April 2010

Healthcare Benefits in India

Executive Summary
The financial crisis has changed many a paradigm and has compelled business entities to critically
assess their business strategy, organisational dynamics and their impact on its human capital. A need for
cost rationalisation has pushed organisations to freeze or reduce their benefits programme budget.
Consequently, the issue of managing increasing costs of healthcare benefits has emerged as one with far
reaching implications, both for the employers and employees alike. Paradoxically, these very benefits
often play a crucial role in differentiating the perceived employee value proposition and progressively
compliment an organisation’s ‘talent management strategy’; to attract and retain a skilled and productive
workforce. Therefore to remain competitive and yet efficiently manage costs, it is increasingly important
that employers develop a strategic and considered approach towards managing their health benefit
provision.

In order to precisely understand the perceived value that employers and employees associate with
healthcare benefits and their resulting liabilities, Towers Watson recently conducted a comprehensive
survey in the second half of 2009 covering 125 of India’s largest employers. The respondents represent a
cross section of industries, mainly from the private sector, reporting average revenue of more than Rs 400
crores. The survey titled “Healthcare benefits in India: changing landscape” provides insightful information
on current trends, issues on hand for employers providing health benefits and best practices for cost
control.

In India, healthcare benefits are an essential part of the benefits package provided by employers. While in
absolute terms, healthcare benefits do not account for a significant part of an employee’s cost to
company, the proven potential to insinuate higher associated value among employees is profound. A
Towers Watson benefits trends survey, published in mid 2009, reported that almost 46 percent of
employers in Asia believe that health is the benefit to which their employees attach the greatest
importance.

The findings of the “Healthcare benefits in India: changing landscape” survey indicates that almost 96
percent of the companies provide medical coverage of some form to their employees and approximately
17 percent provide Post Retirement Medical Benefits (PRMBs). Usually these benefits are insured and
employers have not experienced the full impact of the increasing costs until now. Historically, health
insurance has been subsidised by other general insurance portfolios; but, with continuing de-tariffication,
any further cross subsidies are not sustainable. In the recent past, the cost of such insurance cover has
been increasing to the extent that medical cost inflation is expected to be around three to four times the
general price inflation, in the future. Employee health care provision is at an interesting cross road trying
to make ends meet - need for better benefits on one hand and cost control on the other. As a result,
companies will have to apply serious thought to health care issues in the foreseeable future.

Key Findings
 More than 55 percent of the respondents have reported higher than 10 percent average premium
cost escalation in the last three years.
 The effect of rising premium is largely borne by employers as almost 58 percent of the companies
do not deduct any premium cost from employees’ salary.
 The top three concerns of employers are:-
o Higher costs due to new medical technologies
o Poor employee understanding of how to use the plan/seeking excessive care
o Providers recommending too many services
 Nearly 50 percent of the respondents want to increase benefits despite increasing costs
 Employers have expressed the importance of health care benefits to attract and retain talent in
the future.
 Great emphasis is placed on increasing communication to employees in order to improve
perceived value of benefits and efficient utilisation.
 The increase in insurance premium for covered health benefits is lower than the increase in claim
ratios over the past three years.

Future developments
Moving forward, we could expect a joint sharing of health care expenditure between employers and
employees; an initiative which is known to have brought substantial improvement in the coverage and
quality in many countries, notably China. There is a similar opportunity for the Indian corporate sector to
consider innovative approaches in controlling health care costs and at the same time provide valuable
health care benefits to its large workforce in organised employment.

Employers in India are also likely to find interest in health saving plans which are offered with varying
degrees of success in several countries such as Hong Kong, Singapore and South Africa. Health saving
accounts is accepted as a viable form of financing long-term health care expenses.

