CHAPTER 2

COMPARATIVE STUDY OF HEALTH CARE SECTOR, HEALTH

FINANCING AND HEALTH INSURANCE SYSTEMS

2.0 Introduction
This chapter discusses a comparative study of the structure of the health
care sector, the health financing and health insurance systems. Health
insurance in India is in a primitive stage both in terms of the types of
products available as well as the number of persons covered. Singh, G.
(200l)m a leading Indian business magazine 'Businessworld' has observed
that in the first three quarters of 2000, the world's top 22 health insurance
companies jointly earned revenues of $136.22 biUion (Rs.6.271ac crores).
Now considering this, during 1999-2000 India's only health insurers, the
four subsidiaries of the General Insurance Corporation of India raked in
revenues of Rs.200crores from health insurance and sold some 2.3 million
Mediclaim policies. The comparison is not out of place. On an average,
each of the 22 global players earned Rs.27860crores fi"om the health
insurance. The GIC, which is a monopoly in a market of a billion people,
earned around 140^^ that amount. The world's three largest specialized
health insurance firms being Aetna Corporation (sales $26 bilhon), Cigna
Corporation ($19.8 billion) and BUPA Inc. ($3,16 billion). Browne, M. J.
(J993) observed that the amount of health insurance persons desire varies
greatly depending on demographic characteristics such as age, sex and
marital status. Income and health of the family, proxied by predicted
medical expenses, are also important determinants of the amount of
insurance a family purchases. It has been argued many a times that the
main reason for the tardy growth in the health insurance sector has been
the very limited number of products that again are restrictive or
conservative in nature. Thus many suggest that we should import health
insurance products offered in the developed countries for injplementation

19
in India. Whether this is workable solution? Just importing new products
from the developed countries and implementing the same in India may not
be so simple as said. It is perceived that a vast difference exists in the basic
health care sector in the developed countries and in India. These
differences will have a direct bearing on the success of such imported or
new products introduced. Thus it is very important to make a comparative
study of the structure of the health care sector, health financing
mechanisms as well as the insurance systems in these developed countries
and that in India. Any new products or systems to be implemented in India
will have to be in relation to the existing health care sector and systems in
the country. A comparative study of the structure of the health care sector,
health financing mechanisms as well as the insurance systems in these
developed countries and that in India will reveal the differences or gaps.
This will also aid in identifying the products that can be suitable for the
Indian conditions. The differences or gaps will need to be rectified or
corrected as deemed fit in the Indian context and any new products or
systems to be implemented will have to be tailor-made to suit the Indian
systems. Similarly basic reforms in the health care sector can be carried out
to enable growth of the health care sector as well as health insurance in
India. The purpose of this chapter is to make a comparative study of the
health care sector, health financing mechanisms as well as the insurance
systems in selected developed countries and that in India, identify the gaps
and make recommendations. This chapter follows the following sequence
a) Health care sector, health financing and insurance systems in select
developed countries.
b) Health care sector, health financing and insurance systems in India.
c) Major Observations
d) GAP analysis & Discussions
e) Suggestions /Recommendations.

20
The developed countries selected for this study include Japan, Switzerland,
Gemiany, France, United Kingdom, Ireland, Italy, Netherlands, Sweden,
Singapore, USA, Australia, and Canada. The criteria for selecting these
countries include a high human development index, developed nature of the
markets especially with respect to health insurance products, uniqueness in
either the systems or products, geographical spread and most important the
availability of information and data. It may be argued why comparisons are
not made with developing countries especially the neighbouring Asian
countries rather than studying the selected developed countries. Such an
approach would only help us to know where we stand in comparison. It may
be observed that the objective of this research is to recommend for
advancement in the healtli insurance mechanisms in India. Thus countries
which have well developed or unique health insurance systems have been
selected. It was felt in order to import the advanced products available in
these countries the basic structure of the health care sector, health financing
and insurance systems should be studied so suitable recommendations can be
made. The information for this chapter has been collected fi-om various
sources as cited herem. These include major publications as well as web sites
as cited in the references.

2.1 Health Care Sector, Financing And Insurance Systems In

Developed Countries

2.11 Japan
As per World Bank (1999) Japan spends about 7.3% of its GDP on Health
sector. 5.7% is public expenditure and 1.6% is private expenditure. Japan's
State health insurance system covers insured either at the workplace or at
home. Insurers range from the state, local administration authorities and
health insurance schemes to co-operatives. The system covers both
sickness and hospitalisation costs, and also cares for disability. The insured

21
has to bear a deductible per month, although the deductible is lower for
those with lower incomes. The cover excludes pregnancy/child birth,
preventive treatment, prostheses, and usage charges levied by public
healthcare facilities and dental care. As the social security system covers
health risks for the most part, private health insurance is still a relatively
small class of insurance in Japan; premium volumes being around one-
thousandth of those earned in the life insurance industry. Private insurers
exclusively provide additional insurances. The more important line of
accident insurance falls entirely into the domain of non-life insurance in
Japan. Income protection cover in the event of disability has been growing
very quickly in recent years. Private hospital insurance, which provides
cover for extra benefits during hospital admission, is also growing due to
the increased standards of living and patients being dissatisfied with state
provisions.

2.12 Switzerland
According to World Bank (1999) Switzerland spends 10.2% of its GDP on
Health sector. 7.1% is by Public sector spending and 3.1% by Private
sector spending. CEA (1997) observes that the health care system in
Switzerland reflects the federal structure of the country's political system.
The cantons act autonomously in the organisation of health care within
their territory. In most cantons' in-patient treatment is provided in cantonal
or regional (district) hospitals, university clinics and private chnics. There
are nursing homes providing long-term care (treatment of chronic
illnesses) as well as psychiatric hospitals, psychotherapy centres, medical
test laboratories and physiotherapy treatment centres. A large number of
towns have centres providing care outside the hospital. Outpatient
treatment and partial in-patient treatment are provided in private surgeries,
in some hospital units and in polyclinics (particularly in cities). As a result
of the development of alternative health insurance models there are also

22
self-fmanced medical centres (similar to Health Maintenance
Organisations) in some large towns. The cost of health care has been rising
continuously. Hospitals account for 60% of that total, outpatient treatment
for 18% and medicaments, etc., for 8%, whilst dental treatment accounts
for 5%. The balance is made up by the cost of paramedical care, laboratory
tests, etc. The financing of the health care system is distributed as follows:
a) The authorities(the Confederation, Cantons, Communes) b) Social
insurance(State disability and military- insurance as well as compulsory
health and accident insurance)c)Private insurance (accident, supplementary'
health and liability insurance) and d) Private households. The health
insurance system in Switzerland can be broken down into three sectors: (i)
Compulsory basic insurance, (ii) Voluntary supplementary insurance and
(iii) Daily benefits insurance in the event of loss of earnings due to illness
(daily sickness benefits insurance). The whole Swiss population is subject
to compulsory basic insurance, covering the cost of providing good quality
basic medical care under Health Insurance Law (KVG). Insurers must
operate State health insurance on a reciprocal basis and guarantee that
insured will be given equal treatment. There is an obligation to accept any
individual without imposing any conditions, together with freedom for
insured to transfer to other funds. Premiums must be the same for men and
women and for all ages from the age of 18(or 25 if still in full-time
education); however, they may be staged up to certain limits in cantons and
regions. The law stipulates that the premiums of insured with limited
financial means should be reduced. Both health funds and private insurers
may also offer voluntary supplementary insurance. Daily sickness benefits
insurance is taken out mainly by employers in favour of their employees to
cover their statutory obligation to continue to pay wages in the event of
incapacity for work due to illness. In Switzerland both non-life insurance
and life insurance companies may \\Tite private health insurance. As basic
insurance according to the Health Insurance Law already provides a high

23
standard of medical care cover; the available margin of supply for
supplementary insurance has been reduced substantially. The latter
essentially meets demands for comfort and choice in respect of in-patient
treatment not covered by basic insurance. In State health insurance,
premiums cannot be influenced by age or gender. Voluntary
supplementary insurance is financed by matching premiums to risks. This
form of finance is also required by the supervisory authority for schemes
that have always been offered by private insurance companies that include
whole-life covers and covers which cannot be terminated. As a rule, group
sickness benefits insurance is financed with annual premiums which are
calculated as a percentage of earnings and which are usually guaranteed for
a contractual period of several years(3 to 5 years). The tariffs usually
contain additional age-related premiums according to the average age of
the insured group of employees. They also contain additional premiums for
higher daily benefits which take into account increased risks in the case of
benefits based on a high percentage of earnings. With regard to taxation,
there is neither tax nor levy on health insurance contracts or any charges
(e.g. stamp duty) on health insurance premiums. Insured may deduct health
insurance premiums from taxable income up to certain limits that var>'
according to canton. Health insurance benefits become taxable if they
replace earnings or income.

2.13 Germany
As per World Bank (1999) Germany spends 10.4% of its GDP on Health
sector. 8.1% is Public expenditure and 2.3% is Private expenditure
According to CEA (1997) virtually the whole population (approx. 99.9%)
has some form of health insurance. About 88.5% of the population are
covered by the statutor>' scheme. Of this more than 85% have compulsory
membership and just less than 15% voluntary membership. The latter may,
therefore, choose between statutory health insurance and private health

24
insurance. Approximately 9%of the population have private health
insurance cover only, in the form of full cost medical expenses insurance.
A further 2.4%has entitlements to various other covers, while the
remainder have no insurance cover. Will, W. (1989) has observed that
Compulsory health insurance has been the oldest form of social insurance
in the Federal Republic of Germany with the introduction Law on Health
Insurance Workers in 1883. Medical care is generally provided by General
practitioners and specialists operating in private practices in the out-patient
sector, and by acute hospitals and hospitals for the treatment of long-term
conditions run by the State, non-profit and private organisations in the in-
patient sector. Doctors and hospitals must have the approval of the health
insurance funds to treat members of the State health scheme. The funds
however settle fees directly with the doctor or the hospital concerned. In
the case of outpatient treatment, settlement takes place on the basis of an
agreement on fees negotiated between the medical associations and the
fimds. Where a doctor treats a private patient, his bill must be based on an
official scale of fees. However, that scale allows doctors a degree of
leverage in the calculation of the charges to be made for each medical
service provided. In the case of in-patient treatment, a uniform, services-
related charge is applied to all State and private hospital patients. In
addition, the cost of accommodation in a single or twin-bedded room and
private medical treatment by senior hospital consultants is calculated
separately, where the patient wishes to avail himself of such services.
Health expenditure accounted for 10.6% of gross national product in 1993.
Approximately half of this expenditure (47%) was financed by statutor\'
health insurance, slightly more than 5%\)y private health insurance,
approximately 15% and 14% by employers and public expenditure
respectively, while the balance was taken up by annuity insurance, private
households and statutory accident insurance. Private health insurance in
the form of medical expenses insurance covers the cost of medical care and

25
services in the case of illness or accident, pregnancy and childbirth. Daily
hospitalisation allowance insurance provides hospitalisation payments and
daily payments' insurance provides a payment of daily compensation in the
event of loss of earnings resulting from occupational disability brought
about by sickness or accident. Statutory health insurance also provides
benefits covering medical expenses and providing compensation for loss of
earnings in the event of sickness, pregnancy, or sickness resulting fi-om an
accident. Since 1 January 1995 there has also been a general insurance
scheme for long-term care needs. The dual health insurance system for the
protection of the population in the event of sickness, which exists in
Germany, is characterised by the simultaneous operation of private and
statutory insurance institutions. The division of health insurance into
public and private sectors has led to the adoption of the following legal
provisions regarding the existence or absence of an obligation to take out
insurance. Law requires that all persons undertaking paid employment
must be insured against sickness. Compulsory insurance ceases to apply
where an employee's income exceeds a certain level. In addition to
employees, there are other occupational categories which are not subject to
the statutory health insurance scheme and where no compulsory insurance
applies such as self-employed and members of the professions operating
independently. They are left to make their own arrangements for health
provision. Approximately 7 million people were covered by health
insurance on an exclusively private basis at the beginning of 1997
demonstrating the important role played by private health insurance in the
German health care system. The 54 companies belonging to the
Association of Private Health Insurance (Verband der Privaten
Krankenversichemng) have more than 99% of the private health insurance
market in terms of premium income. Within the private insurance industry'
as a whole, health is the third largest class with 14.5% of overall premium
income in 1996. Since certain population groups may take out health

26
insurance solely on a private basis ('substitutional health insurance'), there
is a range of measures designed to provide the maximum possible
protection for the insured. The obligation to submit insurance conditions
apply equally to insurance undertakings registered in Germany and foreign
undertakings wishing to offer substitutional health insurance in Germany.
Insurance undertakings registered in Germany must also submit their
premium calculation to the Federal Office for Insurance Supervision which
checks that the calculation complies with the legal provisions on
calculations designed to ensure that the interests of the insured are
protected and that obligations arising under contracts taken out for life can
be fulfilled. Protection of the insured is also provided by the requirement
for specialisation under which health insurance may be written only by
specialist undertakings independently of all other classes. This requirement
is limited, however, to insurance undertakings registered in Germany.
Private health insurance is characterised by the wide range of types of
cover on offer (insurance covering the cost of out-patient treatment,
hospital treatment, dental care, daily hospitalisation allowances, cover for
loss of earnings resulting from sickness, the risk of the need for long-term
care, supplementary cover for expenses not borne by statutory insurance,
health insurance for travel abroad, etc.) which allow each individual
insured to choose insurance cover which is fully adaptable to his own
wishes and requirements. The insured may choose between policies
refunding health care costs in full and those that cover only certain
elements or a fixed percentage of medical expenses. Insured may also
choose to pay an excess, in which case the premiums are reduced in return
for an undertaking on their part to pay a fixed amount of costs per annum;
costs exceeding that amount are then reimbursed in full. A standard tariff is
applied uniformly within the class for individuals who have completed
their 65* year and who have had a previous insurance for a period of at
least 10 years of substitutional private health insurance. This tariff provides

27
for benefits that match the benefits of statutory health insurance and
guarantees that premiums will not exceed the average maximum premium
of statutory health insurance. The covers allow an insured to make a free
choice of doctor or hospital without the need for his health insurer's
approval. Furthermore, it allows him to freely choose how to use the
benefits to which he is entitled under his contract; the insurers reimburse
expenses. Private health insurance premiums are fixed in accordance with
the risk, age at entry, gender, and state of health of the individuals to be
insured, together with the required scope and level of insurance cover.
Private heahh insurance has been written in the same way as life insurance,
i.e. using an actuarial basis, which follows a technical business plan
containing all the calculation bases, used. Law for substitutional health
insurance prescribes this. Health insurance in Germany is characterised by
the fact that premiums are not dependent on increasing age and the
consequent increase in the sickness risk, that reserves for increasing age
are constituted and that contracts may not be cancelled (they are usually
taken out for life). Where there is a discrepancy between the actual cost of
health care and tlie costs used as a basis for calculation, insurers are able to
adjust premiums to the increased level of treatment costs using an
adjustment clause. 50% of employees' contributions are paid by the
employer and 50% by the insured, regardless of whether the policy has
been taken out with a private or a statutory institution. Nevertheless,
contributions can only be made to private health insurance schemes if the
insurer from which cover is requested meets certain quality criteria defined
by social law. Health insurance premiums are deductible fi'om taxable
income as specially allowed expenditure within certain specified limits.
Compulsory long-term care insurance has been in operation since the 'Law
on Compulsory Long-term Care Insurance' came into force on 1 January
1995. It has played a special role in private health insurance, usually seen
as a volujitary system. Anyone who has taken out private substitutional

28
health insurance is obhged to insure himself and his dependants against the
risk of long-term care needs with his insurance undertaking or another
insurance undertaking that writes this class of insurance. Those insured
under statutory health insurance are insured against the long-term care risk
through their sickness fund (social long-term care insurance). The benefits
laid down by law are fixed according to the degree of need for assistance
in performing certain "Activities of Daily Living". Benefits are paid for
both cares in an individual's home and in a nursing home as well as for any
necessary aids. Pension contributions are paid for unpaid carers unable to
pursue a full-time occupation because of the care they are providing. The
amount of long-term care insurance benefits is limited so that the insured is
usually left with a portion to pay himself Accommodation and treatment
charges are also not covered, to ensure there are no incentives to
accommodate those in need of long-term care in nursing homes. The
premiums for private long-term care insurance are calculated according to
the qualification procedure and are dependent on the age of the insured at
the time of entry into the insurance contract and are the same for men and
women. To ensure regulations are durable, all insurance undertakings that
write private long-term care insurance must participate in a system which
guarantees constant and effective equalisation of the different costs without
making access to the market difficult for new providers. Under this system
premiums excluding charges will be determined uniformly on the basis of
joint calculation bases for all undertakings writing private long-term care
insurance. A reserve is set up under the qualification procedure with
portions from premiums to cover the long-term care risk that increases
with age. Private insurance undertakings also offer, in addition to
compulsory insurance for those privately insured, supplementary' long-term
care insurance for anyone, which in the case of long-term care either pays
remaining costs or a previously agreed monthly amount.

29
2.14 France
As per World Bank (1999) France spends 9.8% its of GDP on Health
sector.7.7% is Public expenditure and 2.1% is Private expenditure.
According to CEA (1997) in France, every individual has a free choice of
doctor and hospital. A range of profit-making and non-profit-making
institutions in the public and private sectors provides hospital care.
However, under the 1997 agreement with independent practitioners
"procedures" may be arranged, on an experimental basis, which specifies
that when treatment is required a General Practitioner must be seen first. In
the majority of cases, outpatient care is provided by independent doctors,
operating individually or in group practices, or by doctors who are
employed by hospitals or a health care centre. Out of the Health
expenditure of 9.8% of GDP, 8.9% related solely to consumption of
medical services. This was distributed between hospital treatment (49.5%),
outpatient treatment (27.8%), non-hospital pharmacies (18.5%), and other
miscellaneous items such as spectacles, etc, (4.2%); all of this
corresponding to a cost of nearly 12,000 Frs. per head per annum. The
social security schemes financed 73.9% of medical treatments in 1995,
State and local communities' 0.8%, complementary schemes 6.8% (mutual
societies) and 3.1% by private insurance companies. Payments due from
private households were around 14 to 15%. About 99% of the population
in France is now covered by either of the following schemes; a) The
general social security scheme, for public sector employees in trade,
industry and agriculture, b) Independent schemes, for self-employed
workers (outside the agricultural sector) and farmers and c) In addition,
individuals who had not previously been covered by any statutory
provision scheme were able to join the general social security scheme by
way of a personal insurance. All the statutor}' schemes reimburse the
treatment costs in the form of flat-rate benefits calculated on the basis of
the health insurance funds financial liability. The schemes operate a system

30
of patients' contributions. Only health insurance schemes for employees
provide cover for the risk of temporary occupational incapacity and
disability entitling the claimant to daily payments. The operation of the
statutory schemes does not necessarily mean that tlie private sector has no
part to play in provision of health insurance. On the contrary, private
means of provision, based on freedom of choice and tailored to individual
requirements, have made a very positive contribution in recent decades.
Both statutory welfare schemes and private insurance schemes exist side
by side in France, as is the case in the majority of European countries.
Mutual aid associations, acting as corporate bodies, were the first
organisations in France to offer their members protection against the
financial consequences of sickness. They must take the credit for paving
the way for the modem concept of the provision of cover for these risks.
Private insurers are mainly confined to the role of complementary insurers
in the provision of insurance for health care costs. Private health insurance
business can be written only by "accident" (non-life) insurance companies
that have received a specific authorisation to do so in accordance with the
regulations currently in force. However, tliere is an exception to this
principle, in that life insurance companies may cover the risk of disability
"by any cause" and accidental death either in the form of direct cover or as
complementary cover under a life insurance contract. All insurance
companies governed by the Insurance Code are subject to the authority and
supervision of the Financial Directorate of the Ministry for Economic and
Financial Affairs. Approximately 150 member companies belonging to the
Federation of French Insurance Companies (FFSA) write health insurance
business in the form of individual or group contracts. None of these
companies writes health insurance alone. Private health insurance, like
other insurance operations, is governed by the Insurance Contract Law and
the Law on Complementary Social Provision which are now included in
the Insurance Code. The mutual sector is regulated by the Mutual Code,

31
which was amended in 1985. The mutual sector, which is organised on an
occupational or local basis, comprises of all mutuelles, which developed
from the mutual assistance associations that existed previously. Private
sector participation in tlie health sector is currently limited to the provision
of supplementary insurance, plus also the possible provision of cover with
full reimbursement of costs for the risks of incapacity' or disability^ which
are not covered by statutory schemes for self-employed workers, together
with health insurance for very limited categories of the population not
subject to a compulsory scheme (cross border workers, French resident
abroad, etc). Statutory health insurance is fmanced largely by a system of
earnings-related contributions (contributions on earned income, general
social contribution on all income) fixed without reference to the specific
nature of the risks involved, under which each individual pays according to
his means and receives benefits according to his requirements. This type of
finance involves a transfer of resources within an organised system of
collective national responsibility. On the other hand, private health
insurance, like any insurance system, is based on the principle of the
mutual acceptance of risks according to which individual's contributions
are linked to the nature and extent of the risks to be insured. In individual
insurance premiums are fixed in accordance with the insured's age at entry
and the insurer is responsible for setting up reserves for increasing risks.
As a general rule, there is an increasing tendency for insurers to apply
uniform rates, regardless of gender. In group insurance (approximately two
thirds of contracts) premiums are used to cover risks for each successive
one-year period. In the case of the majority of company insurances,
premiums are fixed as a percentage of earnings and shared between the
employer and the employee on a 60/40 or 50/50 basis. Therefore, they
depend neither on the insured's age or his marital status and so the risk is
borne on a completely mutual basis.

