CHAPTER I

OVERVIEW OF HEAL TH INSURANCE

1.1 INTRODUCTION
Health is an important aspect of human resource development. Good health care
facilities and services are essential for creating healthy citizens and society that can
effectively contribute to social and economic development. With increased
urbanization, industrialization and the changing environment, health related problems
are being emphasized and have become a great concern for the contemporary world.
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In developing countries very few amount is being spent on health i.e. medical
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facilities. Good health is indicator of high efficiency. It is closely related with

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human resource development, which contributes for national wealth. Good health is
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necessary for well-being. Even billionaires cannot enjoy life when their health is
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poor. Good health is also required for economic and social development (WHO
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2000). Workers have to be healthy to work and good health of children needed for
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learning different things properly. Yet most of the developing nations lag far behind
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in terms of their populations' health. Poor health is impact as well as cause of

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poverty. For poverty eradication, healthy population is needed.

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In developing nations, the principle causes of poor health care such as inadequate
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prevention and lack of reasonable access to basic health care, along with poor
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nutrition and unclean water, whereas health-related impoverishment results from a

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lack of risk pooling and insurance (WHO 2000). Under funding of health care is
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central to both of these negative outcomes. Moreover, many countries compound

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these problems by making inefficient use of the resources they do have for health care
and risk pooling.

Most low- and middle-income nations face difficulties in funding health care. While
nations declare similar admirable goals to provide their citizens with equal access to a
reasonable quality of health care and to prevent health-caused impoverishment, the
reality is starkly different. These dignified aims are not backed up with adequate
 2

public funds or a rational financing system. As a result, poor health, impoverishment,

and disparity are prevalent.

Poverty is the real context of India. Three-fourth of the population lives below or at
subsistence levels. This means 70-90 percent of their income goes towards food and
related consumption. In such a context social security support for health, education,
housing etc. becomes critical. Ironically, India has one of the largest private health
sectors in the world with over 80% of ambulatory care being supported through out-
of-pocket expenses. The public health services are very inadequate.

There is a positive linkage between good health and economic development. A

healthy community is the infrastructure upon which an economically viable society
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can be built. Unhealthy people can hardly be expected to make any valid contribution
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towards development programs. Charaka, the renowned Ayurvedic physician is

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known to have said, "Health is vital for ethical, artistic, material and spiritual
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development of man." Buddha has said that of all the gains, the gains of health are
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the highest and the best.

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Over the last 50 years India has achieved a lot in terms of health improvement. But
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still India is way behind many fast developing countries such as China, Vietnam and
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Sri Lanka in health indicators. 1 In case of government funded health care system, the
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quality and access of services has always remained major concern. A very rapidly
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growing private health market has developed in India. This private sector bridges
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most of the gaps between what government offers and what people need. However,
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with proliferation of various health care technologies and general price rise, the cost
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of care has also become very expensive and unaffordable to large segment of
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population.
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The Indian market is extremely lucrative. India, being a highly populated country
with a large percentage of people living below the poverty line, the insurance
becomes one of the critical factors for its development. But unfortunately, through
India is the 5th largest economy, its healthcare sector has never really taken care off,
 3

despite its huge potential. This research attempts to study how insurance has fared in
India since its inception and the reasons behind its underperformance.

1.2 HISTORICAL BACKGROUND OF HEALTH INSURANCE

Human beings are confronted with various kinds of risks in their daily life. Every
risk involves loss which could be monetary or physical. While today the life
expectancy has gone up, at the same time the risks to which life is exposed have
multiplied manifold. To search for security is a natural instinct in human beings.
However, the mode of searching has undergone changes over the period of time.

Insurance is a co-operative device to spread the loss caused by a particular risk over a
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number of persons who are exposed to it and who agree to insure themselves against
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the risk. There are different kinds of insurance but the subject matter of this study
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pertains to health insurance, which is offered by general insurance companies.

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Insurance has a rich and colorful history2 . It is a part of much ancient civilization
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and almost any economic history contain with reference to practices that can be
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identified as the forerunners of modem insurance techniques. The concept of

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insurance can be found in the Babylonian civilization as well as in the economics of

Arya Chanakya. The evolution of insurance is not so precise that one can point with
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confidence at a single civilization or year or transaction to the beginning of

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insurance. Marine insurance can be traced back to the Babylonians and Hindus where
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contracts known as, "Bottomry" loans were used to shift the burden of risk from
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owners of ships and cargoes to moneylenders. Life insurance can be traced to ancient
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civilizations in Rome. Burial funds were common in those days. In Greece, religious
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organizations collected and depressed funds for burial costs of members. The
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Egyptians left many evidences in the tombs of the pyramids that burial societies were
then in existence. Five insurance appeared in the 17th century, prompted by a
disastrous five that destroyed 85% of London in 1966. The beginning of corporate
insurance appeared in 1720. The first incorporated five insurance companies in USA
were in 1752. The economic expansion in the 1800s found the growth of life
insurance companies. The development of insurance in the 1900s paralleled the
 4

major economic change of the times. Major developments in casualty insurance have
been the rise of worker's compensation insurance since, the early 1900s. Will,
W. (1989) has observed that in Germany the entire spectrum of social insurance
(pension, accident and Health insurance) was included in the Reich Versicherungs
Ordnung (Empirical Insurance Law) known by the abbreviation RVO. The
compulsory health insurance is the oldest branch of social insurance in the Federal
Ruplic of Germany. On 15th June 1883 compulsory insurance was introduced for
working people when the Gesetz betreffend die krankenversichrung der arbeiter (the
law on health insurance for workers) was enacted. Those insured under health
insurance programme were offered medical attention (the cost of which were directly
reimbursed to the doctor by the health insurance fund), financial support in the event
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of inability to work and a lump-sum payment on death. In the United Kingdom the
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provident association evolved during the 1920s and 1930s to provide insurance
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against the costs of hospital treatment. The associations were formed on a regional
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basis and had strong links with medical profession and with voluntary hospital.
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Contribution to a provident association or provident club a moral (if not legal) right to
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treatment in the voluntary hospitals associated with the provident association. The
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outbreak of the Second World War in 1939 accustomed the nation including the
medical profession in the United Kingdom to the central government direction.
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Demands grew slowly for a free health services, covering the whole country on a
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non-discriminatory basis and funded out of taxation. These demands found