We also envisage that a major component of health care initiatives in India is likely to be in the form of
preventive and wellness-based health programmes. As suggested by a research report published in
September 2007 by a leading think tank, the Indian Council for Research on International Economic
Relations, a well-designed employee wellness programme can lead to a 25 percent reduction in health
plan costs, sick leave, disability pay and worker’s compensation. The report quoted that 98 percent of
employees who have undergone preventive health check ups, found them beneficial in terms of higher
productivity at work and better quality of life. Buoyed by favourable regulations, there is the possibility of
having more stand-alone health insurance companies to be licensed in India in the next few years. Such
companies specialising in employee health plans in other countries could develop health insurance as a
viable business proposition in India.

Participant profile
The survey, which was conducted in the second half of 2009, covered 125 large employers in India. The
respondents represent a cross section of industries, mainly from the private sector, reporting average
revenues of more than Rs.400 crores.
Source: Purchasing value in Health Care Survey 2009
Towers Watson

Industry Groups Percentage of companies

Business & professional services 7

Construction, real estate and engineering 3

Information, mass media & communications 8

Manufacturing 22

Pharmaceutical 4

IT and ITES 13

Financial 8

Wholesale & retail trade 3

Education, healthcare and medical services 9

Transport, storage and logistics 1

 Others 22

Current health care provision

With signs of economic recovery, companies need to closely evaluate their talent management policies to
ensure they can attract and retain key talent. Not surprisingly, a majority of the surveyed companies
report the use of their health care plans as a talent management tool (Figure 1). This clearly substantiates
the view that ‘benefits’ are being avidly deployed as an ‘employment value differentiator. It is equally
important that such benefits are relevant and adaptive to changing market conditions.

Figure 1: Objective of providing health care plan

Source: Purchasing value in Health Care Survey 2009

Towers Watson

Further analysis of specific features of health care provision by employers, provides a deeper
understanding of the context.

I: Types of Health Care Provision

Hospitalisation and personal accident cover seem to be the most widely provided health benefits in India.
Almost 96 percent of the surveyed companies provide hospitalisation and 93 percent provide personal
accident cover to their employees. Disability, critical illness and domiciliary cover are also provided by
more than 50 percent of the employers. Moreover, the survey validates that health benefits are a valuable
differentiator, irrespective of the size of the company (Figure 2).

Post retirement medical benefits and other forms of health insurance (other than traditional mediclaim) do
not seem to be prevalent benefits provided by employers. Over 22 percent of companies provide health
insurance other than traditional mediclaim and nearly 17 percent of companies claim to cover post
retirement medical expenditure. Post retirement medical benefit is mostly provided by companies in the
public sector while a very small proportion of private companies provide such long term benefits to their
employees. Moreover, this benefit is provided mainly by companies that reported revenue in excess of
Rs.400 crore.

Figure 2: Health care provision by employers

II: Benefit Coverage

Amongst the companies surveyed, it appears that health care benefits are by and large provided to all
employees, with a majority of respondents reporting it to be compulsory for all. The benefit generally
differs in terms of the insured amount based on management level of the employee in the company.
Hence, it is possible that the cover being provided may not be commensurate to individual needs, which
may differ by age, marital status, current health status etc. But with increasing competition for talent and
rising premium levels, employers may consider moving beyond a ‘one-size fits all’ traditional approach
towards flexible employee benefits. In Towers Watson’s view, the solution lies in giving employees the
liberty to choose benefits that they value most and thus would make optimum use of.

However, medical benefits are not restricted only to employees alone. 88 percent provide health care
floater to employees’ family members as well. Figure 3 shows that most of the surveyed companies
provide medical cover to the employees’ spouse, children as well as dependant parents. Almost 38
percent companies provide life time coverage to employees’ parents. Some liberal plans provide
coverage to other dependents like parents in law, unmarried sisters and unemployed brothers below 25
years of age. A floater hospitalisation cover is generally provided to all employees irrespective of their
management level. Therefore, it will not be surprising if a high number of claims arise from treatment of
family members covered under the ‘family floater’. This could be one of the strong factors leading to
higher premia charged by the insurance company which is discussed in the subsequent section.