32
2.15 United Kingdom
As per World Bank (1999) United Kingdom spends 6.7% of its GDP on
Health sector. 5.7% is Public expenditure and 1.0% is Private expenditure.
According to the CEA (1997) State health care in the UK is provided
through the National Health Service (NHS), available to all those normally
resident in the UK. The NHS comprises of services provided by General
Practitioners (primary care), dentists, opticians and the community health
services, e.g., health visitors, ambulance services, etc., together with
speciahst care in State hospitals. About £40 billion per year are currently
spent on the NHS. Around 83% of the cost is met from general taxation,
13% from the NHS element of the National Insurance (Nl) contributions
paid by employees, employers and the self-employed and 3% from patient
payments. The comprehensive services are generally free at the time of
use. Nominal charges may be made for pharmaceutical, dental and
ophthalmic services, although there are widespread exemptions from
payment, for example for pregnant women, children, the elderly, and the
chronically sick. Benefits for unemployment, loss of income following
long and short-term sickness, industrial injury and disablement are
available under the separate State social security system, which is financed
mainly from the NI contributions (about SSVo) with the remainder mainly
coming from government subsidy. Private health insurance encompasses a
range of different insurance types, each meeting different needs: a) Private
medical insurance for medical expenses b) Permanent Health Insurance
(PHI) for income replacement in the event of Long-term illness or
disability c) Personal accident insurance for income replacement in the
event of short-term illness or disability and d) Critical illness insurance
which normally provides a lump sum on diagnosis of certain serious
illnesses.

33
Private medical expenses insurance is more broadly defined to include
hospital contributory schemes and hospital cash plans as well. Private
medical expenses insurance and Permanent Health Insurance can be
offered as employee benefits as well as being purchased by individuals.
Private medical expenses insurance is purchased by approximately 11% of
the population to supplement or provide private access to some benefits
otherwise available under the NHS. It covers the costs of specialist
treatment and acute surger>', but benefits may also be available for other
treatments such as the treatment of alcoholism or psychiatric treatment.
Individuals with private medical expenses insurance continue to pay
through general taxation and NI contributions for the NHS. Individually
paid premiums may not be offset against tax. Thus people are effectively
paying twice for parts of their health care. They do, of course, remain
entitled to use all NHS facilities. Private medical expenses insurance is
sold by "provident associations" and by other insurance companies
offering health insurance as part of their general portfolio. All are
registered as insurance companies, complying with the provisions of the
Insurance Companies Act of 1982 and various otlier regulations. Insurance
companies are supervised directly by the Department of Trade and
Industry (DTI), a government department. The UK private medical
expense insurers do not receive any financial support from the State.
Consequently, all private medical expense insurers, with or without
shareholders' capital, must be financially self-supporting. Permanent
Health Insurance is classified as "long-term" insurance business for the
purposes of supervision. This meant that it may be sold only by companies
authorised for this class and subject to financial requirements regarding the
calculation of premiums, the adequacy of reserves and solvency margins
similar to those which apply to life assurance business. Private medical
expense insurers who were not previously authorised to sell long-term
insurance may now do so under European legislation. Over forty-five

34
companies offer Permanent Health Insurance products. In total, there are
twenty-seven provident associations and insurance companies active in the
private health insurance market. In 1995, the market as a whole covered
6.2 million people, had a subscription income of £1,701 million and paid
out £1,390 million in claims. There are approximately twenty-nine
"hospital contributory schemes" which are not-for-profit bodies classed as
insurance companies and which operate under the same legal provisions as
provident associations. Hospital cash plans are available from
approximately sixteen organisations in the UK, including provident
associations and insurance companies. Private medical expenses insurance
is designed to meet the costs of private specialist acute treatment, on either
as an in-patient or an outpatient basis. The main areas not covered are
primary (General Practitioner) care, normal maternity, long-term illness,
routine dentistry and outpatient drugs. Many NHS hospitals make beds
available for private patients and charge for them but the majority of
patients are treated in private hospitals, although the role of NHS private
beds is increasing. Most clinical specialists (known as "consultants" in the
UK) who undertake private medical practice also work for the NHS. The
private health insurers or private hospitals do not employ them and there is
no legal relationship between consultants and the insurers that is there are
no standard fee schedules, although some new voluntary agreements are
being tried. The cover available under private medical expenses insurance
is of two main types a) Some schemes cover each part of the private
medical treatment needed up to fixed cash limits, e.g., £ 600 for a major
operation, £500 per year for out-patient treatment, etc., b) The other kind
of scheme offers, in effect, full cover for all eligible private medical
treatment up to a fixed annual limit. A fixed daily benefit may be payable
when free treatment is received in a NHS hospital. Private medical expense
insurers offer both group and individual contracts, each of which may
include dependants. For individual contracts, the right to renew lies with

35
the insured, although the insurer can alter the general terms of the
insurance and the premiums from the renewal date. With group contracts,
the right to renewal normally lies with the group. However, for large
experience-rated groups, generally no right of renewal is given to the
company and terms are negotiated at each contract renewal. Private
medical expenses insurance is an annual contract. A few companies offer
longer-term contracts, especially to employers as employee benefits.
"Voluntary groups" are a hybrid category, in which premiums are
negotiated by employers, associations, or unions on behalf of employees,
but paid by individual employees typically via salary deduction. Benefits
available under hospital contributory schemes are less comprehensive than
those available from the medical expense insurers and are generally not
intended to meet the fiill costs of medical treatment. They include limited
benefits for hospital in-patient stays, whether as a NHS or as a private
patient, together with optical, dental, maternity and convalescence grants.
Hospital cash plans provide an income of a fixed daily sum during the
member's stay in either a NHS or a private hospital, to be spent as the
individual wishes. Permanent Health Insurance is a long-terai contract
designed to provide an income for people whilst they are unable to work
owing to disability through illness or accident. The maximum benefit
payable ranges from 50% to 80% of earnings over the twelve months
preceding disability, less any money received from State benefits (social
security) and other health insurance schemes. A person once accepted for a
Permanent Health Insurance policy cannot be refused continuation of cover
by the insurer unless one of the policy conditions is broken. Under the
newer forms of individual policy and group business, the insurer does,
however, have the right to increase premiums in the light of overall
experience, rather than for selected policyholders only. Personal accident
contracts are annual, renewable and can be changed at the option of the
insurer. Both group and individual contracts are available, designed to

36
provide an income for around two years when an insured person is
temporarily disabled following an accident and to pay a lump sum if the
accident results in death or permanent disablement. Payment can be made
after the first day of incapacity or after a specified waiting period.
Although payment from the first day is normally made only when the
incapacity is for one week or more, the income benefit can be extended to
include incapacity from sickness. Premiums for Private medical expenses
insurance for individuals are related to both age and the claims experience
of the entire individual purchase sector, i.e. individuals are community
rated. Most insurers require a proposer to complete a medical history form
and each application is scrutinised. Restrictions on cover for existing
conditions or potential recurrences of past conditions may be imposed. A
few companies allow proposers to join without completing a medical
histor>' form. Instead a "moratorium" on treatment operates, whereby
proposers cannot claim for treatment of conditions or associated conditions
which tliey developed in the previous five years, until they have remained
free of advice and treatment for (usually) two consecutive years.
Company-paid group schemes, where the employer pays the entire
premium, normally have specially calculated premiums, unnamed policies
are given, premium is "experience-rated" with each group's claims
experience. Similar premium-rating factors would also be taken into
account in the rating of short-term personal accident and sickness policies.
For group schemes, these vary considerably, from those financed in full by
the employer to arrangements under which the employer merely acts as a
collecting agent. Individuals purchasing private medical expenses
insurance for themselves and their dependants may not offset the cost
against income tax. Employees receiving private medical expenses cover
under a group scheme are treated as receiving a "benefit in kind", which is
itself subject to personal income tax on the value of premiums paid by the
employer. However, ver>- low-paid employees are not taxed on such

37
benefits, whatever their purpose. Permanent HeaUh Insurance pohcies
attract no tax rehef. If any benefit becomes payable, it is liable to tax as
unearned income after one full tax year. Where benefit is paid under a
group scheme, it is channelled through the employer and taxed as earned
income.

2.16 Ireland
As per World Bank (1999) Ireland spends about 6.7% of its GDP on Health
sector. 5.1% is Public expenditure and 1.6% is Private expenditure.
According to CEA (1997) in the Republic of Ireland there are three
principal components to the health finance system. The State provides free
access to care via eight Regional Health Boards. A statutory health insurer
supervised by the Ministry of Health, offers Voluntary Health Insurance
(VHl) to individuals and employer-groups prepared to pay the premiums.
Income tax relief at standard rate is available on premiums. Private
insurers traditionally offered "hospital cash" (non-indemnity) schemes.
Nov^ they can register to provide cover broadly comparable with VHI
schemes, also with tlie benefit of standard rate tax relief Private health
insurance on an indemnity basis became permissible in 1996 and the first
entry to this market on any scale was in 1997. Indemnity health insurance
may be offered by companies suitably registered under the Health
Insurance Act of 1994, which requires compliance with key criteria laid
down by the Department of Health.- Minimum benefits. Community rating,
Life long cover. Open enrolment and Equalisation of risks among insurers.
Society Of Actuaries In Ireland (1995) suggested these criteria which are
believed to be consistent with the "general good" provisions in the
European Union Third Non-Life Framework Directive, given their view
that voluntar>' health insurance in Ireland, as a significant part of the
national health economy, requires regulating in the public interest.
Minimum benefits for cover are laid down in regulations in order to avoid

38
erosion of the price benefit package under competitive pressure. Open
enrolment allows people with pre-existing medical conditions to join or
transfer between health insurers. To avoid adverse selection by proposers,
there are regulated, transferable, "waiting periods" before pre-existing
conditions can qualify for benefit. Insurers are not obliged to offer cover to
new (rather than existing or transferring) proposers aged 65 or over.
"Community rating" in Ireland prohibits variation of premium by age, sex
or state of health. It is moderated by the possibility to offer uniform
reductions and discounts to children under 18 and to students up to age 21
in group schemes respectively. Life-long cover requires insurers to renew
contracts on standard terms whatever the individual claims history. The
equalisation mechanism is based on a "Co?nmunity Rated Equalisation
Fund"(CREF) and requires insurers to monitor their actual claims
experience in detail and to make official returns based on a range of
standard claims costs for the defined "minimum benefits". The calculations
are designed to identify the excess costs of any one health insurer covering
a higher-than-average risk portfolio and to redistribute those costs among
all health insurers. The system was intended as far as possible to allow
insurers who are more efficient in administration or clinical cost control to
retain the proceeds of such efficiency. Payments under the equalisation
system are not triggered until one insurer exceeds a prescribed threshold of
payment due. In 1991 all citizens became entitled to free hospital treatment
irrespective of income. Those in a higher income categorv' were still
required to pay a nominal Irish £ 20 per day for care if such care was given
in public hospitals or Irish £6 for an out-patient visit in public facilities,
subject to a maximum of Irish £ 200 a year. The history of the Irish system
has therefore added to the original lower-income basic scheme, firstly, a
State-sponsored voluntary substitutional scheme, and then, when the
substitutional element was ended, a voluntary private system which is now

39
capable of market development subject to government-imposed regulations
that are being developed.

2.17 Italy
As per World Bank (1999) Italy spends about 7.6% of its GDP on Health
sector. 5.3% is Public expenditure and 2.3% is Private expenditure. As per
CEA (1997) the National Health Service in Italy covers all Italian
nationals, including those without any form of employment. In principle,
the health service pays benefits in full. However, there are patients'
contributions that stood at 13.44% in 1995 in respect of expensive
pharmaceutical products. Direct contributions, which are proportional to
income, are the main source of finance. The range of benefits provided
under the national health service is very extensive; it includes; a) Visits to
a General Practitioner (chosen by patients insured under the State scheme
from lists maintained by tlie health service) and also visits to a specialist
(to whom the General Practitioners may refer their patients whenever they
consider necessar>) b) pathology and radiology c) hospitalisation and
medical costs d)pharmaceutical costs (in full or in part depending on the
type of medicament) and e) additional benefits such as spa treatments. The
State insurance scheme also offers its members indirect cover (e.g. in the
form of reimbursement of the cost of any treatment in hospitals not linked
to the National Health Service, but only if the State scheme confirms
treatment in a State hospital is not possible). The conditions of, and limits
on, such covers are laid down by each individual region. Mutual aid
societies and some insurers have offered private health insurance since the
beginning of the twentieth century. However, it is only in recent years that
there has been notable growth in the private health insurance market.
Much of that growth has been as a supplement to personal accident
policies. Since 1973/74 tlie average annual rate of growth of subscription
income has been around 25% in money terms. Private health insurance

40
accounts for 4.7% of the total premium income compared with all classes
of insurance other than life. Non-life insurance companies, most of which
are not specialist but authorised, sell private health insurance in Italy by the
appropriate ministry to write this class of insurance. Current health
insurance policies contain no schedule of specific illnesses. They confine
themselves to defining illness as "deterioration in the state of health,
which is not the result of an accident". A comprehensive range of schemes
is offered by Italian health insurers, including: a) Reimbursement of the
costs of hospitalisation and costs associated with convalescence b)
Reimbursement of out-patient costs c) Daily benefits for loss of earnings d)
In addition to traditional policies under which medical expenses are
reimbursed, policies will be made available which provide for direct
payment of expenses by the insurer to a health care body provided there is
an agreement between the latter and the insurance undertaking. Such
insurance is valid for both sickness and accident e) Furthermore; cover for
total or partial permanent disabihty as a result of an illness also exists. In
general, undertakings waive the right to cancel an individual contract, a
right that in any case is only granted by law for the two years following
inception of the contract. Private health insurance premiums are calculated
according to the age of the insured on joining the scheme and are paid
annually. Premiums and sums insured in respect of policies providing for
reimbursement of costs may be varied on the basis of index-linking
clauses; such index-linking is based on national indices which generally
take account of health care costs and are published by ISTAT (Istituto
Centrale di Statistica).

2.18 Netherlands
As per World Bank (1999) Netherlands spends about 8.5% of its GDP on
Health sector. 6.2%o is Public expenditure and 2.3% is Private expenditure.
According to the CEA (1997) medical care in the Netherlands is largely

41
funded through a system of pubhc and private insurance systems. The
Netherlands, with 37% of the population not covered under the obligatory
social health insurance system for medical care, medicines and hospital
care, have the largest private health insurance market share in Europe. All
the self employed, employees with an annual income exceeding the wage
ceiling, most civil servants employed by the State and senior citizens with
an income exceeding a limit are privately insured. To understand the
structure and financing of tlie Dutch health care system it is better looking
at it as a three compartment system:
Compartment I: The first compartment is the Exceptional Medical
Expenses Act (AWBZ). The AWBZ is a compulsory national insurance
scheme for long-term care and high-cost treatment, where the risk is such
that it cannot be borne by the individuals or not adequately covered by
private insurance, for example, the care for the handicapped, mental health
care and care for the elderly. With a few exceptions, everyone living in the
Netherlands and all non-residents who are employed in the Netherlands
and are subject to Dutch income tax are covered by the AWBZ. Both the
not-for-profit Healtli Fmids and the private insurers are the executives of
this Act. State influence is relatively high in comparison with that in the
other compartments.
Compartment 2: Normal medical expenses are covered by a variety of
insurance arrangements, the most important of which is the one governed
by the Health Insurance Act. Persons up to the age of 65 whose annual
salary is below a statutory ceiling are compulsorily insured according to
this Act, Around 63% of the Dutch population are covered by the Health
Insurance Act. Other compulsory health insurance schemes cover the civil
servants at province and community levels and police officers (5%). Costs
for this group are covered by three specific statutory regulations. The
premium is income-related and the entitlements are comparable with those
under the social health insurance scheme, witii the exception that this

42
system is based on reimbursement. 32% of the population is not covered
by compulsory insurance and they only can buy private insurance. Both
insurances are nearly equal in cover but not in financing. The premium for
the social health insurance is related to income. Dependants of a person
entitled to the obligatory insurance system are in general included in the
coverage. The entitlements are legally defined and comprise of medical
treatment and care, given in kind, in case of medical necessity. This means
that the cost of care for insured people is paid directly by the social health
insurance funds to the provider of care. Premiums for the privately insured
are not based on income but are set on a fixed amount, and they var\'
considerably according to the risk the insured represents and the kind of
coverage taken. The private insurance company is not obliged to accept a
candidate for insurance. There is, however, one exception. In order to
guarantee access to the private insurance market, insurers are required to
include among their policies one offering cover as defined in the Medical
Insurance Access Act (WTZ). Rules governing acceptance, extent of cover
and the premiums payable are laid down in the Act.
Compartment 3: The third compartment comprises of complementary
insurance coverage of any nature the need for which the government
believes as best if left to individuals insured to judge. This private
insurance compartment is voluntary and consists of all treatments not
covered in the first and second compartment.
Mid-1995 there approximately 5.5 million people were covered by health
insurance on an exclusively private basis. The fact that these 5.5 million
people are approximately 32% of the total insured population demonstrates
the important role played by private health insurance in the Dutch health
care system. In 1995 there were 47 private insurance companies operating
in the Dutch market, in addition to 27 social health insurance funds active
in the Dutch market. All these health insurance companies, both the social
and the private insurers, are members of the Association of Dutch Health

43
Insurers {Zorgverzekeraars Nederland). In the Netherlands, a distinction
can be made between private health insurers who write only health
insurance and composite insurance companies who in addition to health
insurance write other classes of life and non-life business. A further
distinction may be made according to the legal form of the companies. A
large number of insurers operate as insurance Mutuals. A third distinction
is according to the objectives of the companies. Some insurers operate on a
commercial basis, while others, particularly those associated with the
health insurance funds, are not-for-profit. Non-life insurance companies
are subject to supervision by the Chamber of Insurance. Law lays down the
powers of this body. One important task is the supervision of solvency of
the insurance companies. In general, insurance companies are free to
establish the scope of cover they provide and the premiums to be paid.
Only the WTZ stipulates a standard range of benefits. This health
insurance policy is comparable with the package of the social health funds,
and is called "standard-package-policy". Premiums are standardised but
government yearly sets the maximum tariff The WTZ scheme is partly
financed by mandator^' cross-subsidisation by all those insured privately.
In January 1989 the Act was amended to admit to the WTZ people aged 65
and over who previously had some other form of private insurance
(generally with high premiums) or none at all. In 1995, 695,775 people
were insured under the WTZ. Given the competition between health
insurance funds and the reduction of the package covered by compulsory
health insurance, the range of complementary insurance (compartment 3)
is growing. Government has given the health insurance funds the
opportunity of offering complementary insurance covers. In general,
privately insured people pay the costs of the medical care they get
themselves and then have their expenses reimbursed by the health
insurance Company (if the care is covered by the benefit package). Private
insurance has an extensive choice of coverage, deductibles, and rates

44
(mostly depending on age). For those belonging to the high-risk categories,
the WTZ standard-package policy is relevant, hi general, the private
insurers determine in their policy conditions that a referral by a General
Practitioner for medical treatment in a hospital is required. Fee for service
is the usual system. Often the charges of hospital and medical care are paid
directly by the insurer. Several insurers provide this possibility for the
expenses of other suppliers and pharmaceuticals. The fees of the medical
specialists used to be more than twice as high as that for the social health
insurance. But, since January 1997 fees for medical specialists is
harmonised. This means that both the privately and statutorily insured pay
the same amount of money for specialist care. An important governmental
measure was the introduction of a co-payment system. In 1997 people who
were insured by obligatory health insurance had to pay contributions out of
their own pockets for most of the medical facilities up to a maximum
amount of 200 guilders a year. The aim of these measures was to increase
effectiveness of the social health insurers. The government asked private
insurers to introduce similarly a (minimum) deductible of 200 guilders in
all policies.