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expression in the 1942 Beveridge Report and in the 1945 White paper entitle 'A
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National Health Service'. The National Health Service bill (NHS) was introduced in
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the year 1946 and the National Health Service Act came into effect during July, 1948
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in the United Kingdom. With the formation of the NHS a major rationalization of the
provident associations and club resulted. A majority of the smaller provincial
associations amalgamated to form an almost nationwide association; this association
is now a major medical expense insurer in the UK. Since 1980 a number of
commercial insurers have entered the medical expenses market. Medical expenses
insurance as we know it, today has been available in the United Kingdom since the
 5

late 1940s. In the USA health insurance originated in the Blue Cross System
developed between hospitals and school teachers in Dallas in 1929. Blue Cross
covered a preset amount of hospitalization costs for a flat monthly premium, and set
its rate according to a "community rating" system. Single people paid one flat rate,
families another flat rate and the economic risks of high hospitalization bills was
spread throughout the whole employee group. The only requirement for participation
by an employer was that all employees, whether sick or healthy, had to join again
spreading the risk over the whole group. Blue shield was developed following the
same plan to cover ambulatory (non-hospital) medical care. In the US health care
funding and delivery has been largely the province of the private sector, except for
the indigent and the elderly, who are covered under the government programmes.
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Employers usually provide health insurance to the employees as employment

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benefits. The genesis of this arrangement occurred just after World War II when the
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US had its first experience with wage and price freezes. Because group health
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benefits were not regulated, labour unions began to press for health and pension
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benefits as a way to provide additional compension to American workers.

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Employers, who were competing for qualified employers, obliged. In the year 1960,
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the US congress enacted the medicare program to cover health care costs growing at
an enormous rate due to various reasons thus began the shift from the traditional fee-
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for-service to managed care.

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1.3 HEALTH INSURANCE IN OTHER PART OF THE WORLD

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Various developed, developing as well as under developed countries have differing

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insurance system to cover health risks. There are generally five primary methods of
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funding health care systems;

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1. direct or out-of-pocket payments,

2. general taxation,
3. social health insurance,
4. voluntary or private health insurance, and
5. donations or community health insurance.
 6

Most countries' systems feature a mix of all five models. There are a wide variety of
health care systems around the world. In some countries, the health care system has
evolved and has not been planned, whereas in others a concerted effort has been made
by government, trade unions, charities, religious, or other co-ordinated bodies to
deliver planned health care services targeted to the populations they serve.

3
Health insurance in the United States:

The United States is alone among developed nations with the absence of a universal
health care system. Healthcare in U.S. does, however, have significant publicly
funded components. Medicare covers the elderly and disabled with a historical work
record, Medicaid is available for some, but not all of the poor and the State Children' s
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Health Insurance Program cover children of low-income families. Roughly two third
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of urban hospitals in the U.S. are non-profit hospitals and the balance evenly divided
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for - profit hospitals and public hospitals. Although public hospitals constitute the
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greatest percentage of non-federal hospitals, care in the U.S. is generally provided by

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physicians in private practice and private hospitals. Just over 59% of Americans
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receive health insurance through an employer, although this number is declining and
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the employee' s expected contribution to these plans varies widely and is increasing as
costs escalate. A significant number of people cannot obtain health insurance through
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their employer or are unable to afford individual coverage. The U.S. Census Bureau
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estimated that 15.3% of the U.S. population, or 45.7 million people, were uninsured
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at some time in 2007. More than 38% of the uninsured are in households earning $
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50,000 or more per year. The census also states that 16.7% of the 39.6 million on
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Medicaid incorrectly reported they were uninsured. In 2005, the United States spent
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15.2% of GDP on health care, or US$ 6, 347 per capita. Of that, approximately 45%
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was government expenditure.

Health Insurance in Thailand: 4

Thailand is a middle-income developing country with an interesting history of health

financing development. Over the past 30 years, the economy has developed from
primarily agrarian to largely industrial. Thailand was one of the world' s fastest-
 7

growmg economies during 1985-95, with real average annual growth of 8.4%
Thailand' s health expenditure, 3.3% of GDP is low considering its level of economic
development. Health expenditure increased steadily from 1980 until peaking in 1996
at 4% of GDP. Since its first unsuccessful effort to introduce a social health
insurance law in 1950s, Thailand has learned from its experiments with various types
of financing mechanisms. Thailand is one of the few countries in Pacific Asia that
have never been colonized. Its political system is a constitutional monarchy, with the
king as head of state and the prime minister, elected by parliament, as head of the
administration. Before implementation of the universal coverage policy in 2001,
health care financing systems were complex and involved multiple financing
schemes. Each financing scheme had its own rules, regulations and benefits packages
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for specific beneficiary groups. The development of Thailand's health insurance

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system has been a long process. The first social security bill was proposed in 1954,
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but was never taken up in parliament. The first medical welfare program started in
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1975, when the government decided to provide medical services in public hospitals
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and health facilities to the poor free of charge. In 1981 health insurance schemes for
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formal sector employees and their families was established. The social security
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scheme (SSS) for firms with 20 or more employees was first introduced in 1990.
Recently, Thailand has implemented universal coverage policy in 2001.
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Health Insurance in Colombia:

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Colombia is a lower-middle-income country located in northern South America. It is

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the fourth largest country in South America. Until the mid-1990s, Colombia
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experienced economic growth and had one of the most stable economies in Latin
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America. However, by 1997, the country entered a period of economic recession that
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hit a low point in 1999, when economic growth rates were negative. Total health
expenditure as a percentage of GDP grew from 6.2% in 1993 to 9.6% in 1997, but
contracted to 7.7% during the economic recession. Health spending has stabilized at
around 8% of GDP since that time. Colombia's national health insurance scheme
came into existence with health reforms implemented in 1993. The reforms paved the
way for transformation of the health care delivery system and brought in a managed
 8

competition model. As the health insurance scheme has now been in place for a
number of years, an analysis of the scheme provides valuable insights about the
design and implementation of universal health insurance that may be applicable to
other countries. Colombia' s health care reform was successful in expanding
insurance coverage from 27% of the population in 1992 to more than 63% by 2003 .

Health Insurance in Kenya:

Kenya is a low-income country in Sub-saharan Africa. Almost 80% of Kenyans live

in rural areas, working mostly as farmers. Half the population lives below the
national poverty line. Life expectancy and infant mortality are slightly better m
Kenya than in the rest of Sub-saharan Africa, but both have worsened in the past two
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decades. Health spending is lower in Kenya than in any of the other country cases in
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this volume. Kenya has had compulsory social health insurance for hospital services
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for more than 40 years; however, only about 20% of the population is covered,
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namely, those employed by the government or by some large formal sector

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employers. The National Hospital Insurance Fund (NHIF) legislation was passed in
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1998, and requires employees with incomes above a certain threshold to make
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monthly contribution to fund. In June 2004, the government proposed the National
Social Health Insurance Fund (NSHIF) to give people access to high quality hospital
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care and to pool risks among the rich and the poor, the young and the old and the
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healthy and the sick. Everyone with an income above a certain amount will make
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compulsory contributions and every citizen will receive hospital care without paying
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user fees. Kenya' s parliament passed the NSHIF Bill in June 2004, but the President
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did not sign it into law because of its apparent lack of sustainability without large new
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taxes or borrowings.
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Health Insurance in Ghana:

Ghana is a low-income agrarian country located in Western Africa, bordering the

Gulf of Guinea. Ghana's income per capita is above the average in Sub-Saharan
Africa and grew faster than that in the rest of this region over the past decade.
However, Ghana has a large poor population. The urban population is relatively
 9

large, though most city dwellers live in slums. Total health care expenditure was
around 4.5 % of GDP in 2003. The majority of health spending was financed
privately, mostly out-of-pocket payments. In 1957, Ghana introduced National
Health Service model after British system. Everyone entitled to free health care and
health care delivery through a network of publicly owned facilities. General revenue
was the source of finance. But there was no sustainability, resulted into decline in
economic performance and the scheme proved to be too expensive. Most public
money is channeled through the Ministry of Health. The voluntary mutual health
insurance movement started in Ghana during the early 1990s with encouragement
from the Ministry of Health and support from donors such as the Danish International
Development Agency and the U.S. Agency for International Development. Such
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community initiatives began to bridge the large gap in social protection between
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people covered by formal schemes and those with no protection against the costs of
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illness. Ghana passed the National Health Insurance Act (NHIA) in 2003, and it
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became operational in March 2004. The scheme is operated as a decentralized

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national health insurance system encompassing district mutual health schemes in all
110 districts, private mutual health insurance, and private commercial insurance
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schemes in order to give all Ghanaians the opportunity to join a health insurance
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scheme of their choice. The central government sets the minimum benefits package,
licenses and regulates the health insurance schemes, certifies the providers and
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collects a national health insurance levy and uses it to subsidize premiums for the
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poor. The intent is that insurance will eventually become mandatory, which implies
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that all Ghanaians would somehow be compulsorily enrolled. The policy document
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speaks of achieving insurance coverage of 30 to 40 percent of the population by 2010

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and 50 to 60 percent by 2015-20.

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Health Insurance in Philippines:

Philippines is a lower-middle-income country located between the Pacific Ocean and

the South China Sea. Poverty rates are high, estimates indicated that in 2003, 37
percent of the population was living below the official poverty line. Income
distribution is also highly unequal. At 3.2 percent of GDP, health expenditure in the
 10

Philippines is among the lowest levels in the region. Approval of the Philippines
Medical Care Act in 1969 was the first step on the road to the National Health
Insurance policy (NHIP) known as Medicare and modeled on the U.S. system. It
mandated the enrollment of workers in regular employment in both the public and
private sectors. In terms of reaching out to the poor and to other workers in the
informal economy, however the program was far less successful. In response to the
late 1980s and early 1990s saw growth in the number of small - scale local health
insurance schemes to fill the gaps in coverage left by Medicare, which focused almost
exclusively on those in formal employment. The Philippines also has a vibrant
private health insurance market that provides supplementary coverage for the middle
class. A further interesting dimension of the situation in the Philippines is that health
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insurance has developed within a service delivery system characterized by a rich mix
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of public and private providers and, since 1991, a far-reaching process of

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decentralization in the management and financing of government health services.