Figure 3: Family coverage under healthcare

Source: Purchasing value in Health Care Survey 2009

Towers Watson

III: Benefit Plan Governance

The cost of providing health care services can also be sensitive to the efficiency of plan administration.
Figure 4 shows that most plans offered by employers are covered by insurance companies except
domiciliary cover, which largely seems to be self-managed. This could be due to a lack of suitable health
care policies in the market or the amount being restricted to a certain fixed sum. Interestingly, in spite of
the health care insurance market being privatised, public insurance companies still seem to dominate.
Amongst the companies surveyed, approximately 52 percent are covered by public insurers.

Figure 4: Health plan insured or self managed

Source: Purchasing value in Health Care Survey 2009

Towers Watson

Insuring most of the health benefits provided may help in better claim administration, as most of these
insurance companies have a tie up with a large network of hospitals either directly or through their Third
Party Administrators (TPA). Yet, looking into the future, employers need to focus on other qualitative
issues and not just administrative aspects alone. These elements range from designing an appropriate
plan which is tailored to the needs of different employee groups to increased communication and
education. Such an approach towards plan governance will ensure operational efficiency while also
helping employers to meet their plan objectives at the same time.

Challenges and strategies

Recently there has been a substantial increase in healthcare premia charged by insurance companies.
Figure 5 shows the average rise in the last three years to be in the range of 10 to 15 percent. The effect
of rising premia is largely borne by employers as almost 58 percent of the surveyed companies do not
deduct any premium cost from employees’ salary and this trend is likely to continue into the next financial
year.

Figure 5: Average increase in premium in last three years

 Source: Purchasing value in Health Care Survey 2009
Towers Watson

There are a number of factors accounting for this rise in premium:

 Health Insurance – claim ratios

Many general insurers providing medical cover are experiencing claim to premium ratios (loss ratio) of
more than 100 percent. As per the latest available IRDA statistics on health insurance claims for the year
ending 31 March 2008, the average claim to premium ratio was over 110 percent. High level of claims by
policyholders adds to the poor profitability of health insurers. This will necessitate health insurers to
increase their premiums in order to cover claim and expense costs. This increase may be interpreted as a
‘catch up premium’ as insurers try to manage loss ratios at a more sustainable level.

Figure 6 shows the link between claim ratios and health insurance premium, depicting that companies
who reported a high claim ratio have also reported rise in premium charged by insurance companies. As
can be seen the full impact of the high claims ratio has not translated into equivalently higher premiums in
majority of the instances. This is because of the high competition amongst insurers and their focus on
topline growth to increase the health insurance portfolio. The health insurance market (comprising of both
group and individual covers) is growing at an exponential rate. As per a IRDA journal report for June/July
2008 the health premium, which was about Rs.2,200 crore in 2005-06 rose to Rs.3,200 crore in 2006-07;
and it further rose to Rs.4,800 crore in 2007-08. Health insurance segment is estimated to grow to about
Rs.12,000 crore by 31 March 2011, which roughly translates into 33% per annum growth over these six
years.

Figure 6: Average rise in premium by rise in the claim ratio

 Source: Purchasing value in Health Care Survey 2009
Towers Watson
 

 Rising medical cost

 
o Changing medical practice patterns and greater availability of new and specialised
medical procedures are also putting pressure on the cost of providing health insurance. A Towers Watson
study on global medical trends in 2008 reveals that insurers expect medical costs in India to rise
“significantly higher” over the next five years as compared to “higher” for countries like China, Hongkong
and “about the same” for countries like Singapore and Philippines. This adds to the insurer’s concern and
they partly share the cost by increasing the premium charges.
 
o Increased awareness amongst the employee population will increase their demand for
insured health care services and lead to higher utilisation and increased claim costs.
 
o Based on recent analysis of data by Towers Watson, it is observed that the inflation in
costs of drugs alone has been 8.1 percent per annum over the past 15 years; higher than the long term
general price inflation. In addition to this, inflation in hospital care and professional care costs will also
have to be factored in as these are other components contributing to total medical costs. As per
approximate projections we could expect inflation in medical costs to continue to be anywhere between
17 to 25 percent per annum in the foreseeable future.
 