2.19 Sweden
As per World Bank (1999) Sweden spends about 8.6% of its GDP on
Health sector. 7.2% is Public expenditure and \A% is Private expenditure.
As per the CEA (1997) the Swedish health care system covers all residents
in Sweden regardless of nationality. Responsibility for the system's
services rests primarily with the county councils. They also operate almost
all the services provided. The primary care sector has the aim of improving
the general health of the people and treats diseases and injuries that do not
require hospitalisation. This sector employs many different professional
categories - physicians, nurses, midwives, and physiotherapists organised
in health centres. In addition to local health centres, primary care is also

45
provided by private doctors and physiotherapists, district nurse clinics and
at chnics for child and maternity health care. For conditions that require
hospital treatment, medical services are provided at county and regional
level. In Sweden a relatively large proportion of the resources available for
medical services have traditionally been allocated to the provision of care
and treatment at hospitals. The county councils are responsible for free
dental care for all children up to the age of 19. For adults dental care is
subsidised to some degree for some special-need groups. Approximately
50% of all dentists' work in the national dental service run by the county
councils, the remaining are private dentists. The national dental service
treats patients on the same conditions as private dentists. Local authorities
are responsible for the care of elderly and disabled persons and for those
suffering from long-term mental illnesses. Private health care exists only to
a limited extent. Less than 10% of all physicians work full-time in private
practices and in the occupational health field. However, more than 50% of
the dentists work as private practitioners. Most of the care provided in the
private field is financed by public means. The patient only pays a small
direct fee. There are only a few private hospitals for short-term care and
these usually have contracts with the county councils. Therefore, only a
small part of these hospitals' services are financed by private means such
as patient fees and health care insurance. In the case of in-patient
treatment, a uniform charge per day's stay in hospital is applied to all
patients except children under the age of 16 years. For outpatient care and
other medical treatments, each county council sets its own fees for care
within certain limits. The fee can therefore varv'. To limit the costs incurred
by patients there is a high-cost ceiling. A patient who has paid at least SEK
900 for medical care is entitled to free care for the balance of the twelve-
month period, which is calculated from the first visit to a doctor. The high-
cost ceiling for pharmaceutical preparations is SEK 1,300. Sweden has an
extensive public system of social insurance benefits. These provide mainly

46
financial security for families and children (including parental insurance)
in case of sickness, handicap, and old age. Work injuries insurance for both
sickness and accident is part of the public system. The whole population of
Sweden is covered by the uniform system, on an individual basis,
irrespective of occupation and, in many cases, regardless of whether the
person is employed. In addition to the public system, collectively agreed
insurance schemes cover almost all Swedish employees. The traditional
private insurance market is comparatively small. Swedish social insurance
and public health care system has a universal nature. This along with the
collectively agreed schemes takes care of all the major needs. Thus the
Swedish private health insurance market is not as developed as in other
European countries. The collectively agreed insurance schemes include
benefits, for example, sickness, occupational injury, and supplementary'
pension. Traditional private health insurance offers several tv'pes of
products, health care, dental care, sickness benefit, health insurance for
travel abroad, child's sickness and accident. These are supplements to the
public schemes and there is no possibility of opting out of the public
system. The employers finance the collectively agreed schemes. The
premiums are not fixed on an actuarial basis, but are usually calculated as a
percentage of the company's gross pay. Traditional private insurance
premiums are fixed on an actuarial basis.

2.20 Singapore
As per World Bank (1999) Singapore spends about 3.3% of its GDP on
Health sector. 1.5% is Public expenditure and 1.8% is Private expenditure.
There has been a discernible shift toward private spending, reflecting price
increases and cost recovery efforts in the public sector as well as the
consumption preferences of an affluent population for a perceived higher
quality of service. The government currently subsidises for about one-
quarter of total health care costs. Phua, K.H. (1997) has observed that

47
Singapore maintains the world's longest-running experiment with medical
savings accounts. These accounts help defray public health care costs
while ensuring that citizens receive adequate and affordable coverage.
Moreover, the system encourages Singaporeans to stay healthy and
minimise the use of unnecessary medical services. Singapore has a mixed
health care delivery system. The government runs the public system;
voluntary and private hospitals and practitioners run the private system.
The health care dehvery system comprises primar>' health care provided at
private medical clinics and government outpatient polyclinics, and
secondary and tertiary care at private and public hospitals. Private
practitioners provide about 80 percent of primary health care; the
government polyclinics provide the remaining 20 percent. For hospital
care, which is more costly, the situation is reversed: 80 percent of hospital
care is provided by the public sector and 20 percent is provided by the
private sector. Patients are free to choose among providers in the dual
health care delivery system and can walk in for a consultation at any
private clinic or government polyclinic. For emergencies patients can go to
the twenty-four-hour accident and emergency departments located in
government hospitals. The government ensures that good and affordable
basic medical services are available to all Singaporeans by providing
heavily subsidised medical services at public hospitals and government
cHnics. All private hospitals, medical clinics, clinical laboratories, and
nursing homes are required to maintain a good standard of medical
services through licensing by the Ministry of Health. To promote personal
responsibility. Singaporeans are required to use the Medisave scheme to
save for their hospitalisation expenses, especially during old age. This is to
avoid over-reliance on state welfare or medical insurance. Under the
scheme every employee puts 6-8 percent of his/her monthly income into a
personal Medisave account. These savings can be used to pay for
hospitalisation expenses incurred by the worker or their family. As noted,

48
this system encourages individuals to stay healthy and minimise the use of
unnecessary medical services. The public system requires that patients
make co-payments for their medical services at the time of consumption to
discourage unnecessarv' use. For people who choose to be accommodated
in the lower classes of wards in public hospitals (there are four classes),
hospitalisation expenses are subsidised up to 80 percent by the
government. Smaller subsidies are given to people who prefer the comforts
and personalised service of the higher-class wards. No Singaporean is ever
denied access to the health care system or use of the accident and
emergency services, and no one is turned away by hospitals. Under its
dental health program the government provides free dental care for all
school children. Both general and specialised dental cares are provided in
five dental hospitals, two community dental clinics, and the central
Government Dental Clinic. Dental services are also available in the private
sector, where 320 dental clinics run by 500 dental surgeons provide
specialised as well as basic dental treatment. As part of the government
program for preventive dental care, the national drinking water supply has
been fluoridated since 1956. Singapore has souglit to control supply factors
in the health sector through deliberate staffing and facilities planning. On
the demand side, efforts have been made to mobilise compulsory savings
through the Central Provident Fund (CPF), thus rationing demand
implicitly through consumer purchasing power. The Government uses
social planning to avoid the problems faced by most countries in
maintaining a balance between demand pressures and supply capacity. The
situation could potentially be more acute for a small nation like Singapore,
where resources are limited and expectations are rising for more and better
services.
The National Health Plan
The National Health Plan was formulated in 1983. The plan's key proposal,
the Medisave scheme, imposes compulsory savings and restructures the

49
system of health care financing. The main objectives of the plan are to
secure a healthy and productive population through active promotion of
healthy lifestyles, and to improve cost efficiency in the use of health
services. In addition to promoting individual responsibility for maintaining
good health, the plan aims to build up financial resources in order to create
the means to pay for medical care during illness. Moves to restructure
health care financing were made to avoid the problems of a welfare state
system financed by taxes (such as the United Kingdom's National Health
Service) and to shift the burden of financing health care to individuals,
families, and employers (including the private and voluntary' sectors). The
strategy used was to increase cost sharing by users and to progressively
move the provision of health care to tlie private sector. This approach was
initially carried under the banner of the privatisation movement, to transfer
the government's hold on the management and control of major public
hospitals. The hospital restructuring program proceeded with the formation
of a new government-owned structure, the Health Corporation of
Singapore. This corporation was created in April 1987 to acquire and
manage all restructured government hospitals. Under tlie restructuring
program public hospitals and specialty institutes have been incorporated as
private companies wholly owned by the government. The current aim of
the restructuring program is to give greater managerial autonomy to
government hospitals so that they can provide more efficient and higher-
quality service, improve productivity, control costs, and have greater
flexibility to respond rapidly to changing needs. The hospitals are fully
owned by the government and continue to pursue the social objectives of
the Ministry' of Health. Restnictured hospitals continue to subsidise their
patients and receive an annual subsidy from the government to offset their
operating deficits. According to Lian, R.K.H. and Loi, S.L. (1996)
Medisave is compulsory and is administered by the Central Provident
Funds (CPF) Board, a statutory board of the Singapore government. All

50
employed persons are required to be members of the CPF and must
contribute 40 percent of their income to meet their retirement, housing,
education, investment, and health care needs. This 40 percent contribution
is jointly and equally shared by the employer and the employee and is
allocated as follows: a) 6 to 8 percent of the total contribution goes to the
Medisave Account; b) 4 percent of the total contribution goes to the Special
account; c) The balance (28 to 30 percent) of the total contribution remains
in the Ordinary account. Funds in the Medisave accounts may be used to
meet personal or immediate family's hospitalization expenses especially
after retirement. For example, these funds can be used to pay for the
hospital bills of the member's spouse, children, parents or grandparents up
to: a) $300 per day for daily hospital charges; and b) A fixed limit per table
of surgical operation according to the complexity of the operation. If the
hospital bill exceeds Medisave limits, the member is obligated to pay the
part of the hospital bill not covered by Medisave. In addition Medisave can
be used to pay for the hospital stay for the delivery of the first three
children. Medisave contributions and savings earn interest at prevailing
market rates and are tax-deductible. The Medisave balance can be
accumulated up to a limit and any amount in excess of this limit is
automatically transferred into the ordinary account. Funds in the Special
account can be used to finance the Minimum Siuii Scheme, which is
compulsory national retirement scheme to help members support a modest
standard living during retirement. At least half the minimum sum must be
in cash; the other half may consist of tangible assets such as property. The
cash portion ensures members of a monthly income in retirement. Prior to
retirement, members have three options to invest their minimum sum: (i)
buy a life annuity from an approved insurance company, (ii) keep it with
an approved bank, or (iii) leave it with the CPF Board. If the income in the
special account is less than the minimum sum, the balance of the minimum
sum is covered by the income in the ordinary account. Funds in the

51
Ordinary accounts can be used for several different purposes including: (i)
retirement (together with the special account to meet the minimum sum
requirement); (ii) housing (can be government or private houses, for the
purpose of owner occupation or for investment in one or more houses);
(iii) education (restricted to local tertiary education); and (iv) investment
(in common stocks and bonds, government bonds, fixed deposit, unit trust,
gold as well as endowment insurance poHcy).
The Medishield Scheme
CPF members' Medisave accounts, however, may be strained in the event
of a prolonged illness that requires long term medical treatment. To protect
the Medisave account, the Singapore government introduced the
Medishield scheme in 1990, a low cost medical insurance that adds more
value to Medisave. Medishield is major medical insurance with
participation built in by way of deductible and co-insurance as measures to
contain cost. All CPF members automatically are covered under
Medishield unless they elect to opt out. The Medishield premium and any
costs not covered by Medishield, such as deductibles, co-insurances, and
amounts in excess of the maximum claimable amount, can be paid from
the Medisave account. Medisave serves as an additional source of personal
financing for medical expenditures incurred by families. This shift in
public cost sharing frees government tax revenue for more urgent priorities
and contributes to better public health services. It is hoped that Medisave,
acting as a personal health financing and payment scheme, will control
effective demand through the price mechanism. Under Medisave most of
the payments for health care are made at the point of consumption. This
close link between payment and use, in a better way reflects the real costs
of health care and helps prevent excess use. Medisave also caters to
different consumer preferences for a range of accommodation in public
and private hospitals. Thus, within certain limits, it can be used to provide
complete coverage in less comfortable wards and to subsidise more

52
expensive charges. The Medisave scheme represents a major departure
from the social security schemes of other countries in several areas.
Medisave is not a common pool of funds to be used indiscriminately by a
government facing pressures from interest groups to respond to short-term
problems; instead, it is a scheme that covers only dependent family
members. This fits in with the concept that the family is the basic social
and economic unit of any society, with caring for the collective but
essentially personal responsibility. The aim is to preserve and enhance the
stability of an essential social structure amid rapid environmental changes.
Only if a family is unable to share in the medical expenses of its sick
members does the state use public taxes to subsidise health care. The idea
is to promote self-reliance, altliough a safety net is still available for those
in need. Unlike tax-based financing, it does not place an unduly heavy
burden on the employed and the young, and does not subject public
expenditure to the vagaries of economic cycles. The current generation of
workers is obliged to save for the future, instead of relying on the uncertain
taxes of the next generation for support. This is in line with official policy
to promote financial independence among the elderly, whose medical
needs are expected to increase. A critical assumption of the Medisave
scheme is that patients are the best judge to decide as to of how their
savings should be spent on health care. Revenue caps have been imposed
on the public hospitals, which also have to maintain at least two-thirds of
their hospital beds for subsidised patients. Besides encouraging the prudent
use of Medisave, financial counseling of patients and family members
prior to admission and other such measures (including medical audits) are
being instituted to prevent abuse and to maintain standards. Medisave has
been extended to cover more ambulatory care (such as day surgery and
certain expensive outpatient services). The issue of health insurance has
cropped up in various discussions about its many shortcomings and lack of
applicability for Singapore. In the deliberations that led to the formulation

53
of the National Health Plan and the Medisave scheme, the health insurance
option was dismissed because of the negative experiences of other
countries' health insurance systems. Among the main weaknesses were: a)
The illusion of a free service at the point of consumption, encouraging
overuse and escalating costs and b) Lack of incentives for the consumer to
stay well and for the provider to economise since they are reimbursed for
any utilisation. Thus the Medisave scheme was conceived to avoid the
pitfalls of third-party reimbursement systems financed from insurance
premiums or taxes. After Medisave was implemented, however, it became
apparent that there was still a need for coverage of major illnesses
requiring expensive and prolonged treatment. To cater to such needs, a
low-cost national catastrophic illness insurance scheme, known as the
Medishield scheme, was introduced on 1 July 1990. Despite the
widespread coverage of Medisave and Medishield, a small number of
Singaporeans lack adequate savings or family support to pay for health
care. This group includes older cohorts of low-income individuals without
families who have insufficient or no provident fund accounts. This is a
large endowment fund to help fill tliis financial gap. According to the
Medical Endowment Act, the government will deposit grants in special
accounts for public hospitals to defray part or all of the bills incurred by
ehgible patients. Medifund was given start-up capital and is supplemented
yearly from budgetary surplus. A Medifund Advisory Council is formed to
advise on the use of income derived from the endowment. Each hospital
has appointed a Medifund committee to approve payments based on the
guidelines established by the council. Needy patients can apply for partial
or full waivers of their medical fees through medical social workers.
Medifund further relieves the dependency on taxation as a means of health
care financing. The main, objectives of health care financing policies are to
strengthen the safety net to protect people against rising health costs as
well as to control costs. Medisave forms the first layer of this safety net,

54
based on compulsory savings and a family support system. Medishield
provides the next layer of the safety net, covering major chronic conditions
requiring long term and high-cost health care. Medifund is an additional
layer, financed through an endowment fund created from surplus revenue.
This multilayered financing system should be able to withstand the
increasing burden of health care costs as well as to provide a greater degree
of social security in the years ahead. Through a multi-pronged approach
using a public-private mix of health services, a varying level of subsidy
and cost sharing, and through the schemes like Medisave, Medishield, and
Medifund, it is hoped that a more controlled increase in health expenditure
will be achieved in line with the rate of inflation and economic growth.
Cost-contaimnent measures suggested by a parliamentary committee to set
out the government's approach to controlling health care costs and keep
basic health care affordable to all Singaporeans include i) Defining a good
basic medical package, ii) Regulating the supply of doctors and hospitals,
iii) Regulating hospitals through revenue caps and subsidies, iv)
Encouraging greater cost sharing in medical insurance and employment
benefits, v) Controlling prices in tlie private sector vi) Co-ordinating
medical research and development and vii)Co-ordinating medical
education and training. Although elements of Singapore's health financing
system may not be entirely transferable to other countries, the system
points to general lessons for health care financing strategies. The concept
of compulsory savings has many advantages over traditional financing
methods, but it requires several prerequisites to work. Among them: (a)
High level of labour force participation in formal employment at
sustainable growth rates, (b) Effective system of payroll collection and
contribution, as well as efficient fund management and payment and (c)
Well-developed computerised information system linking personal medical
savings accounts with hospitals and health care providers, in addition to
security features and accounting controls. When resources are pooled

55
among family members or combined with insurance mechanisms for
catastrophic coverage, compulsory savings are a potentially powerful way
to finance health care and old age security on a sustainable basis (allowing
for lifetime risk-adjusted contributions) without distorting economic
growth.