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Health Insurance in China:

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China is a lower-middle income country. China's economy is huge and expanding

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rapidly. In the last 30 years, the rate of Chinese economic growth has been almost
miraculous, averaging 8% growth in GDP per annum. However, there are still
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inequalities in the income of the Chinese people, and this income disparity has
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increased in the recent times. China is undertaking a reform on its health care system.
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As of September 2007, around 80% of the whole rural population of China had
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signed up (about 685 million people). Health care was provided in both rural and
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urban areas through a three-tiered system. In rural areas the first tier was made up of
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barefoot doctors working out of village medical centers. They provided preventive
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and primary-care services, with an average of two doctors per 1,000 people. At the
next level were the township health centers, which functioned primarily as out-patient
clinics for about 10,000 to 30,000 people each. These centers had about ten to thirty
beds each, and the most qualified members of the staff were assistant doctors. Only
the most seriously ill patients were referred to the third and final tier, the county
hospitals, which served 2, 00,000 to 6,00,000 people each and were staffed by senior
 11

doctors who held degrees from 5-year medical schools. Health care in urban area was
provided by paramedical personnel assigned to factories and neighborhood health
stations. If more professional care was necessary the patient was sent to a district
hospital, and most serious cases were handled by municipal hospitals.

Health Insurance in Australia:

In Australia the current system, known as Medicare, was instituted in 1984. It

consists with a private health system. All legal permanent residents are entitled to
free public hospital care. Treatment by private doctors is also free when the doctor
direct bills the Health Department (Bulk Billing). Medicare is funded partly by a 1.5
percent income tax levy (with exceptions for low-income earners), but mostly out of
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general revenue. An additional levy of 1 percent is imposed on high-income earners

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without private health insurance. There is a uncapped 30 percent subsidy on private

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health insurance. As well as Medicare, there is a separate Pharmaceutical Benefits

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Scheme under which listing and a government subsidy is dependent on expert

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evaluation of the comparative cost-effectiveness of new pharmaceuticals. In 2005,

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Australia spent 8.8 percent of GDP on health care, or US$ 3,181 per capita. Of that,
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approximately 67 percent was government expenditure.

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Health Insurance in Canada:

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Canada has a federally sponsored, publicly funded Medicare system with most
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services provided by the private sector. Each province may opt out, though none
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currently do. Canada's system is known as a single payer system, where basic
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services are provided by private doctors, (since 2002 they have been allowed to
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incorporate) with the entire fee paid by the government at the same rate. Most family
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doctors receive a fee per visit. These rates are negotiated between the provincial
governments and the province's medical associations, usually on an annual basis. A
physician cannot charge a fee for a service that is higher than the negotiated rate -
even to patients who are not covered by the publicly funded system - unless he or she
opts out of billing the publicly funded system altogether. Pharmaceutical costs are set
at a global median by government price controls. Other areas of health care, such as
 12

dentistry and optometry, are wholly private. In 2005, Canada spent 9.8 percent of
GDP on health care, or US$ 3,463 per capita. Of that, approximately 70 percent was
government expenditure.

Health Insurance in Germany:

Germany has a universal multi-payer system with two main types of health insurance:
"State health insurance known as sickness funds and "Private". Compulsory
insurance applies to those below a set income level and is provided through private
non-profit "sickness funds" at common rates for all members, and is paid for with
joint employer-employee contributions. Provider compensation rates are negotiated
in complex corporatist social bargaining among specified autonomously organized
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interest groups (e.g. physicians' associations) at the level of federal states (Lander).
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The sickness funds are mandated to provide a wide range of coverage and cannot
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refuse membership or otherwise discriminate on an actuarial basis. Small numbers of

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persons are covered by tax-funded government employee insurance or social welfare

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insurance. Persons with incomes above the prescribed compulsory insurance level
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may opt into the sickness fund system, which a majority do, or purchase private
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insurance. Private supplementary insurance to the sickness funds of various sorts is

available. In 2005, Germany spent 10.7% of GDP on health care, or US$ 3, 628 per
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capita. Of that, approximately 77% was government expenditure.

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Health Insurance in Japan:

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In Japan, services are provided either through regional/national public hospitals or

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through private hospitals/clinics, and patients have universal access to any facility,
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though hospitals tend to charge higher for those without a referral. Public health
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insurance covers most citizens/residents and pays 70% or more cost for each care and
each prescribed drug. Patients are responsible for the remainder (upper limit apply).
The monthly insurance premium is 0-50,000 JPY per household (scaled to annual
income). Supplementary private health insurance is available only to cover the co-
payments or non-covered costs, and usually makes a fixed payment per days in
hospital or per surgery performed, rather than per actual expenditure. In 2005, Japan
 13

spent 8.2% of GDP on health care, or US$ 2, 908 per capita. Of that, approximately
83% was government expenditure.

Health Insurance in France:

There are both private as well as public hospitals. Most doctors remain in private
practice. Social security consists of several public organizations, distinct from the
state government, with separate budgets that refunds patients for care in both private
and public facilities. Until recently, social security coverage was restricted to those
who contributed to social security (generally, workers or retirees), excluding some
poor segments of the population~ the government put into place the 'universal health
coverage'. In some systems, patients can also take private health insurance, but
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choose to receive care at public hospitals, if allowed by the private insurer. France
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spent 11.2% of GDP on health care, or US$ 3, 926 per capita. Of that, approximately
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80% was government expenditure.

