Unit 3

Health Insurance
Health Insurance
• Health insurance is a method to finance healthcare.

• The ILO defines health insurance as “the reduction or elimination of

the uncertain risk of loss for the individual or household by combining
a larger number of similarly exposed individuals or households who
are included in a common fund that makes good the loss caused to
any one member

Dr. Andria J N Sirur, Assistant Professor, Department of

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• In a health insurance programme, people who have the risk of a certain event
contribute a small amount (premium) towards a health insurance fund.

• This fund is then used to treat patients who experience that particular event
(e.g. hospitalization).

• The essentials in a health insurance programme are prepayment and risk

pooling.

• The main advantage of a health insurance programme is that of prepayment.

• Individuals or families pay when they are healthy and are able to pay.
Dr. Andria J N Sirur, Assistant Professor, Department of
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• However, when they are affected by illness, the insurance fund can be used to
finance their healthcare needs.

• Thus there is no burden at the time of illness.

Dr. Andria J N Sirur, Assistant Professor, Department of

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There are three types of risk pooling:
• Between the sick and the healthy: When a group of people contributes
towards a health insurance fund, it is not clear who will fall sick. While
most will remain healthy, some will fall sick. However, the funds from all
the contributions are used to finance the treatment of the sick.
• Between the rich and the poor: A group of people, who contribute
towards an insurance fund, should ideally belong to different socio-
economic strata. So the rich, by paying more, will cross-subsidise the
poor.
• Between the active and inactive: While it is usually the employed who
contribute, their contribution should be used to finance their own
healthcare as well as the that of the children and the elderly.
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• Health insurance functions when there are large numbers enrolled.

• An important value is that of solidarity → A successful health insurance

programme requires people to contribute, knowing fully well that their
contribution may not help them directly, but will help others who require the
support.

• Without this value, a health insurance programme is doomed to fail as people

will insist on withdrawing at least their contributions from the fund.

• This will destroy the concept of health insurance and will result in bankruptcy
of the programme.

Dr. Andria J N Sirur, Assistant Professor, Department of

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Commerce, Manipal Academy of Higher Education, Manipal
• Another value rarely talked about is one of -- equity.

• A health insurance programme should ideally promote both horizontal

equity and vertical equity.

• This promotes cross-subsidy between equals and also between unequals.

• A health insurance programme usually has two main functions (Kutzin):

1. To increase access to healthcare. 2. To protect households from high
medical expenses at the time of illness.

Dr. Andria J N Sirur, Assistant Professor, Department of

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Commerce, Manipal Academy of Higher Education, Manipal
 Dr. Andria J N Sirur, Assistant Professor, Department of
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• (553) How Health Insurance Works | What is a Deductible?
Coinsurance? Copay? Premium? - YouTube

Dr. Andria J N Sirur, Assistant Professor, Department of

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Commerce, Manipal Academy of Higher Education, Manipal
The basic elements in a health insurance
programme

Dr. Andria J N Sirur, Assistant Professor, Department of

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Advantages of Medical Insurance
• Individual clients:
→Protection against financial loss
→Peace of mind
→Better quality of medical care privately
→Choice of facilities with freedom in selection of a time for treatment
(No waiting time)
→ Choice of hospitals and doctors
→Private room and “hotel” facilities
→Health consciousness
→ Limited individual health costs

Dr. Andria J N Sirur, Assistant Professor, Department of

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• Corporate clients:
→Attraction and retention of qualified staff
→Healthy workforce
→Limited health care budget
→Increase productivity/profitability
→Reduce employees’ absentee rate
→Employees’ loyalty
→Reduce employee turnover

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Disadvantages of medical insurance
• Cost of doing business
Insurers consumes economic resources such as land, labour, capital, and
business enterprise in providing insurance to society
In financial terms, an expense loading must be added to the pure premium to
cover the expenses incurred by companies in their daily operations.
However, these additional costs can be justified for several reasons.

First, from the insured’s viewpoint, uncertainty concerning the payment of a

covered loss is reduced because of insurance.
Second, the costs of doing business are not necessarily wasteful, since insurers
engage in wide variety of loss prevention activities.

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• Finally, the insurance industry provides large number of jobs to large number of
people

• Fraudulent claims: High moral hazard

→Examples of fraudulent claims –
a) Swapping membership cards with other family members or friends
b) Frequent use of unnecessary medical services
c) Exchange of drugs for other cosmetic items at the pharmacies
d) Frequent use of unnecessary or excluded procedures. This is done by
requesting treating doctors to adjust diagnosis to justify these procedures.
The payment of fraudulent claims results in higher premiums to all insured
persons.
These extra costs fall directly on society

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• Inflated claims: Exceeding the actual financial loss experienced by the
insured
→Examples: A surgeon may charge above-average fees for surgical
procedures covered by a patient’s medical insurance policy.
Others might prescribe unnecessary procedures for the sake of revenue
maximization.

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Type of Health Insurance functions.
• Indemnity plans:
Conventional indemnity plans are the earliest plans offered to the markets.
These plans were originally designed to cover expenses incurred in hospitals as
inpatient;
Modern plans often offer more comprehensive cover.
Currently, the scopes of coverage under these plans are often categorized under
the headings of:
a) Basic plans – Provides limited range of inpatient benefits, with a limited choice
of hospitals, and sometimes surgeries are limited to a number of illnesses.

Dr. Andria J N Sirur, Assistant Professor, Department of

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b)Standard/Core Plans
Provides controlled or limited benefits, low level of hospital accommodation and
limited choice of hospitals
c) Comprehensive plans
Provides widest scope of cover, refund most charges and are the most expensive
type of indemnity plans
d) Tailored plans
Expand or limit coverage to suit individual clients’ needs and budgets. These
plans are usually available to group clients.
e) Cafeteria plans
Individuals and employees are able to substantially design their own plans based
on a list of benefits offered by the insurer.

Dr. Andria J N Sirur, Assistant Professor, Department of

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Moral hazard
• Arises from the human tendency that results in higher than average chance of
loss because insurance is in force.

• Both insured persons and care providers attempt to overuse the benefits in
order to profit from an incurred loss.

• Examples of moral hazard include exchange of drugs for cosmetic items at

pharmacies; adjusting diagnosis to justify excluded procedures or prescribing
unnecessary procedures.

• Risky individuals often rationalize their actions based on a false perception that
medical insurance is an ‘open cheque” policy that covers all their health care
needs or they think that “the insurer has plenty of money”
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How does moral hazard affect the medical
insurance premium?
• High moral hazard leads to inflated claims.

• Since premium rates are mainly based on the insurer’s past claims experience,
higher claims will lead to higher premiums.

Dr. Andria J N Sirur, Assistant Professor, Department of

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Moral Hazard
• The condition, which exists when an insured becomes lax, careless or
indifference in matters of safety and prevention.

• An example is some individuals’ tendency to undertake or continue unhealthy

or self abusive lifestyles because of the knowledge that insurance is in force to
pay for any loss which, may occur.

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Adverse selection
• Anti selection – tendency of persons who are vulnerable to specific losses to
purchase insurance to cover those particular losses.

• For example, a person who has a history of illnesses would be very interested
in obtaining medical insurance.

• If such applicants are successful in obtaining the coverage, we say that the
insurer is “adversely selected against”

• Can never be completely eliminated

• Stringent
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underwriting measures may reduce the risk.
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• Policy provisions are also used to control adverse selection.

• Examples of such provisions are the pre-exisiting condition clause in

medical insurance.

Dr. Andria J N Sirur, Assistant Professor, Department of

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Commerce, Manipal Academy of Higher Education, Manipal