2.21 United States ofAmerica

As per World Bank (1999) in the developed world United States is the
highest spender on health care, which amounted to about 14.1% of its
GDP. 6.6% is Public expenditure and 7.5% is Private expenditure. Health
care in the United States is considered to be the most expensive. The State
and Federal reimbursement system under Medicare and Medicaid cover a
staggering 47% of these health care expenses. Out of pocket expenditure
from private resources covered about 19%of the total expenditure of health
care and the remaining 35% is financed by means of private insurance
written by various types of insurers. It is observed that in the United States
virtually all persons over age of 65 are covered under the Medicare
programme and about 60% of the Medicare covered person purchase
private insurance to supplement protection under Medicare. Most persons
under age of 65 (approx. 85%) are covered by private health insurance. In
the US under the Social Security Act, the employers, employees, and the
self-employed make social security contributions. Heath insurance
originated in the Blue Cross system developed between hospitals and
schoolteachers in Dallas in 1929 in the US. Law enacted Medicare and
Medicaid programmes in 1965. As per the US Census Bureau, Department
of Commerce about 43.3 million people in the US had no insurance cover
in 1997 that amounted to 16.1% of the total population. About Vi (2.6
million) of poor full time workers were uninsured, 10.7 million children
under 18 years of age and in total about 11.2 million poor people nearly
1/3 of all below the poverty line had no health insurance. Global

56
Reinsurance (2000) has observed that while increases in health insurance
premiums slowed dramatically during the 1990s, by the end of the decade
signs indicated that health care inflation was again on the rise. What fuels
rising health insurance premiums? Many people think that health insurance
premium drive up the cost of health care in the United States. But the
opposite actually is true: premiums rise to keep pace with the increasing
costs of health care goods and services. In fact, statistics show that, on
average, 90 cents out of every premium dollar are paid back in benefit
payments for health care services. Health care spending trends - America's
spending on health care, as well as the prices of related goods and services,
continues to grow faster than the rest of the economy. Spending on hospital
services represents, on average, the largest share of the nation's health care
expenses. Over the past two decades, however, the percentage of the
nation's spending on hospital care has decreased as other categories have
grown more rapidly. Shorter hospital stays have led to greater reliance on
home health care services; As a result, home health care has been one of
the fastest growing categories of health expenditures. The major
infomiation for this section is obtained from the following sources
a) Katie Insurance School (1999) b) Enteen, R (1992) and c) Various
Internet sites as given in the references
Medicare: The Social Security Act of the United States provides for the
Medicare programme, which is the largest Federal Health Insurance
programme in the United States of America. The eligibility criteria for this
scheme includes (a) Person should be 65 years or more in age and eligible
for monthly social security benefits, (b) Person who is disable and under
age of 65 and meets certain requirements of the social security disability
insurance and (c) Person of any age with permanent kidney failure.
Medicare coverage is in two parts:
Part A: This is a Hospital insurance coverage and the broad benefits under
this fall into the following categories: a) Hospital care b) Care in a nursing

57
home or extended care facility c) Home health services and d) Care in
hospice. Part A is compulsory hospitalisation insurance financed by
payroll taxes levied on the employees and employers as well as the self
employed. Part A pays for all covered hospital expenses subject to certain
deductibles, co-payments and limits wherever applicable for each of the
four categories.
Part B: Supplementary- Medical Insurance - This is an optional coverage
on payment of a monthly premium. The covered expenses include
physician and surgeon's services, home health services, diagnostic
expenses, surgical dressings, splints, all outpatient services and even
purchase of medical equipment. Medical insurance pays 80% of the
covered expenses in excess of the deductible provided that the charges are
reasonable. This part is characterised by deductibles as well as co-
insurance or co-payments. Part B is financed jointly by monthly premiums
paid by persons who elect the coverage and a contribution for each
participant by the Federal government. The original Medicare plan has
certain limits with respect to the amount reimbursable under the plan. The
original Medicare plan can be supplemented with a supplementary policy.
There are 10 standard supplemental insurance policies for extra benefits.
These are termed as Medigap and Medicare Select. Additional monthly
premium is charged for tlie supplemental pohcy as per the range of
benefits available. Apart from fee-for-service, managed care option is also
available for Medicare. In the original Medicare plan one has to pay
additional costs such as hospital deductibles and co-insurance and the plan
also do not cover prescription drugs. This out of pocket cost can be
covered by purchase of a supplemental insurance policy. A Medicare
Medical Savings Account (MSA plan) has also been introduced for the
benefit of some eligible Medicare beneficiaries.
Medicaid: Medicaid coverage is mainly provided for individuals of the low
income group who receive Federal assistance income maintenance

58
payments as well as for related groups not receiving cash payments. This is
also provided imder the Social Security Act. The coverage includes in-
patient, outpatient. Physician, Surgical, Dental services. Nursing facilities,
Pre-natal, and Delivery- services for pregnant women, etc.
Federal CHAMPUS Programme: Civilian Health and Medical Program of
the Uniformed Services. This program provides reimbursement subject to a
deductible for medical expenses provided to dependents of active military-
personnel, retired and their dependants and dependents of deceased
military personnel. This is designed for those persons who are unable to
use governmental and military medical facilities because of distance, over
crowded facilities, or unavailability of required medical treatment at a
military medical facility.
Child Health Insurance Programme: The Balanced Budget Act of 1997
introduced this programme from the year 1998. This programme will
enable states to provide health insurance cover to poor uninsured children
who do not qualify for Medicaid. There is a Federal agency known as
Health Care Financing Administration (HCFA) which administers the
Medicare, Medicaid and Child Healtli Insurance Programme. HCFA
provides health insurance for over 74 million Americans through these
schemes. The majority of these individuals receive their benefits through
the fee-for-service delivery system. However, an increasing number is now
choosing managed care plans. Singh, G.(2001) has observed in a leading
Indian business magazine Businessworld that in the US, for example,
insurance has been somewhat responsible for the setting up of the Joint
Commission for Accreditation of Healthcare Organisations(JCAHO) an
autonomous, non-profit organisation that establishes standards by which
quality care is measured in hospitals, nursing homes and hospices. The
exacting standards are rigorously established to make sure that
organizations provide the best possible care to patients. All of this has
resulted in healthcare emerging as the single biggest contributor to the

59
gross domestic product of the US. Private Health Insurance in the US is
broadly categorised as Medical Expenses Insurance and Disability Income
Insurance. Laws have laid down certain regulations for beneficiaries of
both these types of coverage.
Private Medical Expenses Insurance: The private health insurance industr>'
is composed of 3 broad t>pes of organisations: a) Commercial Insurance
companies b) Blue Cross and Blue Shield Organisation and c) Capitated
Health Providers
Commercial Insurance companies: The Commercial Insurance companies
selling medical expenses protection include non-life insurers, life insurers,
and exclusive health insurers. There are about 1200 insurance companies
that sell health insurance providing about 78 million persons with hospital
and surgical expenses benefit. This includes 38 million persons covered
under fully insured group plans and 7.2 million persons covered under
individual policies. The rest are covered by plans, which are fully or
partially self-insured by employers and administered by insurance
companies or third parties.
Blue Cross and Blue Shield Organisations: These plans are associations
usually organised under special state legislations to provide for pre-
payment of hospital and surgical expenses. Both these plans market
"service contracts" under which service benefits rather than a dollar
indemnity is provided to insured members. These plans basically came up
as non-profit organisations but now have become commercial in nature.
Blue Cross were founded chiefly to cover hospital costs although they have
expanded their coverage to outpatient care, other institutional services and
home care. Blue shield plans were founded chiefly to cover Physician
services though they have been expanded to cover other benefits such as
dental, vision and other outpatient services. These plans contract with
thousands of hospitals and physicians to provide care to subscribers when
they need it. Blue Cross-and Blue Shield organisations insure an estimate

60
of 67.1 million persons. Some of them represent participants in employer
self funded plans that are administered by the Blue Cross and Blue Shield
Organisation.
Capitating Health Care Providers: Capitating health care providers
include Health Maintenance Organizations (HMO), Provider-sponsored
Organisation (PSO), etc. These organisations differ from commercial
insurers in the fact that they are also health care providers. The insurance
elements in the operation of HMO and PSO, derive from the manner in
which they charge for their services, which is called capitation. Under the
capitation approach individual subscribers pay an annual fee and in return
receive a wide range of health care services. HMOs insure an estimate of
60.4 million persons including about 8.7 milhon persons enrolled in HMOs
operated by commercial insurance companies and 9 million enrolled in
Blue Cross/ Blue Shield HMOs.
Self-Insurers: In addition to these some large employers have opted for
group self insurance plans which may be administered by Third Party
Administrators or an insurance company. It is estimated that in 1997 more
than two-thirds of the large employers were self insured with programmes
covering 62.4 million persons. Self-insured plans include those of large
employers and multiple employer plans such as multiple employer trusts
and multiple employer welfare arrangements.
Multiple Employer Trusts (METs): These are legally formed trusts, with a
corporate body such as bank, serving as the trustee. They are formed to
provide health insurance to employer-employee groups that are too small
to purchase insurance economically and individually. These are sponsored
by insurance companies and other organisations formed for this purpose.
They operate either on a self funded basis using the premiums collected
from trust members to fund the health care costs of the group or by
purchasing group insurance from commercial insurers.

il
Multiple Employer Welfare Arrangements (MEWAs): These are METs
which provide health and welfare benefits under the provision of employee
retirements security Act. Payments by employer of health insurance
premium for employees are deductible as business expense for the
employer. In case of individual health insurance no special tax treatment is
applicable. They are considered as medical expenses and are deductible in
combination with other medical expenses. In case of the self employed
25% of the cost of health insurance premium can be deducted from the
gross income.
Managed Care Organisations (MCOs): Transformation of US health care
system from a pre-dominantly fee for service environment to that
dominated by Managed Care Organisations with different paying
mechanisms has been the most important change in the delivering and
financing of private health care in the US. Within the managed care
industry the following major models have emerged: a) Health Maintenance
Organisation(HMO), b) Provider-sponsored organisations(PSO), c)
Preferred Provider Organisations(PPO), d) Point of Service Plans (POS),
e) Physician Practice Manager and others
Disability Income Insurance (DII): DII is sold, in the US by non-life, life,
and specialty insurers that operate only in the Health insurance field. This
t>pe of insurance is marketed essentially in two ways that is group and
individual. Approx. 4/5 of the disability income insurance is sold on a
group basis. For disability risks arising out of and in the course of
employment most injured workers are benefited under the Workers
Compensation Act of each of the states. In some of the States, workers are
covered for non-occupational disabilities by compulsory programs under
which the benefits are also prescribed by law. Workers who are totally and
permanently disabled and who meet the eligibility requirements for
disability under the federal disability programs benefit from that program.
The tax treatment of disability income benefit has an important effect on

62
the amount of income that needs to be replaced. Benefits received from
individually owned disability income policies are not subject to federal
income tax. Premiums paid by individuals for disability income insurance
are not deductible for federal income tax purposes. Whereas sick pay and
other disability income payments that have been paid for by the employer
are treated essentially the same way as wages and are taxable to the
employee.
Regulatory Framework
a) Health Care Financing Administration (HCFA) administers the
Medicare, Medicaid and Child Health Insurance Programme.
h) National Association of Insurance Commissioners (NAIC) is an
organisation of the insurance regulatory authorities from the 50 states,
District of Columbia and the four US territories which provide a forum for
the development of a uniform policy where uniformity is required. This
association provides invaluable support to insurance conmiissioners.
Certain uniform provisions have been prescribed on the basis of what has
been recommended by the NAIC to be included in all individual health
insurance policies.
c) COBRA: The Consolidated Omnibus Budget Reconciliation Act
requires that employees and certain beneficiaries be allowed to continue
the group health insurance coverage following a qualifying loss of
coverage which includes 18 months for a terminated employee and up to
36 months for spouses of deceased, divorced, etc., employees.
d) In 1996 the US congress enacted the Health Insurance Portability and
Accountability Act (HIPAA) which imposes standard designs to improve
the portability and availability of insurance for all employees. The primary
purpose of this law was to ensure the security of health insurance coverage
for those who already have insurance.
e) West's Encyclopedia of American Law, (Vol. 6) 1998 has observed that
The federal Medicare Program introduced diagnosis - related - groups

63
(DRGs) in 1983 which for the first time set predetermined limits on the
amounts Medicare would pay to hospitals for patients with a particular
diagnosis.
j) Managed care is a highly regulated industry. It is regulated on the
federal level by the Health Maintenance Organisation Act of 1973 and by
the states in which it operates.
g) One of the most significant provisions of the HIP A A 1996 Act is the
authorisation of limited number oi Medical Savings Accounts (MSA). The
basic idea is to allow individuals to make tax shelter contributions into a
fiind to be used to cover medical expenses. Generally this is jointly used in
connection with a High Deductible Insurance Policy and is used to cover
the expenses that fall within the policy deductibles.
h) The HIPAA Act of 1996 imposes reforms and some of the major include
(i) In the group market - guaranteed renewability, limitations on pre-
existing conditions and portabihty, (ii) A federal definition of pre-existing
conditions - a medical condition diagnosed and treated within past 6
months and provides that pre-existing conditions may not be excluded for
more than 12 months, (iii) Similarly in the individual market also the
policies must be guaranteed renewal, (iv) HIPPA permits states to use one
of the two approaches as suggested by the NAIC to guarantee access to
individual health insurance and (v) Formation of qualified High-Risk
Pools.
i) The Balanced Budget Act (BBA) 1997 has also introduced certain new
changes in the Medicare system. The NAIC has also adopted a model law
for consideration by the state specifying minimum standards for LTC
policies. They should be guaranteed renewable and the premium may be
changed at renewal only for an entire class of long term insurance. This
means that renewal for such polices cannot be refused and premium cannot
be changed for individual selectively. Individual premiums paid on
qualified LTC policies are deductible as medical expenses. US is the most

64
developed and open market as far as health insurance is concerned. It
offers the most diverse products/schemes but still has a very strong
regulatory framework.

2.22 Australia
As per World Bank (1999) Austraha spends about 8.5% of its GDP on
Health sector. 5.8% is Pubhc expenditure and 2.7% is Private expenditure.
Carroll, P.M. (1990) has observed that Australia has a National Health
Service called as Medicare which provides publicly funded health care
through public hospitals. Medicare is financed totally from taxation - partly
from an earmarked levy of 1.25% of all taxable personal incomes and
partly from general tax revenues. All Australians are entitled to public
hospital treatment free of charge. Public hospitals are predominantly
government funded and, under Medicare, all Australians are entitled to
admission and treatment, without charge, in these hospitals. Public
hospitals also accept private patients, who are prepared to pay for the
services they receive, and who wish to retain the choice of doctors who
treat tliem in hospital. Most private patients have private hospital insurance
but there are also private patients who are compensable at law or under
workers' compensation insurance and some patients are not eligible under
Medicare (e.g. some foreign visitors) However, about 40% of the
population go in for private medical insurance which provides cover for
treatment in semi-private and private rooms in public hospitals and in
independent private hospitals. A semi-private treatment is deemed to be
semi-private if the patient opts to be treated by Doctor of his own choice.
Society of Actuaries In Ireland (1995) has observed that the Private health
insurance industry in Australia is regulated strictly by the federal
government. Legislation covering the Private Medical Insurance (PMI)
market requires the insurers to practice community rating and open
enrolment. Community rating is defined as a single rate for all above the

65
age of 18 years and precisely double the single adult rate for married
couples with or without depending children. All insurers are required to
offer a basic table of insurance, which covers the cost of a semi-private
room in public hospitals. The insurers may also offer supplementary tables
to cover the cost of private rooms and treatment in private hospitals. About
70% of insured persons are covered under a supplementary table as well as
a basic table. Insurers also offer ancillary benefits for non-hospital items
such as dental care, optical care, prescription drugs, etc. There are about 50
insurers operating PMI market including both not-for-profit organisations
and commercial insurance companies. The regulatory authority operates a
reinsurance system, which was designed to share the cost of chronically ill
between all funds. The cost of consultant fees is on the basis of a statutory
fee schedule and law prohibits insurers from insuring any higher fee if
charged. Many employers provide medical benefit for their employees by
means of self-insurance.

2.23 Canada
As per World Bank (1999) Canada spends about 9.2% of its GDP on
Health sector. 6.3% is Public expenditure and 2.9% is Private expenditure.
According to Reddy, K.N. (1994) Canada is considered to have one of the
best health care financing system in the world and is the best example for
public financing and private delivery. According to the Canadian Life And
Health Insurance Association Inc. (1998) Canada has a universal health
care system. The provinces pay major medical expenses such as surgical
fees, physician fees and hospitalisation cost. Private health insurers are
prevented by law from selling coverage that approx. a provincial health
plan. In Canada there are about 132 life and health insurance companies as
on December 1998. About 7.8 million people have been covered under the
disability income insurance plans, 21.3 million under the extended health
care and 40.1 million under the dental care. Canada Life Insurance

66
Compensation Corporation (COMPCORP) administers the industry
consumers' protection plans that safeguard Canadian hfe and health
insurance policyholders. Life and health insurance are regulated by both
federal and provincial governments to ensure that commitments to
policyholders are met. The insurance companies and their representatives
mostly abide the various strict guidelines on consumer disclosure and
insurance practices. Private health insurance in Canada takes up where
government coverage ends and it is more supplemental in nature. Private
health insurance provides for medical expenses not covered by public
funded provincial health care plans such as prescription medication, dental
and alternative therapies. These private insurers also provide disability
insurance, travel health insurance, critical illness insurance and long term
health care. Group insurance with employee benefits is the largest share of
private health insurance. The private sector is responsible for 32% of
health services in Canada. There is an active interest demand by private
insurance in the area of saving plans. A report titled, 'The Place of the
Private Sector in the Health Care Field' presented by The Canadian Life
and Health Insurance Association Inc. to the working group on the
complementarities of the private sector in pursuing the fundamental
objectives of Quebec's public health system suggests a concerted approach
between the private and the State would have the advantage of allowing
the State to concentrate on hospital care and the needs of the elderly and
individuals receiving social assistance, who have suffered from recent
budget cuts, while private insurers concentrate on the active population,
whom they already cover to a large extent. Disability insurance plans
available in Canada include individual insurance plans, government plans
and group insurance plans through an employer, union or an association.
The individual insurance plans are characterised by non-cancellable
guarantee renewable and guarantee renewable provisions. The government
plans are as per the workmen's' compensation act of the state.

67
2.3 Health Care Sector, Health Financing and Health Insurance in
India
As per World Bank (1999) India spends 5.6 % of its GDP on health care,
public expenditure being only 1.2 % and private sector expenditure being
4.4%. Ellis, R..P. and others (2000) have observed that there is growing
evidence that the level of health care spending in India is considerably higher
than that in many other developing countries. This evidence also suggests
that more than three-quarters of this spending includes 'out of pocket
expenses'. Despite such a high share of expenditure by individuals, the
provision of health care, that is adequate in terms of quality and access, is
becoming more and more problematic. Particularly, public delivery of health
care is poor in quality, presumably for reasons of inadequate finance. The
private sector expenditure is in fact out of pocket expenses of the household.
Reddy, K. N. (1994) observed that resources in the health sector have been
misallocated all along. More than 60 % of the resources allocated under the
purview of the Ministry- or Department of Medical, Public Health, and
Family Planning of the Central and the State governments have gone to the
payment of services viz. medical relief, medical education and training,
Central Government Health Scheme and Employees State Insurance scheme.
Only 26 % is spent on preventive services viz. prevention and control of
disease, prevention of food adulteration, drug control, family planning,
maternity, child health, etc., and the rest has been spent on miscellaneous and
administrative services. Very little has been allocated to facility creation such
as hospital buildings, beds, machinery and equipment and too much has been
allocated to consumption expenditure. To be specific the allocation was
58.97% towards salaries, 2.58% towards office expenses and 35.47% others
as against 2.97% to machinery and equipment. There has been an urban bias
in the allocation of resources. As of 1990-91, 66.96 per cent of the resources
spent on health care had gone to the urban sector which accounts for 25.7 per
cent of the total population, while only 33.04 per cent of the resources has

68
gone to the rural sector, which accounts for 74.30 per cent of the total
population. In terms of per capita allocations, the biases are substantial. The
per capita expenditure on health care of the urban sector was Rs.l52 against
Rs.26 of the rural sector. In other words, the allocation of resources to tlie
urban sector in terms of per capita was 5.86 times more than what the rural
sector had received. The pubhc sector expenditvires include the government
health expenditure, parastatal expenditure, and foreign aid, making the
figures comparable with those for OECD countries. The system
discriminates between the employees in the organised sector and the
employees in the unorganised sector. There is a mismatch between the
supply of and demand for health services both at the Central and the States'
levels. Under the Constitution of India, the States are responsible for the
provision of health care, but are not able to cope with demand for health
services. The quality of service in public hospitals (government hospitals)
has been deteriorating fast, partly because of the lack of adequate supply of
medicines and equipment and partly because of the faulty manpower
planning and selection procedures. The delivery system has become
bureaucratic and unaccountable. The government is unable to do anything to
increase the supply of services except forcing the people to obtain health care
from the private sector. A more important thing is that the present system of
health care is not cost-effective.
Table 1. Progress made in the major health indicators in India:
Description 1951 1993
Expectations of life at birth (Males) 32,45 59
Expectations of life at birth (Females) 31.66 59.70
No. of Hospitals 2,694 13,692
No. of Dispensaries 6,515 27,403
No. of Beds ^ 1,17,000 8,34,000
Regd. Medical Practitioners(GTaduates) 23,812 2,00,678
(Source: Statistical Abstract India 1997, Vol. I & II)

69
Sharijf, A. and others (1996) in "Health Care Financing and Insurance
Perspective for the Ninth PlanfJ997-2002)" which is the revised version
of the report prepared by the sub-group on Health Care Financing and
Insurance, constituted by the Planning Commission in consultation with
the Ministry of Health and Family Welfare, Government of India in March
1996 observed that: It has been seen that patients from the rural as well as
urban areas have overwhelmingly chosen public facilities such as the
government hospitals, community health centres and primary health
centres for in-patient care and the reliance on private facilities are largely
on out-patient care, particularly as is seen in the urban parts. Unlike public
facilities which are centrally located for instance 70% of hospitals and 85%
of hospital beds in the public sector are located in urban area the private
practitioners are found even in remote and backward areas. As regards the
cost of treatment as per NCAER study (1993) it was Rs.850 per episode in
rural areas and Rs.l065 in urban areas for in-patient care. The
corresponding figures for outpatient care were Rs.70 and Rs.97. There are
large inter state and rural-urban variations in the cost of treatment
tliroughout the country. The cost of treatment is much higher in urban than
in rural and on an average the private sector charge 3-4 times the public
sector agencies. Overall, 80.2% of the total health expenditure by the
households was for receiving the private care facility. Health care delivery
availability in India has a public-private mix depending upon purchasing
power of individual and sustain upon income and price elasticity of health
care. Research studies have shown that in rural areas, even for
immunization services for which Government runs special programmes,
private health care facilities have been used more than 40% of the time.
This clearly shows that the private sector is playing an extremely important
role in taking care of the health needs of the population, sometimes even
substituting the Government's role. This is likely to increase even more in
future due to variety of reasons. There is an absolute lack of planned effort