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Health Insurance in Switzerland:

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In Switzerland, compulsory health insurance covers the costs of medical treatment

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and hospitalization of the insured. The Swiss healthcare system is a combination of

public, subsidized private and totally private healthcare providers, where the insured
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person has full freedom of choice among the providers in his region. Insurance
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companies independently set their price points for different age groups, but are
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forbidden from setting prices based on health risk. In 2000, Switzerland topped all
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European countries' health care expenditure when calculated as per capita

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expenditure in US dollar purchasing parity terms. The Swiss health care system is
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interesting as if was the last for-profit system in Europe. In the 1990s, after the
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private carriers began to deny coverage for pre-existing conditions-and when the
uninsured population of Switzerland reached 5% - the Swiss held a referendum
(1995) and adopted their present system.
 14

Health Insurance in United Kingdom:

Each of the four countries of the United Kingdom has a separate but co-operating
National Health Service; the National Health Service of England, NHS Scotland,
NHS Wales and Health and Social Care in Northern Ireland. They provide free
physician and hospital services to all residents of the United Kingdom, funded from
general taxation. Hospital staff are salaried employees according to nationally agreed
contracts, whilst primary care is largely provided by independent practices, who are
paid, again via nationally agreed contracts, according to the number of patients
registered with them and the range of additional services offered. Private health
services are also available. Private health care continues parallel to the NHS, paid for
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largely by private insurance. There are no private hospitals providing accident and
emergency services. Most ambulance services are publicly run but some private and
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charity run ambulance services also exist. In 2005, the United Kingdom spent 8.2%
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of GDP on health care, or US$ 3, 065 per capita. Of that, approximately 87% was
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government expenditure.
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Health Insurance in Singapore:

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Health care in Singapore is mainly under the responsibility of the Singapore

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Government's Ministry of Health. Singapore generally has an efficient and

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widespread system of health care. It implements a universal health care system and
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co-exists with private health care system. It ensures affordability, largely through
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compulsory savings and price controls, while the private sector provides most care.
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Overall spending on health care amounts to only 3% of annual GDP. Of that, 66%
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comes from private sources. It has well-established health care system comprises a
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total of 13 private hospitals, 10 public (government) hospitals and several specialist

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clinics, each specializing in and catering to different patient needs, at varying costs.
Patients are free to choose the providers within the government or private health care
delivery system and can walk in for a consultation at any private clinic or any
government polyclinic. For emergency services, patients can go at any time to the
24-hour Accident & Emergency Departments located in the government hospitals.
 15

Singapore' s medical facilities are finest in the world, with well qualified doctors and
dentists, many trained overseas.

Health Insurance in Pakistan:

According to 2002 government statistics, there were 12,501 health institutions

nationwide, including 4,590 dispensaries, 906 hospitals with a total of 80,665 hospital
beds, and 550 rural health centers with a total of 8,840 beds. According to the World
Health Organization, Pakistan's total health expenditure amounted to 3.9% of GDP in
2001 and per capita health expenditure was US$ 16. The government provided
24.4% of total health expenditures, with the remainder being entirely private, out-of-
pocket expenses.
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1.4 INDIAN SCENARIO OF HEALTH INSURANCE

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In India, the insurance profession commenced in 1818 5 initially, the Oriental

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Insurance Company did business only with the British. Later it started doing business
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with Indians as well, but at a premium higher by 15-20%. By this discrimination, six
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Indian businessmen came together in 1870 and formed the Bombay Mutual Life
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Assurance Society. In 1909, Ishwarchandra Vidyasagar, the famous educationist

formed The Hindu Family Mutual Fund, insurance company which provided pension,
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which was first of its kind in India. By then, motor vehicles had started playing on
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the roads in the Indian subcontinent. This created a new problem of vehicle accidents
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and thus accident insurance was born. A lot of people experienced the damage of the
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household when the principal break winner died. So, to protect these unfortunate
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people economically, the concept of Life Insurance was born. The first general
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insurance company formed in India was the Titron Insurance Company, which was
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formed in 1950. Many companies started doing business in the later years, but due to
the lack of adequate government control on them, many of them went bankrupt as
they failed to settle their insurance claims, so eventually had to close down. To
counter these problems, the Insurance Act was passed in 1938. Sir Chintamanrao
Deshmukh amalgamated all insurance companies and nationalized the Life Insurance
business on 19th Jan 1956. By an Act of Parliament the Life Insurance Corporation of
 16

India (LIC) was established which began to function on 01 st Sep 1956. The LIC
which started with a share capital of Rs. 5 crores, has now expanded all over the
country, and its business up to March 2007 had crossed Rs.12,00,000 crore. All other
forms of general insurance other than life insurance were kept open for private
companies and 107 companies were in the general insurance field. But Prime
Minister Indira Gandhi nationalized even the general insurance business under the
provisions of General Insurance (Emergency Provisions) Act 1971 and General
Insurance Corporation of India (GIC) was registered as company in November, 1972.
In January, 1973 all the 107 private companies, both Indian and foreign, were merged
with one of the four subsidiaries of GIC i.e. New Indian Assurance Company, United
India Insurance Company, Oriental Insurance Company and National Insurance
SA

Company. The total business of these companies was just Rs.390 crore. In 2007, it
VI

grew to a whopping Rs.12,000 crore. After 1993, winds of economic liberalization

TR

started blowing. On the basis the Malhotra Committee recommendations, the Central
IB

Government took the decision to make the insurance field free for private sector
AI

comparues. The Parliament passed the IRDA Act in 1999 and the Insurance
PH

Regulatory and Development Authority (IRDA) was established. It exercise control

U
LE

over all the insurance business in the country as a regulator just as RBI does for the
banking sector.
PU
N

The Employee State Insurance (ESI) Act, 1948 ushered in health insurance in India.
E

The legislation introduced a mandatory social insurance scheme with managed care
U
N

concepts for employees in the formal sector. The Employee State Insurance Scheme
IV

(ESIS), introduced in 1952, is managed by the Employee State Insurance Corporation

ER

(ESIC), a wholly government owned enterprise. It provides cash benefits, medical

SI

benefits, preventive and primitive care, and health education. It is a compulsory

TY

social security benefit for workers having an income less than Rs.6, 500/- a month in
the formal sector, covers employees and their dependants and is mainly financed by
contributions from employers, employees and the government. Employers and
employees contribute 4.75% and 1.75% of their wages respectively. The state
government' s share is 12.5% of the total expenditure. In 2000, about 33.4 million
beneficiaries were covered by the scheme. ESIC has set up 136 hospitals with 43
 17

annexes having 23,720 beds. There are 1,443 ESI dispensaries, 6,542 medical
officers, and 2,988 medical practitioners.

