One of the concerns around the Modi government’s National Health Protection Scheme, which aims to give health insurance of Rs 5 lakh to India’s poorest 10 crore families, was that it would channel public funds into private insurance companies, without significant pay-offs for the poor.

State governments seem to have taken these concerns seriously. As many as 23 states have bypassed the option of partnering with insurance companies and have instead decided to create non-profit trusts to implement the scheme. These trusts will be responsible for carrying out all aspects of the scheme including registering beneficiaries, empaneling hospitals, monitoring hospitals, verifying claims, disbursing verified claims and checking for fraud.

Both the options were offered to state governments by the National Health Agency, which is in-charge of implementing the Ayushman Bharat-National Health Protection Mission. In mid-July, Indu Bhushan, chief executive officer of the agency, told the Economic Times that of the 28 states that have signed memorandums of understanding with the Centre to implement the scheme, 23 states have opted for the trust model. In fact, Uttar Pradesh first said it would implement the scheme as an insurance programme but has since switched to setting up a trust to operate it.

Here is why experts say it is more advisable for states to run the NHPM through a trust than with an insurance company.

1. Insurance schemes have high rejection rates

In an insurance model, the government pays a premium to an insurance company. Assuming the premium amount is Rs 100 per person, for 10 crore people, the government would end up giving Rs 1,000 crore to the company. The company would reimburse the claims, spend some of the money on operational costs and make a profit of whatever remained.

“It is the insurance company’s job to make some profit out of this,” said Indranil Mukhopadhyay, associate professor at the School of Government and Public Policy, Jindal Global University. “So there is always the incentive for an insurance company to reject claims. There is very little that the payer, which is the government here, can do to ensure that rejection does not take place. So rejection rates are typically much higher under insurance schemes.”

This has been a major shortcoming of the Rashtriya Swasthya Bima Yojana, the health insurance scheme for unorganised workers that provides a cover of Rs 30,000 per family to 3.6 crore families. The RSBY is run in partnership with public and private insurance companies.

“Insurance companies did not have the right to cancel claims from hospitals because, under the RSBY contract, once the claim is pre-approved by the insurance company, it will have to be reimbursed because they have accepted the diagnosis and treatment,” said N Devadasan, co-founder and director of the Institute of Public Health in Bengaluru. “But what many insurance companies have done is that once the treatment is done and the claim is filed, they have started nit-picking and found grounds to reject the claims.”

Awareness programme and enrolment of RSBY beneficiaries in Meghalaya. (Photo: RSBY)

In a trust model, there are no premiums to be paid. Barring operational expenses, the government can use the entire scheme amount – say the same Rs 1,000 crore – to disburse payments.

“It is a long-term investment because you develop the IT system, you develop the claim verification system,” said Mukhopadhyay. “You have greater control over the healthcare providers too. You know who is providing services and who is making fraudulent claims.”

He added: “From the perspective of the patients and from the financier’s, which in this case is the government, trust models are more efficient.”

2. Unsustainable government health insurance schemes

Savings made in the trust model stay with the government and can be used in the future. On the other hand, in an insurance model, the costs keep escalating.

An analysis of government-funded health insurance schemes published earlier this year by the National Institute of Public Finance and Policy pointed to their lack of sustainability. The sustainability of any insurance scheme is calculated through Net Incurred Claims Ratio or NICR. That is, the sum of all claims that the insurance company has paid out in a year divided by the total premium it has earned in the same year.

The Health Insurance Product Filing Guidelines, 2016 state that if the ratio of the portfolio of an insurer is more than 90% for four consecutive half-years, the insurer is not allowed to participate in the tender for any government-funded health insurance scheme. This rule basically protects insurance companies to make sure that they do not incur outsize losses or risk bankruptcy. However, according to data from the Insurance Regulatory and Development Authority of India, the NICR of government-funded health insurance schemes has been higher than 90% since 2013-’14, indicating that they are unsustainable.

Shortfall in premium paid

Year Premium paid (Rs billion) NICR (%) Premium shortfall (Rs billion)
2013-'14 20.82 93 0.69
2014-'15 24.74 108 4.94
2015-'16 24.25 109 5.12

The paper also points out that the costs paid out by insurance companies will ultimately translate into fiscal costs for the government. Here’s why. Insurance works on the basis of pooling the financial risks of a large number of individuals. Far fewer individuals incur large claimable medical expenses than those buying into the pool by paying premiums. Therefore, the scheme is sustainable with more money coming in than payouts being made. However, in a public health insurance scheme, the government pays premiums for the entire pool and so bears all the risk and all the costs.

