Healthcare may be divided up into the following broad risks categories listed below. Adigozel, Pellathy & Singhal (2009)1 of the Healthcare Practice at McKinsey and Mahal (2010) of the Harvard School of Public Health argue that each category will require a different financing mechanism:
- Routine Expenses (high frequency, low value, low uncertainty): These are perhaps best suited for savings and credit lines (and where necessary, subsidies may be offered directly to individuals through cash transfers) which would need to be used by customers to pay for them. The suggestion of a Health Savings Account (HSA) made by Professor Martin Feldstein (2005)2 of the National Bureau of Economic Research (NBER) and Harvard University may be useful to examine here, and is similar, in spirit, to the new National Pensions Scheme (NPS). It is possible that in the absence of good financial inclusion (i.e., good avenues to save or borrow money) even these expenses, while small in value, result in the catastrophic consequences that Krishna (2006)3 finds for those households that may not be eligible for means-tested (i.e., after determining poverty status) cash-transfers. Some form of HSAs may be able to address this challenge as well. As Mahal (2010)4 points out, the challenge of separating this out from other types of health risks (and care) are that this should ideally be the gateway for all individuals so that necessary first-level curative care and preventive care may be administered before they are referred further to secondary and tertiary care facilities. Any durable financing mechanisms would need to address this critical issue of integration carefully. Mahal (2010) draws attention to the Managed Care Kaiser Permanente model in the USA and the National Health Service in the UK as two potential ways in which this may be done.
- Preventive Care at the Population Level (low and steady, zero uncertainty): Here it is possible that the government spending tax money and even provisioning this care may be the best model, with citizens receiving this service largely for free. It is possible that a Managed Care model may be able to include those preventive expenses that have a high impact on the future disease burden of an individual but not those that are more in the nature of public goods.
- Catastrophic Care for Unforeseen Events (very low frequency, very high value, very high uncertainty): These authors and Professor Mark Pauly (2007)5, of the Department of Healthcare Systems at the Wharton School, argue that this is the only category of health expenses that have sufficient high volatility to ensure that the welfare gain from reducing that volatility justifies the very high administrative costs involved in an insurance-led model. Professor Pauly warns against using insurance to pool rich and poor people as well as to pool those with a higher expected disease burden with those that have a lower expected disease burden. In his view, direct (conditional or unconditional) cash transfers may be better suited to address the problems of poverty and varying premiums based on expected disease burdens (as measured perhaps by smoking status and Body Mass Index – refer the Lancet 2009 Prospective Studies Collaboration on this which followed 1 million individuals for 15 years to determine the most important predictors of all-cause mortality) and would produce the most efficient outcomes. For Indian populations, to the extent that these expenses account for high out-of-pocket spending, insurance may be a good substitute. Perhaps a universal, (not only restricted to the poor) catastrophic health insurance programme may be useful to consider so that the efficiencies of a single-payer system may be available to the entire population and the clientele would include both rich and poor individuals – and not just poor persons as in the case of universal public provision from which the rich opt-out.
- Chronic Care (high frequency, high value, low uncertainty): This is also something that needs to be “paid for” by the individual (perhaps through higher insurance premiums and by maintaining higher balances in the HSA) using alternate financing mechanisms and through sincere efforts at lifestyle modification and other preventive interventions such as the famous “poly-pill”. Regular insurance is simply not designed to cover chronic care, the expected costs for which are broadly known upfront and have low volatility. There is always the possibility of shocks even in the most diligently followed prevention plan. The catastrophic cover mentioned earlier would be designed to cover those shocks, but the premium would need to reflect the high expected costs around which these shocks are likely to occur. For countries such as India and its states, like Tamil Nadu, which are undergoing rapid disease transition where the top two conditions (measured in terms of premature mortality as well as in terms of DALYs lost) are all chronic in nature (Cardio Vascular Disease and Diabetes and COPD and Asthma for premature mortality; and Unipolar depression and Cancer for DALYs lost) this poses a significant challenge particularly when there are several large unfinished agendas on issues such as Tuberculosis, Malaria, Pneumonia and Nutrition.
- Elective Procedures (high value, low uncertainty, unknown frequency): Since these are in the “non-essential” category (such as cosmetic surgery) a pure out-of-pocket payment model, using either savings or credit lines, are the best methods to pay for these expenses.
- End-of-Life Care (high value, high uncertainty): Riders on life-insurance policies (instead of health insurance policies) might be the best option to finance this so that when elderly individuals discover that they have a particular illness they can decide how much to draw upon their insurance policy to cover such care verses how much to bequeath to their survivors.
1 Adigozel, Ozgur; Thomas Pellathy and Shubham Singhal (2009). “Why understanding medical risk in key to US health reform”. The McKinsey Quarterly, June 2009.
2 Feldstein, Martin (2005). “Rethinking Social Insurance”. National Bureau of Economic Research Working Paper 11250, March 2005.
3 Krishna, Anirudh (2006). “Pathways out of and into poverty in 36 villages of Andhra Pradesh, India”. World Development, Volume 34, Number 2, Pages 271-288, 2006.
4 Mahal, Ajay (2010). “Health Financing in India”. Ajay Mahal, Bibek Debroy, Laveesh Bhandari edited India Health Report 2010. Business Standard Books, 2010.
5 Pauly, Mark (2007). “Insights on Demand for Private Voluntary Health Insurance in Less Developed Countries”. Alexander Preker; Richard M. Scheffler and Mark C. Bassett edited Private Voluntary Health Insurance in Development: Friend or Foe? The World Bank, 2007.
6 Prospective Studies Collaboration (2009). “Body-mass index and cause-specific mortality in 900,000 adults: collaborative analyses of 57 prospective studies”. Lancet 2009; 373: 1083–96.