STATISTICAL ANALYSIS OF RISK COVERAGE ON HEALTH INSURANCE POLICIES

Abstract
While many believe that an individual’s health plays an important role in both their willingness and ability
to obtain health insurance in the employment-based setting, relatively little agreement exists on the extent
to which health status affects coverage rates, particularly for those with lower incomes. In this paper, we
examine the relationship between health risk and the purchase of group health insurance and whether that
relationship differs by a person’s income and whether they obtain coverage in the small, medium, or large
group market. Using the panel component of the 1996-2002 Medical Expenditure Panel Survey (MEPS),
we find that health risk is positively associated with private health insurance across the different markets,
and that this positive relationship is stronger for low and middle income people, particularly in the large
group market. Our results are consistent with the existence of adverse selection in the group market in the
form of low rates of coverage among low risks due to an absence of risk rating of premiums. We conclude
that pooled premiums for low risks, particularly those with low incomes, may represent a more important
financial barrier to coverage in voluntary group insurance than high premiums for high risks.

INTRODUCTION
SOCIAL SECURITY FOR MEDICAL EMERGENCIES IS NOT NEW TO THE INDIAN ETHOS. It is a
common practice for villagers to take a ‘piruvu’ (a collection) to support a household with a sick patient.
However, health insurance, as we know it today, was introduced only in 1912 when the first Insurance Act
was passed (Devadasan 2004). The current version of the Insurance Act was introduced in 1938. Since then
there was little change till 1972 when the insurance industry was nationalized and 107 private insurance
companies were brought under the umbrella of the General Insurance Corporation (GIC). Private and
foreign entrepreneurs were allowed to enter the market with the enactment of the Insurance Regulatory and
Development Act (IRDA) in 1999. The penetration of health insurance in India has been low. It is
estimated that only about 3% to 5% of Indians are covered under any form of health insurance. In terms of
the market share, the size of the commercial insurance is barely 1% of the total health spending in the
country. The Indian health insurance scenario is a mix of mandatory social health insurance (SHI),
voluntary private health insurance and community- based health insurance (CBHI). Health insurance is
thus really a minor player in the health ecosystem’s.

Private Health Insurance

Since the liberalization of the insurance industry in 2000 India has been promoting private players to enter
the health insurance sector. With the enactment of the IRDA, the industry now has a regulatory framework
to protect the interests of policy holders. This was followed by another landmark decision in 2001
establishing Third Party Administrators (TPAs) to facilitate speedier expansion by providing an
administrative– intermediary structure to the insurance industry. There are, at present, 12 general insurance
companies and 25 TPAs. The total number of insurance holders is reported to be 112 lakh with almost 90%
enrolled with the four public sector insurance companies. These four companies collected a premium of Rs
1128.64 crore under Mediclaim. Of the 102 lakh enrolled by these four companies (excluding GIC,
Employment Guarantee Corporation, AICL), which are permitted to market health insurance products,
Mediclaim alone accounts for 97 lakh persons, the rest being enrolled under other insurance. schemes such
as Jan Arogya, etc. During 2003–2004, the claim ratio was about 96.34%. The industry, however, believes
that the overall claim ratio is expected to go up from around 130% to 300%–350% in the next three years

Current status of private health insurance in India

India has lessons to learn from the experience of Chile. India too has a dual system of care—a private fee-
for-service based sector where the money is paid out-of-pocket by individual households and a tax-based
public sector where the providers are salaried. Utilization of insurance under both these systems is partly
restricted and rationed by the affordability of the individual household and availability of the budget. On
the other hand, insurance as a means of financing is a far more sophisticated mechanism, requiring a
comprehensive understanding of the failures that characterize health insurance markets. For example, a
problem such as asymmetry in