 Changing regulatory environment

Prior to the de-tariffication policy introduced by IRDA, health coverage was cross subsidised by other
lucrative insurance products like fire, motor etc. But, post de-tarrification, insurance companies cannot
offer cross subsidisation and companies will be required to do independent pricing for each business line.

Consequently, insurers are bound to revise their health premium charges, making it increasingly difficult
for employers to maintain an affordable health cover.

The survey results re-emphasise the concern of improving medical technology leading to higher cost.
Moreover, employers are also concerned about moral hazard issues related to health insurance. Figure 7
highlights that approximately 30 percent of the employers are concerned about employees using
unneeded benefits as they do not have to bear the financial consequences of their choices. There have
been instances of providers recommending more medical services than required for insured employees.
Such practices by employees and providers leads to higher claim ratios and consequently, a
corresponding rise in premium.

Figure 7: Challenges faced by employers to maintain affordable benefit coverage

Source: Purchasing value in Health Care Survey 2009

Towers Watson

* Companies were asked to rate top three challenges

Despite these challenges, companies do realise the importance of health care and plan to increase their
benefits in the near future. Figure 8 shows that more than half of the companies in the survey plan to
increase their health provision. This trend can be attributed to increasing competition and changing
corporate attitude. Therefore, it is important for companies to implement appropriate solutions to achieve
the inherently conflicting objectives of increasing health care benefits while simultaneously controlling
rising costs.

Figures 8: Planned changes in health cover

 Source: Purchasing value in Health Care Survey 2009
Towers Watson

There are five broad ways in which employers can attempt to restrain cost:

 Strategic plan design: Designing a plan that aligns well with the desired outcome in terms of
cost, utilisation rate or policyholder behaviour can help organisations in efficiently managing their costs as
well as achieving other desired objectives. For instance, designing a plan that penalises employees with
unhealthy habits such as smoking or tobacco use, spousal waiver and surcharges can help employers in
bringing down claim ratios
 Administration: Monitoring plan administration can also help employers in cutting costs. Periodic
vendor assessment and analysis of claim data will align the plan to strategic objectives.
 Greater levels of customisation: Ensuring that health care plans are tailor-made keeping in
mind costs, utilisation rates and policyholder behaviours. Communication of health care benefits in
monetary terms as a part of the total remuneration package can play an important role.
 Cost sharing with employees: Companies can consider several options in order to share health
care costs with employees. They can offer plans with co-payment or high deductibles. This will not only
help companies reduce their costs but will also increase the accountability on the part of employees.
 Preventive measure/ focus on wellness: Wellness plans promote healthy behaviour and
practices. Companies can offer regular health check ups, offer on-site exercise facilities or health club
memberships to their employees. Such initiatives can make employees’ healthier and help the
organisation in curtailing premium costs. Moreover, a healthier workforce can also lead to higher
employee productivity and high contribution to company performance.
Currently, there are very few companies that employ these practices and worryingly there are no evident
signs of a changing precedent in this regard. In order to address the issue of rising costs, companies
have traditionally preferred to switch insurers as against redesigning their existing policy. The survey
shows that approximately 51 percent of employers have changed their providers in the last two policy
years. This practice is clearly unsustainable and companies will have to take more strategic decisions to
deal with the broader issue of increasing health care benefits while managing costs.

On a more positive note, companies seem to understand and value the importance of employee
education (Table I). They believe that effective and regular communication will help employees become
better health consumers. Moreover, apart from helping employees’ make informed choices, it will lead to
employees’ appreciating the health care benefits provided by employers.

Table I: Employer views to help employees be better health consumers.

