How NPS Swasthya model may reshape elderly healthcare financing in India

PFRDA's proposed NPS Swasthya Pension Scheme seeks to combine retirement savings with healthcare financing, potentially reshaping elderly-care funding beyond traditional insurance models

Earlier this year, the Pension Fund Regulatory and Development Authority (PFRDA) floated the idea of a health cover scheme that would be carved out of the current pension corpus an employee puts aside to serve as a buffer against medical expenses later in life.

 

The proposed NPS Swasthya Pension Scheme, as it was named and being currently tested as a Proof of Concept (PoC) under the pension architecture, is particularly remarkable because it could do away with the episodic nature of insurance-led healthcare coverage.  

 

The implications of the scheme, should it get off the ground, could be far-reaching: India’s health insurance sector continues to witness robust growth, growing at a rate of around 9 per cent, with total health insurance premiums volume exceeding Rs 1.2 trillion by FY25. At the same time, the industry is inundated with complaints of denials of claims. Insurance portal data shows that while 87.5 per cent of claims made were paid out, healthcare records the highest rate of consumer grievances among all insurance products.

 

Current healthcare financing structures in India remain largely hospitalisation-centric, with insurance products primarily designed around acute hospitalisation, surgery, inpatient treatment, and episodic medical interventions.

 

However, medical support at an older age can be a prolonged scenario requiring continuous support, with various needs that may include any or more of services such as preventive care, home nursing, assisted daily living, physiotherapy, rehabilitation, dementia support, supervised living, palliative care, and long-term wellness management. Most of these are not covered by traditional healthcare plans.

 

What the NPS Swasthya proposes is a more radical approach. Payees into the NPS will have a portion of their pension contributions set aside in a separate, compounding corpus for healthcare costs in their senior years. Contributors will be able to decide what portion of their pension they want to divert to NPS Swasthya and for how long. Their contributions will be compounded and kept out of reach until their retirement. In case of any medical needs, they will be able to access the funds in their NPS Swasthya corpus. In the event that they do not feel the need to use those funds, they can repatriate that back to their normal pension account.

 

While the Prime Minister Jan Arogya Yojana provides healthcare coverage up to Rs 5 lakh annually for secondary and tertiary care services and hospitalization to enrolled socio-economically deprived families and senior citizens above 70, it has its limitations. Moreover, insurance cover bought annually depletes rapidly after even one episode of hospitalisation. In case of an illness in the previous year, the next year's premium may go up while coverage may reduce. Consequently, a large portion of elderly-care expenditure continues to be funded through out-of-pocket household savings, placing substantial financial strain on retirees and their families.

 

The proposed NPS Swasthya Pension Scheme appears to recognise these changing realities. The PFRDA has developed the model on the working model that while an older person may present more medical risks, s/he will also have a larger pension pool that is exclusively theirs to draw from.

 

An insurance model, on the other hand, offers a potentially low premium by pooling all premiums paid by a group of people in the hope that only some among them will utilise the cover. This model, however, does not always hold for older cohorts, which is why health insurance pools of almost all companies in India and abroad often face an almost 100 per cent dry-out as the number of claims rise. For instance, health claims paid ratio was 87.5 per cent in FY25, up from 85.7 just two years prior.

 

Rather than rely on this conventional pooling, the NPS framework creates a hybrid architecture combining: a) pension accumulation; b) healthcare financing; c) wellness incentives; d) elderly-care access; and e) limited protection overlays. The underlying philosophy is that retirement savings should not merely provide periodic pension income, but should also help finance the broader continuum of ageing-related healthcare and assisted living needs.

 

The NPS Swasthya model recognises that catastrophic illnesses will still need insurance cover, but regular elderly-care financing may be met from the subscriber’s own corpus. Such a framework preserves flexibility while still providing risk protection where necessary. The core principle of the scheme is that the retirement corpus will remain individually owned by the subscriber, and the corpus continues to grow. More than that, unused balances remain part of the subscriber’s wealth and could even be inherited by the nominees. That means routine healthcare, assisted living, rehabilitation, wellness, physiotherapy, and elderly-support expenses may be financed through the subscriber’s accumulated pension-health corpus.

 

These sorts of covers are absent from traditional insurance models because they are not episodic or sudden, the very basis for any insurance policy. Yet it is these costs that often financially drain older population groups. As the table shows, these differences matter to the cohort of senior citizens.

 

Patching of pension corpus to the medical risks of the target population, the sector regulator hopes, will make it a good business strategy for companies, too. It also builds on a rising trend worldwide. As people live longer, a significant behavioural and financial shift is taking place. Individuals now are more reluctant to surrender accumulated retirement wealth into irreversible annuity structures, essentially a cash flow for a long period, where the residual is mopped up by the company. The pooling arrangements also mean there is no inheritance flexibility for legal heirs.

 

Despite the advantages of individual accumulation, a former senior official of a government-led insurance company cautioned that “complete elimination of risk pooling may neither be practical nor desirable”. Certain risks are simply too large for individual financing alone, including advanced dementia, prolonged institutional care, severe medical catastrophes, ultra-long longevity risk, expensive surgeries and terminal illnesses. “Accordingly, the most sustainable framework may be a calibrated hybrid model,” this officer suggests.

 

As for regulatory oversight, the PFRDA is likely to regulate pension accumulation, retirement account architecture, subscriber protection, fund management, withdrawal norms, digital pension infrastructure, and the governance of retirement-linked healthcare accumulation structures. In other words, anything that contributes to the pension architecture would come under the PFRDA's purview.

 

In contrast, the Insurance Regulatory and Development Authority of India (Irdai) would continue to regulate insurance underwriting, risk pooling, solvency, pricing of catastrophic risk covers, health insurance products, top-up insurance structures, claims standards and insurer conduct. This regulatory distinction is essential to preserve institutional and regulatory demarcation between pension accumulation functions and insurance risk-pooling activities, while enabling coordination across the retirement, healthcare, and insurance ecosystems.

 

Several companies have begun to participate in the PoC, including Pension Fund Managers and insurers, since it was rolled out in January this year. However, it is too early to know if it provides more cash flow for them. If the PoC succeeds, it could potentially create an entirely new category within the pension sector. Future possibilities may include senior-care linked pension products, assisted-living financing modules, long-term care accumulation plans, tax incentives for healthcare-linked retirement savings, digital retirement-health marketplaces, longevity planning products and wellness-linked pension incentives. The framework could also create new opportunities for Pension Fund Managers, CRAs, insurers, healthcare providers, assisted living operators and digital health platforms.