Risk sharing

Insurance copayment will not address deeper problems

The General Insurance Council’s (GIC’s) proposal to introduce a mandatory 10 per cent copayment on individual health insurance is rooted in a genuine problem. When patients are fully insured, the price they face at the point of treatment is effectively zero. This can weaken their incentive to question the need for tests, procedures, hospital stay, or more expensive providers. Hospitals, too, may have greater scope to induce demand or charge more when they know that the bill is being paid by an insurer. There is the classic moral-hazard problem in health insurance. The RAND Health Insurance Experiment, conducted in the 1970s and ’80s, in the United States found that people facing higher cost-sharing used less health care, though the reduction was not confined to unnecessary care and poorer and sicker patients could be adversely affected. The question, then, is how much risk patients should retain and at what point insurance should provide full protection. The GIC proposal risks getting this balance wrong.

 

Under the proposal, even a comprehensive policy would leave a patient liable for 10 per cent of an admissible inpatient hospital bill, subject to a maximum contribution of ₹5 lakh per claim. There is a strong consumer-choice argument against making this arrangement mandatory. An individual may reasonably prefer to pay a higher premium in return for complete coverage. But if all general insurers collectively adopt the same 10 per cent copayment, that choice disappears. A customer can no longer trade off a higher premium against greater protection. The proposal, therefore, merits scrutiny not only from the insurance regulator but also from a competition perspective. More importantly, patients may be the wrong group to discipline hospitals. They cannot be expected to determine whether a diagnostic test is necessary, negotiate the price of a procedure, or compare hospitals. Insurers, by contrast, possess claims data, actuarial expertise, and bargaining power.

 

Measures need to be taken to control hospital costs before making patients bear a larger share of their medical bills. A common hospital network can strengthen insurers’ bargaining power; reasonable benchmark prices for treatments and surgeries can provide reference rates for different procedures; outcome-based contracts can link payments to the quality of treatment; and a formal grievance mechanism can help resolve disputes over bills and claims.

 

There is also a broader question of what optimal health insurance should look like. Economic theory does not favour full coverage because it creates moral hazard. But neither does it imply that individuals should bear the same proportion of every medical expense. The logic of optimal insurance is to make people bear some cost when expenditure is manageable, while protecting them against large and uncertain losses. This is particularly important for chronic conditions and catastrophic hospitalisation, where the ability to avoid treatment is limited and the financial risk is precisely what insurance is meant to mitigate. The objective should, therefore, be to strike a balance between incentives and protection. While some copayment may be justified, it should not be made compulsory across all policies. Consumers should be given a choice between paying a lower premium with copayment or paying a higher premium for full coverage. A blanket industry-wide requirement risks making patients the shock absorbers for inefficiencies in the health care system.