70
to define and encourage the role of private initiative in health sector in
India. Despite such handicap, the private sector has shovm tremendous
growth. However, this growth is limited to non-hospitahsation services as
more than 70% of hospital beds are still in Government hospitals. The flow
of private capital in creation of hospital bed facilities has been inadequate.
The public expenditure on health and family welfare is just a httle over one
per cent of the GDP and over and above the spending is disproportionately
low in demographic and socially backward states. A majority of health
care problems faced by the Indian masses are amenable through essential
public health investments, cost-effective interventions, and improvement in
efficiency of public health deliver>' system and reduction in inequity in the
distribution of benefits from public health services. Both the nature of
morbidit>' and causes of death data clearly suggest the need for an
overwhelming focus on primary health care in India. It is well known that
financial allocations in health care are inequitable between sub-sectors as
well as among the geographic areas and the programmes are not
adequately targeted. Health sector is largely characterized by an emphasis
on hospitals rather than primary health care, urban rather tlian rural
population; fascinations rather than paramedics, all of which have large
private than social returns. In the recent past, however, the National
Sample Survey (NSS) and the National Council of Applied Economic
Research (NCAER) have made commendable efforts to estimate morbidity
rates through carefully designed sample surveys. The study points to
considerable inter-state differentials in the prevalence of morbidity.
Incidentally, Kerala considered being in the advanced stage of
demographic and health transition has recorded the highest level of
morbidity in all the surveys reviewed. Generally speaking, incidence of
morbidity is higher in rural than in urban areas. The NSS data suggest that
both the incidences of illness and hospitalization increase as the Monthly
Per Capita Expenditure (MPCE) Class increases. On the other hand, the

n
NCAER data indicate that the decision to hospitalize is not significantly
related with income. However, both the surveys confirm that the SCs and
STs report lower levels of hospitalization, which is largely due to their
inaccessibility to health care facilities on the one hand, and lack of
resources on the other. About 10 to 15 percent of all those reporting
sickness may not seek treatment at all; the proportion tends to be higher in
rural than in urban areas. Overall medical expenditure constituted 84 per
cent of the total cost of treatment which also included indirect cost such as
expenses on transport, special diet, rituals, gifts, tips and other
miscellaneous expenses. In most states, the proportion of indirect cost
(mainly transportation) was higher in rural than in urban areas thus
reflecting poor distribution of health care facilities in iiiral areas
particularly in hilly states. Overall, 80.2 per cent of the total health
expenditure by the households was for receiving the private health care
facility. This is largely because the private health care expenditures, both
for inpatient and outpatient care, are considerably higher in terms of out-
of-pocket payments by the households. The total curative health care
market in India was estimated to be wortli about Rs.22276 crores about 4.1
percent of the NNP, during 1993. Besides, households out-of-pocket
expenditure on medical care, the government medical expenditure during
1993 was of the order of Rs7518crores (includes both revenue and capital
expenditure) which amounts to 1.4 per cent of the NNP. Thus, the gross
health care market in India is of the order of 5.5 per cent of the NNP i.e.
Rs.29794crores during 1993. There are large inter-state variations in both
government and household spending on health care whether expressed in
per capita or as percentage of state domestic product (SDP). While there is
a need for systematic improvements in the delivery of quality health
services by the public sector itself, it is also important to regulate and
control the health care dispensation, quality, and pricing in the private
sector. In fact, the State has subsidised the growth of the private health

72
sector by various means-subsidized medical education for those who
ultimately go into private practice or even migrate abroad; concessions,
subsidies and tax relief to private practitioners and hospitals - many
private hospitals function as trust hospitals whose incomes are exempted
from tax. Further, the public sector units supply bulk drugs and raw
materials at subsidised prices to the private pharmaceutical industry and in
the process have gone 'red' and become inefficient. Over and above, the
private sector gets duty concessions for importing the expensive new
medical technology that largely benefits the richer sections. A dual priced
dispensation of health care with adequate guarantee to quality services is
likely to lead to self-selection and better targeting. A recent NCAER
survey on the disease prevalence yields an all India estimate which
suggests a total of about 41 million individuals on medication for major
sickness at a given point of time in 1994. A large majority of those who
suffered from these conditions might have already gone through
hospitalization or would likely to go for it is near future. This estimate of
morbid population clearly suggest as per the committee the need for a full-
fledged system of hospitalization insurance - based on certain well
conceived guidelines and a properly monitored regulator^' mechanism to
minimize the risks of possible exploitation by the insurers and the
providers. The sub-group has also observed several limitations that need to
be carefully examined before the health insurance is further expanded or
privatised to any significant extent. Four issues in their view are more
critical and should therefore be examined at length. First, the insurer and
provider network are poorly regulated. Second issue relates to the
inadequate facilities and/or infrastructure in most of the hospitals and
nursing homes in the country. With the growing health insurance coverage,
demand for good quality services would likely to increase at a much faster
pace resulting into over crowding and long waiting period for patients in
hospitals and nursing homes that are most efficient, better managed and

73
possess good infrastructure. An accreditation or star rating of hospitals on
the basis of the facihties they have and their service quality is therefore
essential. Third problem lies with the exclusion clause. Without
questioning the validity of this argument, it may be noted that exclusion of
a pre-existing condition on permanent basis cannot be fully justifiable.
Fourth and the most critical issue in the current debate on the need for a
comprehensive health insurance mechanism in India is the non-coverage of
those who are needy and more vulnerable either socially or economically.
Most of the now available health benefits leave more than 80 per cent of
the workforce in rural and urban areas to fend for themselves in one or the
other ways. The more important role of private sector in India is also due
to prevalence of various types of medicinal schools in the country. For
many t>pes of chronic and neurological disorders, the services of
Homeopathic, Ayurvedic, Unani, Sidha, Chinese Acupuncture, Tibetian
and even Tribal Shaman practitioners are consumed. But studies also show
that these practitioners do not always stick to their school of medicine and
use some kind of elective system combining various systems
simultaneously. There is also no control on the qualification and quality of
the medical practitioners in the country. One study has shown that in rural
areas, only 3% practitioners are qualified MBBS doctors with the rest
being RMP (RegisteredMedical Practitioners). Moreover, hardly anybody
seems aware about registration regulations. On an average, one household
spends 5% of its annual income on curative health care expenditure. This
figure is higher for rural areas and some micro level studies suggest that
this could be as high as 7-10%. Studies have estimated that about 60% of
the per capita public spending on health by the Indian government for the
year 1990-91 have been spent on clinical services and rest on family
planning programmes and immunisation programmes including supply of
safe drinking water in certain areas. Compared to this the per capita private
household expenditure on health care was four times that of government

74
expenditure. Private household expenditure on health care was Rs.250 in
1991 as against Rs.84/-, which is the government expenditure. The share of
household expenditure being 75%. The government spends less than 1% of
its planned expenditure on health sector against a World Bank prescribed
norm of 5%. On an average one household spends 5% of its annual income
on curative health care expenditure. Unlike many of the developed
countries, India does not have a National Health Scheme. Moreover the
health care sector is not at all regulated at any levels. The medical
practitioners and Hospitals in many places have no registration. There is a
differential pricing system for the delivery of health care and for the same
type of treatment the deviation in the charges incurred vary ver>' widely.
In India certain Social Security schemes have been introduced for the
benefit of weaker sections of the society by the central government. But
these schemes do not cater to the health needs and only pay compensation
for the death of the individual. In a news report in July 2001 by Kalpana
Jain, Times News Network, appearing in, 'The Times of India' daily form
Mumbai titled, "Private sector dominates health care in India: study" it
has been reported that the findings of a collaborative research undertaken
by the World Bank and institutions under the Union health and family
welfare ministry reveal that the private sector in India accounts for 55 per
cent of all hospital admissions, 40 per cent of ante and post-natal care. The
study also reveals that one-quarter of hospitalised Indians slip below the
poverty line because of hospital expenses alone. Hospitalised Indians
spend more than half of their annual expenditures on health care, More
than 40 per cent of those hospitalised borrow money or sell assets to cover
expenses. Overall the distribution of private services is even more skewed
towards the rich than the public sector. This study has also observed that
Public health resources too are disproportionately distributed in favour of
higher-income groups. The poorest 20 per cent of the population receives
only 10 per cent of the benefits. As it is, disparities across states and

75
betweens groups are so striking that poor show little benefits of reduction
of mortality and morbidity: overall the poorest 20 per cent Indians have
more than twice the rate of mortality, malnutrition and fertility of the
richest 20 per cent. The institutional allocation of funds by the government
in the Health sector when examined reveals that majority of the allocation
is for salaries and administrative purposes and a very negligible amount is
allocated to equipment and infrastnicture.
Social Security Schemes introduced by the government: India does not
have a national scheme for health or national comprehensive social
security scheme. However the social security schemes introduced over the
period of time include
Personal Accident Social Security Scheme (PASS) for families having an
income level of less than Rs.7200/- pa. If an earning member of the family
in the age group of 18-60 years dies in an accident the eligible dependent
gets compensation of Rs.3,000/-. This scheme was being implemented by
the four subsidiaries of General Insurance Corporation of India (GIC) on
flag company basis. However discontinued w.e.f 1/11/2000. The entire
premium was borne by the central government.
Hut insurance scheme wherein the beneficiaries very poor families having
annual income lower than Rs4800/- pa. get compensation if their hut is
destroyed due to fire. Was also implemented by tlie four subsidiaries of
GIC on flag company basis and discontinued w.e.f l/11/2000. RslOOO/-
for the hut and Rs 500/- for contents was the compensation payable.
Life Insurance Corporation of India (LIC) also implements certain
schemes for the weaker section of the society. As per the directives of the
central government a social security fund has been created to extend
insurance benefit to the economically weaker section of the society in the
unorganised sector. Half the premium will be drawn from the social
security fund maintained by LIC and the remaining 50% is collected from
the nodal agency which may be contributed by the state government and or

76
the beneficiaries. Insurance cover up to Rs.5,000/- is granted under the
scheme. However, in case of death or permanent disability including loss
of two eyes or two limbs due to accident a sum of Rs.25,000/- and in case
of loss of one eye and one limb a sum of Rs. 12,500/- is payable. The
government of India has approved 23 occupations, which can benefit under
the scheme and as on 31.3.97 about 491ac members have been covered.
LAGLI scheme: Landless Agricultural Labourers Insurance scheme
Landless agricultural labourers numbering about 1.20crores in India have
been covered for a uniform sum of Rs.2,000/- and the entire premium is
made available from the social security' fund. All the beneficiaries under
the IRDP scheme have also been covered under group insurance scheme
wherein a borrower is covered for a sum insured of Rs.5000/- for natural
death and Rs. 10,000/- in accidental death. About 1.94crores borrowers
have been covered under the scheme. These government-sponsored
schemes cater mainly to the beneficiaries of the weaker society and
majority of them covers only death and there is no scheme covering
sickness.
Employees State Insurance Scheme (ESIS)
India has Employee State Insurance Scheme, which has been implemented
under the ESI Act of 1948 and amended in 1989. As per Employees' State
Insurance Corporation (1997). This act is applicable in the first instance to
non-seasonal factories using power and employing 10 or more persons and
non-power using factories and specified establishments employing 20 or
more persons. As of now employees of factories or establishments in receipt
of wages not exceeding Rs.6,500 p.m. are covered under the ESI Act in areas
where the scheme has been implemented. The scheme is mainly fmanced by
contribution from employers and employees. The employers contribute
4.75% of the wages payable to the covered employees and the employees
contribute 1.75% of their wages towards the scheme. Employees in the
specified lower wage group are not required to contribute. The state

77
governments contribute a minimum of 12.5% of the total expenditure on
medical care in their respective states. Under the Act, exemption can be
provided to estabhshment or factories that provide social security benefits to
their employees superior or similar to those available under the ESI schemes.
The benefits provided under the scheme include medical care which is
provided to the insured person and the family members through a vast and
widespread network of ESI dispensaries, clinics, hospitals, etc. under whose
jurisdiction their residences are located. Sickness benefit is also made
available as periodical payment to the insured person during the period of
certified sickness. The sickness benefit rate is approximately 50% of the
daily wages of an insured person. Maternity benefit and disablement benefit,
dependant's benefit, fiineral expenses, rehabilitation allowances are other
benefits provided under the scheme. The Employee State Insurance
Corporation (ESIC) monitors this scheme spread in 22 States and Union
Territories covering about 77,31,650 employees along with their families and
totalling about 3,27,66,600 estimated beneficiaries. There are 125 ESI
Hospitals and 43 ESI Annexes, 1443 ESI dispensaries and over 8000
insurance medical officers/ practitioners. The number of ESI beds is 18695
in ESI hospitals, 867 in ESI Annexes and 3772 are reserved in other
hospitals. ESIC, which is implementing the ESI scheme, is in fact one of the
largest HMO in the world. Most of the employees in the organised sector
who do not come under the purview of the Employee State Insurance Act by
being above the wage limit as prescribed by the act are generally covered by
various group health insurance schemes offered by the insurance companies.
Central Government Health Scheme (CGHS): On the same lines as ESIS
there is a scheme for the central government employees called the Central
Government Health Scheme (CGHS) which also works on contribution
basis between the central government and the employees and provides
comprehensive medical care which includes free medical care through the
network of allopathic dispensaries, Ayur\edic, Homeopathic, etc., and

78
supply of medicines, laboratory examinations, confinement, in-patient and
out-patient treatment. The facilities under CGHS include free consultation
with general duty medical officers in the CGHS dispensary and with
various other specialists with prior appointments, clinical, pathological
tests, radiological facilities and round the clock emergency services in
limited number of dispensaries. All drugs prescribed by the medical
officers or specialists are provided free of cost from CGHS dispensaries.
Similarly, hospitalization facilities are provided through a chain of Central
Government and State Government hospitals, municipal hospitals, and also
some approved private hospitals. Moreover, the medical officers also make
free domiciliary' visits as and when required. About 481ac beneficiaries are
covered under this scheme. Similarly Railways also administer their own
captive scheme on the above lines covering about 201ac employees. In total
above 851ac beneficiaries who include the dependents are covered under
this scheme. There are no schemes to take care of the unorganised sector,
the self-employed, or the unemployed as far as health care is concerned.
The majority of health insurance underwritten in India is by the four public
sector companies. The major scheme under the non-life insurance is tlie
"Mediclaim" which is a Hospitalisation and Domiciliary Hospitalisation
Medical Insurance Scheme and is offered on individual as well as group
insurance basis. Apart from this certain Critical Illness Covers, Long Term
Hospitalisation and domiciliary hospitalisation medical insurance scheme,
etc., are in the market but if the penetration of these covers is examined it
is seen that about 8 million persons have been covered under the schemes
put together including mediclaim as in 2001-02. LIC has also come out
with two major types of health covers, which include a critical illness
cover as a rider on a life insurance policy, and major surgical operations
cover. Except for the section of employees covered under the ESI scheme
most of the employers in the organised sector go in either for group
medical insurance and group personal accident insurance where disability

79
benefits only due to accident are given to cover their employees. The WC
policy offers coverage as per the Workmen's Compensation Act, which is
in fact a liability policy offered to the employers covering the employees
against death/disability or injuries due to occupational accidents or
occupational diseases. The number of covers in the market, the options
available to the public at large are very restrictive and the penetration is
very low especially the individual insurances in the unorganised sector.
There are no laws in the country which provide social security to an
individual citizen in case of health as well as disability. There is no
regulator^' framework protecting the insured for continuation of their
existing health insurance policies as well as making a health insurance
policy available to any person in need of the same. Premium paid under
certain medical insurances is deducted from the income while calculating
the income tax. This is subject to a limit. Similarly the amount of premium
paid by an employer to effect or to keep in force insurance on the health of
his employees under a scheme framed in this behalf by the GIC of India is
allowed as deductions while computing the income.

2.4 Major Observations

2.41 Health Care Sector

2.411 Health Care Expenditure
The health expenditure patterns of the selected countries under study are
shown in liable 2. The total health care expenditure ranges between 6-9 %
of the GDP for most of the countries. In case of Germany it is 10.4% and
the highest being 14.6% of GDP for USA. In case of India it is 5.6 %. If
the patterns of the public and private expenditures are studied it is
observed that the major portion is the public expenditure except for
Singapore, USA and India. In case of Singapore 1.8% is private
expenditure and 1.5% is the public expenditure. In case of USA private

80
expenditure is 7.5% of GDP as against 6.6% public expenditure. Whereas
in India 4.4% of the GDP is private expenditure as against 1.2%) of public
expenditure. Thus in all the developed countries the government has a
major role as far as health care expenditure is concerned. Even in countries
such as the USA where the private health care expenditure is more than the
public expenditure, the government spends substantial amount.
Table!
HEALTH CARE EXPENDITURE - Select Countries
Source: World Bank (1999)
•
Total Public Private Per
Countries
%Of %0f %Of Capita
GDP GDP GDP $

Japan 7.3 5.7 1.6 2,442

Germany 10.4 8.1 2.3 l<oll
France 9.8 1.1 2.1 2,349
U.K 6.7 5.7 1 1,454
Ireland 6.7 5.1 1.6 1,337
Italy 1.6 5.3 2.3 1,515
Netherlands 8.5 6.2 2.3 1,978
Sweden 8.6 7.2 1.4 2,222
Singapore 3.3 1.5 1.8 943
Australia 8.5 5.8 2.7 1,798
Canada 9.2 6.3 2.9 1,829
USA 14.1 6.6 ' 7.5 4,093
1

India 5.6 1.2 4.4 18

Note:
a. Public health expenditure: consists of recurrent and capital spending
from government (central and local) budgets, external borrowings
and grants (including donations from international agencies and non

81
 governmental organisations), and social or compulsory' health
insurance funds.
b. Private health expenditure: includes direct household (out-of-
pocket) spending, private insurance, charitable donations, and direct
service payments by private corporations.
c. Total health expenditure: is the sum of public and private health
expenditures. It covers the provision of health services (preventive
and curative), family planning activities, nutrition activities, and
emergency aid designated for health but does not include provision
of water and sanitation.

2.412 Health care infrastructure and utilisation

The health care infrastructure and utilisation of services of the select
countries under study are shown in Table 3. It is observed that the
Physicians per 1000 people ranges from 1.4 to 3.4. In USA there are 2.5
Physicians per 1000 people and in Germany there are 3.4 Physicians per
1000 people whereas in India there are only 0.4 Physicians per 1000
people. The number of Hospital beds per 1000 people ranges from 3.6 in
Singapore to 16.2 in Japan. In USA there are 4.1 hospital beds per 1000
people, in Germany 9.7 whereas in India there are only 0.8 Hospital beds
per 1000 people. The inpatient admission rate ranges from 9 in Japan to 23
in France and UK. It is 12 for USA and 21 for Germany. The average
length of stay in hospital ranges from 7 days in Ireland to 44 days is Japan.
The same being 8 days in USA, 14 days in Germany and 10 days in UK.
The outpatient per capita visits range from 3 in Sweden to 16 in Japan. It is
averaging at 6 for most of the countries including USA, Germany, and UK.
In case of India such statistics are not available though some sample
studies have been carried out.