Information puts the patient and the insurer at a disadvantage due to their inability to resist or
challenge medical opinion regarding an existing condition or future treatment. Besides, in the absence of
knowledge of prices, the provider can shortchange the two by overcharging. Second, cashless insurance
creates disincentives to control costs as it appears to be a ‘free’ good for the patient and the provider, often
resulting in excessive treatment by the provider (induced demand) and frivolous use by the patient taking
treatment even for a condition which he would normally have ignored or cured with a home remedy (moral
hazard). Third, it is only the patients who know their health status. Since it is normally those in need of
health care who tend to subscribe to health insurance, this puts the risk on insurance agencies to resort to
extensive processes of risk selection, such as medical examination, before being given admittance as an
enrollee and focusing on low risk groups, such as the young or healthy. Risk selection in individual- based
policies however results in increasing the loading fee and consequently the cost of premium. This is one
reason for the attractive group discounts being as high as 67%. For these reasons, private commercial
health insurance is known to select its customers—the young, healthy, rich, males—leaving the bad risks to
the government—old, poor, young women in the reproductive age group, and the ill.
Health insurance in India is usually associated with the ‘Mediclaim’ policy of the GIC, which was
introduced in 1986 as a voluntary health insurance scheme offered by the public sector. The premium
based on the age, risk and the benefit package opted for, ranged from a minimum premium of Rs 201 for
those <25 years of age, to a maximum benefit of Rs 15,000 with discounts for group memberships. In
2001, there were 78 lakh persons covered under Mediclaim (Gupta 2003). The subscribers are usually from
the middle and upper class, especially since there is a tax benefit in subscribing to Mediclaim. The standard
Mediclaim policy covers only hospital care and domiciliary hospitalization benefits. Most medical
conditions are reimbursed though there are important exclusions, such as pre-existing diseases, pregnancy
and childbirth, HIV/AIDS, etc. Hospitals with more than 15 beds and registered with a local authority can
be identified as providers.
The insurance company (or the TPA, where applicable) administers the scheme. Being an
indemnity scheme, the patient pays the hospital bills and submits the necessary documents to the company.
The company in turn reimburses the patient. A study of 621 GIC claims for the year 1998–99 by Bhat and
Reuben (2001) showed that the average time between submission of documents and reimbursement is 121
days. This study also showed that one-third of the claims were due to adverse selection; 38% pertained to
doctor’s fees and 25% charges for diagnostic services. The provider-induced claims thus accounted for
63%. Yet another interesting insight was that 22% of the total claims were for the treatment of
communicable diseases, while 64% were for non-communicable diseases. There is also uncertainty about
the amount reimbursed, there are times when the patient is reimbursed only partially, the usual reason
being the insufficiency of documentation. The policy is not renewed automatically and is dependent on

A comparison between Health Life Insurer General Insurer

Insurance offered by a Life and
General Insurer Nature of the
contract
Period of coverage Contracts are usually made Contracts are usually,
for a long period. though not invariably, made
for a short period of one
year or less and at the end
of that period are renewable
by mutual consent of the
insurer and the insured.
Obligation of the insured Once the contract has been At each renewal there is an
made, the insured is onus on the insured to
generally under no observe utmost good faith
obligation to report any in informing the insurer of
changes of circumstances any changes in
affecting the risk insured circumstances which may
unless a change in the affect assessment of the
actual nature of the contract cost of the risk borne by the
is requested by the insured. insurer.

Premiums The premiums for a life The premiums may vary at

assurance contract remain each renewal to reflect
 fixed over the term of the changes in individual
contract circumstances
Benefit payout Pays a lump sum, Pays claims according to the
irrespective of whether the hospital expenses that a
policyholder has incurred person incurs, depending, of
those expenses on his course, on the amount of
hospital stay cover that a policyholder
has taken.
Valuation of Liabilities A deterministic approach A stochastic approach (with
(the life & morbidity table) statistical models more
may be adequate for the complicated than the life
valuation of life assurance and morbidity table) has to
liabilities be considered for general
insurance
Taxation Portion of premium paid in Premium paid in respect of
respect of health insurance health insurance policies is
covering the assessee as deducted from taxable
well as any member of the income under section 80D
family is deducted from
taxable income under
section 80D