The second imitative was the Central Government Health Scheme (CGHS) in 1954
for employees of the central government, members of parliament, judges, freedom
fighters, and their families. Mainly financed by the central government, this
contributory health scheme-contribution varies from Rs.15 to Rs.150 per person
based on the salary of the employee - provides comprehensive medical care to about
4 .4 million beneficiaries (1996 figure). Separate dispensaries are maintained and
inpatient facilities are available in government hospitals and approved private
hospitals on referral.
SA

Certain ministries like railways, defense and coal give health coverage to their
VI

employees as a benefit, while there are some government-sponsored schemes that

TR

provide health coverage to specific employment-based target population. This

IB

includes schemes for handloom workers and handicrafts artisans sponsored by the
AI

ministry of textiles. Here we discuss the schemes under the ministries of railways,
PH

defence and textiles. Railway working employees and their families can avail the
U
LE

railways managed health facilities without paying any contribution; the retired
employee can opt for continued health benefits by contributing the last month's basic
PU

pay. Currently, about eight million beneficiaries avail the health services through a
N
E

network of 584 health units, 124 hospitals, including five super specialty hospitals
U

and nine apex referral hospitals. Similarly, ministry of defence provides

N
IV

comprehensive health coverage to the serving anned forces personnel and their
ER

families of all three wings; army, navy and air force. The total beneficiaries add up to
SI

6.6 million. There is no contribution from the beneficiaries and the entire expenditure
TY

come from the budge of the ministry of defence. The ministry of textiles offers
schemes to provide social security to the handloom weavers and handicraft artisans,
which involve health coverage. State government operates this scheme. The medical
reimbursement up to maximum of Rs.1 , 500 per weaver per annum.

For persons not covered by these schemes, government - run public sector insurance
companies, such as Mediclaim scheme of General Insurance Corporation, introduced
 18

in 1986. An indemnity-based health system, covering only inpatient treatment, the

premium is based on age and sum insured. Clients can avail of medical services from
any public or registered private hospital. In the year 2000, insurance sector kept open
for private players along with public sector.

1.5 INTERNATIONAL COMPARISON:

India has the largest number of medical colleges in the world. India produces largest
number of doctors in the developing world. These doctors are exported to many other
countries, and are considered among the best in the world. Number of colleges in the
country have introduced nursing course, pathology courses along with training
arrangement for paramedical personnel. India is the fourth largest producer of drugs
SA

by volume in the world and is among the largest exporter of drugs in the world.
VI

Despite all these resources, the majority of citizens have very limited access to quality
TR

healthcare. The following table throws light on the availability of the resources in
IB
AI

respect of physicians, nurses and number of hospital beds to Indian population.

PH

Table 1.1
U

International comparison of Health manpower and Hospital beds

LE

Sr. Particulars Physicians Nurses per Midwives per Hospital

PU

per '000 '000 '000 beds per

No. population population population '000
N

population
E

1 Indian Public Sector 0.2 - 0.2 0.4

U
N

2 India Total 1.0 0.9 0.2 0.7

IV
ER

3 World 1.5 3.3 0.4 3.3

SI

4 Low Income countries 1.0 1.6 0.3 1.5

TY

5 Middle Income countries 1.8 1.9 0.6 4.3

6 High Income countries 1.8 7.5 0.5 7.4

Source: India Health Report (2003), 'Misra/Chatterjee/Rao', Oxford University Press, Page 19.
 19

The income category is defined by per capita GNP in 1999: Low income countries <
$755 ; Middle income countries between $756 and $9265 and High income countries
> $9265.

The above table 1.1 shows that the number of physicians per 1,000 populations for
the world is 1. 5 the figure for India is 1 which is at par with the average of low
income countries. For the public health sector, the figure is measly 0.2 The number
of nurses per 1,000 population for the world 3.3 where as for India it is just 0.9 which
is even less than low income countries. The number of hospital beds per 1,000
populations for India is 0. 7 which is much lower than the world average of 3.3 and
the average of low income countries. India is far away from middle income as well
SA

as high income countries in comparison of health manpower and hospital beds.

VI

Observations:
TR
IB

In Asia, China opened up its insurance sector to foreign players in 1992. It

AI

concentrates on home care-quite different from managed care-which will curtail the
PH

rising cost of hospital care. Thailand introduced the concept of managed care in
U

1996. The Philippines allowed entry of foreign insurance companies in 1991.

LE

India' s position on health parameters compared even to some of its neighbours

PU

continues to be unsatisfactory. Life expectancy is still four years below the world
N
E

average and probability of dying under five is higher than world average.
U
N

Data from china, India and many African countries suggest that 30 to 40 % of poor
IV

households incur indebtedness and/or sell important assets such as farm animals or
ER

land to pay for health care at times of crisis. This feeds a vicious cycle whereby the
SI

reduction of household assets and debt servicing undercuts spending on food,

TY

housing, and other inputs required for good health.