82
 Table 3

HEALTH CARE INFRASTRUCTURE AND UTILISATION - Select Countries

Source: World Bank (1999)
Average Out-
Countries Physicia Hospital Inpatient
ns Beds Admission length patient
Per rate of stay Visits
Per
1000 1000 %
in per
people people of days capita

population
Japan 1.8 16.2 9 44 16
Germany 3.4 9.7 21 14 6
France 2.8 8.9 23 11 6
V.K 1.5 4.7 23 10 6
Ireland 2.1 5 16 7 Na
Italy 1.7 6.4 16 10 Na
Netherlands 2.5 11.3 11 33 5
Sweden 3.1 6.3 18 8 3
Singapore "" 1.4 3.6 12 na Na
Australia 2.2 8.9 ^ 17 16 7
Canada 2.2 5.1 13 12 7
USA 2.5 4.1 12 8 6
India 0.4 0.8 Na ^ na Na
i i

Note:
a. Physicians: are defined as graduates of any faculty or school of
medicine who are working in the country' in any medical field
(practice, research, teaching)
b. Hospital beds: include inpatient beds available in public, private,
general, and specialised hospitals and rehabilitation centres. In most
cases beds for both acute and chronic care are included.
 c. Inpatient admission rate: is the percentage of the population
admitted to hospitals during a year.
d Average length of stay: is the average duration of inpatient hospital
admissions.
e. Outpatient visits per capita: are the numbers of visits to health care
facilities per capita, including repeat visits.
f na: data not available.

2.413 Health Care Systems

The health care systems in most countries, regardless of their financing
structure, rely on a mix of private and public provision (Society of
Actuaries in Ireland (1995). Health care sector in most of the countries has
some or other methods of regulations. The minimum standards for delivery
of health care are stipulated, schedule of fees are regulated (Germany) or
there is some system tlirough which the health care sector is monitored or
regulated.
a) Hospital services: In most countries, there is a mix of public, private and
voluntary not-for-profit hospitals. Hospitals are typically paid on the basis
of one, or a combination, of the following methods;
Fee-for-service: Payment consists of a separate amount for each service
provided by the hospital (e.g. the use of theatre, radiology/pathology tests,
drugs, dressings, etc.) on top of a basic "maintenance charge" per day spent
in hospital.
Per diem rate: Payment consists of a unifonn sum for each day a patient
stays ill hospital, regardless of the t\pe of treatment given.
Cost-per-case: This involves estimating the likely bundle of services that
will be required in treating a case belonging to a particular DRG (diagnosis
related group), combining this with their costs (fee-for-service schedule)
and arriving at a price for treating a case that will, on average, cover the
cost (this is sometimes referred to as prospective pricing).

84
Global budget: A fixed sum is paid to a hospital during the course of a
year with the obhgation on the hospital to meet demand for services within
the budget during the year.
h) Doctors' services: In many countries, general practitioners are self-
employed professionals, while clinicians' are salaried employees of
hospitals or clinics. Self-employed doctors may practice individually or
may form group practices. Payment methods for doctors fall into three
broad categories:
Fee-for-service: Doctors receive retrospective payment for each medical
service provided.
Capitation payments: Doctors receive a fixed payment for every patient
they are registered to treat. The capitation payment may vary for different
demographic groups.
Salary: Doctors are employed by health authorities and receive a fixed
salary for services provided to patients.
c) Managed Care: With the escalation of health care costs, a new type of
health care delivery system Managed Care has evolved. The term
"Managed Care" encompasses a variety of innovations in both the dehvery
and financing of health care that are intended to eliminate imnecessary and
inappropriate health care and reduce costs, for example: (a) Utilisation
review and control of decisions about health services provided, either
prospectively or retrospectively (b) Limiting or influencing patients' choice
of providers and (c) Negotiating different payment terms or levels with
certain providers (i.e. discounts, capitation). Utilisation controls can
involve any or all of the following: a) second surgical opinions, b) prior
authorisation for hospital admission, c) the use of Primar\' Care Physician
"gatekeepers" who must be seen first to obtain referrals to specialist
physicians, d) concurrent review of hospital use i.e. ongoing monitoring
while the patient is in hospital, e) discharge planning and f) profiling of
physician practices. Utilisation control may lead to a refusal to pay for a

85
particular service, establishment of guidelines for anticipated utilisation
(e.g. authorisation for a specific number of hospital days for a particular
diagnosis), or efforts to educate physicians whose practice patterns vary
substantially from accepted norms. Managed care may be delivered
through HMOs, PPOs, etc. Compton, R. E and Schlackman, N. (1998) have
observed that managed care is an organised system of medical care that
integrates financing and delivery of appropriate health care and measures
performance. It has been amply documented that the most expensive
medical care is not necessarily the best medical care: in fact, often the
opposite is true. Managed care plans generally offer several advantages
over traditional insurance coverage, including lower costs, more
comprehensive benefits, preventive services and lower out-of-pocket
expenses for patients. Because managed care relies on performance
measurement and use of data, the cost and effectiveness of treatments can
be documented. Thus, managed care provides a mechanism to provide
better quality at lower cost. It manages both the utilisation of care and the
cost of services provided. The goal is a system that delivers value by
giving people access to quality, cost effective health care. There are many
forms of managed care. They have in common several key components.
Among them are: (a) Negotiated arrangements with selected providers to
furnish comprehensive services for a lesser fee, or sometimes for a flat fee,
called "capitation", (b) Explicit standards for selecting providers, (c)
Formal quality assurance and utilisation review programs (d) Use of
advanced information systems to track medical outcomes and measure the
performance of the provider and the treatments used and (e) Emphasis on
healthful lifestyles, primary care services and prevention of illness. The
main difference is each plan's ability to coordinate care provided by the
doctors, hospitals and other service providers in a cost-effective way. As
the level of coordination increases, so do cost savings. Health Maintenance
Organisations (HMOs) have a good track record for achieving cost savings

86
while offering more comprehensive benefits and lower out-of-pocket costs
to patients. HMOs place significant emphasis on prevention and disease
management. This focus has had profound, measurable impact on the
practice of medicine. Obviously, this benefits patients in terms of earlier
treatment and better medical outcomes, but it also saves money because it
costs much more to treat later stage illnesses. Managed care has
fundamentally and permanently altered the way care is financed and
delivered. The rise of capitation and its effect on provider behaviour, the
shift from treating disease to managing health and how that shift has
benefited patients, the increasing importance of performance, measurement
in assessing quality of care, and the incontrovertible data that prove that
cost control and quality care can, and do, go hand in hand. Under fee-for-
service, the financial incentives reward physicians for each service they
provide. Thus, the more services provided, the greater the financial
rewards. Among the most positive trends is that managed care is increasing
the ability to gather and analyse data that will help \'alidate uniform
guidelines to monitor and measure quality of care and service. One of the
consequences of indemnity insurance rewarding more care is that a
significant amount of the care delivered has been found to be inappropriate
and/or unnecessary. The Rand Corporation examined the frequency of
several expensive, serious medical procedures to determine if they were
being done appropriately. The study showed often the procedure was not
appropriate or the indications were found to be equivocal. Further studies
show that there is significant variation in the frequency with which
hospitals appropriately perform the previously mentioned procedures.
Studies show that many simple office procedures are performed with far
more frequency in the US than in England, yet controlled studies show that
the outcomes for patients do not significantly differ. John E. Wennberg,
MD, MPH, Dartmouth Medical College, documented that hospital
admission rates vary significantly depending not on the nature of the

m
illness or the health of the patient, but, rather, on the number of hospital
beds in the patient's community. In some cases, the amount and kind of
health care an individual receives depends solely on where he or she lives.
Researchers have estimated that only 43% of existing hospital beds would
be needed if just half of the population were covered under capitated
arrangements. If the entire population were capitated, far fewer beds would
be needed. A study in California on the effect of capitation on physician
behaviour found 80% decline in cardiac catheterizations after capitation
was implemented. Compton, R. E. and Schlackman, N.(1998) also observe
that since it is known that there is significant overuse and inappropriate
use, the question that needs to be answered is, "Which rates are the right
ones?" All participants in the deliver^' of care will benefit from the
increased emphasis on measuring qualit>', but they will have to provide
objective evidence of their accountability. Quality of care is measured a
number of ways, ranging from patient perceptions to medical outcomes
data. The ability to manage certain chronic diseases requires systems to
understand the affected population and its risk factors so that early
intervention is possible. The most important aspect of managed care going
forward will be advanced technology systems that improve the flow of
quality', performance, and outcomes-related data throughout the system.
The pressure of rising costs, aging population and technological advances
will continue. That means the health care system - and health insures -
must continue to evolve to address these and other issues.
Cos t-effectiveness
The theory behind managed care is that health care can be made more cost-
effective by eliminating unnecessary^ and inappropriate utilisation.
However, debate abounds in relation to both the efficacy and acceptability
of managed care. One issue is the difficulty of determining when health
care is unnecessary. For instance, in the United States, the RAND
Corporation reported in 1988 that 50% of all cardiac bypass procedures

88
were unnecessary and in 1990 reported that only 9% of cardiac bypass
procedures were unnecessary-. Those who oppose managed care delivery
maintain that patients may not obtain all the treatment that would be of
benefit to them. Many people are uncomfortable with the role of the doctor
within an HMO, which has been described as that of a "double agent".
Stein, R. W. (1995) has observed that while controllable delivery practices
contributed to increases in the health care costs, demographic changes,
especially the inexorable aging of the population, seem to have been a
significant factor. And these forces will not easily be tamed simply by the
implementation of managed care. There is also debate about the level of
savings that can be achieved by managed care programmes. Some studies
show that those insured by HMOs have substantially less hospital
admissions and, once hospitalised, spend substantially less time in hospital.
Other studies suggest that the level of savings, which can be achieved, is
very minor. For example, the US Congressional Budget Office estimated
in 1992 that if all US health care services were delivered through managed
care programmes, national health care expenditures might be reduced by
1%. It is also argued that the administrative costs of managed care may he
substantial and may outweigh potential savings. Finally, it is argued that
the cost savings achieved by managed care programmes are to a large
degree achieved by "cost-shifting", i.e. that the reduced costs for managed
care programmes give rise to increases in costs in other forms.

2.42 Health Care Financing Systems

The future costs of acute health care for any mdividual are unpredictable
and potentially catastrophically high. Hence, in most countries, health care
costs are pooled, either by means of public funding or insurance. Society?
Of Actuaries in Ireland (1995) have observed that while the structure of
health care financing varies enormously from country to country, three
major health care financing models can be identified as follows:

89
a) Predominantly Tax Funded.
Health care funds are raised through general or dedicated payroll taxes.
Funds are transferred to regional authorities who act as third party payers
by financing health service providers. The prominent examples are UK,
Canada.
b) Predominantly Social Insurance Based
Membership of social insurance programmes (often called sickness funds)
is compulsory for all or most citizens. Sickness funds reimburse health
service providers via negotiated contracts. France, Germany, the
Netherlands are the prominent examples.
c) Predominantly Voluntary Insurance Based. Health care finance is raised
by competing private insurance companies, which then reimburse
providers for services delivered to their members. United States is the
major example. In practice, most systems are, at least to some extent,
hybrid forms of the above models.
Society of Actuaries in Ireland (1995) has observed that for most of the
countries public funding, i.e. State funding and social insurance
contributions combined amounts to between 70% - 80% of the total. Social
insurance contributions play a major role in European countries such as
France (67%), Germany (66%) and the Netherlands (63%j, State funding
play a major role in European countries such as Denmark (87%), Ireland
(66%), Sweden (69%), and UK (72%). Rest of the European countries it is
about 40-45% social insurance contributions and 25-35% state funding. In
the United States about 19% is through social contributions, 25% is by
State fiinding and 31% which is the largest in the world is by Private
Medical Insurance. Self-payments are highest in Switzerland (24%), USA
(22%), and Italy (20%) and lowest in Denmark (12%), Sweden (12%),
Netherlands (12%), Germany (13%), and UK (14%). The rest of the
countries it ranges between 15-20%. High proportion of self-payments
probably relates to primary care and prescription and over the counter

90
drugs. Singapore maintains the world's longest-running experiment with
Medical Savings Accounts. These accounts help defray public health care
costs while ensuring that citizens receive adequate and affordable
coverage. Moreover, the system encourages Singaporeans to stay healthy
and minimise the use of unnecessary medical services. The Private sector
expenditure for Health care is higher in Singapore than the Public sector.
Singapore has a three layered structure of health care: (a) Medisave forms
tlie first layer of this safety net, based on compulsory savings and a family
support system, (b) Medishield provides the next layer of the safety net,
covering major chronic conditions requiring long term and high-cost health
care, (c) Medifund is an additional layer, financed through an endowment
fiuid created from surplus revenue. Japan's Health expenditure shows a
very high share of Public sector.

2.43 Health Insurance Systems & Coverage

If we observe Table 4 it is seen that in most of the countries the majority of
the population is covered under some public health insurance or scheme. In
tlie United States, tliere is public financing of health care for significant
segments of the population through the Medicare and Medicaid
programmes. In Europe it is observed that nearly 95% of the population
had public health insurance coverage, nearly 20.5% were covered by the
Mutual/ Sickness funds and 10.9% had commercial health insurance
coverage in 1990. Countries such as Belgium, Denmark, Greece, Ireland,
Italy, Portugal, Japan, and the United Kingdom have nearly 100% of their
population covered under the Public Health Insurance coverage. In fact
other than Netherlands which has about 70% of the population under
public coverage and Germany having about 88%, rest of the countries in
Europe have more than 95% of their population covered under public
health insurance coverage. Countries such as Belgmm, France, Netherlands
has more than 50% of their population being members of sickness fiinds/

n
Mutuals. When "mutuals" and commercial insurance cover is combined,
tlie proportion of the population that is insured is strikingly high in France,
Belgium, and the Netherlands. Vast majority of EU citizens are entitled to
at least some publicly funded health care, whether through compulsory
social insurance arrangements (e.g. French and German sickness funds) or
through a centrally funded system (as in Ireland and the UK). The principal
exceptions are Germany and the Netherlands, where a proportion of the
population is allowed to opt out of or is not entitled to participate in the
Table 4
HEALTH INSURANCE COVERAGE - Select Countries

Countries Public Mutuals Commercial

% % %

Japan 100 # 0
Germany 88 10 9
France 99 65 14
U.K. 100 5.3 11
Ireland 100 30 0
Italy 100 5 10.5
Netherlands 70 54 40
Sweden 100 # #

Singapore 100 0 0
Australia 100 0 40
Canada 100 0 #

USA m # 69
1

India * 0 0.3
Source: 1. Societies of Actuaries in Ireland (1995) 2. CEA (1997
Note: * ESIS, CGHS and Railways not included # Inclusive/ not available

m
sickness fund system and is therefore insured privately. In some countries
such as Austraha, Ireland, and the UK, private health insurance also
provides an ahemative to the public system; those with private insurance
forego their public entitlement in order to avail of alternative private
treatment. Contributions to social insurance schemes are normally income
related. USA has the largest coverage under commercial insurance (69%)
and Netherlands and Australia having 40% respectively. In Europe the
commercial insurance coverage averages about 11%. In the UK,
approximately 11% of the population voluntarily finance their health care
privately. In Germany and the Netherlands, parts of the population are not
eligible for membership of sickness funds and therefore effect private
insurance. Belgium, France, Italy, and the UK are the major European
countries having more than 10 % of the population covered under
commercial insurance. In many European countries, substantial
proportions of citizens have health insurance cover in addition to their
public entitlement in the form of supplementary insurance cover. This
means a basic public health scheme is available to cover the majority of the
population. In some countries compulsory memberships of mutuals or
effecting private health insurance is stipulated. Commercial insurance
supplements public coverage in most countries. In countries with tax-based
or social insurance-based systems, people supplement their entitlement
with voluntary private insurance. Typically, supplementary private
insurance is effected to cover co-payments / deductibles required under the
public system or to cover services that are not fully covered under the
public system, e.g., dental treatment. Much of the private health insurance
is effected to cover costs which are not covered by the public system (e.g.
the public system may require patients to contribute a proportion - usually
relatively small - of the cost of treatment, or access may be required to
health services which are not covered by the public system). In Ireland,
the UK and Netherlands, most, private health insurance is for the purpose

93
of access to alternative private treatment, rather than to supplement
entitlements mider the public system. Japan's State health insurance
system covers insured either at the workplace or at home Insurers range
from the state, local administration authorities and health insurance
schemes to co-operatives. The system covers both sickness and
hospitalisation costs, and also cares for disability. Private insurance
premiums are normally risk-related, except where there is statutory
regulation of the market, which requires community rating as in Australia
and Ireland. Private medical expenses insurance is usually underwritten on
a short term basis; the principal exception is Germany, where health
insurance policies are whole-of-life, with premiums determined on the
basis of age at entry and increasing thereafter only to reflect medical
inflation,

2.44 Regulations in Health Insurance

Health insurance sector is regulated in most countries either through
legislations, registrations, stipulations of minimum benefits/coverage,
obligations to the weaker sectors, protection of the insured, community
rating, uniform provisions, etc. In Switzerland the whole of Swiss
population is subject to compulsory basic insurance, covering the cost of
good quality health care under Health Insurance Law (KVG). The law also
stipulates that the insurers must operate State health insurance on a
reciprocal basis and guarantee that the insured will be given equal
treatment. The law stipulates community rating in State health insurance
and also that the premiums of insured with limited financial means should
be reduced. In Germany Doctors and hospitals must have the approval of
the health insurance funds to treat members of the state health scheme. The
fijnds settle fees directly with the doctor or hospital concerned. When a
doctor treats a private patient, his bill must be on an official scale of fees.
In case of in-patients treatment, a uniform, service related charge is applied

94
to all state and private hospital patients. In addition private hospital
accommodation, treatment by senior consultants is separately calculated
for patients who want to avail the same. Compulsory health insurance is
tlie oldest branch of social insurance in the Federal Republic of Germany
with the Law on Health Insurance for Workers being enacted in 1883. The
RVO (Imperial Insurance Law) was the legal basis for statutory health
insurance from 1911 to 1988. Several legislations have been passed to
extend the coverage under healtli insurance with the most significant being
the Health Reform Law, which came into force from 1989. Law requires
all persons undertaking paid employment must be insured against sickness
and compulsory insurance ceases to apply where an employee's income
exceed a certain level. The health insurance premium calculations as well
as policy conditions have to be submitted to the Federal authorities. Private
health insurance premiums are based on age at entry, gender, and state of
health of the insured and are underwritten on an actuarial basis, which is
prescribed by law of substitution health insurance. Health insurance in
Germany is characterised by the fact that premiums are not dependent on
increasing age and the consequent increase in the sickness risk and that
reserves for increasing age are constituted and that contracts may not be
cancelled (they are usually taken out for life). There is a Law for
compulsory long-term care insurance, which has come into effect from
1995. In France private health insurance is regulated by the Insurance
Contract Law and Law on Complementary Social Provision which are now
include in the Insurance Code. The mutual sector is regulated by the
Mutuals Code. In UK insurance companies are supervised directly by the
Department of Trade and Industry and have to comply with the provisions
of the Insurance Companies Act of 1982 and various other regulations.
Otherwise private health insurance as such is an unregulated market. In
Ireland the Health Insurance Act of 1994 requires compliance with key
criteria laid down by the Department of Health which include a) Minimum

95
benefits for cover are laid down in the regulations in order to avoid erosion
of the price benefit package under competitive pressures b) Community
rating in Ireland prohibits variation of premium by age, sex or state of
health c) Life -long cover requires insurers to renew contracts on standard
terms whatever the individual claims history d) Open enrolment allows
people with pre-existing medical conditions to join or transfer between
health insurers e)Equalisation of risk among insurers is a mechanism based
on a "Community Rated Equalisation Fund (CREF) which requires
insurers to monitor their actual claims experience in detail and to make
official returns based on a range of standard claims costs for the defined
'minimum' benefits. The calculations are designed to identify the excess
costs of any one health insurer covering a higher-than-average risk
portfolio and to redistribute those costs among all health insurers. The
system is intended as far as possible to allow insurers who are more
efficient in administration or clinical cost control to retain the proceeds of
such efficiency. Payments under the equilisation system are not triggered
until one insurer exceeds a prescribed threshold of payment due.
Netherlands has tlie largest private healtli insurance market share in
Europe. The Netherlands health care system is unique with the three
compartment systems and the legislations such as the Exceptional Medical
Expenses Act (AWBZ) which is a compulsory national insurance scheme
for long-term care and high-cost treatment, Health Insurance Act and the
Medical Insurance Access Act (WTZ). USA being the leader in health
insurance both in terms of coverage as well as innovations has also the
highest number of legislations governing the health insurance sector.
Health Care Financing Administration (HFCA) administers the Medicare,
Medicaid, and Child Health Insurance Programme. National Association of
Insurance Commissioner (NAIC) an organisation from the states provides a
forum for the development of a uniform policy where uniformity is
required. Uniform and minimum policy conditions have been specified by

96
the NAIC. The Consolidated Omnibus Budget Reconciliation Act
(COBRA) requires that employees and certain beneficiaries be allowed to
continue the group health insurance coverage following a qualifying loss
of coverage which includes 18 months for a terminated employee and up to
36 months for spouses of deceased, divorced, etc., employees. Health
Insurance Portability And Accountability Act (HIPAA) ensures the security
of health insurance coverage for those who aheady have insurance with
provisions such as guaranteed renewability, limitations on pre-existing
conditions and portability, formation of High Risk Pools, etc. The
Balanced Budget Act (BBA) has also introduced certain changes in the
Medicare. HMO Act governs the functioning of Health Maintenance
Organisations. USA being the most advanced has also the most advanced
legislations regulating health insurance as well as protecting the insureds.
The Social Security Act ensures social security to all the citizens of the
US. In Australia the private health insurance market is regulated strictly by
the federal government. Legislation covering the Private Medical
Insurance (PMI) market requires the insurers to practice community rating
and open enrolment. Community rating is defined as a single rate for all
above the age of 18 years and precisely double the single adult rate for a
married couple with or witliout child dependents. All the insurers are
required to offer a basic table of insurance that covers the cost of a semi-
private room in public hospitals. The cost of consultant fees is on the basis
of a statutory fee schedule and law prohibits insurers from insuring any
higher fee if charged. The regulatory authority operates a reinsurance
system, which was designed to share the cost of chronically ill between
funds. Canada which has a universal health care system with the provinces
paying major medical expenses such as surgical fees, physician fees and
hospitalisation costs prevents the private health insurers by law from
selling coverage that approximates a provincial health plan. Canada Life
Insurance Compensation Corporation (COMPCORP) administers the

97
industry consumers' protection plans which safe guards Canadian life and
health insurance policyholders. Life and healtli insurance are regulated by
both federal and provincial governments to ensure the commitments to
policyholders are met.