“There is no net difference to the exchequer if the government directly pays the hospital or uses insurance companies,” said Shubho Roy, legal consultant at NIPFP and one of the authors of the paper. “Total costs to government if it were to run the hospitals directly are equal costs paid to insurance companies. In addition, now the government has to pay for the administration and capital costs of the insurance companies.”

Moreover, public health insurance scheme expenditures are likely to go up because of political considerations. “Once a promise is made to the general public, it is politically more difficult for the government to take it back rather than if the promise had not been made at all,” said Roy. “Households seeing this promise will stop saving for health and start depending on the insurance schemes. Insurers and health care providers will realise that the government cannot move back or throw them out of the schemes and start raising rates.”

Finally, an ageing population will result in increased per capita costs because there are likely to be more claims per person per year as people grow older and have more health problems.

“We do not know if the governments have thought through the fiscal implications of these schemes as the population ages,” said Roy.

3. Trusts have better monitoring systems

Devadasan said that the most important advantage that a trust model has over an insurance model is that the trust can, if it wants to, ensure technical monitoring to ensure that no unnecessary procedures are performed.

“When a hospital says that this person needs a coronary artery bypass graft, the insurance company does not look into whether the procedure is needed or not,” he said. “In an assurance model, the assurance agency like those implementing Vajpayee Aarogyashri in Karnataka or Rajiv Aarogyashri in Andhra employs full time doctors to go through the medical investigations. This is an additional expenditure for insurance companies so they will never do it.”

Government agencies can also send government doctors to verify claims and thereby have greater control over the process.

The National Health Protection Scheme seems to have followed the example of these state programmes and has announced that it will recruit about one lakh ‘Ayushman Mitras’ to help monitor, evaluate and implement the scheme at public and private hospitals.

4. Karnataka’s success with the trust model

The efficiency of the trust model of health cover has been demonstrated to some extent by the Vajpayee Aarogyashri Scheme in Karnataka that is operated by a state-run trust. The scheme that was launched in 2010 was a social health insurance scheme for households below the poverty line that focussed on improving access to tertiary care – the highest level of hospitals providing intensive care and specialised care.

The programme has provided greater access to tertiary health facilities to people who could previously not afford such care. A study published in the BMJ Global Health earlier this year showed that households eligible for the scheme were more than 40% more likely to report hospitalisations than those households not covered by the scheme.

The programme has also ensured the beneficiaries use better quality health facilities and get earlier diagnoses. The study showed that beneficiaries were also 35% less likely to report unmet need for medical care for a serious illness than people not covered by the scheme. Moreover, the mortality rate from conditions covered by the scheme – mostly cardiac conditions and cancer – was 0.32% in households eligible for the scheme compared with 0.90% among ineligible households.

The respondents eligible under the scheme who were hospitalised reported 88% fewer post-hospitalisation infections and were 48% less likely to report needing to be re-hospitalised than respondents ineligible for the scheme. Care for beneficiaries was also found to be largely appropriate – 86.7% of cases were deemed appropriate and only 3.7% of cases were deemed inappropriate.

5. Trust model might not work for some states

The drawback of trust models in India is that most states, particularly in north India, do not have the capacity to run health protection schemes without the help of insurance companies. So while insurance companies may reject or delay claims due to a profit motive, trusts may delay claims due to lack of administrative capacities.

“In the short-term you may want to get insurance companies on board for one to three years and use that time to build public sector capacity,” said Devadasan. “It is easy if the government has the will to do it.”

West Bengal is among the states that have chosen the insurance route for the National Health Protection Scheme. A senior health official from Tamil Nadu told that the state will adopt the insurance model even though it has not yet signed a memoradum of understanding to join the scheme. Tamil Nadu already runs its Chief Minister’s Comprehensive Insurance Scheme by partnering with insurance companies. But offering only health insurance is not enough, said the official, and pointed out that the state offered health assurance in the form of free treatment for large number of procedures.

“From the beginning we have been offering free treatment at government hospitals,” he said. “Insurance should be the icing on the cake and not the cake itself.”

This is the second article in a two-part series on the National Health Protection Scheme. The first part can be read here.