The Impact of COVID-19 on the Indian Health Insurance Sector

Introduction

            Health insurance firms exist as a remover of risk and a provider of certainty and security during a time of uncertainty and insecurity. Individuals use these policies to hedge against the risk of loss of health. However, the past eighteen months have been so extraordinary that even insurance firms have been unable to cope with such unpredictability. The risk has been too great for most health insurance firms to bear, and this has had consequences across the health market.

Effects of COVID-19 on the Health Insurance Market

Higher Demand for Insurance Plans & Greater Insurance Penetration

            One of the few positive benefits that COVID-19 has had on the Indian economy is that it has incentivized more Indians to insure themselves against health risks. COVID-19 had been an unknown danger in the early months of 2020, so there were many uncertainties regarding the procedure and costs of treatment. This led to more households taking out health insurance policies to protect themselves against this.

Product development strategies on the part of both private and public health insurance firms have been used to design insurance policies specifically to fight against the coronavirus. The Corona Rakshak and other similar policies introduced in the past year have been extremely successful in increasing demand for healthcare and incentivizing higher health insurance penetration rates. Government campaigns also helped increase awareness of the benefits of health insurance (Shukla et al., 2021), causing demand for insurance to go up massively. While in 2019, the private sector was responsible for the insurance of 115 million Indians, this number grew sharply to 136.7 million in 2020 (Statista Research Department, 2021a) and has likely grown further in 2021.

Figure 1: India’s Health Insurance Market

Note: This graph shows the projected increase in the market for health insurance in India since the beginning of the COVID-19 pandemic. Retrieved from GlobalData (2020).

Due to this high demand, some insurance firms have made massive profits during a time of global recession (Plott et al., 2020). Further, as more people have health coverage, not only do insurance firms benefit through added revenue, but individual consumers of healthcare also benefit from being less susceptible to the crippling costs of healthcare. These benefits derived by individuals will collectively have a macroeconomic effect, by boosting labor productivity, quality of life and general health even after the coronavirus epidemic has long passed (American Health Association, 2019).

Astronomical Costs of Healthcare Goods & Services

The direct impact that COVID-19 has had on the health insurance market has been the multifold increase in demand for healthcare goods and services. There have been massive shortages of these goods and services across India as demand rose sharply due to mass spread of the disease, but supply constraints kept the industry from producing at potential output. These shortages increased the costs of healthcare massively, so it not only became less accessible but also less affordable to the public (Rama et al., 2021).

Figure 2: Market for Healthcare Goods and Services

Note: This graph shows the effect of an increase in demand for healthcare caused by the pandemic, met simultaneously by constraints in supply. The end result is more expensive healthcare, which is paid either out of pocket or by health insurers.

These increased costs of healthcare not only burden individuals that pay out of pocket but also insurance providers who take on the responsibility of these healthcare costs. Recent government directives have compelled insurance companies to honor COVID-related claims without reservation and expedite the claiming process as a top priority (Shukla et al., 2021). These costs increase a firm’s risk, cut into their profit margins and decrease the likelihood that private health insurance will remain a sustainable industry. More people demanding health insurance may make for greater revenue, but if it is met by a larger increase in costs, it is a net negative for insurance providers.

Figure 3: Market Performance of Indian & Global Insurance Companies

Note: This graph represents the downturn in the performance of the insurance sector in India since COVID cases started rising. Retrieved from Jain et al. (2020).

Greater Role Assumed by Government

            Perhaps the greatest fear in the minds of insurance companies now is that the Indian government may be looking to take a larger role in the healthcare industry, and the fallout caused by the coronavirus epidemic could be the trigger. Currently, India is one of the global leaders in out-of-pocket healthcare spending, with 63% of healthcare being funded by private expenditure (The World Bank, 2019). Indian economists have long recommended a step up in public investment in healthcare in order to decrease poverty and improve health and economic outcomes, and calls have only intensified since the coronavirus took hold (Chitravanshi, 2021).