Predominant form of health insurance in various country, like Kenya has been
selected for illustration of the design stage, Ghana for initiation, the Philippines for
extension of population coverage, Colombia for fuller implementation of health
insurance and managed care, and Thailand for universal coverage. These countries
 20

also differ in relation to vanous criteria known to be important to the enabling

environment for health insurance. A low per capita income, a small formal sector, a
high prevalence of poverty, and a high dependency ratio can be expected to be
particularly demanding.

All stages of health insurance face major problems in relation to defining, certifying
and subsidizing the poor. As implied by the Ghana and Kenya, the poorer the
country, the worse the problem, because the number of poor will be large and the
capacity to monitor and evaluate them will be limited.

All countries would like to offer a comprehensive benefits package to all citizens.
Unfortunately low-and middle-income countries may not be able to afford such a
SA

package. Formal sector employees demand comprehensive benefits and might be

VI

able to pay for it. However, a difficult trade-off has to be made for the poor and near
TR

poor. The choice involves covering fewer poor and near-poor with a comprehensive
IB

packages or covering more of them with a less comprehensive package. For example,
AI

Colombia had to limit the benefit package of the poor to make to only half as
PH

expensive as that of formal sector employees so it can be affordable. Now Colombia

U
LE

is expanding its coverage to the near-poor with benefits packages less comprehensive
than that of the poor.
PU
N

All low-and middle-income countries have large poor populations who are unable to
E

pay the premium, and nations use different criteria to establish the poverty level. The
U
N

indigent population usually accounts for 40 to 50% of the population of low-income

IV

nations. Even in the United States, 12% of the population falls below the poverty
ER

line. The government has to have the budget to subsidize the poor, and to do this, it
SI

could reallocate funds from other programs to health and/or raise new tax revenues.
TY

For example, Ghana imposed a new 2.5% value added tax to help finance the
subsidized regime, but whether the funds will be sufficient to pay for all the poor as
Ghana's social health insurance coverage expands is not clear. The Philippines used
revenues from a national sweepstakes lottery to help finance premiums for the poor.
 21

Three main arguments support the establishment of a single insurance fund instead of
many funds. First, low-income countries lack the human resources, experience, and
information technology systems to start even one fund properly, so having multiple
funds would further dilute the human resource pool. Second, having multiple funds
would increase administrative costs at both the insurer and provider levels, meaning
that fewer of the scarce resources would be spent for health services. Third, a system
with multiple funds develops political and bureaucratic barriers to universal social
health insurance with equal access. Thailand' s major hurdle to equalizing access is to
merge its various funds. Colombia, Ghana, Kenya, and the Philippines learned from
the struggles of more advanced economies such as Germany, Korea and China that
had multiple social health insurance fund, and established a single social health
SA

insurance fund. Nonetheless, several economists argue that many funds would give
VI

people a choice and that competitions among funds would promote greater efficiency;
TR

however, no credible evidence to support this theory is available.

IB
AI

1.6 AN ECONOMIC OVERVIEW OF HEALTH INSURANCE

PH

Economics underpins all business activity with insurance being no exception6 .

U
LE

Almost all important insurance operations, practices and regulation relate to

PU

economics. In the health care sector, supply and demand do not interact in the same
way as in other markets.
N
E
U

Economic security and need for Health Insurance:

N
IV

People have always looked for security. The need for security was a vital role in the
ER

primitive formations of families, tribes and other groups. Today people are more at
SI

risk than their ancestors used to be. The physical and economic security provided by
TY

joint families and tribes is extinct today because of industrialization. Now, the
income dependency and wealth acquiring style of people put them move at risk to
external charges over which they have no control. Individual and families need to be
prepared to face unfavorable consequences of loss of health, death, unemployment,
old age etc. It is true that, individuals cannot forecast or totally avoid such
occurrences but they can minimize the financial losses due to such occurrences.
 22

Insurance provides defense against such disasters by making many pay for the loss of
the unluckily few. Health insurance, about which we are concerned have, provides
security against loss of income or extra expenses because of disability or ill health.

Economic value of human life:

In terms of physical composition the human body has no economic value, but the
earning ability of a particular person may be worth corers of rupees 7. It does not
imply that the earning ability alone can create an economic value. An individual is
said to have economic value only if some other person or organization can expect to
benefit from his existence. If no other person or organization can benefit from his/her
either in the present or in future, and he has no dependents then that particular
SA

individual, for all realistic purposes has no economic value. However, such
VI

individuals are not found regularly. Most income earner either has depends or can
TR

expect to have them in near future. Even those income producers who have no family
IB

depends often extends financial support to charitable organization. Thus, every

AI

individual possess an insurable interest in his/her wealth creation abilities. Here

PH

' Health' being a critical component of keeping one' s earning capacity intact demands
U
LE

its preservation.
PU

Preservation of a family's economic security:

N
E

Normally, an income earner's family is totally dependent on his/her earning to meet

U

its daily needs. The economic security of family depends upon the earning capacity
N
IV

of each income earner, which is represented by his/her character and personality,

ER

health, training and experience, the industry in which he/she is working, initiative and
SI

judgment etc. over a period of time these strength are slowly converted into income,
TY

a part of which is used on self-maintenance, another to support dependents and the

remaining is saved to meet future needs and contingencies. By means of health
insurance an individual can ensure that the family will receive the monetary value of
the economic or income producing qualities that fall within his/her physical being,
irrespective of sickness/death, by bearing the cost of curing the sickness, besides
reimbursing the losses in earning during the sickness period. Thus, the income earner
 23

can leave his/her family in the same economic position that they would have enjoyed
normally.