Indian Healthcare System India has made considerable progress in improving the health status of its
population. Crude death rate has fallen from about 40 per 1,000 at the time of independence to 9 per 1,000
in 1998 which can be attributed to the mortality reduction of the under five age group from a round1 61
per 1,000 live births to 71 over the same period. Consequently, life expectancy has increased from about31
years to 63 years. Yet challenges remain: life expectancy is still four years below the world average and
under-five mortality (12 per 1,000 per year) is higher than the world average. India Is one of the major
countries where communicable diseases are still not under control: polio has not yet been eradicated, HIV
incidence is on the increase and tuberculosis and malaria still take a high toll. Chronic non-communicable
diseases such as heart disease, diabetes, and cancer are also on the rise. The health sector, therefore, faces
dual challenges: while the control of communicable diseases is of paramount importance, non-
communicable diseases should be addressed as well (for instance, the incidence of diabetes and heart
disease in India is double that of China).The primary healthcare system is not yet geared to diagnose and
treat chronic degenerative diseases .India, there-fore, faces the daunting challenge of meeting healthcare
needs of its population and ensuring accessibility, efficiency, equity, and quality of healthcare. Through its
budgetary allocations the government has set up remarkably impressive health infrastructure. The system
envisages availability and accessibility of publicly funded health care to all, regardless of their ability to
pay. However, it faces serious challenges in meeting its objectives. The present healthcare system is
characterized by mixed ownership pattern s and different types of providers who practice different systems
of medicine. Both public and private facilities provide health services, but the bulk of the curative services
is skewed towards the urban areas and dominated by the private sector. Public health sector: The Bhore
committee, set up in 1946, set the foundation for the current public healthcare system. The committeer
ecommendedfr eeh ealthcarefu ndedb y thes tate,w ith generala ndl ocal taxationg eneratingf undst o
providef or it. The government provides medical care through government-run hospitals,d ispensaries,
primaryh ealthc entres,s ub-centres, and otherh ealthf acilities.P rimaryc arec onsistso f healthc entresa nd
dispensaries whereb asicm edicalt reatmentfo rc ommona ilments is provided,a s also immunisationa nd
healthp romotionala c-tivities.S econdarym edicalc are is providedb y specialistsa t the district, sub-
divisional,an dc ommunityh ealthc entrele vel.T ertiary medical care is provided by super specialists at
multi-speciality and super-specialityh ospitalsa nd medical colleges. Research, training, ande ducationa rea
lso carriedo uta t tertiaryle vels. State governments own theb ulko f the healthd eliverys ystema ndh ave to
beart he costs of operation. Government hospitalsa ccountf or 30 per cent of hospitals and 60 per cent of
beds, whereas local bodies own 2 per cent of hospitals and 3 per cent of beds. State-owned enterprisesli ke
Coal India , railways and the police have developed their own healthcare facilities. Privateh ealths ector:T
he private sector plays an important role in India's health delivery system and has a wide network of
facilities that cater to the requirements of both urban and rural populations. The presence of the private
sector has profound implications for the existing character of the Indian health care system, since it affects
both cost and quality of services available [Bhat1 996].T he private sector consists of organized private and
voluntary in situations, accounting for 68 percent of the hospitals and3 7 percent of hospital beds.
Variations in hospitals and beds are quite significant across states. The organized private sectors is primarily
profit-oriented and includes all levels of private hospitals, dispensaries, nursing homes, general practitioners and
pharmacies. The voluntary, not-profit institutions are run by charitable trusts. A bout 10 per cent of hospitals and 13 per
cent of hospital beds are in the voluntary sector. The informal private sector consists of practitioners with no formal
qualifications and various types of less-qualified providers. Surveys show that a majority of people seek care from private
providers. Concern about quality of public services is the main reason.

Conclusion:
Health insurance is like a knife. In the surgeon’s hand it can save the patient, while in the hands of the
quack, it can kill. Health insurance is going to develop rapidly in future. The main challenge is to see that it
benefits the poor and the weak in terms of better coverage and health services at lower costs without
negative aspects of cost increase and overuse of procedures and technology in provision of health care.
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