The government has also been taking up a greater role as an insurance provider in the past year, allocating large transfer payments to cover insurance costs for some low-income households (Shukla et al., 2021). These added responsibilities the Indian government has undertaken may indeed be beneficial for the economy at large, but this also creates a crowding out effect against existing private sector insurance companies. Greater public spending on healthcare facilities will reduce household expenditure in this market and therefore the need for health insurance, whereas government insurance schemes will directly compete against private insurance firms and possibly drive them out of business.

What Will Happen?

            The most likely result of these consequences of COVID-19 on the health insurance market will be revised insurance premiums once these firms are able to better forecast their costs over the next few years. These prices could be increased by up to 25% in the next year alone (Livemint, 2021).

However, since health insurance suffers from vast information asymmetry (consumers have a significant advantage as they know much more about their demand for medical care than insurers do), this increase in prices will lead to relatively healthy individuals dropping out of the market, as insurance becomes significantly more expensive than simply paying for their medical needs directly. As the health insurance market becomes saturated by bad risks, i.e., individuals with higher need for medical care, premiums will likely rise further so insurers can cover their extra costs. This will cause a vicious spiral that will ultimately result in exorbitant insurance premiums and very few consumers in the insurance market (Latha, 2020). For this reason, if insurance remains in the private sphere, it will remain a very fragile market because of the existence of moral hazards and adverse selection.

What Should Be Done?

            The share of the private sector in the Indian health industry has gradually been declining since 2001 (The World Bank, 2019). It is likely that the trend will be accelerated by COVID-19 as the high costs of out-of-pocket expenditure and private insurance have been showcased (Thiagarajan, 2020). The inefficiencies of the private sector handling healthcare should increase the government’s interest in investing in healthcare systems and insurance (Latha, 2020). By increasing government expenditure on healthcare and insurance schemes to just 3% of GDP, India can halve out-of-pocket expenditure (Chitravanshi, 2021), and this will have massive positive outcomes on the middle and lower classes of the country.

Figure 4: Share of Out-of-Pocket Health Expenditure out of Total Health Expenditure

Note: This graph shows that consumers have been spending proportionately less on healthcare over the years, so government healthcare expenditure has been on the rise. Retrieved from Statista Research Department (2021b).

            Since COVID-19 has increased interest of the public in being insured, the main goal should be to increase the penetration of health insurance in lower classes and rural areas specifically. As of now, 86% of India’s rural population is completely uninsured (Thiagarajan, 2020). For them to have access to health insurance, regulation and other government schemes are required (Goyal, 2021). Additionally, given the excess of unexpected claims coming in due to the coronavirus, it seems unlikely that the private sector can sustain this while making profits without drastically raising premiums. As the government does not have to worry about the profit motive, they would be in a prime position to absorb a larger role in the health insurance market.

            Previous universal health insurance schemes in India, such as the Rashtriya Swasthya Bima Yojana and Pradhan Mantri Jan Arogya Yojana, have proven to be quite effective by publicly funding insurance schemes for below poverty line households. It has widened insurance coverage across the population and improved protection against financial risks (Vitsupakorn et al., 2021). However, even these schemes may be unsustainable given the recent huge increase in health spending. More needs to be done to expand these schemes and further improve access to health for all.

Conclusion

            The COVID-19 pandemic has undoubtedly had a great impact on the health insurance sector, but it has also brought to the fore numerous shortcomings of our current system. To successfully clog these holes, it is advisable to increase government participation in the insurance market. India is woefully overdependent on the private sector for health and insurance, and this system creates far too many uncertainties and risks to be efficient. The profit motive also disincentivizes private insurers from spreading out and serving rural and poor populations. Government intervention would therefore ensure a more equitable distribution of health insurance across the economy. The various effects of COVID-19 on the insurance industry converge to signify the importance of government participation in this sector.

References

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