2.5 Gap Analysis & Discussions

India spends 5.6% of her GDP on health care though health expenses as
percentage of GDP for the more developed countries amounts to 14.1% for
USA, 9.2% for Canada, 9.8 % for France and 10.4% for Germany among
the advanced developed countries. However most of the developed
countries have a very large portion of government involvement in this
sector whereas in India only 1.2 % of the GDP is Public expenditure and
4.4 % is private expenditure which is mainly private out of pocket
expenses. In India, the Government is committed to ensure the health of
the citizens and towards this end it runs a health service and implements
several National Health Programmes. However, due to several
interconnected reasons, the rural people are dissatisfied with the services
offered. There is an increasing tendency to depend upon private medical
care facilities. Again the Indian demographic situation is very different
with more than 74% of the population living in rural areas and this
population is distributed in nearly 5.81ac villages. Nearly 30 % of the
population live still under the poverty line. Literacy rate is low and so also
insurance awareness is very low. While government health services charge
minimal user fees, the private sector charges considerably more and the
people appear willing to pay the same. The institutional allocation of funds
by the government in the Health sector when examined reveals that
majority of the allocation is for salaries and administrative purposes and a
very negligible amount is allocated to equipment and infrastructure.
Though as a percentage of GDP India is a high spender on health care
among the developing countries the per capita expense on health in India is

9B
only 18$ as against 4,093$ in USA, 1,454$ in UK, 2,677$ in Germany
2,349$ in France and 1,829$ in Canada. As per Human Development
Report (1995) India has a share of 16% of the world population but the
health expenditure in terms of percentage of the world total is only 1%
whereas member countries of the OECD have a share of 15% of the world
population and the health expenditure is 87% of the world total. India does
not have any National Health Scheme or any National Health Insurance
scheme. India does have the ESIS covering about 771ac employees from
the organised sector and their family members and in total the beneficiaries
of this scheme are estimated to be over 3crores. Similarly CGHS covers
the central government employees and their dependants and Railway
scheme the railway employees and their dependents. The rest of the
employees in the organised sector who do not fit into the eligibility of
ESIS are insured with the insurance companies through group policies by
their employers. A two series news report by Roli Srivastava, Times News
Network appearing in, 'The Times of India' Mumbai edition dated 29* &
30 October 2001 titled, "Non-functional OTs, broken equipment plague
ESIS hospitals" and "Patients shun ESIS hospitals as medicines are hard
to find" has higlilighted the inefficient manner these hospitals are being
run and the general apathy of the ESIS in terms of the infrastructure and
medicines available and also the dearth of good doctors. The self employed
and the employees from the unorganised sector are not covered mider any
such schemes and have to optionally procure private health insurance
which a majority has not. Mutual benefit societies. Not-for-profit
organisations are not involved in the financing of health care in India.
There are no social security legislations to provide health care for any
section of the society except for the ESI act and the Workmen's
Compensation Policy. Reddy, K. N. (1994) has observed that the health
care by the government in India has lost its efficiency thrust. Nor it has
encouraged any innovation. The sooner the health care by the government

99
 T H 8*30 5

is reformed in terms of financing, organisation and deliver^', the speedier

would be the improvement in the health status, and faster would be the
increase in the human development index in the comity of nations. He has
suggested that there is ample scope to reform health care in the direction of
National Health Insurance. The findings of a collaborative research
undertaken by the World Bank and institutions under the Union health and
family welfare ministry in India reveal that the private sector in India
accounts for 55 per cent of all hospital admissions, 40 per cent of ante and
post-natal care. The study also reveals that one-quarter of hospitalised
Indians slip below the poverty line because of hospital expenses alone,
Hospitalised Indians spend more than half of their annual expenditures on
health care. More than 40 per cent of those hospitalised borrow money or
sell assets to cover expenses. Overall the distribution of private services is
even more skewed towards the rich than the public sector. This study has
also observed that Public health resources too are disproportionately
distributed in favour of higher-income groups. The poorest 20 per cent of
the population receives only 10 per cent of the benefits. As it is, disparities
across states and betweens groups are so striking that poor show little
benefits of reduction of mortality and morbidity; Overall the poorest 20 per
cent Indians have more than twice the rate of mortality, malnutrition and
fertility of the richest 20 per cent. Ansari, H. (1999) has observed that the
World Development Report advocates the phasing out of subsidies for
tertiary care, especially where they benefit the wealthy and urges the
governments to foster competition and diversity in the supply of health
services in order to improve quality and lower costs. At the same time, it
calls upon governments to regulate privately delivered health services in
order to ensure safety and quality; and also private insurance in order to
ensure universal access and coverage and discourage malpractice and
abuse of the system. This prescription needs to be examined in the light of
what we know about Health Insurance System in India and effectiveness of

100
government policy interventions. The private sector on the other hand, has
hmitations on its capacity to invest in healthcare facilities due to high cost
of capital, long payback periods in terms of returns due to absence of
popular and widespread health insurance system. Increased spending at the
time of sickness is the predominant moral hazard observed in health
markets. Both patients and health care providers respond to the presence of
insurance by increasing the level of spending on health care. Charging
higher fees or higher co-payments for more expensive care will encourage
consumers to get referrals and become better informed about the necessity
of treatment. If we have a comparative look at the Physician per person
and beds per person it is observed that while in USA the number of
physicians per 1000 people is 2.5 and Hospital beds per 1000 people is
4.1 whereas in India it is 0.4 physicians and 0.8 beds. The health care
deliver^' system in India is unique with different schools of medicine in
practice such as Allopathy, Ayurveda, Homeopathy, Siddha, Unani, etc. In
India there is a mix of public and private health care delivery. There are no
laws for regulating the health care providers including the doctors,
hospitals, nursing homes, etc., Hospital/Nursing homes are not graded nor
require any statutory registration with the Medical council or any other
body. In view of this the following situations are likely to prevail a) Many
quacks without any registrations with the medical councils may be
practicing b) In rural areas qualified doctors fi'om one field of medicine
may electively practice other fields of medicines and c) Problems of dual
economy are likely to persist where providers do dual accounting. There is
no uniformity in the fees charged by doctors as well as hospitals, nursing
homes, etc. There is a very wide variation in the fees charged for the same
procedure in the same hospital or by the same doctor to different patients,
in the same town/city, in different areas/towns/cities and mainly vast
difference is seen in urban/rural areas. An article in a leading business
Indian business magazine Businessworld (22 October - 6 November, 1998)

101
has observed that healthcare expenses are estimated to be rising at the rate
of 30% a year in India mainly due to advancement in treatments and
development of technologies. It is not just technology-intensive treatment
that has become expensive. Even the prices of drugs have shot up since the
government relaxed controls on drug pricing in 1995. According to a study
conducted by the Mumbai based Drug Action Forum, Prices of even
commonly used medicines like cough syrups and drops have gone up by
50 - 200%. There are no regulations in place to check procedures in
hospitals and practices of consultants. As per Businessworld (22 October ~
6 November, 1998) a recent study found that 100 doctors in Mumbai used
80 different methods to treat symptoms of tuberculosis, of which only four
matched the standard procedures recommended by the World Health
Organisation. For an appendectomy in a good private hospital in New
Delhi the cost was Rs67,000/-; the cost included surgery and five days in
hospital. The same procedure would have cost Rs.26,000 in an equally
good private hospital in Calcutta, with a four day stay in hospital and in
Ahmedabad, it would have cost even less: Rs.24,000. Specialty treatment
is available only in major towns and cities.

The extent of penetration by the insurance companies especially in Health

insurance is very low, only about 3 million. Health Insurance is mainly
transacted by general insurers and a few covers by the Life sector.
Specialty Health insurers are not there in India. Individual Health
insurance penetration is very low though there is growth in group
coverage. In a pilot study titled Rural Insurance Business-Potentiality &
Marketing (1999) carried out at the National Insurance Academy, Pune by
the author it is observed that 54% of the Two-wheelers, 11% of the
commercial vehicles, 35% of the Tractors are not at all insured in the rural
areas. This is when Third party insurance is compulsory by law. This
shows the insurance awareness level especially in the rural areas. In the

102
same study it is observed that the major reasons given for not insuring their
assets have been Not felt necessary and Not approached. The respondents
were aware about various covers available but majority did not feel the
necessity of effecting insurance. They were aware about the availability of
covers but did not know what actually insurance is and the principles on
which insurance works and the need was not felt. Among the policies
issued by non-life companies only one policy that is the Mediclaim policy
is popular. Though considered to be comprehensive in India is quite
restrictive as compared to comprehensive medical expenses insurances
sold world -wide. There are no legislations to ensure continuity of health
insurance to those who have bought such insurance earlier. Pre-existing
conditions are totally excluded. Though some covers now introduced as
Long-term covers have the provision of deleting the pre-existing cover
after the policy has been in force for four years. No cover is available for
person with a pre-existing condition even on loading of premium. No High
Risk Pools as in the US are seen in the Indian market. Medical expenses
policies offered by non-life companies are on indemnity basis only and no
Service Contracts or Managed care is available. However recently with
effect from October 2002 the public sector insurance companies have
introduced cashless service through utilisation of Third Party
Administrators (TPA). No coverage for dental expenses, prescription drugs
coverage, outpatient treatments, Family physician expenses, etc., is
available. Long-term care policies (LTC) are not available. For formulation
of any effective health insurance scheme or for growth of health insurance
availability of basic data is a must, Giridhar, G. (1993) suggested that data
from employers, employees, major insurers, persons covered and managers
of nursing homes and private hospitals would be required to design an
insurance scheme or expand the existing one. He has further suggested that
it would be useful to conduct a study on the feasibility of insurance
schemes in India and to develop comparative cost effectiveness estimates

103
of alternate media of health insurance. Regulations are also needed to
ensure that health insurance plans do not compete so as to avoid high cost
patients and attract only profitable, low cost patients, there would be
danger that biased selection will undermine the efforts to expand the
coverage and scope of health insurance market.

Health care in India has not received the importance it needs to be

received. Health care in developed countries is a very important subject
and "Reforms in Health Sector' becomes an election issue in many
developed countries including the USA. A lot more priority needs to be
given for this sector in India. Studies by researchers have shown that there
is an urgent need for reforms in the Health Care sector in India. In most of
the developed countries the state plays a major role in this sector which
includes infrastructure creation, regulating the public as well private health
sector, financing, etc., with the overall aim to provide best possible healtli
care to its citizens. Browne, M. J. (1993) has used data from the 1977-78
National Medical Care Expenditures Survey in the USA to evaluate five
different measures of insurance: a family's expected out-of-pocket
payment for medical care, the expected value of the indemnity (fee-for-
service) benefits from an insurance policy for a family, the percentage of
the expected loss that the insured pays, the policy premium, and the policy
limit of coverage. The study provides information that can help us
understand whose insurance coverage will change significantly as a result
of health care reform. For example, it shows that those with low income
(such as minorities, families headed by females, and unmarried
individuals) on average purchase low amounts of health insurance. These
groups would benefit considerably if health care reform institutes universal
coverage. Conversely, whites, families headed by males, married
individuals and those with high incomes on average have considerable
health insurance coverage. Mandatory purchase of health insurance

104
coupled with community rating would alter the consumption of health
insurance greatly. The health insurance market today provides a myriad of
different products that reflect individual and group preferences. Depending
on the form of health care reform enacted, if any, individual choice in the
market may be reduced significantly. Although the leading proposals for
health care reform call for community rating and universal coverage, there
will likely be a sizable market for supplemental insurance after reform.
Most developed countries have a National Health scheme or National
Health Insurance to cover at least the needy section of the society if not
majority of the citizens. Private Health Insurance in most developed
countries complement or supplements the state system. Most of the
developed countries have also encouraged not-for-profit organisations,
societies, mutuals, sickness funds for financing and also in some cases
delivery of health care. Some countries make it compulsory for its citizens
to be members of such societies. Gross, P.F. (1998) while discussing the
health insurance reforms around the world and the implications for
insurers, policyholders and healthcare providers has observed that three
major forces - globalisation, the aging of the population and the death of
traditional insurance markets - are reshaping the delivery of healthcare,
the methods by which it is financed, and, as a consequence, traditional
indemnity insurance is expiring rapidly as the world market for personal
financial services is being reshaped. The influence of multinational
corporations (MNCs) is increasing in healthcare delivery and health
insurance worldwide. Second, the creation of markets for new medical
technology is creating new alliances in a world economy because the
technology (eg. Information technology and digital imaging to mention but
two) is capable of creating a new healthcare business (i.e. teleradiology
and telemedicine), leading to a significant restructuring of service delivery
in healthcare that overflows national boundaries with such "virtual" health
services. Third, the twin pressures of inadequate government budgets for

105
healthcare and a private sector generating profits in healthcare has led to
"privatization" of government and government-run health services and
related insurance operations. Fourth, despite rapid changes in international
and national policies for healthcare, there is really only one constant (viz.
every national healthcare system is being forced to live with limited
resources) and one inevitability (viz. any reliance on a single national
health financing strategv', eg. National social health insurance scheme such
as in UK and Germany or a significantly privatized health insurance
system such as the US, will surely dissipate, leading to a mix of pubUc
financing based on tax revenue and private household self-support through
private health insurance and medical savings accounts). In the industrial
nations, studies of the growth of national health expenditures on personal
health care i.e. expenditures excluding research, administration and
prevention) over the last 10 years suggest that about 40%-50% of this
growth is attributable to wage and price inflation, 30%-50% to the
combined effects of increases in use rates per capita and technology used
per contact with healthcare, and 10% to population growth and aging. The
World Bank estimates that about 9% of the world's population (nearly 500
million) were over 60 in 1990, increasing to 1.4 billion persons in 2030. In
34 years, China will double its proportion of the population aged over 60
years from 9% to 18%, whereas France took 140 years to achieve such
growth. The burden of aging varies - but older people are usually sicker
and more costly to treat. Persons over 65 can be expected to use three to
five times the volume of healthcare (particularly hospitals, medical
services and drugs). The health insurance scenario in the developed world
is fast changing. In nations such as US and Australia, Doctors watching the
rising tide of "managed care" and its ultimate derivative "managed
competition", are approaching reinsurance companies with propositions
that doctors can avoid the middlemen (i.e. a traditional company offering
indemnity or managed care products) by having their services directly

106
underwritten. Governments have embraced both corporatisation (where for
eg. Parts or whole of the government hospitals are taken out of Ministry of
Health control and contracted out to managers of private companies) and
privatization (in which the private sector is invited by government to build,
own and operate new private hospitals next to existing government
hospitals. Data suggest that during the growth periods of "privatization" in
its different manifestations in Asia, there have been predictable increases
in the use rates and costs per service of major health services covered by
traditional indemnity insurance, confirming the existence of both moral
hazard on the demand side and supplier induced demand on the supply
side. In 10 of 14 Asian nations, the private share of national health
expenditures exceeds 50%. In three of these nations (India, Hong Kong
and Thailand) the private share is 75%. Stripped of their veneer, these
versions of privatization represent cost-shifting from government budgets
to private household budgets and to insurance companies - and without
smarter benefit design, claims processing and member education on
appropriate use of benefits, many health insurance companies will fail
quickly under unregulated privatization. Healtli insurance is being
transformed by a number of market forces, and the demand for smart
health insurance and related products will grow. Understanding and
controlling those forces is a sine qua non for survival in the evolving
global marketplace for personal financial services, with three core abilities
of the health insurance company determining profitability and growth
benefits design, IT systems and member outreach and education. Health
care access and availability in India has a public private mix which is
dependent upon purchasing power of individuals and sustain upon income
and price elasticity of health care.