Lack of information: The most crucial feature in relation to health care is the fact
that the consumer lacks the necessary information about the relationship between
health care and health outcomes to enable to him to choose between different
treatment options. The main asymmetry in information that affects health care
economics comes about because the provider of health care is generally perceived by
all concerned to have a substantially greater degree of knowledge about appropriate
health care and its effect than the consumer/patient. The relationship between health
care and health outcomes is not only a technical one requiring specialized knowledge,
SA

it is inherently uncertain. Thus, the health service provider takes on a central role in
determining consumers' choices in relation to health care.
VI
TR

The demand for Health Insurance: Economists since Adam Smith have recognized
IB

that people are important element of nations' wealth. The essence of human capital is
AI

that investments are made in oneself with an expectations of future benefits.

PH

Investment in human capital - education for example - has become one of the most
U
LE

cogent explanations for the differences in countries' rates of economic growth as well
as differences in wage rates between and within countries.
PU
N

Estimating the value of human capital is complicated by the necessity to distinguish

E

between expenditure for consumption and investment. Much of what is called

U
N

consumption constitutes investment in human capital. Thus expenditure on

IV

education, health and migration to take advantage of better job opportunities are
ER

examples, as are workers acquiring on the job training. In these and other ways, the
SI

quality of human effort is greatly improved and productivity is enhanced.

TY

Supplier induced demand: Much of the debate in relation to health care economics
centers on how health services providers react to this situation. It is argued that
because health service providers are in a position to significantly influence or
determine consumer behavior, there is a considerable scope for providers to seek to
maximize their own utility. This leads to the concept of 'supplier-induced demand':
 24

the supplier brings about a level of consumption different from that, which would
occur if a fully informed consumer was able to choose freely. This may occur if
the health service provider has a financial incentive to influence demand i.e. if
payment is on a fee-for-service basis, rather than by way of capitation or a salary. It
is extremely difficult to determine the extent of supplier induced demand. However,
there are studies that show that there are higher levels of utilization where providers
are paid on a fee-for-service basis rather than by way of capitation or a salary. There
is also evidence to suggest that where the supply of providers is relatively high
utilization levels for health services are also relatively high. It is important to
emphasise that those who support the hypothesis of supplier-induced demand
recognize that the financial incentive is only one aspect of the diverse and complex
SA

motivations to which health service providers respond under equally diverse and
VI

complex constraints.
TR
IB

Factors determining the demand for private health insurance: The demand for
AI

health insurance has been analyzed at two levels 8 . First, the factor determining the
PH

decision to purchase health insurance and second factors that determine the amount
U

(extent or coverage) of health insurance. Healthcare expenditure is another important

LE

variable affecting health insurance purchase. Relation of health insurance purchase

PU

decision and health expenditure is based on the premise that families which have
N

higher chances of requiring hospitalization will have higher probability of buying

E

health insurance. Some other socio-economic factors like age, education etc. have
U
N

also been found to be important factors affecting health insurance purchase.

IV
ER

Other issues related to purchase decision of health insurance: The health status of the
SI

family is another important factor which may influence the health insurance purchase
TY

decision. Another set of factors which are found important in the literature of health
insurance are demographic and economic variables. These variables are employment,
age, marital status and gender.
 25

Factors affecting health insurance consumption:

Price: Of course, price is a critically important factor of insurance demand and

supply. The prices that insurers charge are influenced by their cost structures, by the
competitiveness by government tax and other policy. Unfortunately, no completely
satisfactory national measures of price exist.

Income: The level of a country' s income has been found to be the most important
factor in explaining the level of national life and health insurance consumption. The
higher a country's income, other things being equal, the more its spend on all types of
msurance.
SA

The demographic environment: Change in demographic affects insurance

VI

consumption. For example, the age of first marriage, for both men and women, is
TR

increasing in many countries, while the years of higher education lengthen. Married
IB

couple who have children - and many choose not to do so - are having fewer of them.
AI

Dual income families are common, as are single parent families. The fitness trends
PH

results in healthier insured's, but also sometimes in a perception of less need for
U

health insurance. These and other demographic trends alter insurance demand.
LE

Education: The educational level of a population or of a household affects

PU

insurance consumption. The expectation is that the more educated or literate a

N
E

population or household the greater the likelihood of understanding the need for
U

msurance.
N
IV

The political environment: Country political and economic stability, influences

ER

insurance demand; an unstable political environment depresses insurance demand

SI

because citizen cannot fully rely on insurers meeting their promises, as laws may be
TY

unenforceable.
 26

REFERENCES

1. Mavalankar Dileep and Bhat Ramesh, 'Health Insurance in India: Opportunities,

Challenges and Concerns', JIM Ahemedabad (Nov 2000).
2. Bhat Ramesh and Jain Nishant, 'Factoring affecting the demand for health Insurance
in a micro insurance scheme', IIM Ahmedabad (July 2006), page no.2 & 3.
3. Agarwala Rakesh, Health Insurance in India: A Review, The Insurance Times,
Kolkata (Nov 2009), page no.426, 427,428 & 430.
4. William C. Hsino and R. Paul Show, 'Social Health Insurance for Developing
Nations', The World Bank, Washington (2004), page no. 125
5. Patukale Kshitij, Insurance for everyone, Maccmillan India Ltd. (2009), page 7, 8 &
SA

10
VI

6. Kenneth Black Jr and Harold D. Skipper Jr, 'Life and Health Insurance', 13th edition,
TR

page no.5, 63, 64, 65 & 67.

IB

7. Health Insurance, ICFAI, University Press, (March 2006), page 2.

AI

8. Michael Beenstock, Gerry Dicknson and Khajuria Sanjay, 'The determination of life
PH

insurance premium: an international cross-section analysis, Insurance mathematics

U

and economics (1986), page no. 261-270.

LE
PU
N
E
U
N
IV
ER
SI
TY