is some hospital earning that just cannot be claimed from health insurance because of pure OP nature of the treatment. Fair deal. But that is a relatively very small number.

If you have health insurance, your CHE must be paid by your policy. That is a clear conclusion one can draw.

Health Insurance Claims

Proof of the pudding is in the eating. For health insurance, the proof lies in the claim payout. IRDAI's last annual report pegs the claim payout number to be Rs 34,983 crores (roughly USD 5 Bn) during the financial year 2018-19.

Now you would wonder - When almost 47 crore lives are covered in health insurance (that's like 35% of the population), the share of CHE that health insurance should cover would proportionately stand at a similar percentage of 35%. But in reality, this number stands at a meager 5%.

Let's split the hair further. Out of the 47 crore lives that IRDAI-regulated players cover, only 11.5 crore people were covered via corporate/group and retail business. All other policyholders were part of the govt schemes which are managed by insurers. That would bring this population down to 8.8% of the overall population. These 11.5 cr people are part of the white-collar workforce that works in the formal sector and enjoys better per capita income than the rest of the population. This segment is also composed of the entrepreneurs who run small and medium businesses (shop owners, businessmen etc) who normally would not have access to group health insurance because of the size of their enterprises. While it is anybody's guess, majority of these high-per capita earners would be based in metro cities and state capitals, which have the largest share of private hospital establishments.

Even with these figures, I would conservatively assume this 8.8% of India's population to spend only 10% of the national CHE of USD 100 Bn. And yet the claim payout of USD 5 Bn by health insurers leaves a large gap.

What explains the gap?

I am no expert, but I did spend last 4 years of my life observing very closely how and where people spend their CHE. My company SureClaim has also amassed thousands of claim settlements to statistically understand how claims behave. Let me list down my theory, you are free to question it or add to my theory.

1. Policyholders fail to claim their expenses. Yes, you heard it right. If the 8.8% population spent nearly 10% of the national CHE but only recovered 5% of the national CHE, then simplistic explanation is that they did not submit their bills to insurers to claim. Majority of people I have met in my life (thousands of people) concur to this fact that people do not know what benefits are covered in their insurance policies and therefore leave out a lot on the table to be claimed. But can that be USD 5 Bn? Naah!! It just can't be that high a number, so here is the second point.
2. Insurers don't pay the entire claimed amount. Everyone who has ever claimed from their health insurance would say that some or large part of their claims was not paid. There are massive deductions that take place in claims. Very clearly, claims filed exceed the USD 5 Bn figure. So how much amount is actually claimed? Insurers are shy to disclose that number. They promote a fake term called as 'Incurred Claim Ratio' or ICR, which is normally more than 100% as per their calculations. ICR is a nasty metric because it is not equal to (claim amount paid) / (amount claimed). Just search the web to find out what this stupid metric means.
3. Indians are under-insured. Yes. I don't have a number - yet, but a large majority of people have either less sum insured than they would actually need or they have subscribed to stupid insurance plans that really do not provide right benefits. Most employees are holding an average 3 lakh sum insured policy from their employers, as if destiny will measure their health insurance cover and fit medical problems within that budget. 7.3 crore people out of the 11.5 crore have coverage through their employers and are living examples of this myth.

As a result of these and many other smaller factors, the net out-of-pocket expenses of people is significantly high even when they have some form of insurance.

Conclusion

My submission is that we are the owners of our destiny. COVID has shown the mirror to us - How fragile are our lives and how expensive it can get to fight an invisible virus. And this is just one heath risk. Higher life expectancy comes at a dear cost. You must be able to afford medical care of your loved ones. What should be your strategy? There is no tomorrow, protect your family with a health cover today. If you have an existing policy, check its relevance because with time, it may not be able to afford you healthcare as it gets expensive @ 16-17% per year. When you are faced with hospitalization, go through your policy and make decisions within policy limits. Lastly, when you claim, not even leave a dime unclaimed.