Should financial protection be separated from universal health care?

The choice of financing method that countries make exerts a powerful influence on how their health systems evolve. In this context, the question which receives most attention relates to the extent to which countries choose to direct tax resources towards healthcare instead of other welfare tools. However, another perhaps equally important question about healthcare financing, how best to utilise pooled funds for healthcare, receives much less attention. Answering this question involves thinking about how to pay providers for the services they offer. These issues have enormous path-dependence and can set health systems on irreversible pathways that either gradually converge to the best possible health and financing outcomes or diverge further away from them. 

One way health systems purchase healthcare is through an indemnity insurance approach in which the patient is compensated for the actual financial costs associated with healthcare, with the insurer/payer playing no role in the provision of services. This allows the patient to direct and control her own healthcare, i.e., choose the level of care; approach healthcare providers of her choice; opt for any service from a range of reimbursable services within an upper limit. This structure has a simplicity in its design and automatically allows for competitive forces to operate. It limits the involvement of the payer (which could be a government trust or a private insurer) to simply paying for whatever care the patient has availed, making such an approach easy to develop and implement. As a result, being unaware of its long-term implications, many national health systems choose this path.  For instance, in the United States, the government-led Medicare and Medicaid established in 1965 primarily took an indemnity insurance form.  PMJAY has adopted a similar design, following the example set by the Indian commercial insurance industry. By the late 1980s, indemnity insurance accounted for nearly three-fourths of all private health plans in the United States.

The indemnity insurance approach relies on fee-for-service (FFS) contracts and pays providers for each service that they provide.  Such an approach creates an incentive for both patients and providers to increase the total quantum of care instead of focusing on keeping patients healthy. FFS fuelled healthcare cost inflation has proven to be the bane of many health systems.  For example, in the United States (US), total healthcare spending has risen from 5% of the Gross Domestic Product (GDP) in 1960 to nearly 17% in 2018, led principally by the benchmarks set by Medicare and Medicaid.  Germany, Japan, Switzerland, and Taiwan are some of the other countries which have taken this route and are facing similar challenges.  Changing course is proving to be hard for them because the system has gotten accustomed to this way of operating. 

FFS payments reflect a deeper design flaw in indemnity insurance, the separation of financial protection from healthcare andhealth outcomes. Because of this separation, indemnity insurance neither offers any healthcare provision related guarantees nor provides any assurance on the nature of population-level health outcomes for its members. This approach, in effect, offers half a car (financing), with consumers left alone to seek out for themselves the other half (health care) and to make it work for themselves. 

Another approach taken by health systems, designed to address some of these problems, is to integrate financial protection and healthcare functions and have providers directly bear the risks associated with the poor health of their covered populations. These are referred to as Managed Care models. In these models, insurers/payers transfer a fixed per-person amount to the owner/manager of a well-integrated network of providers, with no additional charges being paid for any care provided to their members during the coverage period. Such an approach aligns the incentives of payers and providers and forces a shift in providers’ focus from curing illness to keeping members healthy. With the integration of financial protection and healthcare, consumers now have access to a complete product and the onus of searching for healthcare no longer falls on them. For a member of such a scheme, this resembles a free care environment at the point of healthcare delivery. However, the downsides with this approach are that providers, having received payments ahead of time, could deny or provide inadequate care and that consumers may fret at being “forced” to visit the same provider. 

Within the public sector in India, the current government-department run health systems (and ESIS) are already very similar in design to Managed Care.  However, they suffer seriously from problems of inefficiency and under-provision of care in the absence of any serious accountability measures. Countries such as the United Kingdom and Thailand have shown that in public-sector owned health systems, the integration of care and financial protection must also come with a robust purchaser-provider split for this very reason. These countries have entirely redesigned their health systems to give consumers a measure of choice while also ensuring that even the government-owned providers are exposed to financial risk linked to the health outcomes of covered populations. 

As health systems evolve, more countries, recognising the limitations of the indemnity insurance approach, have been moving towards such integrated models of care and insurance, including Colombia, Israel, Thailand, and even the US. Despite these global trends, in India, within the private sector, current regulations, unfortunately, do not allow for such integration for commercial insurance. The government, through PMJAY, is also choosing to offer indemnity insurance and attempting to move away from government-provided integrated care.  Such integration is seen as restricting competitive forces and choice instead of as moving competition to another level- now between multiple Managed Care providers instead of separately between insurers and providers. This continues to give customers a choice but now between more complete offerings. The consequences of indemnity insurance led approaches such as rapidly rising healthcare costs, over-provision of surgical procedures, and poor overall health outcomes are already becoming very visible even within India’s tiny health insurance industry and will further be reinforced as schemes like PMJAY grow in size.