Indian demographics are very peculiar and so are the conditions prevailing
in the Indian Health Care sector and it may not be possible to adopt any of

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the systems from the developed world straight away. The gap analysis has
shown the various differences in the health care sector, financing as well as
the delivery. Without reforms in the entire health sector at all levels the
growth and sustainability of Private Health Insurance may not be
encouraging. Just introducing new covers in the country and also new
players in the area may not yield the required results of health coverage to
all. It will definitely improve the types of coverage available and better
service to the insured but it will only give a better deal to those who are
having some coverage. If this is coupled with health sector reforms the
results will be very encouraging. IIMA (1987) study on Health Care
Financing in India, sponsored by the Asian Development Bank, Manila,
while reviewing the Health insurance schemes of GIC had concluded tliat
the schemes have not performed well for two reasons, a) Even those who
can afford the premia are not t>'pically insurance conscious, and b) The
Insurance Companies have given ver>' low priority to the health insurance
business. It is felt that the situation might not be much different even now.
Shariff, A. and others (1996) have observed tliat even the response rate to
the GIC's Jan Arogya Bima Policy has remained far below the expectation
due to lack of information, guidelines and managerial support. The
Mediclaim policy is also not encouraging mainly as a reason of losses due
to the collusion between insurers, doctors, and hospitals. This group
suggested Policies and Financing Strategies for the Ninth Plan which
included a) Restructuring of Public Health Care System b) Restructuring of
public allocations and c) Regulating and redefining the role of private
health care sector by facilitating a non-government private regulatorv'
authority and d) Health insurance and alternative financing schemes. The
committee suggested that hospital care especially to the vulnerable
population should be insured and community health insurance systems
using the panchayat structures should be evolved. The committee also
suggested introducing graded registration fee for hospital care and dual

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pricing in public health dispensation. The committee also recommended
that the total health care allocation of the Government should be increased
to 2.5-3% of GDP and two third allocations for primary health care and
urban bias should be removed with infrastructure development in all areas.
Reddy, K.N. (1994) while describing the alternate models that can be
adopted for health care financing and delivery namely; a)Public financing
and public delivery (UK), b) Private financing and public delivery (US,
Singapore), c) Public financing and private delivery (Canada, Germany,
France, Japan) and d) Private financing and private delivery (USA) has
observed that according to William C. Hsiao of the Harvard University, who
made a comparative study of the UK, USA, Canada, Germany, Japan and
Sweden, the public fmancing and private delivery system of health care,
practiced in Canada scored highest from the point of view of performance,
health outcome, public satisfaction, and access to health. The system of
public fmancing and public delivery (1st model), practiced in the UK
produces social equity and low cost health care, but suffers from rigidity,
over centralisation and inadequate responses to patients' demands. On the
other hand, tlie system of private fmancing and private delivery, coupled
with public financing and private delivery for the old and infirm, and the
indigent, practiced for to a large extent in the US, produces innovation and
high quality services for those who can pay, but suffers from high costs
and social inequity. However Reddy, K.N. (1994) while discussing the
same has also observed that doubts may arise whether India can go in for
the best of the system, namely, public fmancing and private delivery for a)
the size of the population is far more than any of the countries mentioned
b) the level of the per capita income is far lower than the others c) the type
of its federal set up is far different from other. But these doubts do not
stand the test of scrutiny. In fact, India has the necessar>' infrastructure,
sizable public hospitals, not-for-profit hospitals, private hospitals, medical
associations, enlightened charitable trusts, voluntary organisations and

109
experience in running public insurance schemes such as CGHS & ESIS
which help implement the national health insurance scheme. He has
estimated that the cost of implementing the scheme may not be more than
what health care is costing now at all India level. Details of public
financing or the mix of private financing or pay-ment of premium to the
centre, state and local government and delivery by the public and private
agencies can be worked out once the choice of alternative is first known.
He has stated that there is ample scope to reform health care in the
direction of the national health insurance. According io Ansari, H. (1999)
observes that India is characterised by high cost and low attainment health
sector. Government is finding it increasingly difficult to provide requisite
health care facilities tliiough its machinery. The demand for healthcare is
growing due to population increase, greater urban migration, increase in
per capita incomes and increased expectations. The private sector in India
has stepped in to bridge the growing health care demand and supply gap. It
is slowly and steadily increasing its dominance in health deliver^-, with
majority of house hold health expenditures being channelled to it. Most of
the house holds expenses are being met out of savings due to absence of
viable widespread health insurance mechanism. The private sector on the
other hand, has limitations on its capacity to invest in health care facilities
due to high cost of capital, long pay back periods in terms of returns due to
absence of popular and widespread health insurance system. Health
insurance whether public, private or through mutuals is the most important
health care financing instrument being adopted by most of the developed
countries. The steady increases in standard of living and levels of
education have resulted in the perception of health care as a basic right
rather than as a costly privilege. For the development of new financing
strategies, this implies that current expenditure levels should be
'reorganised' through methods that would capture a significant part of
current household spending and assure that the total was spent on more

110
cost effective and higher quality services. Most developed countries have a
State Health insurance scheme that usually provides at least a good basic
cover. Private health insurance plays an important role in protecting people
from the rest of the medical cost. These state health insurance schemes are
increasingly suffering from financial problems with the result that the State
is gradually withdrawing from the health insurance field in favour of
private insurance industry. Even, in those countries that have no health
insurance scheme, or at best, only an inadequate one, the improvement of
living standards and of medical infrastructure, better education and
demand of people for qualitative treatment are leading to an increased
demand for private health insurance.

Thus the major question is does India need a National Health Insurance
Scheme and whether it will he feasible. It may be observed that most of
the developed countries have a very large government involvement in
heahh care financing and delivery. Most developed countries have a
national health scheme or national health insurance. Experience shows that
most such schemes are suffering from heavy losses and the state is
gradually withdrawing to make way for private insurer.

Whether we can bypass a national scheme and go only for private health
insurance. Can Private Health Insurance satisfy the needs of the masses?
Considering the level of insurance awareness, the structure of the health
care sector, etc., it is very much debatable. The concept of insurance has
not yet fully convinced the average Indian. Thus initiation to such a
concept. National Health scheme/insurance is necessary to make people
aware and introduce them to the benefits of health care insurance. Such a
scheme is necessary at least for a section of the people who are in need of
it. Subsequently State can gradually withdraw and Private Health insurance
can play the major role.

Ill
2.51 Impact of Health Insurance on the Health Care Sector
Health care access and availability in India has a public private mix which
is dependent upon purchasing power of individuals and sustain upon
income and price elasticity of health care. The health care delivery system
in India is unique and more over it is an unregulated sector.
Hospitals/Nursing homes are not graded nor require any statutory
registration with the Medical Council or any other relevant body. Specialty
treatment is available only in major cities and towns. The extent of
penetration by the existing insurance companies especially in Health
Insurance is also very low. As against an estimated insurable population of
315 million only about 8 million people (2001-02) have been covered
under private medical insurance. The insurance sector has opened up and
new insurers have just begun their operations. Looking at the unique health
care setup in the country many question the growth and success of Health
Insurance in the country. Most of the insurers who have begun operations
are still not sure about the health insurance sector. They are limiting
coverage to group policies issued to major clients where other business is
involved. The potential is definitely there but insurers cannot import and
implement strategies. Insurers will have to plan their strategies considering
the ground realities that exist in the Indian health care sector. The Indian
Health Care sector is in the infancy stage and is growing rapidly. Health
Insurance can play a major role in the structured growth of the health care
sector. The growth of health insurance will stimulate faster growth of the
health care sector and will have a positive impact on the health sector as a
whole. The impact health insurance can have on the health care sector if
implemented in a planned and phased manner are enumerated as below.
a) Opening up and growth of Health Insurance sector provides an
opportunity to improve the health care standards in India especially
medical infrastructure and accessibility to quality care.

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b) The current health care expenditure levels can be 'reorganised' through
Insurance which would capture a significant part of current household
spending and assure that the total was spent on more cost effective and
higher quality services.
c) Proper growth of health insurance will promote uniform standards of
health care across the length and breadth of the countr>'.
d) Health Insurance is a tool to bring down health care costs and make
quality health care accessible to every India citizen
e) The success or failure of any health insurance programme depends to a
great extent on the network and quality of the providers. Thus there will
be an immediate need of quality service providers such as Hospitals,
Doctors, Laboratories, etc.
j) In India there are high quality facilities though a few in number and
located in major cities and they have high occupancy rates. Insurers will
have to invest in creating a network of provider facilities, a quality
bench mark, possibly by assisting smaller, privately owned facilities to
meet certain quality standards.
g) Not-for-profit organisations, societies, sickness funds can be
encouraged and involved for financing and also in some case delivery
of health care especially in the rural areas.
h) Growth of Health Insurance itself will encourage facilitating regulations
among the providers thus improving the quality of health care.
i) A non-government institutional regulator mechanism could be
developed to obviate and optimise the services of the private health care
market.
j) The State can withdraw from various health care activities and allow
the market forces to take over and devote more resources than at
present to public health programmes and prevention programmes that
can improve general health.

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k) A organised public-private mix of the delivery system will ensure
universal and comprehensive health care to all.
I) Effective health insurance can help remove urban bias and healthcare
infrastructure development will take place in rural areas.
m) Accreditation or star rating of hospitals on the basis of the facility they
have and their service quality will be essential and thus improve quality
of health care.
n) Profiling of Physicians and their practices
o) Different and innovative health products will become available to the
citizens.
p) Proper segmentation and need based specialised health insurance
products will improve the health care financing and delivery.
q) Specialised products such as Managed Health care that can provide
cash less service to the citizens can be tailor made and introduced.
r) Medical help will become easily available witli growth of
Telemedicine, Internet.
s) Growth of health insurance means increased handling of data and data
ware housing thus stimulating the growth of Information technology in
the health care sector.
t) There will be a stimulated growth in the Pharmaceutical sector.
u) There will be increased manpower requirements in the health sector as
well as the health insurance sector thus generating more employment.
v) Health Insurance can ensure access of medical care to patients in most
appropriate and cost effective manner.

2.52 Managed Care

Managed Care in private health insurance is not available in India in the
true sense. ESIS can be considered as the largest HMO in the world.
Though it is very much debatable whether managed care can be
implemented successful throughout the countr\' in the conditions

114
prevailing in India. Evolution of the concept of managed care was mainly
related to the rising costs of treatment as a result of legislations protecting
the patients, technological advances, defensive treatments, etc. The per
capita expenditure on health care in India is just $18 as against $4,093 in
the USA. In India the structure of health care delivery and financing is
quite different. As such it is an unregulated providers market. Very few
corporate are in the field of health care though the number is increasing.
These are again concentrated in metros and major cities. Negotiating the
costs per treatments with the existing providers especially the specialty
hospitals may be challenging. Moreover such hospitals are very costly.
Managed care in India is fast gaining importance for the fact that cash less
service can be made available to the insured. But it can be argued that for
cash less serv ice there is no necessity of managed care. Service contracts
can take care of the need. Few tie up arrangements were experimented by
the public sector insurance companies with Hospitals for paying directly to
the providers but such attempts have not seen much success and most had
been discontinued. However there is a scope for managed care in
introducing Outpatient healtli insurance in India. Managed care can be
tailor made to suit the Indian conditions. Devising suitable managed care
products for those who have the paying capacity and for those who need it
but don't have the paying capacity will be a challenge. Managed care for
employer - employee related groups could be experimented. Non profit
organisations like charitable trusts, etc., can also be successful. Can such
arrangements reduce costs in India under the present circumstances is the
major question.

2.53 Role of Third Party Administrators (TPAs) in the India Health

Insurance Sector.
TPA's have emerged with the evolvement of managed care. Managed care
encompasses a variety of innovations in both the delivery and financing of

115
health care that are intended to ehminate unnecessary and inappropriate
health care and reduce costs. The role of the TPAs became more important
with escalation of health care costs in the developed countries. The Indian
conditions are very much different tliough it may not be possible to avoid
the TPAs. The so called Third Party Administrators (TPAs) made an entry
into the Indian Health Insurance sector more as intermediaries a few years
back. They took up the role of agents, brokers, claim settling agents as well
as insured resulting in a chaotic situation in the health insurance market.
They would get the benefit of the commission, group discount as well
servicing charges from the insured and claim processing charges from the
insurers. Regulations for the role of the TPAs need to be frame very
cautiously. The regulations should define the exact role of the TPAs in the
health insurance sector. The TPAs should not function as agents,
intermediaries for marketing of health insurance products. The TPAs have
to be compensated by the insurers for the services they provide and should
not charge the insured nor receive payments/commissions fi'om the service
providers such as the hospitals and doctors. The TPAs should not be the
service provider. The major role of the TPAs should be to monitor the
health insurance schemes of the insurers in such a way that the health care
costs are reduced by eliminating unnecessary and inappropriate health care
and make available appropriate health care to the insured more
conveniently and without delay. The TPA's role will thus focus mainly on
a) Utilisation review and control of decisions about health services
provided, either prospectively or retrospectively. This can involve second
surgical opinions, Prior authorisations for hospital admission, Ongoing
monitoring while the patient is in hospital (Hospital review). Discharge
planning. Profiling of service providers, referral systems, etc. b) Limiting
or influencing patients' choice of providers and c) Negotiating different
payment terms or levels with certain providers (discounts). TPA's will
have to follow any or all the above to reduce the health care costs. In the

116
present Indian setup how this can succeed is a matter of debate and
concern. The TPA's should be able to reduce the cost to such a level that
tlie cost of TPA to the insurer is met from that reduced cost otherwise the
health care costs will shoot up. This should be along with better service say
cash less service to the insured. Otherwise the basic purpose of introducing
TPA services is defeated and it may result in just cost shifting with the
TPA making business at the cost of the insured in the name of service. You
don't need TPA for cash less service, service contracts are sufficient. The
regulator should insist on the insurers to disclose to the public the actual
premium for the insurance plan and the fees collected for the services to be
offered by the TPA separately. This will help analyse and review the role
of the TPA in the Indian health insurance sector vis-a-vis their cost to the
society.

History of Managed health care shows tlie following patli a) Indemnity -

Hospital costs only b) Indemnity - Inpatients and outpatient cost and c)
Managed Care. In India we are only at stage (a). Whether we can jump to
stage (c) directly is the major question. Health care sector in India itself is
very much unregulated unlike the developed countries. Introduction of any
new concept should be carefully done otherwise the health care costs in
India may rise substantially. Health care being primarily a State subject
makes it more difficult. The Central government and the State
governments both spend on the health care sector. The major spending is
by the State governments. However very clear cut responsibilities are not
very evident. Central government generally implements the Central
sponsored schemes however curative treatment is purely the State's
responsibility. The National Health policy does not address any of the
concerns which have a bearing on the growth of health insurance.
Regulations in tlie health care sector as well as health insurance regulations
can have a major impact on each other. Quality of health care is very

117
important. If the quality of health care can improve by marginal increase in
the cost the same may become acceptable in the Indian conditions.
Research has proved that expensive treatment is not always the best
treatment. Experience of Managed Care in some countries indicates
deterioration in quality of care. Managed care may have been able to
reduce health care costs but the quality has suffered with long waiting
periods. In India the so called TPA talk about cash less service and better
service but nobody talks of cost reduction which is the basic principle for
the existence of a TPA. In many countries the TPAs have graduated to call
themselves Management Service Organisation (MSO) where their function
encompasses the entire business of transacting Health insurance on behalf
of the insurer (out sourcing). Such a role may be envisaged in view of the
new private players. But such a step without reforms in the Indian Health
sector may prove adverse. TPAs or MSOs even administer the entire health
insurance plan of a very large corporate in the form of a self-insurance.
Such plans are reinsured by avoiding a direct insurer. Any regulations in
the health insurance sector will be having a direct impact on the future of
tlie health care sector in India. A two series news report by Shabnam
Minwalla appearing in, 'The Times of India', Mumbai edition titled,
"Panacea or poison? The prescription is still not clear" and "Without
controls, doctors warn that India will repeat America's healthcare
mistakes" has revealed the fears about just importing and implementing
managed health care in India and the ills of managed health care on the
basis of the American experience. In an interview to M Ramesh which
appeared in, 'Businessline' a daily which appeared on 6* September 2001
the IRDA Chairman, Mr N. Rangachary has observed that for the health
insurance market to grow a lot of infrastructure development is needed and
a regulatory' control over the health providers such as hospitals and doctors
is required. He also emphasised that establishment of a health insurance
regime requires a number of players to be co-ordinated and some sort of a

118
health policy to be drawn. You have to work in collaboration with the
Ministry of Health, Medical council of India, etc. Asia Insurance Post
(September 2001) has reported that the American Dental Association has
filed suit against Aetna Inc., the largest health insurance agency in the
country with over 14 million dental members, for alleged breach of
contract, unlawful interference with the patient-dentist relationship and
libel, after insurance company suggested that dentist are overcharging
patients. Asia Insurance Post (September 2001) has reported that health
insurers are facing a new legal challenge in New York, where the state's
largest physician's group filed six separate complaints against six of the
state's largest managed care carriers, seeking an end to a series of
destructive ongoing practices. The Medical Society of the State of New
York, which represents 27,000 member physicians, filed lawsuits in New
York State Supreme Court against Aetna Inc., Cigna Corporation, Empire
Blue Cross/Blue Shield, Oxford Health Plans Inc, United Health Group Inc
and Excellus Inc. The complaint outlines a clear pattern of deceptive
behaviour of managed care carriers and seeks an end to the range of tactics
which they term as deliberate and deceitful, (insure.com 1999) A report by
the Associated Press states that HMOs have found a new way to restrict
access to your doctor by restricting the primary care doctor's role in one of
the most sensitive places -the hospital. HMOs have started hiring
'hospitahsts' who work full time in the hospitals co-ordinating care while
the patient is in hospital replacing the role traditionally held by the
patient's regular physician. Hiring of 'hospitalist' has resulted in shorter
hospital stay of the patients thus cost reduction for the managed care
carrier whereas the critics state that, "At a point when the patient most is in
need of health care, they are withdrawing the central feature - the doctor
who Knows the patient best'. Therefore any decision taken in the Indian
conditions has to be done after evaluating and studying the consequences.

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2.6 Suggestions & Recommendations
Reforms in Health sector are a very urgent need for the growth of health
insurance in the country. The following is being recommended for debate
and implementation

(A) Regulations & Monitoring in the Health care sector.

a) The government should register, certify, regulate and monitor private
provider / agencies by enacting legislation.
h) A non-governmental institutional regulator mechanism could be
developed to obviate and optimise the services of the private health care
market.
c) Star accreditation or star rating of hospitals on the basis of the facility
they have and their quality of service.
d) Compulsory registration of Doctors with medical councils and
regulating and profiling the practice of Physicians/Doctors, establishing
clinical protocols, etc.
e) Co-ordinate prices in the health care delivery sector botli public as well
as private.

(B) Corporatisation and Privatisation of Health care delivery systems as

seen in many developed countries can be considered.
The Central as well as the State governments have a very vast network of
hospitals, nursing homes, dispensaries, etc., which can be corporatised and
/ or privatised. The government can offer incentives in terms of tax
concessions for hospitals especially in rural sector. Such providers should
adopt dual pricing of sendees - free/subsidised for needy and poor and
charge those who can afford.

(C) Government Can Impose User Fees On Government Hospitals.

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Adopt dual pricing of services - free for needy and poor and charge for
those who can afford. Levy registration fees for pubhc sector dehvery
system especially for inpatients. Such a move has already been initiated by
many state governments.

(D) Mutual societies, not-for-profit organisations, Charitable Trusts,

NGO's/Voluntary organisations should also be allowed to operate as
health care financing and delivery organisations. Growth of such
organisations will improve the Health care financing and delivery to the
needy. These will be in addition to the health insurance companies.

(E) Set Up an Organised Public-Private Mix to provide universal and

comprehensive health care to all. Public provider, NGOs and private
practitioner should not compete with each other but provide a
comprehensive and integral national system.

(F) Government Involvement And Funding Should Be Increased: total

health care allocation of the government should be increased to 2.5-3% of
GDP. Government priorities need to change.

(G) Remove Urban Bias and Infrastructure Development Should Be In All

Areas.

(H) Adopt a mix of Public funding and Private deliveiy for the needy and
Private funding and Private delivery for those who can afford in India

(I) A National Health Insurance Scheme on the following lines can he

adopted
a) A basic scheme to be devised which should be offered by all the
insurers wherein the minimum benefits are specified.

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h) Participation of private insurers in this scheme should be compulsor>' as
social obligation.
c) This scheme should be on actuarial basis and should have an element of
co-payment to avoid over usage wherever possible.
d) Central or State governments can bridge the gap between the paying
capacity and the actuarial premium for the needy.
e) Such a scheme should adopt community rating and should not
discriminate on age, sex, as well as health status of an individual and
allow open enrolment.
f) All the health care providers will have an obligation of treating /
admitting the members of such schemes in the general wards.
g) Corporatised / Privatised government hospitals, facilities of the ESIS,
CGHS, etc., can be utilised for implementation of this scheme.
h) Cashless service to be provided.
i) Fonnation of a "Community Rated Equalisation Fund (CREF) on the
lines as established in Ireland. Equalisation of risk among insurers is a
mechanism based on a "Community Rated Equalisation Fund (CREF)
which requires insurers to monitor their actual claims experience in
detail and to make official returns based on a range of standard claims
costs for the defined 'minimum' benefits. The calculations are designed
to identify the excess costs of any one health insurer covering a higher-
than-average risk portfolio and to redistribute those costs among all
health insurers. The system is intended as far as possible to allow
insurers who are more efficient in administration or clinical cost control
to retain the proceeds of such efficiency. Payments under the
equilisation system are not triggered until one insurer exceeds a
prescribed threshold of payment due.

(J) Governments both State as well as Central can share catastrophic

losses of the insurers for any such public schemes .

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(K) Private Health Insurance can supplement or complement

(L) Allowing tax benefits to the insured as well as the employers on all the
health insurance policies will have a major effect on the growth of the
health insurance sector. Government may specify the minimum benefits
which the policies should offer to be ehgible for tax benefits.

(M) Regulating the Insurance Sector

a) Uniform minimum policy conditions to be stipulated and minimum
basic health insurance policies to be offered by all insurers
b) Premium to be on actuarial basis and private health insurance to be on
risk rating basis whereas scheme for National Insurance on community
rating.
c) Legislations to protect the insured for continuance of insurance cover.
d) Regulating the TPA, intermediaries in health insurance

(N) Morbidity data both inpatients and outpatients, Causewise, Average

duration as inpatient. Cost per episode should be generated as is being
generated in other countries. This is the basic data which the insurers can
make use of This would mean adopting the ICD (International
Classification of Diseases) WHO standard with uniform billing pattern,
etc. This may have to be implemented by the health service providers and a
system of data generation at national level to be put in place.

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