Critical to help employees become better health consumers Number of Percentage

respondents
Educating employees to be more informed/active consumers of 67 74.44
health care

Creating company-specific communication/education on health 49 54.44

care costs and living a healthier lifestyle

Actively managing vendor prepared communication/education on 42 46.67

health care costs and living a healthier lifestyle

Branding the wellness programme for use in all communication 40 44.44

related to wellness

Senior leadership visibly supporting the importance of a healthy 40 44.44

work environment

Creating wellness-related activities calendar 32 35.56

Offering healthier food options in cafeteria/vending machines 26 28.89

Communicating to spouses about the company wellness initiatives 13 14.44

Communicating to spouses about the company wellness initiatives 13 14.44

Integrating multiple vendors to improve the delivery of information 11 12.22

to our members (e.g. vendor summit)

Other 2 2.22

* Companies were asked to rate the top three

Case study
 I: Health care strategy with design focus
A large diversified corporation was faced with the challenge of controlling their rising claim ratio while
maintaining the quality of health care facilities. Till 2006 they experienced high claim ratios, which
reached its peak at around 150 to 160 percent. In order to curtail this increasing cost they developed a
health care strategy with special focus on appropriate benefit design:

 Initially they had no ceiling on their benefit provision but then introduced a limit on maternity
expenditure, hospital room rent expenditure etc.
 Introduced a co-payment system which required the employees to share the treatment cost
above Rs.10,000. This step not only shared the cost with the employees but also prevented them from
seeking excessive services.
 A special emphasis on wellness and preventive health care plans. Such measures not only
helped in curtailing claims but are also being valued favourably by employees
After two years of implementation of the revised plan, the company observed a more conscious usage of
medical benefits and a decline in claim ratio to 94 percent. Additional measures such as providing no
claim bonus to employees who do not make any claim are also being considered to further bring down
claim ratios.

II: Balancing benefits and costs through healthcare design

A leading technology and IT services provider recently introduced three different types of health care
programmes to cater to the diverse needs of its employee base. In the recent past the health plan has
undergone changes on a yearly basis:-

 The parental coverage has consciously been capped to Rs.50, 000 so that the resultant savings
could be used for better employee coverage. As a result, the claim ratio has been brought under control.
 Current experience suggests that employees only opt for basic health care cover and not add on
versions where they can take additional cover with self contribution.
 While most employees realise benefits only when a claim arises, the company on its part has
ensured that a proactive communications plan is in place to share information on changes in medical
benefits.
 There are standalone facilities of free regular medical checkups, yoga, aerobics, etc. but these
are not linked to the medical benefits as insurance companies do not offer premium benefits on account
of such initiatives.

Conclusion
Health care benefits are not merely an operational cost for employers but a tool to maintain a healthy
workforce and be competitive in the market place as a preferred employer. Currently, the general practice
is to follow the traditional approach with most surveyed companies providing hospitalisation and personal
accident cover to their employees and their families. But, in order to include medical benefits as a
competitive part of the employment package, it is essential to design a plan that meets the differing needs
of a diverse employee profile. It is critical that employers segment their covered populations into
appropriate cost/risk categories and design interventions for each segment to control costs, create plan
efficiencies and change employee behaviour. This ‘targeted’ approach would fundamentally recognise
that all health care consumers are not alike and thereby engage more employees with practical solutions
and strategies.

Finally, our research highlights that appropriate plan design, regular communication to employees and
efficient administration are critical to deliver a plan which is aligned to the changing health care benefits
market. Currently, the impact of increasing costs is yet to be fully borne by employers and with projections
of substantially higher costs, companies have to address the root cause of the issue. Employers will have
to combine consumer-oriented health care models and health management initiatives with education and
financial incentives to help employees become more actively engaged in their own health and make
smarter health care decisions.

About the authors:

Anuradha Sriram is a Senior Benefits consultant with Towers Watson, India
Kanika Chawla is an Economist with Towers Watson, India

About Towers Watson

Towers Watson is a leading global professional services company that helps organisations improve
performance through effective people, risk and financial management. With 14,000 associates around the
world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and
capital management